§ I now turn to the capital account. During 1968 the net effect of the capital account on the balance of payments was a debit of only £39 million. But the make-up was complicated. Our official capital transactions showed a small surplus, despite the aid loans we have provided. But this surplus resulted from drawings on the U.S. aircraft loans, which will soon give way to net repayments; and we took a bisque on the North American loans.
§ Private capital transactions were in moderate deficit. Both inward and outward investment increased. There was a large inflow of inward direct investment. The outflow of private portfolio investment to Australia was very large in the first half of 1968, though it has since declined. There was also a large amount of both direct investment and portfolio investment in the non-Sterling Area, almost all financed either by reinvested overseas profits or by overseas borrowing, not all of which shows statistically as helping the published balance of payments.
§ It is therefore not the case, as is sometimes suggested, that in the past year, or in the two or three years preceding it, the capital account has been responsible for a large part of our difficulties. Indeed in the second half of 1968 it helped to bring us close to the elimination of the deficit.
§ The Government's policies on private overseas investment are as follows. Broadly speaking, we allow overseas direct investment which can be arranged so as to impose no burden for any significant period on our reserves. In transactions with the non-Sterling Area, we allow official exchange for investment only under the special arrangements introduced just over a year ago to assist certain projects directed to promoting immediate export sales. These have met an important need, and the scale and cost has been a little less than we expected.
§ On a much larger scale, we permit investments which can be financed by 996 foreign borrowing—usually from the international markets—on terms which can be met from the earnings of the investments. We allow within limits reasonable plough-back of retained profits from existing investments.
§ In transactions with the Sterling Area, there is under the Voluntary Programme a standing request for retraint by British companies and institutions in their direct and portfolio investment in Australia, New Zealand, South Africa and the Irish Republic. The effects, though irksome, have been of great value. Companies and institutions have responded loyally throughout. I ask that they should continue to abide by the Voluntary Programme.
§ The continuation of the Voluntary Programme has been explained to the Governments of the four Sterling Area countries concerned. I am glad to express my appreciation of the understanding way in which they have received this necessary but unwelcome news.
§ I can, however, make one change in the Voluntary Programme, which will be welcome to certain investment trusts and similar institutions, and which can be made without cost to our reserves. Until now, in addition to the provisions of the Programme which apply to investment in the four Sterling Area countries, and which all remain in force, investment institutions have also been requested not to increase above the level of 3rd May, 1966, their portfolio holdings of foreign currency securities, that is, securities denominated in a currency of the non-Sterling Area. From today this part of the Voluntary Programme is abolished. Investment trusts, pension funds, and other institutions concerned with portfolio investment, may consider themselves free to acquire foreign currency securities within the normal rules of Exchange Control, irrespective of the level of their holdings in May, 1966. Details of this change are being communicated to those concerned. Investment in foreign currency securities by United Kingdom residents, including institutions, is in> any case permissible only through the investment currency market, or with special permission in certain cases by overseas borrowing. These arrangements will continue to ensure that there is no net call on our reserves for this purpose.
997§ With this exception, the current policies on overseas investment must continue. Whatever rate of return overseas investment may provide in the long run, we cannot at present afford significant initial outflows of funds from our reserves to finance it. Our policies are not, and are not intended to be, totally restrictive of overseas investment. Their object is to avoid immediate burdens on the reserves. As a result of our policies this country is maintaining a high level of direct overseas investment, with its undoubted future benefits, and doing this with minimal call on the reserves.