France - Current economic position and prospects

RICTED FILE CGp R IRECWT ED FILE7 C? I eport No. E.A. 55-a REr- This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT GURRENT ECONOMIC POSITION AND PROSPECTS OF FRANCE z W A s 1 0- z Europe, Africa and Australasia CURRENCY EQUIVALENTS PAR VALUES U.S. $1 a Frs. 350.0 Frs. 1 = .2857 U.S. cents Frs. 1 million a U.S. $2,857 Frs. 1 billion a U.S. $2.857 million TABLE OF CONTENTS Pape Charts Basic Data Progress and Stability 1 The Public Finances 2 The External Position 3 FRANCE BALANCE OF PAYMENTS (BILLIONS OF U.S. DOLLARS) ALL 0 2.0 2.5 3.0 3.5 4.0 4.5 CURRENCIES RECEIPTS 1950-- PAYMENTS 1951 RECEIPTS PAYMENTS RECEIPTS 952 PAYMENTS . RECEIPTS 19 5 3 . . . . . . . . . . . . . . PAYMENTS IPPOTSMNDNTTE CAPITAL.......... (NE)GN ORNLOSS RECEIPTS 19504 AMET EXPPNDIENTS PAYMENTS ISERVICSN OTHER CAPITAL (NET) GAINE OR EOSS RECEIPTSVE U.S. DOLLAR ) EXPORTS ANo .5 1.0 15 9ACCOUNT SEVIE I /USAID 1953 PACMENTS................ 1954 PAYMENTS GROSS NATIONAL EXPENDITURE (BILLIONS OF CURRENT FRANCS) 15,000 _15,OC 2,500 9,5.1: INVESTMENT 12 C PAYMENGVERMEN CONSUMPTIO........ O,000 10,0c 7, 50----- --7, 50( 7/29/55 1951 1952 1953 1954 IO49 18RD - Economic Staff FRANCE EXTERNAL TRADE OF METROPOLITAN FRANCE WITH FOREIGN COUNTRIES WITH FRANC AREA TOTAL 5 5 VALUE (BILLIONS OF U.S. DOLLAR EQUIVALENTS) IMPORTS 3 3 I,, EXPORTS 3' 250 r-250 .VOLUME (INDEX, 1949=100) 200 ---200 EXPORTS 150- 150 100/-*-IMPORTS 0110 100 -qn- 100 50 -I I t 1 50 '38 '48 '50 '52 '54 '38 '48 '50 '52 '54 '38 '48 '50 '52 '54 200 200 UNIT VALUE (INDEX, 1949=100) 1 0IMPORTS15 100 100 50 .50 125 I25 TERMS OF TRADE (INDEX, 1949 100) 100 \100 75 75 50 150 '48 '49 '50 '51 '52 '53 '54 '48 '49 '50 '51 '52 '53 '54 '48 '49 '50 '51 '52 '53 '54 7/29/55 1050 IBRD - Economic Staff FRANCE EXTERNAL DEBT SERVICE REQUIREMENTS 300 (MILLIONS OF U.S. DOLLARS) A 300 3000 ALL CURRENCIES. 200 · .200 INTERES TOTAL 100 - 100 AMORTIZATION O --O TOTAL U.S. DOLLARS \00 -100 y,xAMORTIZATIO0 N 1955 1960 1965 1970 1975 1980 BUDGET EXPENDITURE (BILLIONS OF FRANCS) 0 CURRENT 1,000 * MILITARY 2,00ORECONSTRUCTION 3,000 4,000 CIVIL EXPENDITURE EXPENDITURES FUND EQUIPMENT 1951 1952 1954 195 5 .x×. >× . . ..<.>×.×. . ..<.x.>.?. *Excluding those financed by U. S. xEstimated FINANCING THE TREASURY CASH DEFICIT (BILLIONS OF FRANCS) 200 SAVINGS BK 400 600 800 1,000 A,,U. S. AID FUNDSý 19 J +-.THERý 1951 NET BANK CREDIT- v,TREASURY BILLS HELD BY THE PUBLIC 1952 19 5 3 -×>------- : 1954 MEDIUM AND LONG-TERM ISSUES SUBSCRIBED BY THE PUBLIC REPAYMENT OF BANK CREDIT WHOLESALE PRICES, COST OF LIVING AND MONEY SUPPLY (INDEX, 1949 100) 200 . . I I . - 200 OUARTERLY MONEY SUPPLY COST OF LIVING (PARIS) ISO 150 WHOLESALE PRICES 100 100 50 ' ' '' 50 l Il III IV i il III IV i Il Ill IV i 11 i IV I il III IV l Il III IV l lil IlI IV i il III IV 7/29/55 1948 1949 1950 1951 1952 1953 1954 1955 1051 IBRD- Economic Stoff FRANCE PRODUCTION INDEXES (1938=100) 2 0 0 ,, , , , , . . . . . . . . . . . . . . . . . 2 0 0 QUARTERLY CAPITAL GOODS FUEL AND POWER BUILDING(EXCL. BLD G.) 1 50 -INDEX - - I150O 100 ..100 GENERAL INDEX (EXCL.BLDG.) CONSUMERS GOODS 50 " t I ' ' ' , I 50 |9 2 9 11 1 IV 1 II Ill IV I 11 Ill IV 1 II 1ll IV 1 II III IV I II III IV 1 II Il1 IV I II 1ll IV 1948 1949 1950 1951 1952 1953 1954 1955 SELECTED INDUSTRIAL PRODUCTS (MILLIONS OF METRIC TONS) 100 - - .150 5 COAL ALUMINUM (Primary) CRUDE STEEL* so FTOTAL .100 S- 60 . 40 - .050 5 5 FRANCE 20 - *A O 0 50 ____________* Includes ingots and castings .6007- O 001 TEXTILES TOTAL ELECTRICITY CEMENT 40 -(MILLIONS OF KWH) .400 -OTAL TO.AL 10 300 WOOL .200 5' COTTON10 N.A. O 0 0 '29 '38 '48 '50 '52 '54 '29 '38 '48 '50 '52 '54 '29 t38 '48.'50 '52'54 SELECTED FOOD PRODUCTS 20 13 200--- CEREALS (MILLIONS MEAT MILK AND WINE OF METRIC TONS) (THOUSANDS OF (MILLIONS OF METRICTONS)HECTOLITERS) TOTAL 50 20TOTAL M LK OTHER~~T **PRDCTION OTHER 0.. 5 -50 BEEF ) WINE of 00 '34-38 '48 '50 '52 '54 '34-38 '48 '50 '52 '54 134-38 '48 '50 '52 '54 AV. AV. AV. 7/05 IBRD- Economic Staff x10FANC FRANCE - BASIC DATA Population: (January 1, 1955) 43.2 million Area: 219,000 sq. miles Working Population: 20.0 million Distribution by Branch of Activity: Agriculture, forestry,fishing 29% Trade and services 17% Industry 37% Government and professional 11% Transport 5% All other 1% Gross National Expenditure: 1954 (preliminary) billion francs Private consumption 10,040 Government consumption 2,550 Gross domestic investment 2,140 Net foreign investment - 10 Gross national expenditure 14,720 External Trade 1954: $ million equivalent Non- Total Dollar Sterling sterling Other foreign Rest of area area EPU foreign countries franc area Total Exports 272 437 1,499 551 2,759 1,562 4,321 Imports LA 1.125 L6 3.173 1,175 i,2A Balance -202 -688 +43 + -41 .±3:87 -_2 Balance of Payments with Foreign Countries: 1954 Goods and services -313 Foreign government expenditures +575 Current account balance +262 External debt - December 31, 1954 Total $2,880 million equivalent of which: U.S. dollar $2,113 million Canadian dollar $ 201 million equivalent Sterling $ 191 million equivalent Swiss franc $ 118 million equivalent CURRENT ECONOMIC POSITION AND PROSPECTS OF FRANCE 1. The Bank last considered the French economy in May 1954 in connection with the French West African Railway Loan (100 FR), The Economic Report that was presented to the Executive Directors at that time ./ summarized the situation in the following terms: "France, together with the rest of the French Union, has a rare combination of material resources. Until the economy lost momentum in the course of 1952, the use that had been made of them since the war had not only made good the lack of progress in many of the inter-war years but carried industrial, and to a lesser extent, agricultural output to new peaks. Indeed, the real increase in French output compared very favorably with that of other European countries. Yet rapid gains have gone with inflation and when prices have been stable or falling, output has been stable or falling too. The general problem is therefore how to reconcile progress and stability. Political-insta- bility has made it difficult to compress the large number of claims on the economy that pass through the Budget. The public finances have lost their flexibility and the Treasury is liable to be overburdened even when the economy as a whole is not. The balance of payments difficulties that went with infla- tion have persisted beyond the end of inflation, because of the price disparities that inflation left behind. The inflow of U.S. aid in support of the war in Indo-China is however relieving the strain both on the budget and on the foreign exchange reserves. It gives France a breathing space in which to regain her competitive position and attain external balance, while continuing to export capital to the rest of the franc area and reduce the level of her own foreign indebtedness." 2. Since that report was written, there has been an end to the war in Indo- China that had burdened the French economy and finances since the Second World War. Yet the armistice, however important psychologically and dramatic political- ly, was much less so from the economic and financial point of view: before the war ended, U.S. aid had begun to relieve the budgetary burden, but expenditures have run on since the end of the war because of the time needed to redeploy-, troops and to dismantle installations. It is consequently not possible to say in any simple or definite way what was the effect of the end of the war, but several points will be noted in the following paragraphs. 3.- The present report is limited to a review of what has been happening, during the "breathing space" and how the situation and prospects now appear. It does not set out to reassess the creditworthiness of France, for no such reassessment is required. Instead three subjects have been chosen for particu- lar comment. The first and most important is what has long appeared to be a dilemma of stability or progress, for the other two - the public finances and the external position - are directly affected by it. Progress and Stability 4. In the last 18 months, the economy has given evidence of considerable progress, though the symptoms perhaps exaggerate the extent of recovery, as in the past they frequently exaggerated the degree of sickness. The outstanding fact has been that for the first time in many years output has gone up and prices have not. Since the beginning of 1954, wholesale prices have continued to drift downwards and retail prices.have risen by less than 1%, yet production, 1/ E.A. 28a - "The Economy of France," May 24, 1954 - 2 - in defiance of precedent, has risen sharply. Industrial production in 1954 ran 9% over 1953. Expansion continued into 1955; production in June was 11% higher than in June 1954 and 19% above June 1953. Some sectors still hung back, textiles being the most important, whereas metal fabricating, automobiles and electrical equipment recorded progress well above the average. 5. Expansion affected most sectors because a variety of steps was tAken to bring it about. Two general wage increases stimulated the demand for consumer goods and durable consumer goods benefited from a notable extension of install- ment credit. The weather was kind and high farm production meant generally higher incomes for a sector that had long lagged behind. Cheaper and more extensive loans encouraged building and the capital goods industries more gener- ally profited from tax rebates and higher Government spending. Exporters were encouraged by measures to overcome price disparities. 6. These stimuli, rather than rising prices, were enough to start output rising, but the fact that prices did not come under pressure as incomes in- creased seems to have been due to three factors. First, there was idle capacity, for 1952 and 1953 had been recession years. Secondly, the rise in disposable incomes coincided with high farm output, so that higher expenditure on foodstuffs for once did not touch off a dangerous rise in food prices. Thirdly, confidence in the franc was maintained and the revival of saving which had begun in 1953 was continued. Moreover, the volume of savings through conventional channels increased and made possible a recovery, still young, but important, in the capi- tal market. 7. Employment is now running at a very high level. Labor shortages are appearing, particularly in the building industry. A comparison of the rise in output with that in employment suggests some increase in productivity but, compared at the current exchange rate, French costs are still generally above those of competitors and industry is having to absorb wage increases amounting on the average to about 8% in the course of little over a year. So long as wages were also rising rapidly elsewhere and nothing was being done to neutral- ize their effect, France was at least not getting further out of line. But the U.S., the U.K., Belgium and Germany have now tightened credit and continued expansion by France alone could endanger the progress made thus far. The Public Finances 8. Over the last 18 months, the position of the Treasury has, in a narrow sense, improved considerably. But the central problem of compressing public expenditures remains substantially unsolved. Each year the budget continues to be larger than the one before. Reductions in military expenditures made possible by the end of hostilities in Indo-China have been offset by rising civil expenditures and the part of the national product that is channeled through the budget remairs high. 9. The financial strain of the Indo-China war was at its greatest in 1953, when budgetary costs amounted to about 400 billion francs ($1.1 billion equiva- lent). In 1954 they were reduced to 250 billion francs, of which the U.S. reim- bursed over 120 billion francs, and for the current year have been estimated at about 100 billion francs. The whole military budget for 1955 is a little under 1,000 billion francs ($2.8 billion) or 28% of all budget expenditures - 3 - as compared with 1,233 billion francs (A3..5 billion), or more than one-third of the budget in 1953. Some of the economies made possible by the end of the war have been more than offset by higher military spending elsewhere and by higher subsidies, salaries and debt service. 10. The Treasury cash deficit, after taking U. S. aid into account, has been around 650 billion francs ($1.8 billion) for the last three years. But whereas in 1953 the Treasury had to have recourse to advances of 228 billion francs from the Bank of France, in 1954 it was able to reduce outstanding advances by 65 billion francs, essentially by substituting for bank credit funds from savings bank deposits and short- and medium-term loans. The liquidity of the Treasury has further increased in the first half of 1955. 11. That the Treasury position is comparatively easy does not mean that its basic weakness has been overcome. The Treasury is still called on to finance and underwrite large capital expenditures in the nationalized and private sec- tors. In so doing it has had to sacrifice the flexibility that should come from using the money market to take up the slack between seasonal variations in the inflow of revenue and the outflow of expenditures. The essence of the crisis in 1953, when the Treasury had to have exceptional recourse to the Bank of Ftance, was that it had no margin to deal with a sudden spurt in expenditures that in fact lasted for only a few months. 12. In the past such crises have had a damaging effect on confidence and hence on the stability of the currency over and above the directly inflationary expansion of bank credit involved. The amount of public and parliamentary attention still given to the deficit suggests that the factor of confidence cannot yet be ignored. The recovery of confidence and of sqvings has made considerable progress but recovery is incomplete if it means only that the Treasury is better able to provide funds for investment rather than that there is less and less need for it to do so. The External Position 13. The external position of France has improved considerably in the last 18 months, although,as in the case of the public finances, the improvement in the liquid position, in this case in French foreign exchange reserves, has been more far reaching than the improvement in the fundamental position alone would warrant. 14. French exports to foreign countries rose in volume by no less than 17% in 1954. The value rose by somewhat less, because the increase in volume went with, and undoubtedly was closely associated with, a decline in average prices. Imports rose in volume by 5%, with only a small decline in prices. On a pay- ments basis, the trade deficit with foreign countries was reduced in the course of the year by $160 laillion equivalent. The trade position has continued to improve in the first six months of 1955, the deficit being only half as large as that recorded in the first six months of 1954. Imports have continued to rise as a result of high industrial output and consumer spending. But exports have continued to rise in value twice as fast. 15. The main contribution to a better trade position came from agriculture. 1954 was an excellent year, following a good year in 1953. Large quantities of grain and meat allowed economies in imports and became available for export. Sales of foodstuffs, mainly in Western Europe, rose by 120 million equivalent during 1954 and are continuing at a high rate. Part of the increase in food- stuffs represented recovery of former sales and the gains achieved in steel products, electrical equipment and chemicals, though smaller in extent, repre- sented more solid progress. 16. The fact that the trade position has improved does not mean that the problem of prices has been resolved. Disparities in price between French pro- ducers and their main competitors at the existing rate of exchange have been reduced, but the Treasury paid out the equivalent of $240 million on export subsidies of one kind or another during 1954 and as quotas were removed from imports from OEEC countries "compensatory" import taxes of up to 15% were imposed. Export subsidies represented a little less than 9% of the value of all exports to foreign countries but as one-third did not receive any relief, the average rate on subsidized exports was about 13%. Rates on different groups of commodities varied considerably and subsidies onagricultural pro- ducts in particular represented a large proportion of the value of agricultural exports. 17. In addition to the improvements in the trade position, France paid out less in freight and took in more from tourists in 1954, so that the deficit in the "normal" goods and services account fell from 1538 million to $313 million. But receipts from off-shore orders, troop pay and other "foreign government expenditures" rose by $100 million to no less than $575 million. When these current, if exceptional, receipts were brought into account, France showed a current surplus with foreign countries of $262 million, which the deficit of the Vest of the franc area reduced by only $68 million. 18. France also received over $500 million in U.S. aid, of which $320 mil- lion was in respect of Indo-China costs. France took advantage of these receipts to prepay debt to EPU, the U.S. and Switzerland in the amount of about $175 million equivalent in addition to routine debt payments. After all other capital operations, she was left with $350 million to add to reserves. The balance sheet of the Bank of France shows that reserves went up by about $100 million more, due mainly to purchases of dishoarded gold by the Stabili- zation Fund on the Paris market. 19. An important part of the exceptional dollar receipts in 1954 resulted from commitments made in earlier years. France is likely to benefit by a further $700-$800 million in 1955 from off-shore orders and aid already com- mitted, in addition to about $200 million from troop pay and supplies to U.S. forces in France. But new commitments are very small and early in 1956 the inflow of exceptional receipts can be expected to taper off sharply. But if the trade position continues to improve, France could well enter 1956 with gold and dollar reserves comfortably exceeding $2 billion, a three-fold increase since the middle of 1953. 20. France is currently regaining gold paid to EPU prior to July 1, 1954 in 8ettlememt of deficits in excess of her quota. Up to the end of the July 195 settlement, she had regained $108 million as a result of building up a cumulative surplus of that amount since July 1954, and has a balance of about p260 million to recover if she continues in surplus. The existence of EPU has been of crucial importance to France because once she had pulled her accounts with continental Europe into surplus, she could use the balance to settle her persistent sterling deficit. EPU's second attraction, as a source of dollars, has latterly been of less importance to her because of exceptional dollar receipts. Their impending decline and the approaching end of EPU itself may pose transition- al problems. But every step away from bilateralism makes it easier for France to service her external debt and convertibility of the currencies of her major trading partners has always been regarded as essential to her long run external well being.