r e s t r i c t ie d report rio. as ... - documents &...

R E S T R I C T IE D

Report rIo. AS. 43

This document was prepared for internal use in the Bank. In makingit available to others, the Bank assumes no responsibility to them forthe accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

QUARTERLY ECONOMIC REVIEW

NO. 1

September 1955

Department of OperationsAsia and Middle EaSt

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EXCHANGE RATES IN TERMS OF U.S. DOLLARS

ETHIOPIA - dollar = $0.4025

EGYPT - pound = $ 2.87

LEBANON - pound 5 $0.31SYRIA - pound = $0.28

PAKISTAN - rupee = $0.21

INDIA - rupee = $0.21

CEYLON - rupee = $0.21

BURMA - kyat E $0.21THAILAND = baht:

Official rate = $0.08Rubber export rate = $0.0494Principal import rate (free) = $0.0477

JAPAN - yen a $0.0031

TABIE OF CONTENTS

Page

ETHIOPIA .*........................ . 1

EGYP ......... ........... *........ 5

IEBANON . ......................................... 9

SnUIA . .................. ....... e............. 12SYAIAT. *......... .. ...... oe 12

INDIA. .............. ................. 20

CEYION . .............. 23

BUREWl . . . ......b*....... ... . 26

THA,IIADD .................... o 29

ETHIOPIA

Although the decline in coffee prices may create a temporarydeficit in the balance of payments, there is no reason to believe thateconomic conditions in Lthiopia, which were very favorable during 1953and 1954, will take a marked turn for the worse.

The available data, which for the most part do not extend beyond1954, indicate that the last year closed with an export surplus of Eth.p27 m:illion and a current account balance of payments surplus of hth.$8 million. Gold, silver and foreign exchange reserves increased by theequivalent of U.S. 'p11 million as compared to U.3. $16 million in 1953.

Lxport earnings declined slightly from Eth. 4178 milliorL in 1953 toLth. P'l67 million in 1954. Coffee exports, which again accounted forabout 60$ of the total, were '07o smaller in volurne than in 1953 but aboutequal in value owing to subst-ntially higher prices. The value of otherexports such as cereals, pulses, oilseeds and hides and skins fell owingpartly to lower output and p.rtly, in some instances, to lovwer prices.The drop in coffee exports followed an established bi-annual pattern ofyields in which a good year is normally succeeded by a less favorable year.This fluctuation may have been accentuated by a tendency of traders andcultivators to hold back part of the crop for speculative purposes. Thepattern of coffee exports is illustrated by the following table:

Coffee Exports, 1949-1954

"ear Volume Value(000 metric toris) (millions of Eth. $)

1949 22.3 22.11950 18.7 32.61951 30.3 62.71952 21.6 50.31953 41.9 100.31954 31.2 99.4

A preliminary estimate of Government revenue and expenditure for1953-54 (fiscal year ending September 10) indicates a deficit of hth.$11 million, compared to a surplus of Eth. 5.5 million in 1952/53. devenuewas estiinated to increase from hth. %1100 millioln in 1952/53 to Eth. p810million in 1953-54 and expenditure from Eth. bp95 million to ;2th. $Il9million. The most imiiportant increase in expenditure was for development,mainly for railway and port improvements in Eritrea and for highways,airports, public buildings in the Empire. Considering the conservativepolicies followed by the lini9try of Finance, expenditures may well havebeen over-estimated and revenues under-estimated, so that the deficit mayprove to be smaller in the final accounting. In particuler, it seemslikely that revenues may have been higher than estimated because ofincreased receipts from coffee export taxes. As the world piice ofcoffee rose, this tax was increased in stages from a fixed rate of Eth.$260 per ton at the beginning of the fiscal year to a fixed rate of Eth.

ETHIOPIA

A;lthough the decline in coffee prices may create a temporarydeficit in the balance of payments, there is no reason to believe .hateconomic conditions in Lthiopia, which were very favorable duiring 1953and 1954, will take a marked turn for the worse.

The available data, wiich for the most part do not extend beyond1954, indicate that the last year closed with an export surplus of Lth.':27 million and a current account balance of paynents surplus of hth.S;8 million. Gold, silver and foreign exchange reserves increased by theeouivalent of U..'. L1]1 million as compared to U.3. .,16 million in 1953.

Export earnings declined slightly fron Eth. X178 million in 15953 tohth. 'l67 million in 1954. Coffee exports, which again accounted forabout 60% of the total, were 30% smaller in volume than in 1953 but aboutequal in value owing to subst,:ntially higher prices. The value of otherexports such as cereals, pulses, oilseeds and hides and skins fell owingpartly to lower output and partly, in some instances, to lower prices.The drop in coffee exports followed an established bi-annual pattern ofyields in whlich a good year is normally succeeded by a less favorable year.This fluctuation may have been accentuated by a tendency of traders andcultivators to hold back part of the crop for speculative purposes. Thepatternl of coffee exports is illustrated by the following table:

Coffee Exports, 19449-1954

Year Volume Value(000 metric tons) (millions of Eth. $)

1949 22.3 22.11950 18.7 32.61951 10.3 62.71952 21.6 50.31953 43.9 100.31954 31.2 99.4

A preliminary estimate of Government revenue and expenditure for1953-r54 (fiscal year ending September 10) indicates a deficit of ht.h.p11 m:i.llion, compared to a surplus of Lth. t5 million in 1952/53. i evenue

was es,tijmated to increase frora ,th. 6100 million in 1952/53 to Eth. :;108million in 1953-54 and expenditure from 1S,th. P95 million to Lth. 81l19million. The most important increase ih expenditure was for development,mainly for railway and port improvermients in Lritrea and for highways,airports, public buildings in the Impire., Considering the conservativepolic:ies followJed by the liainistry of Finance, expenditures may well havebeen over-estimated and revenues under-esvimated, so that the deficit mayprove to be smaller in the-final accounting. In particular, it seemslikely that revenues may have-been higher than estimated because ofincreased receipts from coffee expo t taxes. As the world price ofcoffee rose, this tax was increased in stages from a fixed rate of 'Eth.$260 per ton at the beginning of the fiscal year to a fixed rate of Eth.

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t600 per ton plus a sliding sca'e surtax at the beginning of April 1954.

Daring calendar 1954 currency in circulation (which comprises about75%'O of the money supply) increased by 11Fth. ti8 million. At considerablylarger increase might have been expected in view of the rise in the. StateBank's gold, silver and foreign exchange holdings by Lth. $27 million.It therefore seems probable that the Government's cash income exceesdedcash outlays during this period and thus offset in part the tendency ofthe money supply to increase in response to the rising foreign assets.Available information indicates continued price stability; the onl;y maTjorchange has been the decline in the wholesale price of coffee in line wiithworld coffee prices.

Very little informrtation is available on economic and financialdevelopments since the end of 1954. In the first quarter of 1955 gold,silver and foreign exchange holdings increased by the equivalent of U.S.$8 million as compared to an increase equivalent to about U.S. $14 millionin t'-,e first quarter of 1954. A coasiderable part of the increase inboth years was d-ue to seasonal factors, since most of the coffee isexported in the first part of the calendar year. The average price ofcoffee (Hew York spot, Santos 4) was about U.S. 61 cents per pound in thefirst quarter of 1955, compared to UJ,S. 78 cents a year earlier. Thecurrency circulation increased in the first quarter of 1955 by E6th. 128million, which was approximately equal to the rise in the gold., silverand foreign exchange assets of the State Bank.

The outlook depends largely on coffee prices. In the imm,ediatefuture world coffee prices will probably fluctuate), with a tendency todecline. The current New York price is about 54 cents per pound, comparedlto 86 cents a year ago. During this period of adjustment, Ethiopia mayincur- trade and balance of payments deficits. imports,based on the highincomes earned during the coffee boom, may continue temporarily to increaseGoveriment revenues will also be affected. The coffee export tax hasal1e!aRdy been reduced substantially from the high level of a year ago, andit may be necessary to make further changes. Assuming a continuation ofthe conservative fiscal policy, -,bich seems likely, tihe adjustment shouldnot be too difficult howsever. Considerable foreign exchange balanceshave been accumulated during the boom period, and these could be used inpart to finance possible balance of payments deficits. It is believedthat sizeable fiscal balances have also been built up.

In the longer run, prospects are favorable that both foreign exchangeearnings and Government revenue will increase gradually. Even with coffeeprices well below the present level, there should be sufficient incentivefor growers to increase coffee production. Moreover, it may be hopedthat the Development Bank coffee program will in time lead to an improve-ment in quality of Lthiopian coffee and thus improve Ethiopia's ccomlpeti-tive position in the world coffee market. An increase in volume of someof the other main exports may also be expected as the transportationsystem is extended end improved. As the volume of foreign trade expands,Government revenues from customs duties may be expected to rise. Moreover,

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with tl-le improveinent in transportation and communications, new areas ,;illbe ope:aed up and the area of effective Government administration-;;i beextended, thus permitting increased collections of taxes other than customsduties. Adequate financial resources should therefore be available to meetthe re!quirements of the growing Ethiopian economy.

ETHIOPIA

1949 1950 1951 1952 1953 1954 1954 1955

POPULATION About 15 rmillion (Nio census has ever been taken)BUDGET (millions Eth. ¢) -

Revenue 63 74 77 84 100 108Expenditure 63 887

, O~~~~~~~~ -1-& 22 0 o §GOVErNM1INT BALANCE at State Bank

(million Eth. $) 8 17 22 31 65 82GOVF-RNMYiNT DEBT (million Eth. $)

Internal 51 59 68 83 102 103 97 103External 16 36 36 40 32 31 32 31

7 10146 Ity 1314 131294MONEY SUPPLY (million Eth. 9)

Currency Girculation 62 73 87 93 111 119 130 119 137Demand Deposits 20 24 19 26 30 n.a n.a- n.a

2/ 97* 106 11-9 PRIVATE CREDIT (million Eth. ,)- 12 11 11 16 17 20 20PRICES (Indnexes of wholesale prices

Addis Ababa, 1951 = 100)Coffee 64 97 100 108 97 133 132 154 132 113 78General Exports 76 81 1OC 85 77 91 90 99 91 82 67

Geneiral Imports 93 80 100 94 79 76 79 76 76 75 76BALANCE OF PAYMENTS, Current Account

(million Eth. ) 3/ 3/3 3/Exports f.o.b 78 78 125 115 178 167 53- 57-/ 30- 20- n.Imports f.o.b 76 62 87 99 120 140 393/ 43- 2 36 1 43)1Trade Balance 2 7 TU TI T§ 27 Th/ :- 1/ I6;/ n.aInvisibles -8 -7 -26 -20 -26 -19Surplus or Deficit (-) - -7~ 13 -; 33B _

COFFEE EXPORTS (million Eth. $) 22 33 63 50 100 99 35 40 16 8GOLD, SILVER AND FOREIGN EXCFHANGEHOLDINGS OF STATE BANK

(million Eth. $) 34 50 63 72 113 140 147 155 144 140 159(million U.S. i equiv.) (14) (20) (25) (2,) (45) (56) (59) (62) (58) (56) (64)

1/ Fiscal year ending Septeihiber 10T/ Credit extended by the State Bank and the Development Hank

,,/.'k UU ~U.~L.UjIL~ u±~u1u. -LUd doulU not str'ictly comparable to annual balance of payments data.Customs data tend to under-value exports and over-value iimports, while balance of payments data have been adjusted toeliminate this te-ndency.

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EGYPT

The major recent economic developments in Eg5pt have been (1) adeterioration in the balance of trade and payments by comparison with lastyear, owinlg primarily to a drop in cotton exports; (2) announcement of theopening of the Alexandria Cotton Exchange in September; (3) adoption of' arecord government budget for 1955/56, and (4) conclusion of a new Anzlo-Egyptian financial agreement on the liquidation of blocked sterling bal.ances.

The foreign trade balance for the first half of this year showed Etdeficit of LE 17.8 million, as compared with a surplus of BE 9.2 million _,An increase of BE 14 million in imports and a sharp reduction of iE 17.,2 ]million in cotton exports vere the principal factors in this shift. Theexact repercussions of this development on the total balance of inter-national payments, which was slightly favorable in 1954,ars not yet known.The first half of the year apparently witnessed only a small decline ofabout BE 3 million in the National Bank's reserves of gold and gross foreignassets, but Egypt's liabilities urider international payments agreementsrose by abnost LE 9 million during this same period.

In the l954/55 season which closed at the end of August, cotton salesabroad have been rather poor, largely because textile production in somecountries slumped and the Egyotian government insisted on maintainingprices at too high a level above those of American varieties. Thus up t.o3 weeks before the end of the season total exports had amounted to only4,816,095 kantars as against 6,779,356 kantars in the same period of thepreceding, season. Apparently the only redeeming feature of the past cottonseason was the sale of most of the government's own remaining stocks,which totaled 362,000 kantars at the beginning of the season, to CommunistChina. This transaction, involving 280,000 kantars, was announed lastAugust.

Although the government has not recognized its responsibility for therelatively poor sales abroad, it has announed a new marketing policy,effective this month (September), which should ensure a rather free flowof Egyptian cotton into the world market in the future. The Alexandriacotton exchange, closed in lNovember 1952, is being reopened; and simul-taneously merchants are being relieved of their previous obligation to"pass" all sales through the Egyptian Cotton Commission whose resaleprices have determined minimum export prices. VWhbile the Egyptian govern-ment will, apparently still maintain a "floor price" at which it is willingto buy cotton and may circumscribe somewhat the freedom of transactionson the e-:.change, export prices will in the main be fixed by world supplyand demand as reflected on the Alexandria Cotton Exchange.

The government's finances have continued to be sound despite thelarge capital outlays budgeted in the fiscal year 1954/55 which ended onJune 30. In contrast to a budgeted deficit of over LE 50 million, therewas a considerable cash surplus as indicated by the rise in government

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deposits with the N4ational Bank from BE 8.2 million to LB [0.1 million.This result is attributable to a combination of circumstances including(1) large extra,budgetary receipts from the liquidation of governmentcotton stocks and supply transactions, (2) substantial underspending of'appropriations on capital account, and (3) receipts of LBE 25 million fromthe three development loans floated toward the end of 1954, The govern--ment's balances at the end of the fiscal year were so ample that it decidedin July to pay off rather than renew an WE 15 million cotton loan whichhad fallen due. Repayment of this loan together with year-end settlementsbrought government balances with the National Bark down to SE 11.12 millionon August, 13.

In view of the virtual disappearance of extrabudgetary resources andthe acceleration of actual expenditures on development, it seems likelythat the government will run a substantial cash deficit in the currentfiscal year. The regular government budget for 1955/56 has been fixed ata record total of LBE 238.3 million or about LE 10.5 rmillion more than lastyear. In addition LB 54,2 million has been budgeted for the Council ofNational Production and LE 22.7 million for the Council on Public Services.Last year appropriations for these two agencies, which are charged withthe government's development program, amounted to WE 42.3 and LE 14h6million respectively. A considerable part of these appropriations evidentlyremained unspent and have been carried over into the new fiscal year.

While these new budgets undoubtedly again overestimate the actualexpenditures that will be incurred, a considerable increase in cash outlayscan be anticipated particularly since the time-consuming preparationsattendant on starting many new projects have been largely completed. L:Lttleinformation on the methods or sources of financing these expenditures sLavailable. The increase in the ordinary budget is apparently to be financedby larger tax revenues and, above all, greater receipts from governmententerprises including the railways and the oil refinery. Part of the ex-penditures of the Council of Public Services are said to be defrayed fromthe ordinary budget. It is clear, however, that the government's spendingcommitments as revealed in the 1955/56 budget have been determined with-out much attention to the financial resources which will be avaiLable inthis and ensuing years.

Mleanvhile, the new Anglo-Eg-ptian financial agreement announced atthe end of Auguist will facilitate the carrying out of a government arrange-ment with the National Bank whereby the latter undertook last May to lendthe government MB 100 million over the years ahead with which to purchasefree sterling from its foreign exchange reserves for the purpose of financ-ing the f"oreign costs of development projects. This arrangement was corn-tingent on further releases of sterling still blocked in the United Kingdomand amounting to L 135 million. Under the previous financial agreement whichwas concluded- in 1947, the rate of release was expected to be recluced t,oL 15 million in 1956 and to T 10 million in the following three years, afterwhich a "hard core" of L 80 million was to remain for subsequent settlement.

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The United Kingdom has now agreed to release O 20 million in each yearup to 1961. and thereafter E 10 million a year until all balances areunblocked by 1963. The new agreement undoubtedly gives the Egyptiangovernment additional flexibility in its operations, but at the same timeit creates the temptation to use up foreign exchange reserves more rapidlythan woulci be prudent.

EGYPT

1909 1950 1951 1952 1953 1954 1954 1955I II III IV I II III IV

POPULATION (millions - mid-year) 19.9 20.4 20.9 21.4 21.9 22.5 22.5AGRICULTURAL PRODUCTION

Index: all field crops (1946-50 = 100) 106 103 99 107 99Cotton (indllion kantars) 8.7 8.5 8.1 9.9 7.1 7.6Wheat (million ardebs) 7.8 6.8 8.1 7.3 10.3 11.5

INDUSTRIAL PRODUCTIONCotton yarn (thousand tons) 54 3 49.0 53 q .7 59.4 64.3Cement (thousand tons) 876 1,020 1,130 947 1,097 1,237Fertilizers (thousand tons) n.a. 70 168 206 216 268Petroleum (thousand tons) 2,266 2,593 2,324 2,383 2,268 1,972 488 502 494 494

FOREIGN TRADE (million LE)Exports and Re-exports 138.0 175.4 203.1 145.1 137.4 138.3 45.7 34.5 22.5 35.6 38.0 29.2

of which cotton 106.1 1L49.8 164.1 126.4 116.3 113.1Imports 178.2 215.7 279.9 223.5 174.41 160.2 34.2 36.7 40.8 48.1 41.1 43.9Balance --40. 2 -40.3 -76.8 =7X . O0 -21.9 1J -2.2 -18.3 -12.5 -3.1 -14.7

BALANCE OF PAYMENTS - CURRENT ACCOUNT(million KU)Foreign Trade and Transit (net) -22.4 -38.9 -64.1 -28.9 -9.8Invisibles (net) 13.2 23.7 10.7 21.0 13.1Balance -9.2 -15.2 -53.4 -7.9 3.3

GOLD AND FOREIGN ASSFTS - NATIONAL BANK l/(million LE) 330.3 328.5 333.3 262.1 253.6 254.9 259.4 263.9 253.2 254.9 258.8 252.0 /

GOVERNMENT BUDGET (million LE) 3/Ordinary 2/ 2/Receipts 158.5 184.7 194.1 198.2 197.5- 221._,Expenditures 163.8 190.2 232.8 208.4 197.5& 227.8Balance -5.3 -5.4 -38.7 -10.2 0 -6.0

Capital 35.6 56.9GOVERNMENT DEBTTotal 120 143 173 172.5 173.5 164.5 160.0 171.8 173.5 198.2 -

To National Bank 16.5 17.5 26.1 52.5 55.3 47.9 44.5 43.3 71.2 47.9 55.1 73.1GOVKRI1AFNT DEPOSITS (million LE) I/

National Bank 70,0 55.8 30.6 - 5.6 6.9 16.9 8.2 3.2 6.9 34.2 40.1Other Banks 6.7 6.8 9.1 8.7 8.8 - 9.0 8.9 16.1 - - -

DOMESTIC LOANS AND INVESTMENTS - CLEARING BANKS(million LE) I/ 113.3 120.4 125.3 118.3 118.0 147.8 123.3 105.9 110.4 147.8 - -

NATIONAL BANK CREDIT TO OTHER BANKS(mil-lion SE) It 6.8 13.0 16.6 4.4 4.1 8.2 5.9 1.6 3.2 8.2 10.8 7.8

MONEY SUPPLY (miXlion LE) 1/ 347,9 360.5 372.9 367.1 350.2 361.0 336.0 334.5 342.8 361.0 - -Currency 170.3 188.7 201.1 206.8 191.3 189.6 182.5 177.4 178.6 189.6 180.6 172.8

PRICESWholesale: Index 332 376 386 343 354 342 354 339 339 342 348 -Cost of Living: Index 282 306 328 296 294 283 288 282 282 283 283 -Cotton (tallaris per kantar)

Karnak G 83.75 137.90 161.50 62.00 59.75 76.00 65.oo 66.50 - 76.0o - -Ashmouni G 76.20 129.65 100.70 55.50 55.50 59.50 57.50 60.75 63.00 59.50 - -

1 End of periodF Estimate

/ Fiscal year beginning on the year indicated.-8-

LEBANON

The Lebanese economy has continued to demonstrate the sam,ze capacityfor orderly economic growth which has characterized it in recent years.National :income is rising steadily; the balance of international paymentsis favorable; and monetary stability is being maintained.

During the first half of 1955 national income was apparently about.hi% above the 1954 level. Taking into account a slight decline in pricesand the further growth in population, the increase in real per capita in-come was probably around 3%.

Preliminary estimates, which may be rather conservative, indicate abalance of payments surplus of some &L 80 million in the first five monthsof 1955. rEuring this period the gold and foreign exchange reserves heldby the government and the Banque de 5yrie et du Liban rose further by1 5.08 million or 6.7%, and the proportion of gold and hard currencies inthese reserves continued to increase as in the past.

The volume of international transactions on which Lebanon depends sogreatly h-Ss evidently continued to expand. hhile no information on foreigntrade is yet available for 1955, traffic through the port of Beirut duringthe first half of the year was 40% above the 195T level. In 1955 foreignexchangre receipts from the tourist trade are expected to be 25% higher thanin the preceding year. The growing importance of Beirut as an internationalfinancial center has been further recognized by the announced intention ofthe National City Bank and the Chase MIanhattan Bank to open offices in Beirutin the fall of this year. The Bank of Anerica is also likely to open abranch.

Monetary and price stability is being maintained. Prices declinedalmost imperceptibly and the market discount rate also fell slightly. Nostatistics are yet available on the movement of money and credit, bTt reportsindicate no change which would be out of line with the general expansion ofthe economy. Although the government budget for 1955 is balanced on paperat EL 137 million, it is alreacdj evident that there will actually be a sur-plus as in recent years. The proceeds of customs duties alone amountedduring the first five months to over iL 39 million as compared with XL 55.5million for the entire year 1954.

A nuamber of new development projects are being initiated, particularlyin the field of transport. The Beirut Port Company, which holds the con-cession for operating the port, 1has undertaken to start expansion worksinvolvin7 an investment of about 1L 30 million before the end of 1955; andthe government is investing LL 10.5 million in the first phase of a programto expand the port of Tripoli in order to enable it to handle 800,000 tonsper year. A program to provide modern dual highways for the key communica-tions lines, Beirut-Tripoli-Homs, Beirut-Damascus and Beirut-Saida-Nerjeioun,has been started; and the U.S. has undertaken to provide a loan of 11 5million to defray the foreign cost of the Lebanese section of the Beirut-Damascus r:ad under an agreement pending before the Lebanese Parliament.

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Projects :for a new LL 5 million radio station and a TL 5 million 'bOlympicCity", wh:ich is expected to provide an additional attr..ction for tourists,have also been announced. Finally, the gcovern-ment is considerinq al-year irri-ation plan costin'R LI 20 million which would be designed toirri.ate the Akkar Plain in the north and other areas to oe selected.

LEBANON

APRIL1951 1952 1953 1954 1954 1955

POPULATION (million) 1,304 1,338 l,l17 1,447 - _NET NATIONAL PRODIUCT

(EL million) 1,071 1,090 1,137 1,167 _M111P fW '~m. ~rITMUff_N.. GhP.L AL LL4 VfNJI

(LL million) 131 150 154 165PRICES (1948 - 100)Wholesale prices 95 86 78 72 72 71Cost of living 94 94 88 83 83 83

DEPOSITS (Private and Public)(LL million)Sight 253 301 324 407)(Deposits in - -Time 6 12 19 37) foreign - -Total 259 313 343 44h) currency - _(of which public deposits) 32 68 108 112) inol.uded) - -

CURRENCY(ELmlillion) 208 200 205 242 -

PUBLIC HJDGET(6L million)Receipts *105 4125 e141 +134 (estimated) -Expenditures - 90 - 89 -117 -120 ( " ) -Balance .15 *36 .24 1 4

NET INCREASE (+) OR DECREASE- IN RESERVE FUND(IL million) +15.256 .31.952 .11.384 .1.340 - _

BALANCE OF PADMENTS(LL million)Merchandise -155 -190 -170 _Invisibles +173 +232 +279 -Balance .18 *42 + 99 - - -

GOLD COVER(EL million) 93 109.2 126.7 219

GOLD AND FOREIGN ASSETSBoSoL. AND GOVERNMENT

(U.S.j million)Gold 26.31 30.63 34.73 63.13 45.24 63.13French francs 12.03 10.93 12.80 11.56 14.27 10.91Other foreign exchange 1.18 .63 7.70 1.37 5.94 5.94-Total '39.52 42.20 24 7. 65.4t 79.97

SYRIA

Syria is facing a difficult problem of economic readjustment as theresult of an excessive expansion of bank credit followed by extremely poorcrops in -t.he current year. The balance of payments has deteriorated,causing a sharp reduction in foreign exchange reserves. While the long-term prospects of the economy are not necessarily affected, the presentsituation indicates that the present government, which is far from strong,may have continuing difficulty in coping with the economic problems of thecountry.

The origin of the present crisis lies in the rapid and almost contin-uous expansion of the Syrian economy. This expansion was marked both by aconsiderable development of industry and by the extension of the frontiersof aricultural cultivation into previously unexploied areas which in lar.gepart enjoyed only a marginal or su'-marginal rainfall. In the optimisticatmosphere engendered by this boom wrhich reached its peak in 195L, importersgreatly increased tneir purchases abroad not only to meet the current demandfor goods but a-lso in an excessively sanguine expectation of a further sharprise in demand. The comnercial banks, most of them foreign, vied with eachother in extending credits for imports and in financing dealers in equiplaentand durable consumer goods, who in turn provided easy credit to their cus-tomers. This expansion was made possible by a substantial increase in bankliabilities to their parent institutions abroad, the rediscounting of paperwith the issue department of the Banque de Syrie et du Liban (BSL) and tosome exter.,t by an increase in deposits. Both banks and merchants becameoverextended, resulting in a substarntial diminution in liquidity. Meanwhile,the influa: of imports apparently created serious problems for Syrian industrywhich still has g.reat dilficulty in meeting free foreign ccmpetition.

During 195h comnercial bank credit to the private sector expanded fromLS 22' million to LS 421 million or tb 8,%. Imports rose to record levelswhile the increase in exports lagged behind. As a result the foreign tradedeficit irncreased from LS 76 million in l953 to LS 168 million in 1951The small surplus on the balance of payments in 1952 and 1953 was convertedinto a deficit when account is taken of the movement of foreimi liabilitiesas well as foreig assets. Thus, while gold and foreign exchange reservesrose by MS 12.3 million, foreign exchange liabilitles increased ty LS 53.3million (aill valued at free exchange rates). During the first five monthsof the current year foreign assets declined substantially, the gold andforeign exchange cover of the currency falling, at official exchange rates,from IS 98.3 to LS 63.6 million. In terms of the current free exchangerates, this loss is probably in the neighbourhood of IS 45 - 50 million.

Corrective measures were taken rather tardily by Syrian monetary autho-rities. In April 1955 a series of measures were taken to restrict credit.Banks were instructed to require a deposit against letters of credit openedfor imports - 30% in the case of non-essentials and 15% for essentials - toinsist on full payment of imports after the delivery of documents and tomaintain with the Issue Department of the BSL certain minimam reserves againstdeposit liabilities. The maturity on bills of exchange, commercial billsand loans and advances for industrial operations was limited to 300 days.

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The Issue Department, which functions as a central bank pending the ult:L'nateestablishment of such an institution, was enjoined to raise its rediscountrate on certain ty_pes of credits and to stop financing the extension ofconsumer credit by the commercial banks. Commercial banks were also -ivensic months to comply with certain requirements to increase their capitaL.These and other measures, which may be followed by additional restrictions,have certainly had a salutary effect and reversed the trend of a continuousexDansion in bank credit.

Meanwhile, the bad harvests reported. for this year have greatlyj a-gra-vated the economic situation. While official estimates that the combinedwheat and barley crop are 60% below last year may, in the light of pastexoerience, be considera'oly exaggerated, there is little doubt that consid-erable amounts of wheat and perhaps even barley will have to be irmported.The financing of such imports presents a serious problem since wheat andbarley normally account for 20 - 30% of Syria's export earnin,s and exportsof cotton, which generally contribute 35 - 40% of export proceeds, may belower this year due to a heavy infestation of cotton worms. Although importsother than cereals are likely to be substantially lower in the immediatefuture, owing to the shrinkage of demand and the accumulation of considerableinventories, the importation of cereals will put a considerable strain on thecountry's resources. It is possi'ble that Syria, which in the past has stead-fastly refused U.S. aid, may seek a way out of this dilemma by obtaining fromthe Uniteo States a surplus commodities loan repayable in local currenc;y.

The present crisis will undoubtedly have its repercussions on goverrmentfinances. Additional expenditures may be necessary to provide droughtrelief and safe,uard the cost of living against an excessive rise. Aboveall, government receipts wili decline, at least for some time. The ordinarybudget for 1954, which was ori7inally estimated to have a small deficit ofLS 7 million, probably ended with a surplus because of a sharp rise in cus-toms and c,ther receipts during this boom year. The decline of iS 26.8million in public deposits, however, ir.dicates that extrabudgetary transac-tions may lhave resulted in a net Treasury cash deficit. The sharp redactionin agricultural output and foreign trade in the current year will substan-tially lowrer receipts. Although expenditures during the first part of theyear were kept dovn by failure to enact the yearly budget, it is likely thatthe increase in government salaries and probable relief outlays will raiseexpenditu-res above last year's leve'ls.

The present setback, however serious, should not be permanent. Poorharvests will inevitably recur from time to time in a country whose aCricul-ture will remain laraely dependent on a rainfall which on the average isbarely adequate. Insofar as the crisis has been caused by the government'sfailure to cope adquately with the expansion of bank credit, one can onlyhope that the government will profit from this experience. The future willdepend in large part on the adequacy of the government's policies and glansrelating to economic development. These will require much more attentionthan the government has yet given to them. In the spring of tnis year, thegovernment rushed through Parliament a 6-year development proeTam entailing

- 114 -

the excen(diture of LS 391 million. This program for the most part consistedof a hod'.7e-podge of projects and was formulated without anything but a mostcursorr consideration of the recommendations of the IBRD's General SurveyMission. It will undoubtedly have to be reconsidered. In the future itwill be necessary to give particular emphasis to projects which can qualifyfor foreifgn loans and to irrigation projects which will make the country atleast to sorne extent independent of the vagaries of a sharply fluctuatiingrainfall.

SYRIA

APRIL1951 1952 1953 1954 1954 1955

POPULATION (settled) (million) 3,260 3,361 3,535 3s,641 - _NATIONAL INCCME (6S million) - - 1,360 1,650 -

PRODUCTIONWheat (tons 000) 510 805.0 1,355.1 1,248.3 - _Barley (tons 000) 155 396.0 4'7i4.9 >789 Cotton and cotton seeds (tons 000) 50 52.0 85.3 202.4 - -

Rice (tons 000) 1.0 3.2 19.4 18.2 - -

Cattle (heads 000) 483.5 486.8 504.1 557.6 - -

Sheep and goats (heads 000) 4s518.7 5,085.4 5,360.2 6,606.5 - -

Area cultivated (hectares 000) 3,227 3,420 3,668 3,845 - -

Cement (tons 000) 38.7 150.6 223.6 240.0 - -

WHOLESALE & RETAIL PRICES(Damascus, 1948 * 100)Food 121.2 120.9 98.4 95.6 - -

Local raw materials 128e6 111.1 118.8 129.7 - -

Retail 109.0 107.7 93.2 89.4 - -

MONEr & CREDIT (LS million)Notes and coins (net) 236.1 234.7 271.5 -366.7 290.4 349.7Total deposits 168.7 198.5 276.0 343.9 299.7 349.5

Private 56.7 69.4 87.1 197.2 153.9 191.6Public 112.0 129.1 188.9 146.7 14568 157.9

Discounts, loans and advances 115.1 146.0 226.8 421.3 267.2 451.3ORDINARY HJDGET (LS million)Receipts 138.9 181.2 216.7 202.0 - -

Expenditures 156.1 177.4 197.0 209,1 - -

Balance -17.2 4 3.8 *19.7 - 7.1 - -

FOREIGN TRADE (LS million)(AdJusted figures)Imports 418 444 484 634 - -

Exports 292 337 408 466 - -

Trade deficit -126 -107 - 76 -168 - -

BALANCE OF PAYMENTSTrade deficit -126 -107 - 16 -168 - -

Invisible8s 135 4 98 4128 4128 - -

Balanc; ---- 4 9 -- -

OFFICIAL HOLDINGS OF GOLD &FOREIGN ASSETS (6S million)

Total at free rate lll.l1 107.4 156.7 169.0 148.5 140.9(195l,_1 19155 figures are rough estimates)

- 15 -

PAIISTAN

The general trends apparent in Pakistan's economic situation during1953 and 1954 continued in the first part of 1955. The fiscal yearending March 31, 1955 closed with a substantial central Government budgetdeficit, and a larger deficit was forecast for the new fiscal year due tocontinuing high defense outlays and a further increase in developmentexpenditures. Gold and foreign exchange reserves at the beginning of1956 were at a minimum safe level, and the downward tendency of exportearnings was continuing. Foreign exchange earnings were insufficient topav for minimum import requirements of consumer goods, capital goods andindustrial raw materials, and the country was depending on foreign aidand loans to bridge the gap. The economic prospects, however, have sincebeen considerably brightened as a result of the devaluation of the rupeeby 30.5% on Tuly 31, 1955. At the same time, elements of uncertainty inthe short run outlook have been introduced by serious floods repo:rted inEast' Pakistal for the second successive year and by a decline in wJheatproduction in iest Pakistan.

Prelininary figures indicate that Pakistan had a balance of pay-ments surplus on current account of is. 67 million in the first quarter1955, compared to a surplus of As. 17 million in the first quarter of1954;. Gold, dollar and sterling holdings of the State Bank increasedby the equivalent of U.S. $14 million in the first quarter of 1955 ascompared to an increase of U.S. t9 million in the earlier period.

The increased current account surplus in 1955 resulted entirelyfrorn reduction inforeign exchange payments from the already restrictedlevel of ds. 378 million in the first quarter of 195t to 3. 22 millionin the first quarter of the current year. Total imports authorized forthe first hialf of 1955, including imports under the 8llO million U.S.aid program announced in October 1954, were increased considerably above tlevels authorized in the preceding year. The U.S. aid imports, however,dicd not begin to arrive in sigrificant quantities until after the firsthalf of 1955, with the consequence that actual imports were substantiallybelow the authorized amount.

The current account receipts of ils. 389 million in the first quarterof 1955 were almost equal to those of a year earlier (As. 395 million).Rai,.i jute exports were higher in both volume and price, but the volume ofraw cotton exports was substantially below that of the first quarter ofl9'"i., The increase in jute exports may be attributed largely to uncer-tainty regarding supplies as a result of floods in Last Pakistan duringAugust-September 1954. This stimulated users of raw jute to make pur-chases during the latter part of 1954 and early 1955 in order tc avoidbeing caught by a possible shortage towards the end of the jute year(June 1955). It is estirnted that the volume of Pakistan's raw juteexports for the year ending June 1955 closely approximated those! in1953/54 (5.1 million bales) and that the carry over at the begirning ofthe new Jute season was small0 The fall in cotton exports was duelargely to increasing domestic denand from the expanding cotton textileindustry, whiich reduced tne export surplus and tended to keep Pakistancotton prices above world levels during the first part of the season.

- 16 -

- 17 -

Conseouentlyr, cotton exoorts during the first half of the 195V/55 season

(September 71954 - AuKust 1955) lagged about 40% oehind exports in thecomparable period of the preceding season. By the spring of 1955., however,the accurnulation of stocks with traders led to a fall in prices to morecompetitive levels and the pace of exports increased. According tlo tradeesti.mates, cotton exports for the full season ending August 31, 1955 were

expected to be about 100,000-150,000 bales below the preceding season'sexports of approximately 1,100,000 bales.

The monetary situation was relatively stable during the first quarterof 1L955. The money supply increased by RIs. 75 million compared to anincrease of is. 134 million in the first quarter of 1954. Major factorscontributing to the increase in the 1955 period were the seasonal expan-sion of private credit and the increase in foreign exchange reserves. Onthe other hand, Government fiscal operations during this period appear tohave been mildly deflationary, since Government balances at the State Bankrose more rapidly than Government debt. Domestic prices of consuner goodseased somewhat. The Narachi cost of living index (1950=100) declined from116 in December 1954 to 111 in M4arch 1955. This reflects the adecuatefood. supply situation, increasing supplies of domestically manufacturedgoods (particularly cotton textiles), and anticipation of imports underthe U.S. aid program.

Although it is too soon to judge the precise effects of the recentdevaluation of the ru:)ee, this step has clearly improved Pakistan'seconomic prospects. With the probable exception of raw jute, it shouldorovide a much needed stimulus to exports. In particular, the increasedrupi2e income which will Drestimably accrue to cotton cultivators, willprovide an incentive to increase production, thus improving the prospectsfor increasing cotton exports wihile still meeting the needs of the domes-tic textile industry. This incentive is not likely to be effective withrespect to raw jute because this cornmodity faces a rather inelastic worlcmarket and Palkistan production is regulated by acreage allotments. Asidefrom these two major commodities, devaluation should benefit Pakistan'ssmaller exports including jute manufactures, tea, rice,Eporting goods,surgical instruments, fresh fruits and vegetables, poultry and fish.Pakistan's reliance on import restrictions and protective tariffs shouldbe reduced since domestic prices, which in many cases had risen aboveextw-nal prices at the old exchange rate, have been brought back morenearly in line with external prices.

Two main factors resulting from devaluation will tend to raiseinternal prices (a) an increase in rupee incomes accruing mainly toprodtucers of export commodities, and (b) an increase in the landed cost

of imported goods. I,arachi spot prices for cotton (NT Holler) haveincreased from Rs. 400 per bale on July 29 (just prior to devaluation)to r1s. 480 on August 20. Similarly the Narayangunj f.o.b price of rawjute (white bottoms) increased from Rs. 90 per bale on July 23 to &.120 on August 19. It is reported that prices of a number of imported

consumer goods have also increased quite sharply. The latter increases,however, are considered to be largely of a speculative, short-term nature.As noted previously, before devaluation domestic market prices of manyimported goods had risen substantially above the landed rupee cost at

-- 18

the old exchange rate, due to shortages caused by import restrictions.Supplies of consumer goods f-om domestic production are now risingrapidly, and irn additiorn the bulk of imports under the U.S. aid programare arriving in the second half of 1955. This improvement in suppliessh-otulLd offset to a large extent the upward pressure on prices resultingfrom the above t-wo factors, and in the longer run the domestic pricelevel and the cost of living may settle dowm not far from thepre-devaluation level.

Government expenditures will be increased by devaluation to theextent that they are for purchases abroad. However, these increasedoutlays probably can be more than covered by the additional non-infla-tionary resources which should become available to the Government4Income from ad valorem customs duties will increase; rupee counterpartderived from sale of goods imported under foreign aid programs willincrease; and the Government should be able to increase its revenuesby taking a share of the increased local currency incomes accruing fronexports and still leave the necessary incentive to increase productionof these commodities. In this connection, on August 23 the export; dutyon staple cotton was increased from Hs. 90 to its. 135 per bale, and theexport duty on raw jute from fis. 15 to is. 20 per bale. These measuresappear sound in principle. However it may be desirable, in light offuture production and market developments, to make additional adjustmentsin these and other duties.

Aside from the devaluation, two other recent developments are likelyto affect Pakistan's short run prospects. First, serious floods arereported at present in East Pakistan for the second successive year.Both the jute and rice crops will probably be damaged, although theextent of damage cannot yet be estimated. It seems likely, however,that, an adequate supply of raw jute will be available even after f'loodlosses, since tlhe new crop was estimated by trade sources before theflood at 7.0-7.5 million bailes, or considerably in excess of tiheprobable demand for Pakietani jute in the 1955/56 season. In the caseof the rice crop the experience of last year indlcates that the fLoodlosses mayr be mitigated by replanting after the floods recede.

A second element of uncertainty is the food grain position in WIestPakistan. A preliminary estimate of the 1954-1955 wheat crop indicatesproduction of 3,134,000 tons, which is more than 500,000 tons belowi thepreceding year and is only about 120,000 tons above the production inthe first year of the 1951-1953 drought when a serious food shortageoccurred. The fall in production is apparently due to reduced yieldssince wheat acreage is reported to have increased slightly from lastyear. The situation may be eased somewhat by drawing on modest reservestocks which are reported to have been built up last year. The probableoutcome, on the basis of information presently available, is that thefood position in 1955-1956 will be tight, but that there will not be asevere shortage.


POPULATIO-N (million) 74,3 75.0 75.8 76.6 77.4NATIOINAL INW'Ox' AT FACTOR COST

(billion rupees) - 2/ 16.8 17.1 18.3 18.1 n.a n.aAGRICULTURAL PROIDUCTTON (000 tons) -

R_ce 81V71 RiO3 774,9 i8147 -4 -I "I

WEheat 3885 3950 3014 2438 3683 3134 -Cotton 219 247 247 31)4 252 4/ 280Jute 595 795 1131 1218 670 - 714 4-

INDUSTRIAL PRODUCTIONCotton Cloth (million yds) 92 106 128 174 252 345 85 81 86 94Cotton Yarn (million lbs) _/ 9 13 19 1/ 20 53 100 19 22 27 32Jute MAfrs. (600 tons) 1/ 0 0 1 - 18 - 44 53 14 8 13 19

GOVERiif.NT BUDGET (million rupees)-Ordinary Revenue 927 1273 1450 1286 1125 1155Expenditure 1409 1246 1692 2093 1849 2055

(Development Outlay) (169) (148) (297) (378) (482) (753)Excess of Expenditure r / 452 -27 242 o0O 724 900

INTERM!AL PUBLIC DFBT (million rupees)- 1203 1,392 1415 1589 1786 2121 1911 2009 2127 2121GOVERNMANT BALANCE i;;TH STATE BANK

(million rupees) 2/ 481 641 582 377 215 173 325 172 260 173 258COId .RCIAL BANMK PRIV'S CREDIT

(million rupees) 6/ 444 770 919 792 781 963 826 789 790 963 1028IMONEY SUPPLY (million rupees) 6/ 2791 2972 3764 3232 3569 3843 3703 3682 3586 3843 3918

PRICES - KARACHI COST OF LIVING INDEX(1950 . 100) 7 .03 .8/ 100 104 106 118 116 118 113 116 115 111

BALANCE OF PAY1 CNTS, QUNRENIT ACCOUNT(million rupees) _! lo/Receipts 1051 1363 2878 1916 1551 1275 395 302 227 350 389 -

Raw jute (376) (521) (1226) (729) (579) (q56) (166) (121) (85) (183)Raw cotton (283) (549) (1092) (807) (683) (370) (1)6) (104) (68) (51) 10/

Payments 1500 1511 2361 2767 1428 1437 378 400 335 323 322 -Sur-plus or Deficit (-) -449 -145 517 -851 123 -162 17 -98 -108 27 67 10/Errors and Omissions -63 34 2 -14 -2 0 0 0 n.a n.a n.a

TIMRhS OF TRA?E (Aoril 1940-l.iarch3949 = 100) '7/ 106 8/ 118 125 103 75 81 1-/74-11/ 86/ 8 l/ 86 -/

STATE BANK GOLD, DOLLAH Liq ,STERLINGHKSEHVFS (million riinees) 980 942 1482 606 689 631 720 630 561 631 677

! sear beginning April 1 2/ Crop years beginning in 'year indicated 3/ ?relimninary 4/ Trade estimateSurplus to mills' owm consumption 67 .d of ;eriod 7/ Average for period 7 April - December

9/ Transactions with India prior to Eebruary 27, ly951 anci with lqepal and TibeT prior to March 16, 1951, are exEluded. Transactions withAlghanistan are exclklUed t*r-ougiiouL.

10/ irress report (BIS ,ress Review No. 155, August li, 1955) Li irovisional- 19 -

INDIA

The deficit financing to which the govermnent resorted during thefirst half of 1955 to meet growing expenditures on development has not yethad any perceptible effect on the country's economic and financia:L stability.Prices have not changed significantly, and the balance of internationalpayments has remained unaffected.

Although the 1954-55 budget envisaged substantial deficit financing,there was apparently no need of this until the last quarter of the fiscalyear which ended I4arch 31. During that quarter the government debt heldby the Reserve Bank rose from Rs. 5.2 to Rs. 601 billion; and in the follow-ing quarter, the first of the 1955-56 fiscal year, there was a further riseto Rs. 6.3 billion. During the first half of the calendar year commercialbank credit, principally to the private sector, has been expanding somewihatmore rapidly than in the preceding year, rising from Es. 9.6 billion atthe end of 1954 to Es. 10.7 billion at the end of June 1955.

While these developments increased wrney supply during the first hailfof 1955 by Rs. 2.1 billion or by about 11%, no sign of inflation hasappeared. Wholesale prices and the cost of living have been lower thanin the corresponding period of the irevious year. While foreign assets ofthe Reserves Bank declined by Rs. 170 million in contrast to an increase ofRs. 130 million in the same half of 1954, this change was caused probablyby capital movements rather than foreign trade developments. During thefirst half of 1955 both imports and exports were about 15% above the levelof the preceding year and the total trade deficit of Rs. 370 million wasonly sligh-tly larger than in the corresponding period of 1954.

An ample supply of domestic goods has no doubt been the principalfactor cointributing to economic stability. The harvest of foodgrains in1954-55 - 63.6 million tons - was again very favorable even though it was4 million tons less than the 1953-54 record crop. The rice crop was about3 million tons below the bumper crop of the previous year, but thegovernment still holds reserve stocks of foodgrains in excess of 2 milliontons. Indulstrial crops in 1954-55 were the highest on record, with cottonand jute production, respectively, 20% and 50% higher than in 1954.Industrial output has also been at somewhat higher levels.

The extent of deficit financing through the remainder of the yearmay be reduced by the government's success in raising funds through theissue of long-term loans. Following the 1954 National Development loan,a new loan was issued in June 1955, through which the Central Governmentobtained in cash an amount of Rs. 458 million. It is expected thatanother loan will be floated in the fall of 1955. It is very likely thatunder the present circumstances the government will raise in the marketan amount higher than the Rs. 680 million enivisaged in the 1955-56 budget.In addition, it should be noted that State Governments issued loansamounting to about Rs. 200 million in August 1955.

- 20 -

- 21 -

Future developments will not only depend on such adventitious factors

as the climate, one of the principal determinants of the size of crops;but will be determined in large measure also by the targets and policiesincorporated in the Second Five-Year Plan which is to be inaugurated inApril 1956., While the final content of the Plan has not been determined,

a tentative outline prepared by Professor Mahalanobis was published. Ithas caused considerable discussion and controversy. Its principal featureswere:

(1) ll total public investment about double that in the first Five-,Year Plan;

(2) lieavy emphasis on the expansion of industry in the publicsector, particularly in steel, heavy machinery, and fertilizers;

(3) Severe restriction of further expansion of consumer goods

factory production, to be offset by a very large increase inthe output of cottage and predominantly handicraft industries;mnd

(4) Substantial reliance on deficit financing.

This tentative plan, reflecting very ambitious goals and a bias against

private ca-oitalist enterprise, is already undergoing substantial modifica-

tion. The restriction on consumer goods factory production has apparentlyalready been lifted and total investment target in this sector was increasedfrom Rs. 2',000 million to Rs. 7,500 million; and the conclusion that thecontemplated expansion of cottage industries is high3y unrealistic isgaining ground.

The tentative plan expected that out of total public developmentexpenditure of Rs. 43 billion, at least Rs. 10 to 12 billion would have tobe covered by deficit financing, even after making extremely optimisticallowances for additional government receipts. The Ministry of Financehas prepared its owm estimate of resources expected to be available forthe financing of the Second Five-Year Plan. It arrived at a figure ofRs. 20 billion to which an amount on deficit financing at a maximum ofRs. 10 billion was added. The Ministry of Finance has emphasized thattaxes would have to be raised and additional receipts obtained should the

new Plan aim at higher figures than are the resources estimated by the

Ministry. It may be assLumed that the Finance Ministry will continue its

practice and will increase investment expenditure gradually according to

the circumstances. In spite of the ambitious plan prepared by Mahalanobis,

it is possible to expect that the final plan will be more reasonable in

both its size and its orientation.

INDIA

1949 1'50 1951 1952 1953 1954 1954 1955

I rx: _n III_ IV I II InI IV

POPULATION (millicn) 353 358 362 367 372 377 382

NATIONAL INCOME (R3. billion) jNet National Cutput at factor cost 90.1 95.3 99.9 98.6 106.0 -

PR.0V75iW5TT0N Ci Or-DIc;nI;RATNS 1 /

Tidllicn tons,0 57.0 52.2 56.1 59.6 67.7 65.7 - -

INDUSTRIAL PRODUCTIONIndex: 1946 = 100 1C06 105 117 129 135 146 138 143 150 155 155

PRICESWholesale PricesIndex: 1938-39 = 100 380 401 439 387 394 388 396 393 382 375 360 343

MONEY SUPPLY (Rs. billion) 1(withl the public) 18.7 18.3 17-7 16.8 17.1 18.4 18.5 18.0 17.7 18.4 19.7 19.9

CENTRAL GOVERNIMFENT BIJDGET #/TThs. billion)Revenue Receipts 3-50 4.11 5.15 4.35 4.16 4.41* 1.07 .85 1.17 1.09 1.30

Revenue Expenditures 3/ 3.17 3.51 3.87 3.96 4,07 14.02* 1.55 .77 .82 .98 1.45

Capital Accounts (net)F3/ 1.29 .79 .71 .39 .24 .49* .05 .15 .05 .09 .20

Loans and Advances by Govt. (net)3/ .55 .58 .60 .85 1.24 2.25* .53 1.29 2.75* 14.04* n.a.

CENTRAL GOJERNEvNT DEBT /(Ps. billion )Total Interest Bearing j 25.1 25.6 26.2 26.5 27.0 29.4* 24.6 25.8 26.5 26.3

Held by Reserve Bank 5.1 5.4 5.8 5.6 5.1 4.9 5.0 5.1 5.2 4.9 5.6 5-9GOVERNMENT CASH BALANCES 2,

(Rs. -billionDeposits with Reserve Bank only 1.74 1.79 2.21 1.78 1.29 .71 1.28 1.37 1.56 .71 1.20 .71

COMERCIAL BANKS CREDIT 2/(Rs. billion)Domestic Loans and Investments 7.8 8.4 8.9 8.8 8.8 9.6 9.4 9.6 9.5 9.6 10.4 10.7

TRADE (Rs. billion)Imports 6.78 5.75 8.,2 8.40 5.77 5.92 1.32 1.45 1.50 1.68 1.69 1.54

Exp)orts 14.76 5.62 7.85 6.20 5.33 5.66 1.33 1114 1.44 1.74 1.52 1.32

Balance -2.02 -.13 -1.07 -2.20 - .114-7.2 .01 o .31 oO6 oO6 - .17 - .20

TE;RMvS OF THADE19148-449 - 1('0 10 106 125 101 97 98 95 95 98 106 107*

FOREIGN EXCHANGE RESERVES /(Ps . billion7)Reserve Bank only 8.26 8.34 7.81 7.06 7,23 7.31 7.53 7.44 7,31 7.31 7.30 7.14

* Provisional estimateFiscal year ending March 31 of folloving year

/ End of period3/ Quar1;erly data not exactly comparatle with yearly data.

CEYL0N

The substantial improvement in Ceylon's economic and financial situ-ation which took nlace in 1954 has been brough to a halt by the sharp dropin tea prices during the present year. Thaere is no indication, however, thatthe hard-w-on economic statbility of the country will be jeopardized, at leastas long as the government continues to adhere to reasonably conservative fin-ancial policies.

The year 1954 witnessed a remarkable recovery from a financial and eco-nomic crisis characterized by heavy government deiicits, a serious deteriorationin the balance of international payments and an alarming decline in foreign ex-change assets. The government reduced its expenditures drastically by cuttingthe public investment program and eliminating food subsidies. This adjustmentwas undouL)tedly greatly facilitated by a significarnt improvemenlt in the country'l.terms of trade. The decline in the price of irmorted rice cushionied the imi-pact of the abolition of food subsidies and lowered tlhe cost of imports. Theprice of tea rose steadily so that the government was able to raise the: exportduty tWice durinE 1954, from a level of Rs. 0.45 per lb. durinL the firsthalf of the year to Rs. 1.20 in December; and total tea exports amounted toRs. 1123 rmillion in 1954 as compared with only Rs. 825 million the previousyear.

Dur-Lng 1954, therefore, Ceylon was able to achieve a surplus both. inthe goverznient budget and in its international accounts. In the fiscal yearended September 1954 revenues rose and expenditures fell, so that, acocirdingto preliminary estimates, the budget closed with a surplus of Rs. 70 millionin contrast to the heavy deficits of the two preceding years. The foreigntrade deficit was converted into an export surplus of Rs. 412 million f'or theentire -ear 1954; and disposable foreiLn exchan-e reserves rose by Rs. 276million or 51%.

This favorable trend continued and was even accentuated during tiefirst quarter of 1955, but was then interrupted by the abrupt fall in teaprices. P?rices at the Colombo tea auctions (including export duty), whichhad risen from a monthly average of Rs. 2.30 per lb. in June 1953 to RS.4.40 in January 1955, declined sharply at the end of March 1955, and fellto an average of only Rs. 2.40 in June. The government has had to cut backits export duty successively from Rs. 1.20 to Rs. 0.50 per lb. 'The foreigntrade surplus shrank considerably in the second quarter of 1955 and tlheincrease in foreign exchange reserves'has evidently come to a halt.

At the present price of Rs. 2.40 per lb., tea exports, which mayreach about 330 million lbs., should yield about Rs. 800 million on anannual basis. Rubber prices have recently become very favorable and rubberexports should be somewhat larger than last year. Total export earning,sshould be sufficient to cover the cost of imports at the 1954 volume, con--sidering the fact that -rice imports will probably cost Rs. 50 million or20% less than in 1954.

- 23 -

- 24 -

The crttical question is whether the volume of imports can in fact bekept down. In the last year and a half imports have not risen commiensuratewith expoxl;s largely because the government skimmed off the greater part ofthe increased income from tea exports throulh rising export levies and thegovernment's own financial operations have been deflationary. In 1954 andthe first half of 1955 the government used a considerable part of its growingreceipts to reduce its debt to the Central Bank and build up its cash ba.lainces.The workers on tea estates profited to some extent from higher tea pricesthrough wage increases obtained in mid-1954, but the additional profits re-ceived by the estates themselves, particularly during the period of peak:prices from October 1954 to March 1955, were apparently used in considerablepart to increase their liquid reserves in the form of bank balances. Privatedemand and tirme deposits rose from Rs. 928 million at the end of June 1954to Rs. 1,133 million at the end of March 1955, but declined thereafter. Thesefactors altogether have kept imports at a rather modest level.

Whether or not a deficit wvill againdevelop in the balance of' internation-al payments will largely depend on the government's financial policies. Ifgovernment balances are rapidly reduced and there is renewed access to theCentral Pank in order to finance rising government expenditures, inflationarypressures will again become manifest and ingorts may rise rather rapidly- Inview of the substantial loss of export revenue from tea the goverinment c:anhardly afford to raise its total expenditures significantly except to the ex-tent of i.ncreased non-inflationary borrowing at home and abroad.

In this connection it should be noted that the budget proposals for1955/56 apparently envisage expenditures about 10% higher than those budgetedfor 1954/55. At the same time the _overnment has submitted to parliament asix-year inivestment program covering the period until October 1960, which con-templates public investment of a little over Rs. 2.5 billion, or an annuLalaverage of Rs. 420 million. This compares with about Rs. 300 million irn1953/54 and probably about Rs. 400 million in 1954/55. For 1955/56, howe-ver,investment outlays of Rs. 491 million have been budgeted, probably becausethe cash position of the government is still easy.

Although the possibility of a recurrence of inflation cannot be ruledout, the government will probably be quite cautious since the memory of thelast inflation is still vivid. The investment program is apparently notconceived as a detailed and binding blueprint, but permits flexibility inthe rate oi spending in accordance wtrith fluctuations in the available re-sources. Certain projects, amounting to is. 1.6 billion, have been given thehighest priority; and the remaining projects can apparently be del yed or a-bandoned in case the government rins short of resources.

CEYLON


POPULATION (million) 7.3 7.5 7.7 7.9 8.2 8.4 _ _ _ _ 8.7NTATIONAL INCOME (Rs. billion)

Gross National Product at factor cost 2.97 3.50 4.62 4.51 4.48 n.a. - - - --AGRICULTURAL PRODUCTION

Index: 1951 - 100 88 98 100 107 97 110 - - - -PRICES

Cost of Living: 1938-39 = 100 258 272 283 281 286 284 283 285 283 285 283 284MONEY SUPPLY (Rs. million) /(with the public)Currency 244 326 377 357 335 342 325 334 350 342 343 345*Demand Deposits 405 585 629 539 492 615 485 522 .532 615 611 575*Time Deposits 289 322 386 414 414 450 407 406 458 450 522 521*

GOVERNMENT BUDGET (Rs. million) ?/ /Revenue 576 623 836 875 871 941* 243 231 319 262 300*Expenditure 670 719 877 1,147 1,066 871* 184 236 300 189 190*Balance -94 -96 -41 -2 7 2 -195 70* 59 -5 19 73 110*Cash Operating Surplus or Deficit n.a. -160 -48 -257 -232 34 46 31 -68 76 84 40*

PUBLIC DEBT (Rs. million) / /(net of sinking funds)

External 80 76 73 73 66 126 74 128 126 130 133Internal 380 445 502 729 926 826 851 782 826 755 791

Held by Central Bank - - 3 130 216 84 127 48 84 27 18 20GOVERNiENT CASH BALANCES (Rs. million) 148 73 139 66 51 49 35 57 39 54 177COMMERCIAL BANKS CREDIT (Rs. million)j/,/306 401 420 480 478 535 473 488 493 535 569 533FOREIGN TRADE (Rs. million)

Imports 1,029 1,167 1,559 1,702 1,608 1,397 336 364 347 349 356 368Exports 1,063 1,563 1,904 1,502 1,568 1,809 429 416 506 460 534 419Balance -3 396 345 -200 -40 412 93 52 159 121 17t 51Tea Exports 650 752 800 723 825 1,123 243 296 300 283 359 260*

TERMS OF TRADE1948 a 100 112 147 151 109 122 155 125 131 138 164 179 156&

FOREIGN EXCHANGE RESERVES (Rs. million)!, 888 1,027 1,133 783 547 828 615 725 758 828 954 970*

* Provisional estimate

E Fiscal year beginning October 1 of preceding year.F Quarterly data not exactly comparable with yearly data.

Domestic loans and investments.

- 25 -

BURMA

Despite a recent firming up in the price of rice, Burma's economicsituation continued to deteriorate during the first h1lf of 1955. Thegovernment has failed so far to fulfill its original plans for marketingand shipping abroad a greatly increased volume of rice. On the other hand,reductions in the government spending program have not been on sufficientscale to offset the decline in resources resulting from the lower value ofrice exports. As a result, lheavy balance of payments deficits have reducedBurma's f'oreign exchange reserves from a comfortable amount to what is nowconsidered1 to be a minimum safe level. By trying to re-establish equi-Libriumthrough tighter control of private imports rather than through the reorgani-zation of' public finances, dangerous inflationary pressures are being created.

At thle beginning of the year, an export target of 2 million tons ofrice had 'been announced by the Minister of Trade Development. Only 800,000tons are reported to have been shipped up to the end of June--only slightlymore than in the first half of last year--and it has become clear that theoriginal target will not be reached by far. India and Ceylon--Burma's tra-ditional main customers--have expressed reluctance to buy any more ricethis year. New outlets for almost 500,000 tons have been found anong coun-tries of the Conmunist world, but at the price of barter agreements which mayprove onerous. In view of the current trends it is likely that the va:Lueof rice exports during 1955 will, at best, equal that of 1954 and will tihere-fore fall short of original government expectations by some K 150 mill:ion.Only a small increase can be expected from exports other than rice.

The loss of prospective resources resulting from developments on -therice market should have called for a substantial reduction in the rate ofgovernment spending. On the contrary, total government expenditures duringthe first five months of the fiscal year (October to February) were 12, higherthan in the corresponding period of the preceding year. While tax coLlections(especially on customs) increased substantially during the same period, otherfiscal resources (especially SAMB profits) declined sharply, so that a largedeficit was incurred. This was financed partly by borrowing from the bankingsystem, partly by further reducing government cash balances. Between Januaryand June 1955, the total public debt increased by nearly K 200 niillion andgovernment cash balances were reduced from K 200 to about K 80 million, Re-ductions in budget outlays were made in March, but not on a scale sufficientto restore financial equilibrium. Total budget appropriations for 195)4-55are still somewhat higher than those budgeted for 1953-54. The fact is thatlong-term commitments on ambitious development projects make it very diffi-cult to adjust expenditures to a shrinking amount of resources. At present,the government seems to be seeking a solution to this dilemma by obtaizingforeign assistance from various sources. Discussions are reported to havetaken place on the possibility of a long-term loan from the United Sta-tes,and the Indian Government has been approached for a short-term loan repayablethrough rice deliveries. Some additional resources are expected to accrueas a result of the Reparation Agreement ratified by the Japanese Governimentin March 1955. The Japanese Government has already agreed to finance theBalu Chaung hydro-electric project on which work was recently started byJapanese contractors.

- 26 -

- 27 -

The continuation of heavy purchases on account of the goveriment develop-ment program has tended so far to maintain imports at a level at least as highas last year. As a consequence, Burma's foreign exchange reserves fell atsuch a rate that various measures had to be taken in March to reduce imports.Import licences for non-necessary goods were reduced drastically and the governl-ment annoumced its intention to scale down the development program. Availablestatistical data do not yet show the effect of these measures on imports.Total foreign exchange reserves declined by K 180 million during the first halfof 1955, as compared with a decline of K 134 million during the correspondingperiod of last year. By the end of June 1955, total foreign exchange reservesamounted to less than K 500 million, of which K 406 million was held by theUnion Bank. This further deterioration of BuLrma's foreign exchange situationis given added significance by the fact that last year the deficit was inpart caused by capital repayments to the British Government and to Britishcompanies, while thereAuxe no such payments this year.

This rapid depletion of foreign balances has so far prevented the govern-ment deficit from generating domestic inflation. M4oney supply with the publichas only moderately increased, especially when compared with the 5% increaseexpected in real gross national income during 1954-55. Prices of domesticallyproduced commodities (mainly food) were generally on the decline during thefirst half of 1955. Substantial increases in the retail price of importedcommodities were reported in March and April after the curtailment of importlicences. This however did not affect appreciably the index of consumeirstprices which in June 1955 was 1% lower than ln December 1954 and 8% lowerthan a year ago.

While e:xisting government commitments prevent a rapid adjustment inforeign exchange expenditures, the revision in the development program under-taken by the government may in the long run produce a better balance betweenresources and outlays. Decisions have been taken not to initiate any new pro-jects except those expressly sanctioned by the Economic and Social Board.Some projects are said to have been stopped, and the timing of others alteredso as to spread expenditures over a longer period. The government has ex-pressed a determination to give more attention to the country's traditionalexports--rice, timber and minerals. In June the government also issued adeclaration greatly defining the field of activities in which private in-vestment, both foreign and domestic, would be welcomed and encouraged. Ihegovernment; has undertaken to enter into agreements protecting approved newprivate ventures against nationalization; and it has already issued a declar-ation guaranteeing that rubber plantations will not be nationalized for atleast 30 years. Much will depend, of course, on whether these decisions areactually carried out in practice.

BURMA


POPULATION (mnillion) 18.3 18.5 18.7 18.9 19.0 19.2 - - - - - 19.4 -NATIONAL INCOME (K billion) /

Gross National Product at marketprices 3.22 3.12 3.68 4,08 4.52 4.63 - - -

RICE PRODUCTION (million tons)Rice and Products 3,33 3.93 4.13 4.25 4.09 4.23 - - - - - - _ _

PRICESConsumer's Price Index: 1941 100 437 363 354 338 326 311 296 321 329 299 293 298*

MONEY SUPPLY VWith the public (K million) 600 551 606 634 780 859 981 947 923 859 1,029

GOVERNMENT BUDGET (K. million) 1/Tax Collections 2 174 227 305 345 374 444 101 130 122 114Other Receipts n.a. n.a. 362 356 567 366 n.a. n.a. n.a. n.a. n.a. n.a.Expenditure 3/ 542 481 506 645 993 1,382* 158 261 600 233

GOVERNMENT CASW BALANCES (K million) /(incl. State Boards) 123 278 432 572 478 336 239 335 209 336 174 233*

INTERNAL PUBLIC DEBT (K million) 2/Total 176 195 218 257 299 707 348 385 529 707 836 904*Held by Union Bank 134 144 156 162 150 389 150 245 291 389 452 476

COMMERCIAL BANKS CREDIT (K million) 7Domestic Loans and Investment 78 157 190 187 212 323 225 231 233 323 351 375

FOREIGN TRADE (K million)Exchange Transactions:Imports n.a. 508 658 778 952 1J097 249 283 312 252 253Exports n.a. 724 963 1,153 1,219 989 251 315 217 206 229Balance n.a. 216 305 375 367 -10 2-95 -46 -24Rice Exports 1/ 595 576 758 809 1,019 840 235 286 189 207 207* 217*

TERMS OF TRADE I/1952 - loU 46 41 88 89 122 105

FOREIGN EXCHANGE RESERVES (K million)?/ 567 607 792 993 1,072 678 991 938 760 678 610 495*

* Provisional estimate1 Fiscal year beginning October 1 of preceding yearY End of period.I/ Quarterly data not exactly comparable with yearly data.

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THAILAND

Since the beginning of 1955, Thailand has progressively adjustedits trade and exchange system to the fall in the world price of rice.So far this adjustment has been carried out successfully. On the otherhand, these changes have virtually eliminated the foreign exchange profitsof the Pank of Thailand, which were previously the major source of non-inflationary financing, available to the Government outside of ordinarybudget revenue. The Government, however, has not yet taken all the stepsto augment its income and reduce its expenditures which have become neces-sary as a result of these changes.

The following decisions on the trade and exchange system were takenat the beginning of 1955:

1. On january 1, the rice export trade was transferred from the Governmentrice monopoly to private traders. At the same time the percentage offoreign exchange proceeds from rice exports required to be surrenderedto the Bank of Thailand at the official rate (012.45 per U.6. dollar)was reduced from virtually 100% to approximately 50%. The other 50%could be sold on the free market at about a2L-22 per dollar. A part ofthe increased profits thus accruing to exporters was taken away byincreasing the rice export tax from l150 to 0400 per ton.

2. In February it was decided that, in mid-year, the official rate of thebaht would be changed from /12.5 to ,20 per dollar.

3. In preparation for this step the gold and foreign exchange in thlecurrency reserve were to be revalued immediately at the rate of $20to the dollar. The foreign exchange thus released from the currencyreserve was to be used to establishan Exchange Equalization Fund whichwould, through open market operations, stabilize exchange rates within2% of the recent average free rate.

4. F:inally it was decided that, in mid-year, foreign exchange surrenderrequirements on rice (approximately 50O), rubber (20%) and -tin (20-)would be abolished, and simultaneously all Government departments andagencies would have to obtain their foreign exchange needs in thefree market. it the same time the export taxes on rice and rubberand the royalties on tin were to be raised in order to compensate theGovernment, entirely or in part, for the loss of resources previouslyavailable to it in the form of the Bank of Thailand's foreign exchangeprofits.

The return of rice exports to private traders and reduction in foreignexchange surrender requirements at the beginning of the year has had thedesireoleffect of introducing flexibility into the rice trade and stimu-lating exports. At the end of 1954 government to government sales forwhite rice with 20% brokens were quoted at ;47 per ton f.o.b. Bangkok, butno sales had been concluded for several months and exports were taperingoff. '[n contrast to this rigidity under Government monopoly, the pricefell in January 1955 to L40-3/4; since then there has been a progressiverecovery to L43 in Mvlarch and E46 in August. Meanwhile exports began to

- 29 -

- 30 -

move at a faster pace, rising to 346,000 tons in the first quarter 1955and an estimated 389,000 tons in the second quarter. The quantity shippedin the first half of the year was thus about 50% higher than in the sameperiocd of 1954 and very close to shipments in the first half of 1953.The vElue of rice exports during the first half of 1955 amounted to aboutU.S. $90 million, as compared to less than $70 million in the corres-ponding period last year; it was, however, well below the total of $115million in the first half of 1953 wnen prices were much higher. Riceexports in the second half of 1955 .re likely to be considerablyr smallerthan in the first half, since a poor harvest has reduced the total exportavailability for this year, including the substantial carry-over from lastyear, to an estimated 1.1-1.2 million tons. Assuming a more normal harvest,the voluxne of rice exports in 1956 and after, may be expected to increase.

Rubber exports also progressed favorably in the first p2rt of 1955,reflecting the improvement in world demand and price since early 1954. Thaiexports registered a modest increase in volume, but nearly doubled in valuebetween the first quarters of 1954 and 1955. The value in the latter periodwas almost $20 million, nearly half as large as rice exports. Tin exportsincreased slightly in volume and value in the first quarter 1955, as com-pared to the corresponding period of last year.

rlo figures of total exports and no import figures have been publishedfor 1955. It is clear, ho-7ever, that the trade and balance of paymentsposition improved substantially as indicated by a rise in the Bank ofThailand's gold and foreign exchange holdings by 4$37 million in the firsthalf of 1955, in contrast to a decline of !36 million in the first half of1954.

Aside from the action taken on rice exports, the other policiesannouniced at the beginning of 1955 have been only partially implemented.In March the gold and foreign exchange currency reserves in the IssueDepartment of the Bank of Thailand were revalued at the rate of $20 to theU.S. dollar. The book-keeping profit is estimated at about $2.1 billion.Appro :imately $300 million was used immediately to write off a debt repres-enting the Government's guarantee of the currency issue. In July in accor-dance with an Act of Parliament, an additional $300 million was used toretire war claims against the Thai Government and an equivalent amount offrozen sterling assets were eliminated from the Issue Department of the Bankof Thailand; and the rest of the profit, estimated at about 1.5 billion,was transferred outside the Issue Department, with approximately 0l.34

billion ($65 million) allocated to a newly established Exchange EqualizationFund and the remainder to the reimbursement of losses incurred by the Bankof Thailand on sales of foreign exchange at 12.5 per dollar for Governmentpurchases and students' remittances abroad. The Government dollar debt tothe Bank of Thailand (Currency Rteserve Loan) of $1.2 billion is still thesame as before the revaluation. In August a further step was taken towardimplementation of the new policies when the foreign exchange surrenderrequirements on rice and tin were abolished.

Ihus, the steps which presumably must still be taken are to changethe official rate of the baht from %12.5 to $20 per dollar; to initiate

- 31 -

operations by the Excchange Equalization Fund to stuabilize exc'Lange rates;to re-value the -old and foreign exchange assets in the Ban-king Delartmnentof the Bank, of Thailand (w,Yhich amounted to about [624l million in June 1955);to ston sales of foreign exchange at 112.5 per dollar to the Government andstudents; to abolish the requirement to surrender 20% of ruQbber exportproceeds at $120I5 per dollar; and to increase export taxes on rice andrubber and the royalties on tin.

T'he limited available infon,-,ation indicates that the internal finan-cial situation was relatively s-table in the first part of 1955, afterallowing for seasonal factors. The currency in circulation outside the Bankof Thailand increased by about 0360 million, or approximately 7%. The Bang-kok cost of livirfg index increased 12.5/; in June it was about 2% highert1han a year earlier. The rise in the currency circulation w.as considerablyless than might have been expected in view, of the substantial increase in th1eBank of Thailand's foreign exchange holdings. It therefore seems Probablethat the Government had only a moderate -deficit in the first half of the yeir,The deficit for the whole year may be much large however, since Governmentexpenditures frequently lag in the first part of the year and tlhen acceler-ate toward the end of the year.

Early in 1955 the overall cash deficit of the Treasury for the yearwas estimated at roughly $630 million (excluding refunding of Treasurybills) compared to more than $1,200 million in 1954. The improvrement wasexpected from a reduction of about $400 million in cash outlays and anincrease of about $200 million in receipts. It was planned to financethe deficit as followJs: $217 million fron U.S. grants, $65 million fromIBRD loans (including $8 million from old loans and $57 million from. therecent railway loan), 0250 million of Government bond sales to the public,and $98 million of new borrowing from the Bank of Thailand. The full amountanticipated from IB3-1D loans may not be realized. Horeover, of the $250million estimated receipts from bond sales, 0200 million were dependent onlegislation which would require life insurance companies to hold governmentbonds as part of their assets and importers to maintain marginal depositson their cornmercial credit in cash or bonds. The available informationindicates that this legislation has not yet been enacted. Consequentlythe Government rm-ay iwell find it necessary to borrow considerably more thanthe estirated $98 million from the Bank of Thailand. Since there nowaopears little likelihood that this borrowing would be offset byr foreignexchanige profits, such financing would add to the money supply, which isalready increasing as a result of the balance of payments surplus and risingforeign exchange holdings. This points to thfe necessity for implementingthe remainder of the policies announced at t;he beginning of the year, par-ticullarl,y the cessation of foreign exchange sales to the Government at12.5 -per dollar and the increase in export taxes on rice, rubber and -tin.

It also suggests that it may be necessary -to cut Government expenditureseven further in order to bring theimr within the available means of non-inflationary financing.

- 32 -

In conclusion, Thailand has made notable progress in 1955 in adjustingits trade and exchange policies to world market' conditions. Tf the budgetestimates prove to be approximately correct, good progress will also havebeen achieved toward fiscal stability, although additionlal measures stillappear necessary to increase Government revenues and reduce expenditures.

19249 1950 1951 1952 1953 1954 1954I II III IT I III

POPULATION (million) 18.1 18.5 18.8 19.2 19.6 19.9 .. - - 20.3NATIONAL INCONE (billion Baht)

Net Domestic Income at factor cost 20.1 23.4 25.0 26.0 n.ao n.e-. - - - - -

RICE PRODUCTION (million tons)Rice and Products 4.94 5.02 5.43 4.89 6.10 4.28 _ _ . - - - -

Cost of Living In Bangkok: 1950 = 100 97 100 111 124 136 135 141 141 129 128 139 144No ifUPP$Y (billion Baht)(with the publ(c) 3.11 3.97 4.91 4.93 5.44 6.o6 5.69 5.42 5.68 6.06 6.48

GOXERM£NT suDaET (billllon Baht) 2/-Revenue 1.92 2.14 2.52 3.34 3.93 4.18 1.02 1.06 1.07 1.07 .93 1.173xpendi tures 2.03 2.27 3,23 4.27 5.57 4.93 1.02 1.21 1.42 1,329 1.15. 1.38Deficit -.11 -. 13 -. 71 - .93 -1.64 -. 75 - .15 - .35 - .32 - .22 - .21Joreign Exchange Profits of the Bankof Thailand and the Government .33 .44 .43 .65 .58 .73 1 9 .2 W .092/ .183/ .071'/- .0 3/

INTETATP PULIC DEBT 1/ V/(billion BDht' 1.35 1.37 1.73 2.59 4.88 6.26 5.48 5.69 5.77 6.26 6.45 6.34*

G-OA33TKT CASH BALANCE 1./(million Baht) 626 578 753 841 1,221 974 1.5t9 1,300 1,056 974 944

CONNERCIAL BANKS CREDIT(billion Bebt) .87 .97 1.17 1.64 2.23 2.61 2.34 2.40 2.60 2.61

YORSO TRKn (million U.S. $)Imports 193 209 272 300 336 314 79 82 81 72]Morts 274 i06 173 333 323 271 67 62 70 74Balance 81 97 101 33 -13 _41 _12 a20 -11 2

EIQE PORT8 (million U.S. $) 195 180 198 216 214 135 38 31 36 30 41 50*(000 tons) 1,216 1,489 1,577 1,425 1,341 1,003 Z54 231 276 243 346 389*

UNIT L yLU 2L OF !PORTS(in terr of U.S. $) 1950 * 100 108 100 118 115 113 99 102 98 97 96 96

IOREIGN =CHOAJG EESERIY I/ j/San of Thallaud (million U.S. $including gold) 176 257 342 337 286 264 275 250 250 264 279 301

*Provisional estimate1/ Ena of period.g Quarterly figures are provisional estimates which have not been reconciled with the annual data.g Profits of the Bank of Thailand only.

H Hold almost entirely by the Bank of Thailand.j/ Excluding frozen sterling assets.

- 33 -

JAPAN

The Japanese economy in the first half of 1955 continued on therelatively favorable course marked in 1954. Internal inflationary pres;ureswere kept under control; there was again a surplus of foreign exchangereceipts; some further gains were recorded in industrial production,although at a slower pace than in previous years; and a favorable 1954r-55rice crop was achieved, in contrast to the disappointing harvest of 1953-54.While Japan't s trade deficit in the first half of 1955 was larger than thesmall deficit in the last half of 1954, the import surplus was only abouthalf that :for January-June 1954. After taking into account special recaiptsfrom the U.S. and other invisibles and an increase in deferred liabiliti.es,the balance in foreign exchange transactions showed a surplus of $140 mi.llion,as compared to the $277 million surplus of July-December 1954. Thesesurpluses were a marked change from the heavy foreign exchange deficits of1953 and the first part of 1954. At the same time much of the inflationaryinfluence of these surpluses and of an increase in the treasury deficitfor the fiscal year ending in March 1955 has been counteracted by the'tight mon.ey"Z policy of the banking system under which the expansion ofbank credi' has been reduced to a slower rate than the accumulations ofsavings and timie deposits. Consequently, the total money supply at the endof May 1955 was only slightly above that of the preceding May, the inteinalprice level has remained steady, and the index of export prices hEas declinedwith an average for January-April 1955 about 6% less than in the same periodof 1954. Meanwhile, the output in most industrial fields in recent monthshas been somewhat above the comparable period of 1954 although, largelybecause of credit restrictions and curtailed industrial funds, the rates; ofgrowth of industrial production and of consumption over the past 18 monthshave been iar less than at any other time since the war. Rice supplies inlate 1954 and early 1955 were well above the preceding year following thefavorable 1954-55 harvest. Recent reports indicate prospects for a 1955-56crop as large or pci'haps larger.

The i.mprovement in Japan's foreign exchange position has been the morestriking in view of the reduction in special procurement expenditures ofthe U.S. ar-med forces by about $200 million in 1954 and by a further cutin special receipts from the U.S. in 1955. The improvement in the lasthalf of 1954 was the result of a substantial increase in export earningsand a marked reduction in imports, which reduced Japants trade deficit toabout $77 million, compared with $580 million in the last half of 1953 and$690 million in the first half of 1954. The rise in exports was attributableto a relaxe.tion of sterling area restrictions on Japanese goods whichespecially stimulated cotton textile exports, to generally favorablebusiness and demand conditions in other Japanese markets, and to thedisinflationary credit policies which were accompanied by some reductionin export prices and increased attention to the export market. The dropin imports followed a high import rate and a marked accumulation ofmanufacturing inventories in-the first half of 1954 and was also fosteredby an improved food supply position in the latter half of the year. Taking1954 as a whole the total value and quantity of imports were at aboutthe same level as in 1953.

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In the first half of 1955 the increased export rate was largelysustained. Import levels, however, increased in the second quarter of1955 and this trend together with a reported weakening of textile marketsand uncertain demand prospects in the sterling area suggest that thetrade deficit for the last half of the year may be larger than duringJanuary-June.

With the improved balance of payments position Japan's foreign assetsincreased from $830 million in June 1954 to $1,253 million, or about 50%'of the recent alnual level of imports, at the end of June 1955. A heavydollar trade deficit continues, however, and declining special receiptsfrom the U.S. can be expected to create a more difficult dollar problemalthough some dollar trade advantage may result from Japan's recentmembership in GATT and U.S. tariff concessions scheduled to go into effecton September 10. Official dollar balances have declined from $679 millionat the end of 1953 to $564 million at the end of 1954 and to $501 millionat the end of June 1955.

A major factor affecting Japan's trade position will be the extent towhich further internal inflationary pressures can be avoided. Restrictivecredit policies continued through the first half of 1955 with banc creditincreasing only slightly and to a much smaller extent than the growth insavings and time deposits. In the same period the government treasuryalso ran a substantial surplus in cash transactions with the publicalthough tlhis is a usual seasonal phenomenon. Meanwhile, after a con-siderable delay, the budget for the fiscal year ending March 1956 has nowbeen adopted which, if adhered to, is not likely to generate significantinflationary influences.

Nevertheless, considerable pressure may be expected for some relaxaLtionof credit and fiscal policies. Under the restrictive credit policies ofthe past year there was a very sharp reduction in the availability of fundsfor industrial equipment and working capital as well as a curtailed rateof growth in internal consumption demand. Considerable opposition hasbeen voiced to the extent of the restrictions and the banking system,having greatly reduced its indebtedness to the Bank of Japan over the past18 months, is now in a somewhat more independent position regarding thefurther continuation of the credit curbs. In estimating an increase in theavailability of industrial funds in fiscal 1955-56 over the preceding ye,ar,the Ministry of Finance has assumed a substantial increase in the availabilityof credit Jrom financial institutions. This is based on the rates of growthin deposits but if it is to take place without a revival of inflationarYpressures it will be essential for the government to adhere to a stablefiscal position.

On thef fiscal side it remains to be seen, then, whether there will bea repetition of the experience of fiscal 1954-55 when, despite announceddisinflationary fiscal policies, the initial budget expenditure estimateswere exceecled with the result that spending rose by about X 100 billionover fiscal 1953-54 and treasury transactions with the Dublic (excludingthe foreign exchange fund) ended with a deficit of X 116 billion wlhich wasconsiderably larger than the deficit of the preceding year. And in view

of Japan's overall investment requirements and the shortage of investmentfunds it is somewhat disturbing that in order to reach agreement on thecurrent budget the proposed outlays on investment were reduced while aidto servicemen and other general spending was increased and taxes, whichwere already proposed at a lower level than last year, were furtherreduced.

Assuming that a stable fiscal policy will be followed, it should bepossible for Japan to avoid serious inroads into its foreign exchangeposition in the near future even though the trade and balance of payment.sposition may be somewhat less favorable than in the first part of 1955.Under the same assumption it should also be possible to realize theprediction of the Ministry of Finance that a somewhat easier credit andindustrial fund supply situation in the current fiscal year might developto the advantage of domestic output and consumption and without adversemonetary and balance of payments consequences.

JAPAN

194 9 1950 1951 1952 1953 1954 1954 1955I II Ill IV I II Ill IV

POPULAT1iON (millions)(as of October) 81.8 83.2 84.6 85.9 87.0 88.3

GROSS NATIONAL PRODUCT (billions of yen)UTor year beginning April) 3,375 3,971 5,541 6,182 7,156 -

INDEX OF REAL INCOME PER CAPITA(year beginning April)1934-36 = 100 69.0 82.9 88.1 98.1 105.9 -

INDUSTRIAL PRODUCTION1934-36 - 100 71.0 83.6 114.4 126.4 155.1 165.4 162.7 165.2 159.8 168.0 162.3 - - -

MANUFACTURING PRODUCTIONi95 =100 8c4 I5 156 1?5 21 210 208 208A 218 209 22t

RICE PADDY PRODUCTION(thousand metric tons) 11,929 12,005 11,302 12,404 10,298 11,392

WHOLESALE PRICES(end of period)1950 = 100 85 100 139 141 142 1142 146 139 139 139 141 1381/

COST OF LIVING (end of period)1950 = 100 107 100 116 121 130 137 138 138 137 134 135 .134

MOIZY SUPPLY (billions of yen)(end of period)1Currency and Deposits with public 678 789 1,048 1,265 1,439 1,463 1,277 1,262 1,221 1i463 1,285 1,314-'

CENTRAL GOVERNMENT TRFASURY TRANSACTIONSWITH PUBLIC (billions of yen)

Balance for fiscal year beginning Aprilor fcr quartera. Including foreign _xchange

transactions 34.6 -52.0 37.1 -0.7 63.6 -191.2 206.6 -27.1 1.1 -267.4 102.5 -33.4b. Excluding foreign exchange

transactions 91.1 93.8 98.6 17.9 -66.2 -116.8 1214.1 -56.0 16.1 -203.5 126.6 -.2.0BANK LOANS AND DEPOSITS (billions of yen)

(end of period)Loans and Investments 627 937 14415 1,981 2,502 2,752 2,536 2,560 2,634 2,752 2,77L 2,822Time Deposits 283 420 667 1,031 1,336 1,588 1,377 1,408 14491 1,588 1,673 1,726Government Deposits with Banks 19 61 33 93 84 84 130 80 63 84 238 150

VALUE OF TRADE (millions of U.S. $)Imports 905 974 1,995 2,028 24409 2,399 723 689 499 489 576 646Exports 510 820 1,358 1,273 1,275 1,629 343 377 417 492 433 460Balance -395 -154 -637 -755 -1,134 -770 -380 -312 -82 3 -143 -186

VOLUME OF TRADE (1950 = 100)Imports 87 1'0 147 165 227 234 280 267 192 194 232 247Exports 54 1(0 106 106 119 156 126 142 158 194 169 176

TERMS OF TRADE (1950 = 100) 106 10.0 108 116 119 121 124 113 121 115 121 -PRINCIPAL EXPORTSCotton fabrics

Value (millions of U.S. $) 135 206 310 180 179 252 66 61 58 68- 49 -Quantity (million sq. yards) - 1,108 1,078 762 914 1,278 327 302 296 353 252 -

Machinery & Transport equipment 2Value (millions of U.S. ) 54Y 7 9 108 116 189 202 41 51 51 59 43 -

Iron and Steel 3/Value (millions of U.S. $) 684/ 74 205 263 140 166 34 30 39 57 57 -Quantity (thousand metric tons) - 717 963 1,633 843 1,183 198 175 295 489 505 -

Rayon fabrics 3/Value (millions of U.S. $) - 49 86 65 72 103 22 25 20 30 28 -Quantity (rllion sq. yards) - 197 293 300 373 576 109 131 3.19 240 174 -

ChemicalsValue (millions of U.S. $) 5 16 36 40 62 79 13 24 20 22 22 -

BA.LANCE OF FOREIGN EXCHANGE TRANSACTION1S(in millions of 11.S. $)Tv al Trasactions 331 331 314 -193 100 -162 -16 95 '8 82 58U.S. Dollar Transactions - - 69 188 209 -92 -151 -56 47 68 -71 -

U.S. MILITARY EXPENDlTURF.S AND OTHERINVISIBLES

U.S. Dollar Receipts (in millions of U.S. $) - - 907 900 889 712 146 188 211 166 1140 -

1/ May 19552/ Machinery onrly'/ Differences between 1954 annual and quarterly figures are probably attributable to year end revisions in annual figu.res7 Tnnludes snmn ntlhmr m-toL R nd metal ornducts.

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