DRAIN ON STERLING AREA’S BALANCES

Press, Volume XCIX, Issue 29265, 25 July 1960, Page 20

DRAIN ON STERLING AREA’S BALANCES

(By

“LOMBARD",

of the "Financial Times"}

The sterling balances problem has on the whole proved to be a good deal easier to deal with than, it was generally expected it would be in the initial postwar period, mainly because it has usually been found that when some members of the £ area were drawing on their London funds others were conveniently adding to them. But it looks as though we are now entering a ■ nhase durin, which withdrawals from the “£ bank” may be exceeding new deposits by a fairly substantial margin. Some of the overseas £ Area countries found themselves forced to dip into their London funds to a marked extent when their export earnings were hit by the slide in commodity prices that was one of the principal features of the deterioration in the world economic climate in 1957-58. But this event generated no major problem in the sterling balances field, the flight from the £ that provoked the U.K. authorities’ 7 per cent Bank Rate action in the autumn of 1957 having been largely due to other factors. And quite early in 1958 the total of the balances was again rising. It continued to climb up to the end of 1959. But early this year the movement flattened out and there are a number of indications that in recent months the trend has become downward. This at all events is the conclusion that seems to emerge from a country-by-country examination of the payments circumstances of the principal overseas members of the sterling family. To begin with. South Africa—a country that was adding steadily to its London funds last year—has drawn them down to the extent of no less than £4om since the outflow of capital touched oi by domestic racial troubles swung the overall balance of payments in deficit back in March. Then there is Australia. The upsurge in imports that has followed the abolition of the official ceiling early this year has caused a deterioration in the current account balance of payments which has already combined with seasonal factors to start London funds falling and is expected to produce a much more substantial decline in them later. Indian Fall

Turning to the Indian sub-Con-tinent, India herself has made inroads into her balances of the order of some £4om during the last few months, the first time she has drawn on them to any substantial extent since she was extricated from her mid-1958 payments crisis by a stop-gap foreign assistance programme. The downward drift in Ceylon’s balances that set in last year appears to be continuing. And though Pakistan has been relatively successful in matching, with an increase

in exports, the upsurge in imports that has come in the wake of her new economic liberalisation programme, the advance in her London funds that was going on throughout 1959 has stopped. Happily, fears that British colonies granted their independence would promptly begin to dig deeply into sterling reserves to finance ambitious development programmes have not on the whole been borne out. But Ghana did allow her external spendings to race ahead at a much faster pace than her earnings last year, with the result that she set in motion a downward movement in London funds that is almost certainly still going on. Meanwhile, the upward movement in Malaya’s London funds in progress in 1959 seems to have more or less petered out. And the Rhodesian Federation has reported a deterioration in its sterling reserves experience since the beginning of this year. The Moral The picture is not altogether without its brighter spots. Thus both New Zealand and the Irish Republic have continued to report stable sterling reserves in recent months. And the latest Treasury round-up showed that in the first quarter of the year the U.K.’s dependencies actually added £27m to their London funds. But the broad implication of this review is that the “downs” are currently tending in total to move well ahead of the “ups.” Drawings on the £ balances need not be an embarrassment to the U.K. if they are merely for the purpose of covering net payments to this country—for then no disturbance to the £ area’s balance of payments with the outside world is involved. And for that reason the run-down in the £ balances of the Union and other African countries may be of less significance than at first appears. For it reflects to an important degree the repatriation of British-owned capital. But if that puts the change in the trend of the £ balances in a rather better light, there is another consideration that makes it rather more worrying. It is that the increased expenditure on imports by the overseas £ area countries is to a substantial extent in non-sterling countries. So their drawings on London funds must tend to be translated into drawings on our external reserves.

The moral is that, from now on, it is going to be just as desirable to push exports to the sterling markets as to push those to the non-sterling world.

SIR JOSEPH G. D. WARD. Bt.. Stock and Share Broker (Member Cbch Stock Exchange) 141 Hereford st, Christchurch. Commercial Bank Chambers, "Phone 77-905: P.O. Box 603. —Advt.