No. E 51 CONFIDENTIAL

This report is restricted to those members of Public Disclosure Authorized the staff to whose work it directly relates,

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

ECONOMIC AND FINANCIAL ASPECTS OF THE BELGIAN LOAN APPLICATION

June 28, 1949 Public Disclosure Authorized Public Disclosure Authorized

Economic Department Prepared by Alexander Stevenson TABLE OF CONTENTS

Page

Summary and Conclusions i Introduction 1

Present Program of State Investment 1

(1) The Extraordinary Budget 1

(2) The Housing Program 2 (3) Reconstruction of War Damage 3 Parastatal Agencies 3 Financing the 1949 Deficit .5

The FinancL~g of Additional Investment 8 The I'Ionetary Effects of an IBRD Loan 11 The Projects Submitted for IBRD Financing 15

Annex I and II ECONOMIC AND FIliANCIA1 ASPECTS OF THE BE1G!A~J LOAN APPI.ICAT!ON

Summary and Conclusions

1. The Belgian Government has applied for a loan of ;;pl09 million for local currency financing. The Belgian franc counterpart would be used to finance a program of railroad electrification and port expansion and modernization.

2. Present investment programs of the state itself and the para- statal agencies, which may be judged as at least politically incompressible if not always economically wise, call for funds to be obligated in 1949 amounting to about 24 billion Belgian francs of which about 17 billion may be said to be assured now, leaving a deficit of about 7 billion francs to be covered if these investment programs are to be completed, 3. The Belgian Government believes, apparently with good reason, that it can finance a deficit of this magnitude by recourse to the local capital market. However, the actual cash deficit may be larger, especially since there is at present a deficit of about 2 billion francs (annual rate) in the ordinary and war budgets, and since the Belgian Treasury must find an additional 950 million francs to pay the National Bank for dollars it r.ru.st repay to the TIl]]'. The cash deficit of the public authorities might thus be greater than 7 billion francs and the Government might have to seek other sources of finance even to meet its existing obligations. Pro tanto, if additional investment of the order of magnitude of the IBRD application (4809 million francs) were to be undertaken, other sources of finance would certainly have to be found. Given present interest rates in Belgium, the interest cost would be higher if the funds were raised in the domestic market than by a loan from the IBRD. ii.

4. Little can be expected from additional or new taxes.

5. Some small amounts of funds may be obtained in Switzerland in connection with purchases of equipment but, on the whole, the balance of

payments position is likely to require additional net investment abroad through payments agreement credi ts, notably to the Netherlands and the United Kingdom, to support Belgian exports. The pressure which these will put on the National Bank will be increased at least temporarily by the re­ cent ECA decision to allow Belgium to spend its loan allotment before it has spent all its conditional aid. 6. I'iith existing credit regulations, the Belgian private banks are not in a position to provide a significant volume of funds to the

Government. It is possible~ though by no means certain, that a relaxation of these restrictions, which has been under discussion, might result in their absorbing some more Treasury paper. 7. With the existing ceiling of only 10 billion francs on advances by the National Bank to the Government, some additional funds might be made available by such advances, but the financing of any substantial amount might have undesirable consequences. 8. If an lBRD dollar loan were made to the Belgian Government, the dollar proceeds would in all probability be added to the country's monetary reserves for the time being at least. On the other hand, the stronger reserve position would put the Belgian National Bank in a position to extend further credits to other countries if this should prove desirable. Thus, apart from psychological influences, the short-run effect of such a loan on the monetary system would be the same as the provision of the funds

through domestic credit expansion. However, it is unlikely that an increase iii. of one or two billion francs in the money supply would cause any grave shock to public confidence at a time when the country's foreign exchange resources were rising. 9. Since, under present circumstances, the provision of the neces­ sary funds from oUler sources such as domestic credit expansion might have undesirable consequences, there is a prima facie justification on general financial grounds for an IBRD loan. H~Never, in view of the fact that a "local currencyll loan can be granted by the Bank only in exceptional circUt'Il­ stances, and especially since the dollar proceeds of such a loan to Belgi~~ would, in all probability, go into the cO\L~try's monetary reserves, the justification for such a loan on purely financial grounds is not in itself completely sufficient and must depend very largely on the urgency and pro­ ductivity of the particular projects for which the local currency counter­ part is to be used. 10. Since the loan request involves dollar financing of local currency investment, the projects must be subjected to extremely severe tests of productivity and yield. If the railroad electrification is limited to the lines of maximum traffic density and the port reequipment to improved technical efficiency excluding expansion of capacity, and if allo~ance is made for recent and prospective price declines, the loan request shrinks to 1860 million francs ($42.3 million), a minimum figure which would have to be verified by engineering analysis if the Bank decides to proceed further vdth the application.

11. Although Belgium's production &~d trade would not be seriously impaired nor would its foreign exchange income probably be sharply reduced if these projects were not carried out in the near future, they may be iv. deemed urgent and essential in that they are well-fo'U..'1ded measures to assure better use of natural resources~ equipment and manpower in an economy which today occupies a uniquely important position in rlestern Europe. Besides in­ creasing the mobility of labor and reducing the operating deficits of the railways, which n01~t constitute a significant burden on the Belgian Treasury~ railroad electrification would lessen the consumption of coal and ma~e possible a more rational use of solid fuel, results which would benefit not only Bel­ gium but \:vestern Europe as a whole. The better and cheaper transport facili­ ties resulting from the modernization of the ports would likffi¥ise benefit Europe in general as well as protecting a foreign exchange earning asset which is extremely valuable to Belgium. CONFIDENTIAL

- 1 - Introduction The Belgian Government has applied for a loan of 3pl09 million for local currency financing. The Belgian franc counterpart of the dollars borrowed would be used to finance a program of railroad electrification and of expansion and modernization at the ports of Antwerp, Ghent and Brussels. An understanding of the request for dollar financing of domestic investment in the public sector requires an examination of the prospective cash position of the state and public authorities. The public investment program for 1949 maybe divided into two major groups: investments of the state itself, and investments of the so-called "parastatal" agencies such as the state railroads, the ports, local authorities, etc.

Present Program of State Investment The existing investment program of the state in 1949 can be sub- divided into three major groups: 1) the investments authorized in the extraordinary budget; 2) the housing program; and

3) the reconstruction of war damage to private property..

The program which the IBRD is being asked to finance is in addition to these.

(1) The Extraordinary Budget Originally the estimates for the 1949 extraordinary budget author­ ized investments of 5,866 million Belgian francs. This figure was subse­ quently raised to 8,622 million, hovrever, notably through the allotment of the expected EeA counterpart fund to additional investment projects - 2 - not previously included in the extraordinary budget (for details see AnneJ~

I). The resources which maybe considered as already available to fir~nce these expenditures amount to 3,757 Belgian francs composed of the ~CA coun- terpart fund (2,462 million), the franc counterpart of the .~16 million lBRD loan (695 million) and extraordinary G~lernment receipts (600 million). Thus, at the present time, 4,865 million Belgian francs of the expenditures authorized in the extraordinary budget remaL~ uncovered.

( 2) The Housing Program As part of its campaign against unemployment, the state has under- taken a housing program the funds for which are in the main not authorized through the extraordinary bUdget.!! This program is to be financed through the following credits, some new and some authorized in previous budgets;

(1) the unutilized portion of the proceeds of the e~~ort tax (400 million

Belgian francs); (2) the so-called II Primes de Thae2/8!!) subsidies author- ized to encourage the building of low cost housing (~50 million); (3) a credit in ~le 1948 budget originally intended to be used for fa~i1y allow­ ances (1200 million) the use of which credit for the housing program was authorized by a decision of the Conference Nationale du Travail on Uarch

31, 1948; (4) neil credits from the Caisse d'Epargne (200 million). vdth the exception of the 200 million francs from the Caisse d'Epargne, however, these sums are merely authorized expenditures, not funds actually available nmv, so that additional cash resources will be required to cover the deficit of 1850 million Belgian francs ·~!jhich remains.

!! Apart from an amount of 600 million francs which has been deducted from the data given below. - :3 -

(3) Reconstruction of War Damage Reconstruction of war damage to private property is to be financed by annual appropriations of 2500 million Belgian francs in the ordinary budget for 15 years.-1/ In order to speed up the reconstruction process, however, the state has borrowed additional funds in the first pos~Nar years for this purpose and intends to continue the policy for some time, repaJ~ng the loans from future budbet allotments received when reconstruction needs are no longer large. Reconstruction outlays by the state in 1949 are ex­ pected to total 4,000 million francs o Since a loan of 3,500 IT~llion francs was successfully floated in February of this year in addition to the annual budget appropriation of 2500 million, cash resources this year vd.ll amount to 6000 million francs leaving a cash surplus of 2000 million francs. The probable effect of existing state investment programs on the Treasury position in 1949 maybe summarized as follows:

Financin~ State Investment in 27_!.j~.9. (In millions of Belgian francs) Authorized Assured Deficit to be E~enditures Financin~ Covered

Extraordinary budget 8622 3755 4867

Housing program 2050 200 1850 Reconstruction 4000 6000 -2000 14672 9955 4717 (Minus sign = surplus)

Parastatal Agencies In addition to state investment proper, account must also be taken of the investment programs of the so-called parastatal agencies, comprising !I According to the Belgian Gover~~ent, present indications are that this ~~ll probably not be enough and that an annual appropriation may be necessary for 20 years. - 4 - mainly the Belgian national railways, the Telephone and Telegraph Adminis-

tration, the local authorities and the ports. AS may be seen from the fol­ lowing table, the existing investment programs of these agencies in 1949, excluding the projects for which IBRD financing is requested, require 9460 million francs of which 7047.5 million may be considered as assured, leaving a deficit to be covered of 2413 million.

Investments of the Parastata1 A~encies in 1949 (In millions of Belgian francs)

Assured Financin~ Deficit Scheduled Other to be Investments State sources covered 1. Local authorities 2.200 1.000 1.200

2. Ports (Antwerp-Ghent) 885 535 350 3. Belgian National Railway Co. (and North-South Junction) 4.hoo 1.080 1.020 2,,300 4. Telephone and Telegraph Administration 1.975 1,,825~/ 112.5

TOTALS 9.460 2 o 652 ".. .fY 4.395 2.412,5 1/ Of which 1.400 millions internal loan issued May 9, 1949. g; This amount is included in the extraordinary state budget.

Thus the investment programs of the state proper and the parastatal agencies as at present planned, call for the obligation in 1949 of about 24 billion Belgian francs. Of thiS, about 17 billion Belgian francs may be said to be assured now, leaving a deficit of about 7 billion francs to be filled if these investment programs are to be complete de The question must be raised whether the capital expenditures al- ready scheduled could not be reduced. It is readily admitted in Go"ern- ment circles that some of the investment envisaged, notably the Jonction

Nord-111di, can hardly be justified on economic grounds under present -5- circumstances. It is also admitted that some expenditures, for example on road maintenance and improvement, could be reduced as was done in 1948. On the whole, however, the present investment program, wnich naturally includes many projects already begun, may be judged as at least politically ~lcom­ pressible. Moreover, prolonged delay on some of the projects might well lead to a waste of the funds already invested in them.

Financing the 1949 Deficit It thus seems fairly well established that a minimum of 7 billion Belgian francs additional cash resources will have to be found by the Bel­ gian Government if it is to finance its existing investment program. Of­ ficials of the Hinistry of Finance believe that this sum can be raised in the domestic market, although only with a very considerable effort. Conditions in the local market for public issues have improved notably in recent months. New issues of private companies are likely to be substantially lQVITer than last year mainly because of the more uncertain business ou~look. Until now, private capital has also probably preferred to await the outcome of the forthcoming elections. Private bond issues this year have been negligible and a recent survey by Societe Nationale de Credit pour lrIndustrie, which may have had a pre.ct-ieal as well as a scien­ tific interest, indicated no unsatisfied demand for private long-term credit.

The prices of Government bonds have firmed noticeably in recent months and the Caisse dfEpargne, which is reported to have a large cash surplus, has been providing a much larger volume of call money this year than last.

Interest rates are still high, however, the most recent public issues being five-~~ar bonds bearing interest at 4~5% and issued at 98. In the first five months of this year, new issues of the state and public bodies amounted - 6 -

to no less than 6 billion Belgian francs compared with only 7.4 billion Bel­

gian francs in the whole of 1948. Further indications of the improvement in capital market conditions is given by the fact that whereas last year the

Government had considerable difficulty in floating a loan of 3700 million Belgian francs" a somewhat similar issue in r:Tarch of this year was fully subscribed in ten days. Subsequently a loan of 1400 million Belgian franca floated by the Telephone and Telegraph Administration (1200 million of which was open to public subscription) in :May was fully subscribed va thin 24 hours. In the light of these facts the Government estimate of a contribution by the

domestic capital market amounting to about 7 billion Belgian francs in the

remainder of the year does not seem unreasonable. Indeed, if ~~e political tension between East andliest were eased, a somewhat larger amount might perhaps be raised. On the whole, however, it would not be prudent to assume that the Government will be able to do more than finance its present invest­ ment program in the local capital market.

Several other factors in the situation reinforce this conclusion. The budget estimates for 1949 anticipate equilibrium in the ordinary and war budgets taken together. In the argument so far it has been assumed

that this equilibrium would be achieved. Actually; if present trends C011- tinue, a deficit of about 2 billion Belgian francs is likely to be recorded, mainly because unemployment is considerably larger th~~ budgeted for. The measures proposed by the l~iinistry of Finance to eliminate this deficit", mainly by the reduction of family allO'.'rances and related expenditures, were not accepted by the Socialist members of the Government who have suggested

that additional luxury taxes be levied to meet the deficit. Viith Parliament

dissolved, the issue will remain unsettled until after the elections of June 26. The new Parliament may well find some suitable formula to balance - 7 - the ordinary and war budgets. At the moment, however, all that can be said is that this requires some Government action. Belgium will also have to repay within the next month or two the advances received from the International Monetary Fund in 1947 and 1948., Final agreement has not yet been reached on the amount to be repaid, but it will probably total $21.59 million. ~\lhen the Belgian Treasury borrowed dollars from the ILW" it sold them to the National Bank against francs. If now the National Bank does not accept a Treasury bill from the Ministry of Finance in payment for these dollars which it (the ltinistry of Finance) must pay back to the Fund - and present indications are that the National Bank will not accept this form of payment - the Ministry of Finance will have to find an additional 950 million Belgian francs in cash. Furthermore, as will be explaL~ed below, the latter may have to find additional franc resources for credits which the Belgian Government has committed itself to grant to the Netherlands in the fiscal year 1949/50.

In considering the probable cash position of the Treasury this year" the structure of Belgian taxes must also be taken into account. The Belgian

Treasury derives a very substantial proportion of its tax receipts from in­ direct taxes. About one-third of these receipts comes from the turnover tax alone. Such a system is extremely sensitive to changes in the level of business activity and one might expect that any decline in the latter - which is not at all imprOb8ble - would be reflected in a corresponding fall in tax receipts. lhe present argument thus leads to the conclusion that given favor­ able conditions, the present public inves~£nt program could probably be financed by recourse to the domestic capital market. However" the cash deficit of the public authorities to be financed is likely to be greater - 8 - rather than less than 7 billion Belgian francs, so that the Treasury might have to seek other sources in addition to meet all its existing obligations. Pro tanto, if additional investment of the order of magnitude of the IBRD application (4809 million Belgian francs) were to be undertaken, other sources of finance would certainly have to be f~~ndo Given present interest rates in Belgium, the interest cost would be higher if the funds were raised in the domestic market than through an IBRD loan.

The Financing of Additional Investment There are, of course, other possibilities open to the Belgian Govern- ment. It might try, for instance, to obtain the additional resources re- quired from new or higher taxes. In an election year, however, with the or- dinary and war budgets showing a defiCit, little can be hoped for from this source. At best, new or higher taxes might be used to bring the ordinary and war budgets back into balance. It may also be noted that the total fiscal charge in Belgium, including social securit.y taxes, appears to be higher than might have been expected. For 1948, it is estimated at about

30% of private income before taxes compared with figures of about 25% in the United States, 30% in France, and close to 40% in the U.K~!I One major potential domestic source of the funds required remains, the expansion of domestic credit. In this connection, however, certaL~ peculiarities of the Belgian situation must be taken into accounto In pre- vious postwar years the current account deficit on the balance of paJ~ents has released a substantial volume of funds for domestic investment. Since

In view of "the lack of comparability between various national income estima"tes in different countries, too much weight should not be at­ tached to these calculations$ Belgian national income estimates, for example, are particularly crude and considered to be conservatively estimated. - 9 - the current account is nO'V': at least in equilibrium and even showing a surplus, this is no longer the case. J~lthough some small credits may be obtained by the Telephone and Telegraph Jl.dministration or the Hational l"\,ailways to fi- nance purchases of equipment in Switzerland, the balance of payments posi- tion is likely to require net investment of Belgian francs abroad mainly in the form of Belgian francs made available to foreign countries through pay- ments agreements by the Belgian National Bark to finance Belgian exports. "hen the mission was in Belgium" it was still uncertain whether the Belgian Government would in fact be able to utilize the full amount of its RCA aid for 1948/49. Since conditional aid was to be spent before the loan allotment, this would have meant that Belgium might not have obtained the to Belgian franc counterpart of the EeA loan which was/finance part of the ex- traordinarybudget. This issue has nmv been settled, however, by EeA's allovving Belgium to utilize the loan allotment before all the conditional aid has been spent. Although this situation ease~ the burden on the Belgian Treasury directly" however, it means that the Belgian National Bank, which has already pre-financed a substantial part of the drawing rights on Bel- gium in the Intra-European Payments Plan before receiving the corresponding dollars as conditional aid, must for the tL~e beL~g make additional Belgian francs available for this purpose. To some extent~ therefore, the overall burden on Belgium has not been eased by the arrangement with ECA, but has merely been transferred from the Treasury to the Belgian National Bank.

At the Benelux conference held at The Hague in March of this year, the Belgian Government committed itself in principle to grant credits to the Netherlands in order to facilitate the achievement of the economic union by July 1, 1950. Discussions have been proceeding on the amount of these - 10 -

credits but this has yet been fixed. The Belgians have also been attempting it would appear, to have this credit provided in some way through the European Recovery Program. If this attempt should not succeed, however, additional Belgian francs to the amount of at least 2 billion will have to be found in the fiscal year 1949/50 to finance the Netherlands Itextraordinaryll deficitY with Belgium. The Belgian National Bank, which was not represented at The Hague conference in Harch, is unwilling to grant these additional credits, arguing that the 11 billion already made available to foreign countries is all that the Belgian economy can afford. Nevertheless, it would appear that these credits vall have to be given either by the Treasury or by the Belgian National Bank. Taking into account the treatment of the ECA counterpart mentioned above, a possible compromise between the two agencies might be the provision by both of part of the Belgian francs required. " The possibility must now be considered of the Belgian GoverrJnentfs financing the cash deficit resulting from the additional investment program through the expansion of domestic credito The commercial banks are not now

in a position to be of much assistance. At present they are obliged to hold from 50 to 65% of their liquid assets in short-term Treasury paper and when the mission was in Belgium they could make additional loans tifonly 1-1.5 billion francs, a margin which was not unnaturally reserved for the private sector. Some relaxation of credit restrictions has been discussed, but so far no action has been taken. h'hether or to what extent such action would enable the Government to borrow more from the banking system vvould of course depend to a very great extent on the demand for capital by the private sec-

tor, but under present conditions, it mig..li.t well be of some assistance to the Treasury.

11 That is, the deficit over and above that financed through dra~~ng rights in the Intra-European Payments Plan. - 10 -

credits but this has yet been fixed. The Belgians have also been attempting it would appear, to have this credit provided in some way through the European Recovery Program. If this attempt should not succeed, however, additional

Belgian francs to the amount of ~t least 2 billion will have to be found in the fiscal year 1949/50 to finance the Netherlands Uextraordinarytl deficiJ! with Belgium. The Belgian National Bank, which was not represented at The Hague conference in Harch, is unwilling to grant these additional credits, arguing that the 11 billion already made available to foreign countries is all that the Belgian economy can afford. Nevertheless, it would appear that these credits will have to be given either by the Treasury or by the Belgian National Bank. Taking into account the treatment of the EGA counterpart mentioned above, a possible compromise between the two agencies might be the provision by both of part of the Belgian francs required.

The possibility must now be considered of the Belgian Goverp~entrs financing the cash deficit resulting from the additional investment program through the expansion of domestic credit4 The commercial banks are not now

in a position to be of much assistance. il.t present they are obliged to 1101d from 50 to 65% of their liquid assets in short-term Treasury paper and '\'"hen the mission was in Belgium they could make additional loans Of only 1-1.5 billion francs, a margin which was not un.'1aturally reserved for t.l).e privat.e sector. Some relaxation of credit restrictions has been discussed, but so far no action has been taken. VJhether or to what extent such action would enable the Government to borrow more from the banking system would of course depend to a very great extent on the demand for capital by the private sec- tor, but under present conditions, it might v,all be of some assistance to the Treasury.

11 That is, the deficit over and above that financed through dra~~g rights in the Intra-European Payments Plan. - 11 -

In the existing circumstances, the limitations on the expansion of domestic credit through increased advances by the Belgian National Bank to the Treasury are extremely stringent. 'rhe convention of September 14, 1948 placed a ceiling of 10 billion fra..'1cs on such advances, and since Treasury transactions amount to something like 3,000 billion francs annually, 10 billion francs represents hardly more than an operating rr~rgin. In recent months they have varied between about 3 and 5 billion francs showing some tendency to fall. As of June 9, they totalled 4.1 billion. It is thus possible that some additional investment could be financed through increased Central Baru{ advances to the Treasury although objections might be raised to financing long-term investment in this way. Hmvever, when it is considered that the Treasury maybe faced with the problem of financing a 2 billion deficit in its ordinary and war budgets and might have to use its margin at the Central Bank to meet other obligations such as part of the extraordinary credit to the Netherlands, it would appear that the financing of any sub­ stantial amount of additional investment through Treasury advances froo the Central BarM might have undesirable consequences.

The Honetary Effects of an lERD Loan

Compared \vith most other ERP countries the Belgian balance of pay­ ments position is extremely strong (for details see Annex II). An overall current deficit of 5810 million Belgian francs ($133 million) in the first half of 1948 gave place to a surplus of 2485 million Belgian francs ($57 million) in the second half of the year. In four of the first five months of 1949 even the trade balance has shown a small surplus. The volume of trade in.the fourth quarter of 1948 was very similar to that of prewar days wi th exports at 99% and imports at 96% of 1937. It must be borne in mind, - 12 - however, that the rising Belgian exports, which have made a major contri- bution to the overall balance, have been supported to a very significant extent by the funds provided to Belgium's customers through the Intra- European Payments Plan.

The dollar balance has also imp~oved very substantially. The deficit ,'lith the U.S. dollar zoneY which had amounted to 25,049 million Belg:tan francs ('.:;.572 million) 1..'1 1947 fell to 7917 million Belgian francs in the first half and to only 3886 million (7772 million Belgian francs or,~177 million annual rate) in the second half of 1948. Complete information is not available for the rest of the i;estern Hemisphere. Since trade with coun- tries other than the U.S. showed a monthly average surplus for BelgiUm of

104 million Belgian fr~~cs in the first quarter of 1949 while trade vlith the Canadian dollar zone, Argentina, Brazil and Uruguay showed a monthly average deficit of 129 million Belgian francs, it may be deduced that the Belgian balance of payments with the ~iestern Hemisphere other than the United States is nOVf more or less in equilibrium. The improvement in the dollar balance is also indicated by the fact that Belgium is findL,g it difficult to spend its allocation of 0011.. aid of :~250 million for 1948/49. The difficulty has arisen not because other ~RP countries have not been able to use their draw- ing rights on Belgium, but because Belgium has found it increasingly diffi- cult to import a sufficient volume of products for which procurement

The balance of payment figures are taken from the estimates made by the Belgian National Bank. They are based upon payments rather than upon customs data. Thus the partial balances do not correspond to a clearly defined geographical area. The dollar zone for example is neither the United States nor thevvestern Hemisphere but those countries "ldth Yfhich trade is ordinarily carried on in U.S. dollars. It does not include Canada, vvith which trade is done in Canadian dollars, or such countries of Latin America as ArgentL~a, Brazil and Uru~uay ?uth which trade is carried on through payments agreements. - 13 - authorizations can be granted. For 1949/50 the Belgian Administration for the ERP has estimated that even allovdng for some easing in ECA regulations it would not be able to find imports eligible for ECA . procurement authoriza­ tions amounting to more than ~~200 million. The Belgian National Bank con- siders a deficit with the U.. S. dollar zone of ~~175 million as a maximum for 1949. From the data given in the previous paragraphs, it is clear that

Belgium now has a substantial current account surplus with the world other than theliestern Hemisphere. The Belgian Administration for the ERP esti­ mates the surplus with other participating countries at (~290 million in 1948 and an annual rate of nO' less than "p340 million in the first quarter of 1949. For 1949/50 this surplus is expected to amO'unt to' at least $400 million. The fact that Belgium is running a surplus with the other participating countries at an annual rate which is approximately twice as large as its dollar deficit cO'nstitutes the major problem in the present negotiations regarding the re- newal of the Intra-European Payments ~lan. As a result of these favorable developments in its balance of pay- ments, Belgium1s gold and foreign exchange position, already one of the strongest in Europe, has continued to improve e Official holdings of gold and free foreign exchange increased by 2348 million Belgian franc equivalents

(~>54 million) in 1948 and by a further 1944 million (r~44 million) in the first quarter of 1949. At the end of March the gold holdings and free foreign exchange holdings of the Belgian National Bank amounted to 30,498 million Belgian francs C~696 million) of which 28,069 million U~640 million}¥ was in gold. In addition, there is at present a lag of ~:i60-70 million

Y At the end of Hay the gold holdings of the Belgian National Bank stood at the equivalent of ~664 million. - 14 - betvfeen ECA shipments and reimbursements. The increase in Belgium's re­ serves of hard currency has resulted mainly from the fact that ECA aid has been sufficient to cover the dollar deficit and that a considerable propor­ tion of the Belgian export surplus with other countries, especially in Western

Europe, has been paid for in gold or dollars. The largest amount has come from the United Kingdom from which, for example, Belgium received gold to the value of a1most.;50 million in the first five months of 1949. She also received gold and convertible currencies from countries in Eastern Europe, the Iliddle .t::ast and even the V{estern Hemisphere. All signs point to a further increase in Belgian reserves in the coming months. A Belgian surplus of at least ~200 million is expected with the other ERP countries over and above the ;~200 million which is expected to be available to them in the form of drawing rights on Belgium. It now seems likely that part of this surplus, perhaps $100 million, yd11 be fi­ nanced by extra Belgian franc credits, especially to the Netherlands and the U.K. Which will be compensated in some way by a dollar allocation from ECA in addition to Belgium's conditional aid of $200 million. The remainder would have to come either from additional Belgian franc credits or from the gold and dollar holdings of the other participating countries. Of course, expectations may not be fully realize d. uvhen the a11oc3.tion of drawing rights in the Intra-European Payments Plan has been made, Belgium may not be Willing to extend additional credit and the other participating countries may not be willing to give up their monetary reserves for imports from Bel­ gium to quite the extent that their estimates would now indicate. Further­ more, the developing American recession could affect Belgium's dollar balance adversely, although it is by no means certain that this would be the case. .... 15 -

Even alloli'1ring for the repayment of dollars to the IHF, however, it is over­ whelmingly probable that Belgian monetary reserves will continue to increase

in the coming months regardless of any IBRD action. This trend would, of course, be reinforced by an IBRD loan, the dollar proceeds of which would -

at least temporarily - be added to the reserve.. On the other hand, an !ERD loan would place the Belgian National Bank in a stronger position to extend further credits to other countries if this should prove desirable. Last fall the argument was often voiced that the proceeds of such a loan would be used to import consumer goods and combat inflation. -;lith the turn of the inflationary tide, this argument has lost much of its force. Ignoring for the moment psychological factors, the purely monetary conse­ quences of such a loan would be the same as the creation of domestic credit. Such factors cannot, of course, be ignored and it is likely that an expansion of the currency wi thout a corresponding increase in the reserves would be regarded with more suspicion in Belgium than in say her Northern neighbor. However, it is highly unlikely that an increase of one or two billion francs would cause any grave shock to public confidence at a time when the country's gold and foreign exchange reserves were rising.

The Projects Submitted for IBRD Financing Although the Belgian loan request stems from fiscal considerations, the justification for it on purely financial grounds is not in itself com­ pletely sufficient. It must, therefore, stand or fall with the urgency, essentiality, and productivity of the individual projects of railway elec­ trification and port reequipment submitted. These add to 4,809 million

francs (~109 million) and are all to be realized between 1949 and 1951. Al­ most the entire sum would be used to buy Belgian-made equipment and materials - 16 - and to pay the wages of Belgian labor. Close to half, or 2,214 million francs, is to be spent on electrifying various double track main lines of the Belgian National Railways (SNCB); more than half, or 2,595 million francs, on modernizing, improving, and expanding the port facilities of Antwerp, Ghent and Brussels.

Bel~ian Railway and Port Loan Request~ 1949-1951 (In millions of Belgian francs) Project -Total 1949 1950 1951 Electrification of SNCB rail network 2214 55 830 1329 Reequipment of port of Antwerp 1600 175 603 820

Reequipment of port of Ghent 753 135 301 317 Reequipment of port of Brussels 242 .2! 150 38 Total 4809 419 1886 2504

Since the loan request involves dollar financing of local currency investment, the projects must be subjected to extremely severe tests of prodl..lctivit:.r and yield. In the SNCB program, lines of differing traffic density are to be electrified, some of which (lowest relative density) pro­ mise much less return on the investment than do others (highest relative density). The port reequipment projects aim not only at improving technical efficiency so as to reduce ship serviCing and cargo working costs, a sound purpose for Bank financing now, but also at immediate expansion of capacity in the hope "f heavier traffic ahead, a doubtful purpose in view' of existing surplus facilities and the present traffic outlook.

If the SNCB electrification is limited to the lines of maximum traffic density and port reequipment to improved technical efficiency alone, the loan ~quest of 4810 million francs shrinks to 2070 million francs worth - 17 - of projects which seem to be urgent, essential, and productive enough to warrant their realization by 1951 through a Bank loan. This is an appraisal at economic first sight subject to engineering verification of excluded as well as included projects. It is to be understood as measuring the irre- ducible ~inimum of projects which qualify on their intrinsic merits on the assumption that the Bank is willing to advance a dollar loan at all in the special circumstances of Belgiumfs foreign exchange holdings, balance of pal~ents position, and internal means of finance.

The estimate of 2040 million francs might well be cut 10%, h~vever, since it is based on 1947~1948 prices of materials and equipment without allovdng for recent or prospective lower prices. Applying such a 10% cut, the irreducible minimum of plausible projects for prompt Bank financing be- comes 1860 million francs ($42.3 million) of which 1075 million francs for railway electrification and 785 million francs for port reequipment.

ComJ;?arison of I,Iinimum Financing Suggested wit~ Actual Financing Requested (In millions of Belgian francs) Mission Proposal Belgian Request Belgian cost 90 percent Project Original{a) Revised(b) Estima teB (C) of esti­ mates (d) SNCB electrification 4514 2215 1195 1075 Reequipment, Port of Antwerp 583 1600 500 450 Reequipment, Port of Ghent 423 753 223 200 Reequipment, Port of Brussels 127 152 135 Expansion of merchant marine 150 - - Total 5797 u8l0 2070 1860 (a) Before discussions with mission. (b) After discussions with mission. (c) Measuring from 1947/1948 prices. (d) Allowing for recent and prospective price declines. - 18 -

Ncne of the projects is urgent or essential in the sense that Bel- gium's production and trade might be seriously iwpaired or its foreign ex- change income very greatly reduced if they were not carried out in the next few years. Yet all the projects are urgent and essential in that they are well-founded measures to assure better use of natural resources, equipment, and manpower and to realize greater technical efficiency in the operation of basic transport facilities. They would thus strengthen the Belgian economy in general, a factor of no small international importance in view of the country's significant position in Western Europe.. The proposed electrifica tion of the railways would lessen the total consumption of coal and mw{e possible a more rational use of solid fuel in the Belgian economy_ This vmuld benefit not only Belgium but hestern Europe as a whole. It v'IOuld also increase the regional and occupational mobility of labor in Belgium, and reduce the operating deficits of a major State-owned enterprise, thus diminishing the burden on the Belgian Treasury. Reequipping the ports as proposed wC..Ild help to assure more prompt ship dispatch, fas>c,er cargo handling, and reduced costs of servicing ships and working cargo. Again, the better and cheaper transport facilities would benefit iiestern £urope in • general and not Belgium alone. No important foreign exchange earnings would accrue from the railway electrification program directly. Modernization of the ports" however, would protect a foreign exchange earning aSSet 'i'lhich is extremely valuable to Belgium. ANNEX I

Belgian Extraordinary Bud~et 1949 (In millions of Belgian francs) Part to be financed from Reconstruction ECA cotmter- New Works of war damage Total part fund Acquisiti.ons and purchases 296 296 Buildings and grounds 1.360 729 2.089 313 Roads 1.127 330 1.457 540 Ports and waterways 798 454 1.252 529 Railroads 512 50 562 250 Fublic health 418 418 Housing 600 - 600 Equipment 819 241 1.060 Collieries 740 740 730 Various financial operations 148 148 -100 6.818 1.804 8.622 2.462

Source: Data supplied by the Belgian Government. cmlFIDENTIAL

ANNEX II

Balance of Pa~ents of the Belgium-Luxembourg Economic Union (Provisional) (In millions of Belgian francs) 1st half 2nd half 1948 of 1948 of 1948 Receipts Payments Balance -ealance Bala~ce Current transactions Merchandise (f.o"b.) 74,090 76,713 -2,623 -5,092 .j.2,469 L'1visibles 18,406 19,108 - 702 = 718 .j. 16 TOTAL 92,496 95,821 -3,325 -5,810 .j.2,485 FINANCING I'HE DEFICIT ON CUP..RENT ACCOUNT Net balance on current account -3,325 -5,810 .j.2,485 Autonomous capital transactions Private capital movements (Mainly repatriation of capital and arrears) - 564 Amortization and other con­ tractual repayments -2,205 -1,646 - 559 TOTAL -3,582 -4,944 .j.1,362 Errors and omissions - 934 - 880 54 Compensatory financing Financing of Belgian exports Loans granted by Belgium - 438 - 438 Increase of Belgian holdings of inconvertible currencies -2,183 Advances in Belgian francs by IlIF and IBRD - 546 - 100 BIS - advances of Belgian francs (net) - 70 70 Utilization of drawing rights in Belgian francs under Inter­ European Payments Plan (net) -2,503 -2,503 Increase in Belgian gold hodlings -1,218 -1,,689 rOTAL -9,291 -7,959 -3,986

- continued Page 2 of Annex II

1st half 2nd half 1948 of 1948 of 1948 Receipts Payments Balance Tarance. - Balance

Financing of Bel~ian imports Loans granted by Belgium 1-3,286 /.2,786 rI 500 Decrease in Belgian holdings of convertible currencies /.2,306 1-1,435 !- 871 Decrease in Belgian holdings of inconvertible currencies I- 548 !-2,731 Il;J]' advance of dollars to Belgium !- 963 I- 963 Decrease in Belgian gold holdings !- 471 BIS - advances of dollars to Bel- gium (net) !- 144 I- 44 I- 100 ECA reimbursements /.2 z044 -- 1-2,044 TOTAL /.9,291 1-7,959 ;'3,986

Source: Adapted from the Belgian balance of pa~;ments estimates made by the Banque Nationale de Belgique. Page 2 of Annex II

1st hall 2nd half 1948 of 1948 of 1948 Receip~ Payments Balance --Balance _.---._-Balance Financing of Bel~ian imports Loans granted by Belgium f3,286 /.2,786 ,.I 500 Decrease in Belgian holdings of convertible currencies /-2,306 /-1,435 /- 871 Decrease in Belgian holdings of inconvertible currencies 548 /-2,731 IIrF advance of dollars to Belgium ~ 963 I- 963 Decrease in Belgian gold holdings /- 471 BIS - advances of dollars to Bel- gium (net) /. 144 /- 44 I- 100 ECA reimbursements /.2,044 1-2 !01.4l TOTAL /.9,291 1-7,959 1-3,986

Source: ildapted from the Belgian balance of payments estimates made by the Banque Nationa1e de Belgique.