COLONIAL STERLING BALANCES (Hansard, 14 May 1956)

§ Mr. Norman Pannell (Liverpool, Kirkdale)

I welcome this opportunity to draw attention to one aspect of the country's economic situation which is too often overlooked. I refer to the vast sums which are deposited in this country on behalf of members of the Commonwealth and of the Colonies. As the recent White Paper on the United Kingdom balance of payments shows, these sums amounted at the end of 1955 to nearly £3,000 million The actual sum was £2,972 million, comprising £1,281 million on behalf of the Colonies and £1,691 million on behalf of the Commonwealth and other sterling countries. Whereas, however, during the year the Commonwealth countries had drawn on their balances to the extent of £132 million, the Colonies had increased the balances deposited in this country by £58 million. It is this debt to the Colonies to which I wish particularly to refer.

We pride ourselves on our efforts to assist the Colonies through the colonial development and welfare fund and by other means, but the fact remains that the deposits of the Colonies in this country far exceed the amounts which we so disburse. At the end of 1951, the amount so deposited by the Colonies amounted to £928 million. At the end of 1955, it was £1,281 million, or an increase during the four years of £353 million.

The Colonies have, in general, since the war enjoyed a period of unprecedented prosperity, and it has no doubt been a convenience for them to deposit the surplus balances on their trading and revenue accounts in this country. Indeed, if they disbursed these immense sums within the Colonies, that would give rise to gross inflation. Furthermore, these sums represent a useful cushion against any future economic setback. It is, however, also a fact that these countries are, in the generally accepted sense, backward countries in need of funds for economic development. They deposit their sterling balances with this country 1791 in the knowledge that they can draw upon them at will, and they frame their development of projects with this consideration in mind.

The day is undoubtedly approaching when these Colonies will no longer be depositing their surplus with this country but will be drawing on the balances already here. As they move towards self-government and thus gain complete control of their own financial affairs, there will no longer be any restraining influence to limit such demands. If, instead of accumulating funds on behalf of the Colonies at the rate of £90 million a year, we were to pay back at that rate or, perhaps, even higher, the effect that that would have on our economy is apparent.

In illustration of my point, I should like to refer briefly to two Colonies of which I have special knowledge—the Gold Coast and Nigeria. Each of these Colonies has deposited with this country approximately £200 million, or £400 million in all. Both of these Colonies are on the thresshold of self-government and will shortly be able to demand repayment of these sums in furtherance of their ambitious development schemes.

When these sums are eventually drawn upon, the Colonies in question may elect to spend the money so drawn upon capital equipment from this country. If they elect to take that desirable course, there will be no adverse effect on our gold and dollar reserves; but the exports would come in the unrequited category, and as such would represent a severe drain upon our economy. But we must also contemplate the possibility that these Colonies will decide to spend the money which they draw from this country on purchases outside the sterling area. To the extent that they do that, there will be a corresponding drain of a serious character upon our gold and dollar reserves.

It will be recognised that both the Gold Coast and Nigeria, like so many other Colonies, are large dollar earners, and they may feel that they have a moral as well as a legal right to spend their money in the country of their choice. It is their own money, accumulated in this country, and they may take that decision. It is hoped that when those Colonies achieve their independence they will remain in the sterling area, and if they do 1792 so they may realise that any severe drain on the gold and dollar reserves will eventually redound to their detriment as well as to the detriment of this country.

However, there is a most disturbing tendency in both the Gold Coast and Nigeria. They are showing an increasing tendency to purchase their requirements from outside the United Kingdom. The figures I have show that in 1953 the Gold Coast imported from this country goods to the value of £42 million. In 1954 such imports fell to £34 million. Yet in 1953 the exports of the Gold Coast to this country were £37 million and in 1954 they rose to £46 million.

The position is similar in relation to Nigeria. The imports of Nigeria from this country in 1953 were £57 million and in 1954 they fell to £51 million. Yet Nigeria's exports to this country in 1953 were £98 million and rose in 1954 to £105 million. It is, therefore, clear that those Colonies rely very largely on this country as an outlet for their exports; but they call on us to a less and less degree every year for their own requirements.

That is, in my view, a tendency which it is necessary to arrest. It is necessary to persuade those countries to import more from this country. There, however, is a difficulty. Neither the Gold Coast nor Nigeria can reciprocate in regard to Imperial Preference. We grant Imperial Preference to imports from those countries, but they cannot grant preference to imports from the United Kingdom. This is largely on account of long-standing international agreements.

In the Gold Coast, the Anglo-Dutch Convention of 1871 prevented the Gold Coast from giving preference to goods from the United Kingdom. When the General Agreement on Tariffs and Trade was introduced, that position was confirmed, and no preference could then be granted.

The case of Nigeria is slightly different. There the Anglo-French Agreement of 1898 operated to prevent Nigeria from giving preference to goods from this country, but that Agreement was unilaterally denounced by France in 1936. Consequently, after that denunciation by the French, we were in a position to arrange, as we had control of Nigeria's affairs then, for preference to be given to imports from the United Kingdom into Nigeria. Unfortunately, we did not do so. We 1793 thought that it was not in the interests of international commerce to do so. Having lost that opportunity, when the General Agreement on Tariffs and Trade was introduced in 1947, we were precluded from arranging for any preference in Nigeria for goods from the United Kingdom.

This is an extremely anomalous situation. The French Colony of Dahomey, which lies between the Gold Coast and Nigeria, can and does discriminate against goods from the United Kingdom, yet neither the Gold Coast nor Nigeria may discriminate against French goods in favour of goods from the United Kingdom or any other country. That is a situation which, I submit, demands urgent consideration, and we must endeavour to arrange for the preference which we grant to these Colonies to be reciprocal.

We adhere rigidly to international agreements which are flagrantly infringed and unilaterally denounced by other countries. I do not suggest that we should follow their example. I think we should seek a modification of the provisions of the General Agreement on Tariffs and Trade in relation to the countries within the Commonwealth, so that the principle of Imperial Preference operates on a reciprocal basis to the mutual benefit of this country and the Colonies themselves.

§ The Economic Secretary to the Treasury (Sir Edward Boyle)

It is certainly a pleasure to reply to this debate, initiated by my hon. Friend the Member for Kirkdale (Mr. N. Pannell), who has such a fine record of achievement and experience in the West African territories.

It is perfectly true that there has been a very large increase in the sterling balances deposited by the Colonies in the United Kingdom. In fact, from the end of 1949 to the end of 1955, these sterling balances rose by about £700 million, which is over 100 per cent. At the same time, in order to get this very large increase into perspective, we have to remember that total colonial exports and total colonial Government revenue also rose by 100 per cent. in that period. Indeed it is estimated that the total 1794 national income of the Colonies also increased by 70 per cent.

At 31st December, 1955, which is the last convenient date for which we have a figure available, colonial sterling balances in the United Kingdom stood at £1,280 million. Of course, it is equally true that the existence of those sterling balances and the fact that they have grown is mainly the result of the deliberate policies pursued by the Colonial Territories themselves, in particular, the policies of Malaya, the Gold Coast and Nigeria, in taking advantage of a period of favourable export prices to build up considerable reserves for the future.

What are the reasons for the existence of these large sterling balances? I suggest that the matter can best be put in this way. Since few Colonies possess either a local money market or real opportunities for local investment, and since London offers such attractive, convenient and profitable facilities for liquid investment, it is natural that the Colonies should habitually deposit their surplus funds in London.

Those surplus funds take many forms. Some of them are no more than cover for the existing liabilities of colonial Governments—such liabilities as pensions and sinking funds. On the other hand, some of these surplus funds are reserve funds for general budgetary purposes, and the decision as to the size at which they should be kept is wholly one for the colonial Government concerned.

Again, other surplus funds are special reserves for development, and the use of them, once more, is entirely a matter for the colonial Government whose funds they are. Finally, some of the surplus funds are reserves of various marketing boards or price assistance funds which have been set up, mainly in West and East Africa, to help to stabilise the prices of their products to producers; and, here again, the policy of those boards is entirely a matter for local decision.

In fact, the only surplus funds the size of which is at all affected by the United Kingdom Government are the funds of savings banks and those used as backing for the currency. Here once again the policy nowadays is to give the colonial Governments discretion to invest a reasonable proportion of their funds in local loans for developments.

1795 All these funds to which I have referred to a very considerable extent reflect the policies of colonial Governments and other public bodies, and about one-fifth of the Colonies' sterling assets consist of London balances of cemmercial banks operating in the Colonies. How much they might choose to hold in this way is entirely a matter for the banks themselves, but, since the greater part of the colonial banking system is an extension of the British banking system and has its headquarters in London, it is only natural that they should leave the greater part of their surplus balances in London.

Now a word about the reasons for the growth in the sterling assets of the Colonies. The reason for that striking growth between the end of 1949 and the end of 1955 are to be found both in the current surplus in the balance of payments of the Colonies in general, particularly of the West African and Malayan territories, and in the increase of long-term capital which has been invested in the Colonies. Between 1950 and 1952 when, as hon. Members opposite would recall, if they were here, there was a very large boom in prices for commodity exports, most Colonies enjoyed abnormally high export earnings. West Africa had the same advantage again in 1954 and Malaya in 1955.

Those earnings were not completely balanced by increases in expenditure, since colonial Governments adopted the policy of putting into reserves for future use a large part of those earnings. Nobody will dispute that that was generally a wise policy. Clearly the Colonies will need much money for future development, and they could not possibly have developed so fast nor so unevenly as to use such a large inflow of money as it came in.

Let me turn to the attitude of Her Majesty's Government. This is really the most important part of what I have to say. At the end of my speech I will try to answer the specific points which my hon. Friend the Member for Kirkdale raised. It will be clear that the Colonies hold their sterling balances in London willingly and because it is to their advantage so to do. Balances are not frozen in any sense of the term. They are required as the reserves of Governments and other institutions, and they can be drawn an at any time.

1796 More than one-quarter of them is held in liquid form, cash, Treasury Bills, or other short-term forms. The existence of these reserves does not impede economic development. On the contrary, it enables the Colonies' development to go forward without financial impediment at the maximum level at which the Colonies' physical and technical resources allow. It is perfectly true that the United Kingdom has certainly benefited from the inflow of short-term capital from the Colonies to the London market. I do not at all dispute that, but it is not a flow of capital which the United Kingdom is in a position to control. What the United Kingdom can do, and what, indeed, it is doing, is to assist the economic development in the Colonies deliberately and directly by providing for an outflow of long-term capital from the United Kingdom.

Thus, while the Colonies' sterling balances rose, as I have said, by £700 million from the end of 1949 to the end of 1955, investments, grants and long-term loans from the United Kingdom to the Colonies in the same period amounted to approximately £600 million. It may interest the House to know that of that £600 million, £150 million consisted of grants from the United Kingdom Government, another £150 million represented official capital of all kinds and some £300 million represented private capital. Therefore, there was just about a 50 per cent. split between private capital on the one hand and other forms of capital on the other. That is not an unsatisfactory position.

The present high level of colonial sterling balances is good reason for satisfaction in the Colonial Territories and provides, I hope the House will agree, a firm basis for confidence in the Colonies' capacity for continued steady expansion over the next few years. I know that some people would like to contrast the growth of the colonial sterling balances with our investments in the Colonies, and to point out, as they would claim, that we have been borrowing short and lending long. If anybody feels inclined to take that line it is worth pointing out, as I have done already, that a considerable proportion of the colonial sterling balances are there simply because the Colonies at all times need certain reserves and find it convenient, because of the 1797 facilities provided by London, to keep those reserves in sterling.

I reiterate that Her Majesty's Government are determined to maintain the security and the value of the sterling reserves, and, even in a relatively short debate such as this, I should not like to refer to this subject without once again reaffirming categorically our intention to maintain the exchange value of sterling, if only because of its all-important effect on the sterling area. I want to assert strongly—that we are determined to maintain the existing exchange parity of the £ sterling, realising what it means to the sterling area.

My hon. Friend raised the question of preferences under G.A.T.T. This is really a matter for my right hon. Friend the President of the Board of Trade rather than for myself. It has been discussed in this House on a number of occasions. All I would say is that if we are to be members of G.A.T.T. we have to obey the rules. I believe that it is in our interest to press that these rules should be obeyed by all its members, and I say to my hon. Friend, do not let us under-rate the advantages that we have gained through that organisation. However, I would not like at this hour, and without preparation, to enter into a debate on that subject with my hon. Friend, particularly as it is not directly the responsibility of the Department which I represent.

It is I rue that Colonies with large development reserves could draw on them and they could place a heavy weight on 1798 the United Kingdom economy. Well, this is a responsibility which we in the United Kingdom must accept, and do accept, and our policies here are shaped in the knowledge that we have these and other liabilities.

My last point, which I want to stress strongly, is this. I think that this point underlines the need for the United Kingdom to have a large continuing current surplus on our balance of payments. I sometimes think that people in this country do not invariably distinguish between gold and dollar reserves of the sterling area and the current surplus of the United Kingdom. Both are equally important. It is extremely important that we keep sterling as a strong international currency. We also need to build up our reserves, which is one of the primary aims of the policy of my right hon. Friend the Chancellor of the Exchequer. In addition, we have to see that we earn a large current surplus of at least £200 million a year on current account.

All those aims Her Majesty's Government are resolutely pursuing and I, for one, was glad to hear the unequivocal declaration from the right hon. Gentleman the Member for Huyton (Mr. Wilson), in an earlier debate this year, that these are not just party aims but are aims shared by all the main political parties in this House.