§ Our balance of payments problem is a formidable one. But we can take some satisfaction from the reduction we have made this year in our deficit on non-oil account. Our non-oil deficit was running at £240 million a month in the last quarter of 1973. Over recent months it has averaged some £80 million a month—a reduction of two-thirds—and at that level it was more than covered by our invisible earnings. On the other hand, as I have said, we have been paying £2,500 million more this year for a smaller quantity of oil. So our overall trade deficit is larger than it has been at any time before 1974.
§ One reason for the recovery in our external trade performance has been the recent halt in the rise of import prices. 247 With export prices still rising fast, this improvement in our terms of trade has helped to narrow the visible trade gap. I now expect that our external deficit on current account this year will be below the figure of £4,000 million which has generally been predicted as the minimum.
§ It is immensely difficult to make any meaningful forecasts for the year ahead. As I have said, estimates for the growth in the volume of world trade have been steadily revised downwards over recent months.
§ It is even more difficult to make a judgment about the competitiveness of our export prices next year compared with those of our main competitors. We can at least agree that, at a time when the growth in world trade is shrinking, it is vitally important that our export costs are not unnecessarily inflated by excessive wage increases.
§ I have some concern that not all British firms are taking full advantage of the exceptional opportunities for exports now opening in the oil-producing countries. Some are putting a great deal of effort into this field. But I hope that more will do so. All oil-producing countries are planning to use as much of their revenues as they can on internal development and expansion. Their imports will accordingly rise rapidly in the next few years and the scope for higher British exports here should be very great indeed.
§ Nevertheless, as I have said, the oil-consuming countries will have to share enormous deficits over the coming years in their trade on oil account, though these can be expected to decrease in time as the oil-producing countries expand their imports. I already recognise this and others will have to do so. I notice that my French colleague, Monsieur Fourcade, has recently stated that French borrowings are likely to total at least $6,000 million this year.
§ We shall therefore continue with the programme for foreign borrowing by the public sector which was started by the previous Government to finance its non-oil deficit long before the increase in oil prices. I have already announced that for technical reasons I have begun to draw on the $2.5 billion borrowing arrangement which I announced in my March Budget Statement. In addition to borrowing in United States dollars, we have seen a sub 248 stantial contribution to our external financing needs through sterling inflows—investment in sterling assets of many kinds. There is no doubt that this willingness to invest in sterling reflects the scale, range, flexibility—and reliability—of the channels offered by the London market—an aspect of the City's rôle which all of us must welcome.
§ In this connection, I now wish to announce a decision I have taken about the present guarantee of certain official overseas holdings of sterling. The guarantee expires at the end of this year, and I have had to consider whether it should be replaced. There are a number of considerations.
§ In the past, the sterling guarantees have made an important contribution to international financial stability. But they were conceived in the international financial situation of 1968. The situation was already very different by September 1973, when the original 1968 Agreements expired. Since then it has been further transformed by the rise in oil prices and the associated emergence of the huge petrodollar surpluses. Against this massive change in the international financial situation, the guarantees have lost much of their relevance. The present guarantee arrangement, which runs to the end of the year applies to only a small proportion of total sterling holdings. The reason is that, like its immediate predecessor, it sets an upper limit on the balances covered, so no sterling holdings built up since September 1973 have been guaranteed. Moreover, the question of the investment of the surplus oil revenues has given this area of policy an international dimension which makes such guarantees inappropriate.
§ I have therefore concluded that the right course is to discontinue guarantees altogether when the present arrangement lapses, and I am so informing the Governments concerned. I am sure that there need be no regret at the passing of an arrangement which has now become largely irrelevant, harking back, as it does, to so different a set of circumstances.
§ I might add that it seems most unlikely that any payment will become due at the end of this year under the present guarantee.
§ What I have said about borrowing and about overseas investments in sterling reflects my expectation that we foresee 249 no difficulty in financing the current account deficit. But I want to make it quite clear that this does not mean that I contemplate borrowing indefinitely on anything like the present scale. I am determined that the balance of payments shall show a continuing and sustained improvement, and this will be a crucial objective of my strategy for the economy over the next four years.