RETUA RTP E D This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF FINLAND August 6, 1962 Department of Operations Europe CURRENCY EQUIVALENT Before September 15, 1957: U.S. $1 - 230 markkas After September 15, 1957: U.S. $1 - 320 markkas 1 markka - 0.31 U.S. cents 1 billion markkas - U.S. $3.1 million CURRENT ECONOMIC POSITION AND PROSPECTS OF FINLAND Table of Contents Page BASIC ZATA SUNARY AND CONCLUSIONS..... . ....... INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 1 I. PROBLES AVD PROSECTS . . . . . . . . . . . . . . . . . 2 Agriculture . . . . . . . . . . . . . . . . . . . . . 2 Forestry . . . . . . . . . . . . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . 4 Savings and Investment . . . . . . . . . . . . . . . . 7 Fiscal and Credit Policies .. . . . . . . . . . . 9 Prices and Wages . . . . . . . . . . . . . . . . . . . . 12 Foreign Trade and the Balance of Paymexns . . . . . . . . 13 II. CONCLUSIONS - CREDITWORTHINESS . . . . . . . . . . . . . 16 STATISTICAL APPENDIX FINLAND BASIC DATA Area: 130,000 square miles Population (1961): 4.5 million Annual rate of growth: 1% Gross National Product (1960): 1,436 billion markkas Per Capita: 11,000 1955 1956 1957 1958 1959 1960 1961 Net Domestic Product (in billion markkas at current factor cost) 770 868 906 965 1020 1159 1285 of which, in percentages, Agriculture and Forestry 23.9 22.5 20.7 20.9 20.5 21.2 21.4 Industry 32.4 31.2 31.5 31.2 30.5 31.1 31.1 Construction 9.1 9.7 9.7 9.8 10.1 10.0 10.0 Volume of Net Domestic Product (195 = 1G0 106 108 109 109 116 126 132 Gross Fixed Asset Formation Percentage of Gross Dom.Product 26 28 27 26 26 29 30 Foreign Tradc Exports (in million U.S. 0) 788 774 838 775 835 989 1,054 Imports (c.i.f.) " " " 769 885 901 729 835 1,062 1,151 Imports and Exports of Goods and Services in Per Cent of Gross National Product (average 1959-60): 25 Wholesale Prices (195h - 100) 99 104 113 123 122 126 128 External Public Debt December 31, 1961: Net of Undisbursed: 0316 million Including undisbursed: 1382 million (of which 169.3 million credits from Soviet Union) Service 1961: $29 million 1958 1959 1960 1961 April 1962 Foreign Exchange Reserves (million U.S. 1, end of period) Gold and Foreign Exchange Assets of Bank of Finland (including Foreign Securities held by Treasury) 250 316 325 344 339 Short-term Foreign Exchange Liabilities of Bank of Finland -7 -7 -13 -4 -4 Net Foreign Exchange Position of CoDmercial Banks 21 16 27 -2 -33 Net total 264 325 339 338 30? SUM1ARY A1ND CONCLUSIONS 1. Thanks to the successful stabilization of its currency and fin- ances and to the large increase in Western European demand for wood products, especially pulp and paper, Finland has, since 1959, been able to combine a rapid growth of production and incomes with a con- siderable degree of price stability and a sound external position. During the three years 1959 to 1961 industrial production increased by 32 per cent, the net domestic product by 21 per cent and exports by 26 per cent. Vholesale prices increased by 4 per cent and the cost of 'Living by 6 per cent, which compares favorably with price developments in most other European countries. 2. As was to be expected, the liberalization of trade and relaxa- tion of exchange controls, together with rapid economic expansion and a further increase in the already high rate of investment, have been accompanied by a very large increase in imports (38 per cent during 1959 to 1961). The resulting current account deficits, of $h2 mil- lion in 1960 and '72 million in 1961, were covered by drawings on IBRD loans and other foreign borrowing. 3. Two facts, however, make the present situation somewhat less satisfactory than this over-all picture indicates. First, foreign borrowing other than from IBRD during the last two years has been mainly in the form of suppliers' and commercial credits which have created large repayment obligations for the next few years. Second, the present net foreign exchange holdings of the Bank of Finland and of the commercial banks,at some '300 million, correspond to only three months' imports, and their composition has recently somewhat deterio- rated, with holdings of Eastern Bloc and bilateral currencies rising and holdings of convertible currencies declining. h. Finland needs to maintain a vigorous pace of industrial growth in order to provide employment for the excessive manpower still en- gaged in agriculture and for a growing labor force, and in order to offset the other disadvantages under which its economy is operating, including those inherent in the magnitude of its bilateral trading. 5. Finland's public external debt is small and remained at about the same level throughout the 1950ts. Only recently have new bor- rowings exceeded repayments. In 1961 the service of the debt amounted to $29 million, corresponding to 2.4 per cent of current foreign ex- change earnings in that year. If the debt in western currencies is compared with current earnings in such currencies, the ratio was still only 3 per cent. Thus Finland can prudently undertake additional - ii - foreign debt obligations. The natural disadvantages of Finland's cold climate and extensive area necessitate heavy investment in the public sector arid housing, which absorbs most of the domestic savings, even though they are high. If the economy is to grow at a satisfactory rate without inflationary strains and without a weakening of the country's competitive position, an inflow of foreign capital is needed. 6. Finland's economic prospects are good and its record as a debtor outstanding, but the political risks involved in investing in a country which seems to rely for its independence on Soviet restraint have, so far, been an obstacle to borrowing in foreign capital markets or attract- ing direct investments. For the time being, Finland must continue to look to the Bank as the principal source of the long-term external fin- ancing obviously required by its economy. 7. Finland's investment needs are greater than can be financed from domestic resources alone and she has the capacity to service additional foreign debt. Barring unforeseen changes that would affect Finland's ability to maintain her independence of action, she is creditworthy for the amount of external borrowing contemplated. INTRODUCTION 1. The last economic report on Finland (issued in July 1961) de- scribed the economic situation during 1958-1960 and appraised the countryts creditworthiness in the light of that situation. The present report brings the information up to date and reviews Finland's position and prospects as they have been affected by developments during the past year. Aspects of the Finnish economy where no change has taken place are not covered again. 2. Finland's development as a modern economy is more recent than that of the other Scandinavian countries, with the exception of Iceland. As late as 1920, 64 per cent of the Finnish population were still engaged directly in farming, deriving a meagre livelihood from a naturally in- fertile soil under an unfavorable climate. Over two-thirds of exports consisted of timber and agricultural products while pulp and paper ac- counted for less than one-fifth of the total. Per capita income was around 40 per cent of the level in the other Scandinavian countries. During the interwar period, however, Finland experienced a more rapid economic growth than most other European countries due to the rising world demand for pulp and paper which continued even during the depres- sed 1930's. This development had a greater impact on a country whose major national resource is its forests than on other timber producing countries. Finland was in a particularly good position to exploit this opportunity thanks to the high levels of education and efficiency of its population and to the stability of its institutions. By 1939 per capita income was about half that of the other Scandinavian countries. 3. Five years of war and its aftermath imposed staggering burdens on Finnish energies and resources, but within a decade Finland had suc- ceeded, through a vigorous production effort and continued self-denial, in liquidating most of the legacy of war and defeat. By 1955 industrial production had more than doubled compared with 1938, and the volume of exports was some 40 per cent higher than before the war, while foreign exchange reserves had been rebuilt to a total of $218 million, corres- ponding to three months' imports. 4. These results were not, however, attained without cost. The strain which the tasks of reconstruction imposed on Finnish resources resulted in a severe inflation which was intensified by the demands of labor and farmers for higher incomes than the economy could ensure to them and by an effort to expand simultaneously social services and social welfare programs. Finland retained the whole armory of price controls, subsi- dies, import restrictions and other direct governmental interventions longer than most other European countries, and there was strong opposition from both the left and the agrarians,who accounted for two-thirds of the seats in Parliament,to a return to a free economy. By 1957, however, it had - 2 - become clear that steadily rising prices and an overvalued currency were seriously undermining Finland's economic prospects, especially since most of the advanced European countries had by then rehabilitated their cur- rencies. 5. A stabilization program adopted in September 1957 was drastic enough to make possible within a short time the lifting of the bulk of quantitative import restrictions and the restoration of external con- vertibility. The substantial dose of deflation with which the author- ities sought to ensure the success of the program coincided with a slump in the world pulp and paper market, causing a decline in indus- trial production and a considerable increase in unemployment in 1958 and in the first part of 1959. In the last two years, however, the strong recovery in world demand for pulp and paper and the expanded capacity and enhanced competitiveness of the Finnish woodworking in- dustry enabled Finland to increase its exports by a total of 25 per cent. The resulting improvement in foreign exchange earnings allowed in turn a relaxation of financial policies which provided the founda- tion for a strong economic expansion, unattended this time by inflation. During 1960 and 1961 industrial output increased by an average of 11.5 per cent per annum and the gross national product by 7 per cent per an- num. Prices rose by 2.5 per cent per annum, a rise similar to that in the other Scandinavian countries. A very large increase in imports has caused some decline in net foreign exchange reserves during 1962 but this was to be expected in a period of boom and following a very exten- sive liberalization of trade. Thus during the last few years Finland has been able to combine economic expansion with financial stability to an extent that only a short while ago appeared beyond the country's reach. Per capita income at present is about two-thirds of the average in the other Scandinavian countries. I. PROBLENS AND PROSPECTS Agriculture 6. Finland is unique among the advanced countries of the world in the high proportion of its manpower engaged in feeding its population. In 1950, the last year for which census data are available, 46 per cent of total employment was provided by agriculture and forestry. The corres- ponding figures for Sweden and Norway were 25 and 31 per cent respectively. Forestry accounted for between one-fifth and one-fourth of the combined work performed by the Finnish agricultural population, which means that the production of the country's food supply employed nearly one-third of the labor force. The results of the 1960 census have not yet been published but estimates based on sample surveys show that in 1961 agricul- ture still provided 29 per cent and forestry another 7 per cent of total employment. In terms of full-time work agriculture accounted for 23 per cent and forestry for 7 per cent of employment while their share in the net domestic product was 12 and 9 per cent respectively. -3- 7. The reasons for the low output per person employed in Finnish agri- culture are to be found in the unfavorable natural conditions and the smallness of farms, not in any lack of efficiency among the agricultural population. Finnish farmers are hard-working and progressive and are or- ganized in a highly developed cooperative system. Natural conditions are relatively more favorable for dairy farming and Finland has tradi- tionally been an exporter of butter. At present world prices, however, butter exports require heavy subsidization, hence have become uneconomic. In order to prevent a further increase in milk surpluses the Government has in recent years encouraged the expansion of bread grain production and this, in combination with good weather, has resulted in near self- sufficiency in cereals, (though at high cost), and in difficulties in absorbing imports from the Soviet Union under the existing trade agreement. 8. A committee on agriculture appointed four years ago has just issued a comprehensive report which recommends a series of measures designed to put Finlandts agriculture on a healthier basis. The principal recommenda- tions include the cessation of further land reclamation, measures to pre- vent further fragmentation of farms, the limiting of price supports to the present volume of production, the replacement of present differential price subsidies to small farms by a cash subsidy per acre, and the shift- ing of Government grants and loans from agriculture to forestry. These recommendations have already met with strong opposition from farm inter- ests and their chances of adoption do not as of now appear particularly good. 9. Since 1955 the movement of labor out of agriculture appears to have slowed down, but it is difficult to determine how far present agricultural policies have contributed to this. Until 1959 unemployment was a major problem, and there was substantial emigration, which indicated that op- portunities for the movement of labor out of agriculture were limited. In 1961, however, a state of full employment was reached in industry and ser- vices, but it is too early to detect any repercussions on the agricultural sector. 10. The high food prices and large transfers of income from the urban to the rural population which are involved in present agricultural policies have been a major factor in the financial difficulties of the past and still constitute a serious threat to price stability. This is so because trade unions are seeking a level of real income for their members which is not attainable so long as part of money wages have to be transferred to the large numbers engaged in agriculture in the form of higher food prices and high taxes. 11. A slow movement out of agriculture will mean that financial stabili- ty in Finland will continue to be precarious and that the development of the economy will be held back. A more rapid movement on the other hand - 4- will be possible only if the tempo of industrialization is stepped up which in turn will increase the already heavy investment needs for in- dustrial installations,housing and other urban facilities. Thus, whether it stays on the farms or moves out, the excessive manpower which at pres- ent characterizes Finnish agriculture is likely to pose serious problems for the economy for at least another decade. Forestry 12. Unlike agriculture, forestry in Finland operates under unusually favorable natural conditions and the forests are truly Finlaidts major source of wealth. This is vividly expressed in the Finnish saying that "Finland without woods would be like a bear without skin". 13. A question of decisive importance to Finlandts economic prospects is the extent to which the supply of raw material for the woodworking industry can be increased in the coming years. 14. Although the forests are largely owned by small farmers, who account for the bulk of the annual cut, scientific and efficient exploitation is the rule and practices are being constantly improved. It is estimated that under present conditions of exploitation the annual growth would gradually increase from the present level of some 46 million m3 to 66 mil- lion m3 or by 43% in one rotation (about 90 years). It is believed that the expansion of the forest area through drainage, replanting, building of access roads, etc., the use of fertilizers and insecticides and the adoption of new techniques could lead to a doubling of the annual growth in one rotation. 15. Another source of additional supplies for the woodworking industry would be the diversion of wood from less productive uses. In 1959 wood used as fuel accounted for 30% of the total cut and exports of logs for another 9%, compared with 54% for industry. Industry 16. The woodworking industry employs less than 5 per cent of the labor force but provides some 10 per cent of the national income and nearly 70 per cent of exports. These figures reveal both the high productivity of this industry and its importance in the Finnish economy. 17. Finland lost 25 per cent of its chemical pulp capacity, 14 per cent of its mechanical pulp capacity and 5 per cent of its paper capacity at the end of the war through the cession of territory to the Soviet Union. During the first postwar years reparations and the resettlement of re- fugees were the overriding priorities and investments in pulp and paper, the most important sectors of the woodworking industry, had to await their turn. Thus it was only in 1951 that prewar levels of production were reached in pulp and newsprint, while in other paper the prewar levels had already been considerably exceeded. In the same period production of pulp and newsprint had doubled in Canada and had increased by 10 and 27 per cent respectively in.Sweden. 18. In 1952 the Finnish woodworking industry embarked on a large program of expansion which within five years increased its pulp and newsprint ca- pacity by some 50 per cent and more than doubled its capacity for other paper. This was a considerably greater expansion than in the other ex- porting countries, and by 1958 Finland had regained the ground lost. A new program of expansion and modernization was adopted in 1958 and was further enlarged at the end of 1960. Thus around 1965 Finland is ex- pected to have increased the capacity of its pulp and paper industry as follows: End 1959 lid-1965 Per cent 000 tons increase Mechanical pulp 1,230 1,870 52 Sulphite pulp 1,340 1,630 21 Sulphate pulp 1,180 2,262 91 Newsprint 865 1,487 70 Other paper 650 9h2 44 Board 510 910 78 19. The large investments made in the pulp and paper industry have been financed mainly out of retained earnings, including in recent years gener- ous depreciation allowances, loans from banks and insurance companies, suppliers' credits and loans from IBRD, (loans from IBRD during 1949-1959 totalled K'68.3 million). In 1959, the last year for which figures are available, new investment in the pulp and paper industry amounted to 70 million, representing 24 per cent of total new industrial investment. 20. The leaders of the Finnish woodworking industry believe that in view of the large additions to capacity currently being made a further considerable expansion will not be justified for some time. This has al- ready raised the question in Finland of how the growth of the economy will be maintained if the prime mover of expansion during the 1950's can no longer be relied upon to play that role in the 1960's. Thus it is widely felt that Finland will have to undertake a major effort to develop new industrial products for export. It is also believed that the metalworking industries, the chemical industries and some consumer goods industries could, through specialization and modernization, become important export industries. 21. Finland had to set up new metal working and engineering plants in order to meet its reparations payments to the U.S.S.R. Because of the wide range of products they covered and the conditions under which they were brought into being, these industries could not be expected to prove competitive in world markets and they have been able to continue in pro- duction only because trade agreements with the Soviet Union, subsequent to the completion of reparations payments, have provided an outlet for their products. In 1959 extorts of machinery and transportation equip- ment amounted to 130 million compared with a gross value of production of $600 million. The Soviet Union took $85 million and other bilateral trading countries a considerable part of the remaining exports. In the short run, this exchange with the Soviet Union has been beneficial to Finland because it has prevented a serious dislocation in industry fol- lowing the end of reparations and has reduced the import bill from free currency markets. In the longer run, however, high cost production and bilateral exchanges affect adversely an .economy because they tend to weaken its competitive position. 22. Some branches of the Finnish metal industry, and especially those producing machinery for pulp and paper, are, however, highly competitive and the industry as a whole meets nearly half of domestic requirements with only moderate protection. Exports of metal and engineering products to Western European markets (EFTA and EEC) increased from '13 million in 1959 to "130 million in 1Q61. It is believed that by concentrating on a smaller number of products, in which Finnish skills and technical ability would give it a competitive advantage, this industry could gradually develop into an important exporter of specialized products. 23. Finland has a relatively small chemical industry which provides some exports, mainly sulphuric acid and tall oil, and meets a large part of domestic requirements for oil products, fertilizers, paints and dyes and pharmaceuticals. It is felt that this industry too could develop into an export industry if it concentrated on a small number of products requiring high technical standards. 24. As in other countries, increased protection during the 1930's made Finland largely self-supporting in manufactured consumer goods. Import duties range from 15 to 50 per cent, being nearer the upper limit for finished products and nearer the lower limit for semi-manufactures. In addition to this protection, the import restrictions of the postwar period, together with inflationary demand. provided great scope for ex- pansion in these industries and some difficulties were experienced when imports were liberalized and internal demand brought under control. The fact, however, that these industries have shared in the expansion of the last three years suggests that they have been able to adjust to the more competitive conditions that have prevailed since 1958. At the same time, however, imports of consumer manufactures have increased considerably, indicating that the high degree of self-sufficiency of the 1950fs was partly artificial. 25. The agreement between the European Free Trade Association and Finland signed in March 1961 recognized that some of the Finnish home market industries would require a longer period to adjust to in- creased foreign competition than the comparable industries in EFTA countries and granted Finland special treatment in respect of a number of products. While some concern was expressed at that time about the ability of a number of these industries to survive without protection, it was generally believed in Finland that the period of transition was long enough to permit the necessary readjustments to be made without un- due hardship or dislocation and that the agreement with EFTA would open up opportunities for the development of new export products. Subsequent developments in the European movement towards integration, and especially the prospect that the principal members of EFTA might join the European Economic Community, have created considerable uncertainty in Finland, since it is difficult to foresee the outcome of current negotiations and especially how it is likely to affect Finland's position. 26. Assuming, however, that present difficulties will be successfully resolved, one may conclude that the progress of industrialization in Finland during the 1960's will depend to a much smaller extent than in the 1950's on the woodworking industry and the expansion of protected industries and will require the development of new competitive and ex- port-oriented industries in fields where Finland's advantages are not as obvious as in woodworking. This means that a major effort will again be required to maintain the impetus of the 1950's. Savings and Investment 27. In the postwar period gross investment has absorbed over a quarter of the gross national product, and in 1959-61 the ratio was 29 per cent. These high investment ratios are explained by the need for large expendi- tures on public facilities, including housing, in a northern and sparsely populated country and by the capital-intensive character of Finlandts main industries and of its agriculture. In 1959, for instance, expendi- tures on roads corresponded to V25.3 per capita in Finland, which was similar to per capita expenditures on roads in Sweden and Norway, but compared with only $ 13.7 in Denmark and 14.3 in France. Another com- parison that can be made is between construction expenditures, including housing, in Finland, which corresponded to $111.5 per capita in 1959, and in countries like Denmark and the Netherlands, where they corresponded to %66.h and :!68.1 per capita respectively. Finally, the relatively greater importance of the public sector and agriculture in Finnish investment may be seen in the following table: - 8 - Composition of Gross Domestic Capital Formation in 1958 (Per Cent of Total) Public Agriculture Sector Housing and Forestry Other Finland 23.1 21.0 10.3 45.6 Sweden 16.4 25.0 3.9 54.7 Denmark 12.3 14.6 5.8 67.3 Netherlands 16.4 21.6 3.5 58.5 France 10.7 24.8 64.5 28. In Finland all public investment, including investment in rail- roads, has been financed out of taxation and, in addition, tax revenue has been used to finance part of investment in housing, power, agri- culture, mining, and manufacturing. During 1956-1961 tax revenue financed half of total new investment and this explains the burden of taxation in Finland, which is among the heaviest in the world. 29. Net personal saving has been high, averaging 9.5 per cent of the net national product during 1956-1959 but the principal motivation for this high rate of saving has been the strong desire for home ownership, and the principal use of the savings has been for down payments and amortization on dwellings. 30. With public facilities, agriculture and housing absorbing such a high proportion of total resources, the business sector, and especially industry, has had to rely for its investments mainly on retained earn- ings, bank credit (representing in part personal saving and in part business saving) and foreign borrowing and has been complaining of a shortage of capital. 31. Not all public investment expenditures have been directly pro- ductive and part of them is motivated by social rather than strictly economic considerations. This is especially true of the large expendi- tures made for the development of the north, which represent an effort to prevent a depopulation of these inhospitable regions. It is signi- ficant, however, that the public has been willing to pay high taxes to finance these investments. 32. Given the magnitude of the expenditures required for public facil- ities and housing, the resources made available to the business sector from the rest of the economy were bound to fall short of what was required - 9 - to finance industrial expansion. It is, therefore, a general shortage of capital rather than any organizational weaknesses, that accounts for the difficulties experienced by industry in financing new investment. It is true that the Finnish capital market is a rather simple one, with most savings taking the form of deposits and most borrowings taking the form of bank credits, but this seems to reflect the preferences of the public rather than any deficiency that could be corrected through Govern- ment action. Thus when bond issues were strictly controlled it might have been felt that this represented an obstacle to adequate industrial financing but the fact that the relaxation of controls has not been ac- companied by any significant increase in such issues strongly suggests that Finnish business prefers bank credit, which it finds more flexible and more convenient, to public issues. Whether tax exemption tends to divert funds from industrial bonds to savings deposits is difficult to determine but the view in Finland is that the main effect of tax exemp- tion is to stimulate personal saving rather than discriminate against a type of investment witli which the general Finnish public is unfamiliar. It is probable that a more sophisticated capital market will evolve over the years but this can happen only gradually as the economy develops. 33. Investment requirements are unlikely to be smaller during the next five to ten years than they have been in the past. While expenditures on agriculture should decline, expenditures on forestry should rise sharply to assure the future expansion of the country's main source of wealth, housing construction is expected to continue at recent levels and public investment is likely to decline only moderately, if at all. Within industry, woodworking will require much smaller investments than at present when the current program is completed by 1965 but the need to rationalize and expand other industries and provide employment for the rising labor force and for the manpower released by agriculture will mean that overall industrial investment may have to be higher than at present. 34. The financing of these investments is likely to prove more rather than less difficult than in the 1950's, first, because personal saving, which has been unusually high, may decline to more normal levels now that consumer durables are becoming more widely available, second, because profits under more competitive conditions may be lower, third, because pressure may develop to reduce taxation, and, fourth, because a con- siderable part of the savings which financed investment during the 1950's were in the nature of forced saving, generated by inflation. Fiscal and Credit Policies. 35. With the exception of the years 1955 and 1956, the budget has not - 10 - on the whole, been an inflationary factor in postwar Finland. In fact, during 1957-1960, the net effect of Government operations on the economy was contractive. 36. This fiscal discipline is not so much the result of deliberate policy but rather of the Bank of Finland's strong resistance to lend- ing to the Government and of the Government's inability to borrow more than modest amounts from the public. 37. Budget making in Finland is a process of adjusting the many pres- sures for increased Government spending to expected revenues under the existing tax structure, with little regard to the over-all requirements of the country's financial position. The absence of strong parliamen- tary majorities is an important factor in this situation. The result is that, in good times when revenue rises, expenditures rise even more sharply, thereby further stimulating the boom while in periods of re- cession the lack of buoyancy in revenue is reflected in restraint in spending which in turn may prolong the recession. 38. During 1957-1960 net borrowing by the Government was small and was more than offset by increased Government cash balances. The large over-all surplus achieved in 1960 in particular was due mainly to the fact that the sharp rise in tax revenue resulting from the boom (13 per cent) had not been anticipated and Government spending had not yet been expanded accordingly (it rose by only 10 per cent). In 1961, however, expenditures more than caught up with rising revenues (they increased by 19 per cent compared with an increase in revenue of only 7 per cent) and the over-all surplus of 12 billion Fmk achieved in 1960 was con- verted into a deficit of 8 billion Fmk in 1961. Thus the Government sector contributed significantly to monetary expansion during 1961. 39. Budget proposals for 1962 imply a further fiscal deterioration, with proposed increases in expenditures considerably greater than ex- pected increases in revenue. It is, however, generally felt that the inability to finance the resulting deficit will force a downward ad- justment of expenditures and some increase in taxation. Developments during the first months of 1962 indicate that this is already happening. 40. Thus, while taking the past five years as a whole, the Government sector has not been an inflationary factor in the economy, fiscal oper- ations have tended to magnify rather than even out year to year fluc- tuations and the result has been that the responsibility for maintaining financial stability has fallen mainly on the Bank of Finland, whose means of control are limited. 41. The two principal instruments available to the Bank of Finland for regulating credit are the fixing of interest rates and the levying of - 11 - penalty rates on rediscounts by commercial banks. In boom periods neither instrument has proved fully or immediately effective and this has been particularly true during the recent boom. 42. Lending by the commercial banks increased as follows during 1958- 1962: End First Quarter Billion Fmk Increase 1958 394 1959 435 10% 1960 529 22% 1961 6h1 21% 1962 757 19% 43. The Bank of Finland began to take corrective action in early 1960 by raising penalty rates and allowing banks to charge higher interest rates on credits for less essential purposes, but the rising volume of rediscounts and deteriorating foreign exchange position forced the Bank to seek other means of checking credit expansion. For some years, the Bank of Finland had recommended to the Government that a system of var- iable reserve requirements should be introduced by law but the necessary legislation had failed to receive parliamentary approval. Uith the use of persuasion, however, the Bank succeeded in April 1961 in reaching a one-year agreement with financial institutions (commercial banks, Post Office Savings Bank, savings banks, cooperative credit societies) con- cerning extraordinary cash reserves. As a resilt largely of this ar- rangement, deposits in the Bank of Finland increased from 0.6 billion Fmk in April 1961 to 6.1 billion Fmk in April 1962. Meanwhile, redis- counts at the Bank of Finland rose steadily, in spite of high penalty rates, from 18.2 billion Fmk in April 1961 to 38.7 billion Fmk in April 1962. In recent months, the Bank of Finland attempted to raise the dis- count rate from 6.75 per cent to 8 per cent, but its action was rescinded by the Parliamentary Committee of Bank Supervisors. The agreement with financial institutions 7.as, however, renewed. 44. Normally, an excessive credit expansion in a country like Finland tends to be self-correcting since, by causing a decline in foreign ex- change reserves, it reduces the liquidity of the banking system and hence its ability to satisfy the existing demand for credit. The difficulty at present is that, while holdings of convertible currencies have been declining during the past year, Eastern Bloc and bilateral balances have been rising with the result that the over-all effect on the liquidity of the banking system has been negligible. Moreover, commercial banks have been borrowing abroad in order to maintain their liquidity. 45. The main hope is that the levelling off of the boom, which seems to be under way, will reduce automatically the demand for credit without the need for further action by the authorities, assuming, of course, that the budgetary situation is kept under control. - 12 - 46. This is the first time since the end of the war that Finland is being confronted with a situation where the checking of a decline in reserves has to 'be accomplished exclusively through fiscal and credit control measures instead of through a tightening up of import restric- tions and exchange controls as well. This is why it is difficult to foresee how the situation will be handled, assuming that it does not correct itself in the coming months. The need is, however, clear for more effective instruments of credit control and for greater coordina- tion between credit and fiscal policy. It is in this sector, rather than in the organization of the capital market, that improvements are most urgently needed. Prices and Wages 47. In spite of the imperfections of fiscal and credit policy the com- bination of lower import prices, greater wage restraint, rising produc- tivity and a larger import surplus has enabled Finland to maintain a much greater degree of price stability during 1959-1961 than appeared possible only a few years ago and one that compares favourably with the performance of other countries. 48. Wholesale prices, which had remained unchanged in 1959, increased by 4.1 per cent in 1960 and rose only fractionally in 1961. In the first quarter of 1962 they were still only slightly over the level in the cor- responding quarter of 1961. The cost of living, which had increased by 1.5 per cent in 1959, rose by another 3 per cent in 1960 and by only 1.5 per cent in 1961. The collective wage agreements for 1960 had raised wage rates by only 3.5 per cent, a remarkably modest increase compared ,ith the past. Towards the end of 1960 the wage agreements were renewed for two years instead of the customary one and provided for wage increases of b.3% in 1961 and another 3.5/ in 1962. Actual earnings, as is usually the case during booms, increased considerably more, by an estimated 5.5% in 1960 and 8% in 1961, but the sharp rise in productivity allowed a large part of these increases to be absorbed by business. 49. Because of the link between wages and farm prices the restraint shown by trade unions in the last three years has also kept the increase in food prices relatively moderate. In the past this link had been a major factor in the wage-price spiral. Between the first quarter of 1959 and the first quarter of 1962 farm prices rose by 7 per cent or by only 2 per cent per annum. 50. Whether the relative price stability of the last three years can be maintained in the future will depend largely on whether trade unions will continue to show restraint and on whether production and productivity will continue to rise and thus help offset the effect of rising wages on - 13 - production costs. The experi&nce of the last three years is promising but not conclusive. The fact, however, that similar pressures on prices are facing most countries makes the task of keeping the economy competitive less formidable than it would otherwise have been. Foreign Trade and the Balance of Payments 51. During 1956-1961 exports increased in value by 36 per cent or by an average of 62L per cent per annum. About 80 per cent of the total increase was provided by forestry and woodworking. Exports of virtually all forest products increased vigorously during this period, but the largest increases were in paper and paper products. Last year's Economic Report pointed out that exports of roundwood and of sawn wood and plywood were unlikely to increase much further in the future and that consequent- ly the continued expansion of Finland's foreign trade depended primarily on pulp and paper. The program under way in this sector would enable Finland to increase its share in world production and trade by 1964 - 1965 and no marketing difficulties were likely to arise. Since then, increased competition has resulted in some weakening of prices and cutbacks in pro- duction in the Scandinavian countries, but the steady growth of world de- mand for pulp and paper should ensure that these difficulties will be only temporary. Finland's competitive position in pulp and paper remains strong and, if internal financial stability is maintained:, should con- tinue to do so in the future. Beyond 1965, however, the rise in exports of wood products should taper off as, according to present plans, the Finnish woodworking industry will not undertake a further major expan- sion in capacity for a while. This is why the Finns consider it vitally important that other export products be developed to sustain a continued growth in the economy. 52. Exports to the Soviet Union have not increased during the last three years and, in view of the expansion in total exports, this has meant that the share of the Soviet Union in Finland's exports has de- clined, from 18.5 per cent in 1955-1958 to 14.3 per cent in 1959-1961. Exports to the remaining countries of the Eastern Bloc have accounted for another 6 per cent of total Finnish exports. Last year's Economic Report pointed out that the upper limit to trade with the Soviet Union was set by the availability of fully competitive processed products in the Soviet Union and the reluctance of Finnish firms to get too depend- ent upon the Soviet Union for spare parts and servicing. Consequently, it was expected that the share of the Soviet Union in Finland's trade would continue to decline, albeit slowly. More recent indications, how- ever, are that the Soviet Union has taken note of this development and is seeking to strengthen its position in Finnish trade. 53. Finland's association with EFTA was discussed in last year's Econ- omic Report, and it was concluded that, while the bulk of Finnish ex-ports - 14 - to EFTA countries would not be affected by the agreement as they were already being admitted duty free or at very low rates of duty, the gradual reduction in relatively high duties on quality paper and paper products should result in improved marketing prospects for such products and that exports of manufactured goods, other than woodworking, would probably also be slowly stimulated by the agreement. Since then, the British decision to seek admission into the European Economic Com- munity has created considerable uncertainty in Finland. It is virtually certain that Finland cannot become a member of an enlarged EEC and the terms of any Finnish association with such a group would depend on the attitude of the Soviet Union, on the one hand, and on the willingness of European countries to make special allowance for Finland's international position, on the other. Very little can be said about the probable out- come at this time, but it seems unlikely that the West will ignore Finland's needs. 54. One of the most important structural changes in the Finnish economy in the last two years has been the emergence of a substantial import surplus under conditions of internal financial stability and of rapid growth in exports. Thus, in 1961 imports had increased by 38 per cent since 1959 compared with an increase in exports of 26 per cent. The principal factors in this development have been the gradual effect of trade liberalization and the relaxation of restrictions on the use of foreign commercial credits. 5. The increase in the import bill came from increased imports of industrial materials, equipment and finished consumer goods. There was no increase from food imports and only a small increase from imports of fuel: 1959 1961 Change million U.S. Food 113 110 -3 Materials for production 300 420 +120 Fuel 87 100 +13 Finished consumer goods 118 193 +75 Finished investment goods 212 325 +113 Total: T3 +17 56. The size of the import bill in the coming years, which will large- ly determine the country's balance of payments position, will depend mainly on the levels of economic activity and of investment. If we as- sume, as we may, that the 1961 import bill was not inflated by the build- ing up of inventories, we may conclude that under conditions of high economic activity and high levels of investment, on the one hand, and internal financial stability and continued freedom of external transactions, - 15 - on the other, the import surplus, which was :76 million in 1960 and $96 million in 1961, would remain within that range for the next few years. 57. This, in turn, would mean a current account deficit of the order of '50 million per annum, since net invisibles are unlikely to exceed $30 million per annum. 58. In 1960 and 1961 a current account deficit of this magnitude was financed as follows: Million $ 1960 1961 A. Current account .h2 -72 B. Capital account 1. Central and Local Govern- ment borrowing Loans received 4 27 Repayments -14 -13 Net -10 l 2. IBRD loans Drawn 18 17 Repaid -h -4 Net 14 13 3. Other Kreditanstalt f. WA 3 7 Export Import Bank 4 1 Private Short-term (net) 25 11 Private long-term (mainly suppliers' credits, in- cluding Government guaranteed debt) Drawn 34 42 Repaid -20 -22 Net l4 20 Other -4 1 Net Capital 46 67 - 16 - 59. The preceding table reveals the following characteristics in Finland's external borrowing during the last two years: (a) debt re- payments, official and private, amounted to nearly $40 million per annum; (b) official loans, other than from IBRD, were small in 1960 but increased in 1961 due mainly to the drawing down of a credit from the Soviet Union and to a not too successful bond issue of 30 million Swiss francs; (c) drawings on IBRD0 loans met 40 per cent of the cur- rent account deficit in 1960 and about a quarter of the deficit in 1961; (d) most of the remaining financing was in the form of short-term and suppliers' credits. 60. Thus the experience of 1960 and 1961 points up both the decisive importance of IBRD loans in permitting Finland to finance sound economic expansion and the precarious character of the other sources of external financing. 61. On April 30, 1962 net gold and foreign exchange holdings of the Bank of Finland and the commercial banks amounted to 2302 million, corresponding to only three months' imports. It is clear that reserves of such a size cannot be allowed to decline much further. In the ab- sence of a continued inflow of foreign capital Finland might be faced in the coming years with the two equally distasteful alternatives of in- ternal deflation or reintroduction of exchange controls and import re- strictions. II. CONCLUSIONS - CREDITORTHINESS 62. Finland was able to recover from the crushing burdens of war and defeat mainly through the vigor of its production effort. The problems facing the country during the 1960's are undoubtedly less formidable but, in comparison with other 'estern European countries, Finland is still laboring under serious handicaps and will be able to meet the chal- lenges with which it is faced only if it can exploit the opportunities to expand production to the limits of its capacity. 63. Finland's economic nrospects are good and its record as a debtor outstanding, but the political risks involved in investing in a country which seems to rely for its independence on Soviet restraint have, so far, been an obstacle to borrowing in foreign capital markets or at- tracting direct investments. For the time being, Finland must continue to look to the Bank as the principal source of the long-term external financing obviously required by its economy. 64. Finland's public external debt is small and remained at about the same level throughout the 1950's. Only recently have new borrowings ex- ceeded repayments. In 1961 the service of the debt amounted to $29 mil- lion, corresponding to 2.4 per cent of current foreign exchange earnings in that year. If the debt in western currencies is compared with current - 17 - earnings in such currencies, the ratio was still only 3 per cent and leaves room for assuming further debt obligations. Barring unforeseen changes that would affect Finland's ability to maintain her independ- ence, she is creditworthy for the amount of external borrowing con- templated. Washington 25, D.C. August 6, 1962 STATISTICAL APPENDIX List of Tables Nunber Sources of et Domestic Product . . . . . . 1 Gross National Expenditure . . . . . . .... . . . . . 2 Agricultural Production . . . . . . . . . . . . . . . 3 Balance Sheet of Finland's Forests........ . . . ... Production of Main Products of Forestry and Woodworking . 5 Index Numbers of Industrial Production . . . . . . . . . 6 Distribution of Gross Fixed Capital Formation . . . . . . 7 Public and Private Saving . . . . . . . . . . . . *.... 8 Credits to Private Sector.... . . . . . . . . . . . . 9 Summary Statement of Central Government Cash Transactions 10 Distribution of Central Government Current Expenditures . 11 Central Government Budgeted Investment Expenditure . . . 12 Monetary Survey....... . . . . . . ..... . . . 13 Index Numbers of Prices and Wages . . . . . . . . . . . . 1 Balance of Payments...... . . . . . . . . *.. . . . . 15 Commodity Composition of Foreign Trade . . . 16 Exports of Main Products of Forestry and Woodworking . . 17 Geographical Distribution of Foreign Trade . . . . . . . 18 Foreign Exchange Position . . . . . . . . ....... 19 External Public Debt Outstanding December 31, 1961 . . . 20 Estimated Contractual Service on External Public Debt Outstanding Including Undisbursed as of December 31, 1961 21 ADDENDUM Statistical Information for 1962 Table 1 Sources of Net Domestic Product (at factor cost) 1/ 1950 1954 1955 1956 1957 1958 1959 1960 1961 2/ 1. In Billions of Markkas at Current Prices Agriculture 66 85 92 112 107 118 127 138 146 Forestry 38 79 92 83 81 85 83 108 129 Industry 132 221 249 271 285 301 311 361 399 Construction 38 66 70 84 88 95 103 116 129 Transportation and Communications 29 46 56 68 75 76 81 91 99 Other 112 185 211 250 270 290 315 345 383 Total 415 682 770 868 906 965 1,020 1,159 1,285 2. In Percent of Total Agriculture 15.8 12.5 11.9 12.9 11.8 12.2 12.4 11.9 11.4 Forestry 9.2 11.6 12.0 9.6 8.9 8.7 8.1 9.3 10.0 Industry 31.8 32.4 32.4 31.2 31.5 31.2 30.5 31.1 31.1 Construction 9.2 9.6 9.1 9.7 9.7 9.8 10.1 10.0 10.0 Transportation and Comrmnications 7.0 6.7 7.3 7.8 8.3 7.9 7.9 7.9 7.7 Other 27.0 27.2 27.3 28.8 20.8 30.2 31.0 29.8 29.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1/The net domestic product at factor cost is equivalent to national income plus net factor income going abroad (negligible in the case of Finland). 2/ Provisional. Source: Central Statistical Office of Finland, Bulletin of Statistics. Table 2 Gross National Expenditure 1/ (at current market prices) 1950 1954 1955 1956 1957 1958 1959 1960 1961 1. In Billions of Markkas Private consumption 319 500 565 619 672 696 739 830 900 Government consumption 59 95 113 134 145 159 178 191 215 Gross fixed capital formation 117 212 236 289 294 303 331 418 488 Exports of goods and services 106 185 216 217 259 292 315 368 396 Less imports of goods and services 2/ -104 -171 -201 -230 -261 -267 -305 -384 -18 Total expenditure on gross national product 497 821 909 1,029 1,109 1,183 1,258 1,423 1,581 2. In Percent of Total Private consumption 64 61 60 60 60 58 59 58 57 Government consumption 12 12 12 13 13 13 l14 1 14 Gross fixed capital formation 24 26 26 28 27 26 26 29 30 Exports of goods and services 21 22 24 21 23 25 25 26 25 Less imports of goods and services -21 -21 -22 -22 -23 -22 -24 -27 -26 Total expenditure on gross national product 100 100 100 100 100 100 100 100 100 Note: Total may not equal sum of components because of rounding. 1/ Changes in stocks are included in private consumption. 2/ Including net payments of factor income to abroad. Source: Ministry of Finance, Division for Economic Affairs, and Bank of Finland, Institute for Economic Research. Table 3 Agricultural Production (in thousand metric tons unless otherwise indicated) 1950 1954 1955 1956 1957 1958 1959 1960 1961 Wheat 296 235 190 199 177 215 243 368 460.7 Rye 215 132 119 124 115 111 162 186 126.7 Barley 176 262 262 286 348 h06 332 40 365.1 Oats 702 774 643 659 698 798 696 1,109 941.0 Potatoes 1,273 1,090 1,067 1,693 1,255 1,381 1,079 1,717 1,057.0 Field hay 3,017 3,390 3,197 3,222 3,672 3,h8 3,313 3,920 4,027.5 Total crop (million fodder units) 3,0 3,607 3,253 3,463 3,685 3,851 3,542 4,842 4,511.0 Milk n.a. 2,896 2,856 3,085 3,153 3,162 3,322 3,460 3,520.0 Meat n.a. 97.0 104.4 108.9 111.5 111.4 119.2 111.0 116.2 Sources: Central Statistical Office of Finland, Statistical Yearbook, and Bank of Finland, Institute for Economic Research Table 4 .Balance Sheet of Finland's Forests (in million solid cubic meters of roundwood without bark) 1951 1954-57 1959 1960 Average Gross increment 46.0 46.0 46.0 46.5 Natural losses 1.7 1.2 1.2 1.2 Net growth 44.3 44.8 i4.8 45.3 Total fellings 45.1 44.2 44.3 48.0 Logging and floating losses 1.9 3.2 3.2 3.5 Net annual removal 43.2 41.0 41.1 44.5 Fuelwood 13.9 13.1 13.0 12.5 Industrial wood 29.3 27.6 28.1 32.0 Export of roundwood 5.5 4.3 3.8 6.0 Raw material for wood- working industry 19.8 20.6 22.0 23.3 Other uses 4.0 2.7 2.3 2.7 Source: 1951 and 1954-57: Revised estimates, made by Professor Pontynen, Forest Research Institute. 1959: Preliminary estimates, made by the Central Statistical Office of Finland. 1960: Preliminary estimates, based on studies by Professor P6ntynen. Table 5 Production of Main Products of Forestry and Woodworking (in thousand metric tons, unless otherwise indicated) 1954 1955 1956 1957 1958 1959 1960 1961 Timber felled for sale (million cu.m. piled measure) 35.5 38.6 36.6 40.9 38.0 38.1 44.6 49.0 Sawn timber (1000 stds.) 1,060 1,055 805 856 987 1,072 1,361 1,297 Plywood and veneers 339 364 272 313 285 348 414 390 Mechanical pulp 715 780 845 847 837 832 988 1,147 Sulphite pulp 867 995 994 1,060 1,084 1,053 1,284 1,392 Sulphate pulp 706 822 857 1,002 981 1,095 1,183 1,435 Fiberboard 129 136 131 131 139 165 192 215 Cardboard and kraftliner 254 286 294 385 422 h8 526 698 Yewsprint h5 526 597 626 639 658 774 945 Kraftpaper 167 202 20 227 223 287 300 306 All other paper and paper products 228 276 293 301 293 300 358 455 Source: Central Statistical Office of Finland: Bulletin of Statistics, and Bank of Finland, Institute for Economic Research. Table 6 Index Numbers of Industrial Production (1954 m 100) Group Weights 1955 1956 1957 1958 1959 1960 1961 All industry (100.0) 111 11 117 113 123 140 150 Investment goods (12.7) 116 117 119 111 118 140 150 Other producers' goods (54.6) 100 111 116 113 125 143 154 Consumers' goods (32.7) 113 120 118 112 122 134 143 Mining and quarrying (1.7) 116 123 133 135 151 160 176 Manufacturing (89.5) 110 113 115 110 121 137 146 Food (10.0) 109 120 118 121 127 139 146 Textiles (8.1) 116 124 122 98 117 121 127 Wood products (8.6) 99 76 82 87 98 122 116 Pulp and paper (10.6) 115 122 134 134 144 167 192 Chemicals (5.0) 107 116 130 128 134 147 151 Metals (25.4) 111 113 115 107 120 140 149 Electricity, gas and water (8.8) 117 121 129 10 142 160 181 Source: Central Statistical Office of Finland: Bulletin of Statistics. Table 7 Distribution of Gross Fixed Capital Formation 1/ (in billions of markkas) 1950 1954 1955 1956 1957 2/ 1958 1959 1960 Agriculture 17.6 23.7 25.1 27.3 21.6 25.0 28.8 36.8 Forestry 1.5 2.8 2.8 3.6 4.4 5.3 5.2 5.8 Manufacturing 27.2 67.2 72.1 90.4 74.1 77.0 86.7 125.9 Transport and communications 9.5 13.1 16.3 22.6 28.9 39.4 39.9 51.3 Commerce, banking, insurance 7.5 7.8 10.3 7.4 16.6 14.7 20.4 26.9 General government 20.3 33.8 36.4 46.4 64.4 69.6 24.6 75.6 Other sectors 2.8 3.8 5.2 6.0 6.7 6.8 6.9 9.5 Private persons and associations 30.6 59.4 68.3 85.1 62.4 64.3 68.9 86.0 Gross fixed capital formationl17.0 211.6 236.4 288.8 279.1 302.1 331.4 Lj17.8 New dwellings (31.9)(56.8)(61.9)(69.5)(66.7) (63.2)(67.3)(82.1) Less depreciation -16.2 -39.2 -44.8 -54.3 -68.3 -82.0 -88.5 108.1 Net fixed capital formation 100.8 172.4 191.6 223.5 210.8 220.1 242.9 309.7 1/ Excluding maintenance and repairs. Classification is by type of agency carrying out the investment, so that, e.g., "general government" includes roads, and dwellings are included in various sectors. The estimate for new dwellings was made separately. 2/ The 1958 level of gross fixed capital formation given in this table is based on the General Investment Survey. The figures for years 1957 and 1959 have been calculated according to the commodity-flow method starting from the 1958 level. The level of gross-fixed capital formation given in this table differs in 1957 from that presented in table 2: "Gross National Ex- penditure", because in the latter it has been desired to maintain the com- parability with the figures for earlier years. Source: Ministry of Finance, Division for Economic Affairs, and Central Statistical Office of Finland, Bulletin of Statistics. Table 8 Public and Private Saving (in billions of markkas) 1954 1955 1956 1957 1958 1959 1960 1961 1/ Net saving of: Households and unin- corporated enterprises 68 86 93 66 97 100 119 163 Corporations 17 21 27 24 21 23 30 33 Central government 101 99 101 134 129 128 158 151 Total 186 206 221 224 246 251 307 347 Depreciation allowances 39 45 55 68 82 89 108 118 Gross saving 225 251 276 292 328 340 415 465 Additional net investment from abroad -13 -15 13 2 -25 -9 13 23 Gross domestic capital formation 212 236 289 294 303 331 428 L88 Note: Totals may not equal sum of components because of rounding. 1/ Provisional Source: Ministry of Finance, Division for Economic Affairs. Table 9 Credits to Private Sector December 31, 1960 Classified by Lending Institutions and by Borrowers 1/ (in billions of markkas) Agri- Manu- Power Con- Com- Trans- Local Other Total cul- fac- struc- merce port Author- ture 2/ turing tion ities Bank of Finland - 13.0 5.9 - 0.8 - 0 0 19.7 Commercial banks 10.3 87.6 3.5 5.1 75.4 13.1 6.5 65.4 266.9 Post Office Savings Bank 0 6.3 11.0 0 1.7 0.1 3.4 16.I 38.9 Savings banks 33.0 10.0 0.8 1.7 13.7 5.5 8.3 83.1 156.1 Cooperative cred- it institutions 47.8 16.5 0.9 0.7 15.7 4.1 5.5 27.9 119.1 Mortgage banks 1.8 25.0 8.4 - 0.2 0 2.1 7.9 45.4 National Pensions Fund - 13.7 61.8 0 1.7 1.0 9.4 2.4 90.C Insurance compa- nies 0.3 17.0 2.6 0.3 11.6 2.4 9.1 37.8 81.1 Other institu- tions 0.2 - - 0 - 0.1 - 1.4 1.7 Total 93.4 189.1 94.9 7.8 120.8 26.3 44.3 242.3 818.9 Note: Totals may not equal sum of component because of rounding 1/ Excludes credit to the State, but includes credit to business enterprises con- trolled by the State. Credits are classified by main activity of borrowers. 2/ Including forestry and fishing . Source: Bank of Finland, Ekonomiska Utredningar. Table 10 Summary Statement of Central Government Cash Transactions 1/ (in billions of markkas) 1954 1955 1956 1957 1958 1959 1960 1961 3/ Current Transactions Receipts 201 215 245 277 292 312 355 378 Expenditures 153 168 192 19? 206 228 248 281 Current surplus 48 47 53 78 86 84 107 97 Capital Transactions 2/ Receipts 12 5 6 6 7 13 9 10 Expenditures 52 61 70 83 87 99 lo4 115 Capital deficit (-) -40 -56 -64 -77 -8o -86 -95 -105 Overall surplus (+) deficit (-) 8 - 9 -11 1 6 - 2 12 - 8 Long-Term Debt Transactions Borrowing 11 13 l 8 16 21 20 25 Redemption 9 6 6 9 12 18 23 20 Net funds received from borrowing 2 7 8 -1 4 2 -3 5 Change in Cash and Short- Term Debt 10 -2 -3 0 10 0 9 -3 Note: Totals may not equal sum of component because of rounding. 1/ All extra-budgetary funds are included. 2/ Excluding borrowing and redemption of debt. 3/ Provisional. Source: Bank of Finland, Institute for Economic Research. Table 11 Distribution of Central Government Current Expenditures 1/ Billion Fmk 1955 1956 1957 1958 1959 1960 General Administration and Police 21.0 25.6 27.4 28.5 30.8 35.0 Defense 14.6 14.9 16.4 18.2 20.5 22.1 Education 26.9 32.9 36.1 38.8 43.7 49.7 Public Health 8.9 10.9 12.2 15.1 16.8 18.4 Social Welfare 42.0 67.5 55.9 5)4.2 54.9 55.5 Transportation l0.4 12.7 14.7 13.6 15.5 16.8 Aid to Agriculture 10.8 10.9 9.4 9.0 13.5 15.0 Aid to Forestry 1.2 1.7 1.2 1.1 1.3 1.3 Price Subsidies 20.5 26.6 18.6 21.9 28.0 31.3 Other 1.9 2.4 2.8 14.9 4.6 7.1 Total 158.2 186.1 194.7 215.3 229.6 252.2 1/ The totals differ slightly from those shown in Table 10 due to differences in classification of certain items. Source: Finland. Economic Surveys. Table 12 Central Government Budgeted Investment Expenditure (in billions of markkas) 1956 1957 1958 1959 1960 Roads 11.5 15.9 21.5 29.7 28.6 Railways 8.3 11.5 12.0 12.9 22.7 Airfields 1.1 0.9 1.2 1.3 1.6 Post and telegraph 2.7 3.0 2.9 3.7 4.2 Other transport and communications 5.6 5.3 7.7 5.6 5.4 Housing 10.3 10.0 10.2 11.9 12.0 Education 7.8 6.4 6.1 8.1 7.0 Health 1.0 3.6 2.4 3.2 3.1 Electric power 7.5 1.8 1.1 0.5 3.0 Cther industry 4.2 0.4 10.8 1/ 0.5 0.5 Other 11.5 16.9 14.6 14.0 12.1 71.5 75.7 90.5 91.4 100.2 1/ Of which 8.1 billion markkas in loans to the woodworking industry from the proceeds of the export levy introduced in September 1957. Source: Yinistry of Finance, Division for Economic Affairs. Table 13 Monetary Survey (in billions of markkas) Bank of Finland Other Monetary Institutions Net Net Net Foreign Claims Claims Notes Advances Assets on on in Sight Term to End of: _ Banks Treasury Circulation Deposits Deposits the Public 1954 27.7 6.3 6.2 47.9 55.6 271.2 311.0 1955 29.9 14.2 10.6 55.9 56.1 315.8 363.0 1956 20.7 32.2 6.3 60.7 61.2 323.0 383.2 1957 31.3 22.5 6.9 60.6 61.2 339.0 386.8 1958 1st Qr. 31.0 12.9 - 0.1 55.9 62.1 353.6 393.7 2nd Qr. 32.3 16.8 - 2.5 59.3 63.3 356.0 405.1 3rd Qr. 53.5 8.2 -10.3 58.2 63.3 362.5 410.3 4th Qr. 52.0 15.2 - 3.3 65.1 67.9 385.2 424.5 1959 1st Qr. 60.2 2.8 - 5.7 61.4 73.8 404.9 435.4 2nd Qr. 58.7 2.7 - 2.5 62.9 77.6 412.2 452.7 3rd Qr. 61.7 - 0.1 1.5 62.5 83.1 422.9 471.8 4th Qr. 64.4 0.6 7.7 69.4 83.5 454.2 504.9 1960 1st Qr. 56.0 3.7 7.4 64.0 77.2 477.4 529.3 2nd Qr. 54.8 17.6 2.4 69.7 79.2 487.0 563.2 3rd Qr. 58.5 17.3 0.0 70.4 84.4 500.7 587.9 4th Qr. 57.0 18.7 0.8 72.7 83.1 540.7 617.4 1961 1st Qr. 64.6 13.3 2.6 76.0 82.9 567.5 641.2 2nd Qr. 65.5 16.0 - 6.9 77.0 79.8 577.8 674.8 3rd Qr. 64.6 14.9 - 3.1 77.4 85.6 590.2 697.5 4th Qr. 63.7 23.3 3.2 83.7 88.0 627.1 727.8 1962 1st Qr. 63.A 29.5 - 2.2 78.0 86.2 649.0 756.8 Source: Bank of Finland, Monthly Bulletin. Table l Index Numbers of Prices and Wages (1954 = 100) Wholesale Farm Cost of Industrial Average for Period Prices Prices Living Wages 1954 100 100 100 100 1955 99 111 97 105 1956 104 127 108 117 1957 113 130 120 124 1958 123 138 128 130 1959 1st Quarter 120 143 129 135 2nd Quarter 121 140 129 137 3rd Quarter 122 143 129 137 4th Quarter 124 152 132 138 1960 1st Quarter 125 155 132 143 2nd Quarter 126 154 134 146 3rd Quarter 126 150 134 148 4th Quarter 128 154 136 149 1961 1st Quarter 128 153 136 155 2nd Quarter 128 149 136 157 3rd Quarter 127 147 136 157 4th Quarter 127 148 138 158 1962 1st Quarter 128 153 139 164,/ 1/Preliminary. Source: Central Statistical Office of Finland, Bulletin of Statistics. Table 15 Balance of Payments (Million U.S. 1)9 1956 1957 19-8 1959 1960 1961 A. Current Transactions Exports f.o.b. 775 822 776 836 990 1056 Imports c.i.f. -889 -889 731 -836 -1066 -1154 Trade balance -114 -67 45 0 -76 -98 Net transportation 72 71 48 49 56 60 Net investment income -11 -11 -12 -6 -6 -7 Net travel -8 -10 -11 -17 -23 -30 Other current (net) 4 6 9 3 7 3 Current account balance -57 -11 79 29 -42 -72 B. Capital Transactions (net) Government 14 -7 -19 -17 -10 14 IBRD 4 5 - 10 14 13 Other -6 26 24 47 42 40 12 24 5 40 46 67 C. Errors and Omissions -11 -10 5 -7 9 2 D. Total (A through C) Change in net foreign ex- change position (- decrease) -56 3 89 62 15 -3 Source: IMF Balance of Payments Yearbook. Table 3 and Bank of Finland. Table 16 Commodity Composition of Foreign Trade (in 5 of imports and exports) Imports c.i.f. Raw Materials Finished Goods and Consumer Producer Accessories Fuel Goods Goods Total 1954 56.8 11.4 12.9 18.9 100.0 1955 53.6 12.1 14.9 19.4 100.0 1956 51.2 13.5 14.0 21.3 100.0 1957 51.5 17.7 12.7 18.1 100.0 1958 51.2 14.0 13.9 20.9 100.0 1959 50.0 10.5 14.1 25.4 100.0 1960 48.9 9.7 14.0 27.4 100.0 1961 46.1 9.0 16.7 28.2 100.0 Exports f.o.b. Forestry Wood Pulp Products of Agricul- Other Products Industry and Metals and tural Products Paper Engineering Products Industries Total 1954 8.7 31.7 39.4 13.4 3.3 3.5 100.0 1955 11.0 28.3 11.8 13.7 2.2 3.0 100.0 1956 9.7 22.7 45.9 14.1 3.5 4.1 100.0 1957 8.1 22.7 45.9 14.3 h.8 4.2 100.0 1958 7.8 23.3 46.5 13.7 h.3 4.4 100.0 1959 6.2 23.8 43.7 16.5 5.6 4.2 100.0 1960 6.5 26.6 42.2 15.0 5.1 4.6 100.0 1961 8.8 24.9 h5.6 11.5 Ll5 4.7 100 0 Source: Cent"al Statistical Office of Finland, Bulletin of Statistics. Table 17 Exports of Main Products of Forestry and Woodworking (in thousand metric tons, unless otherwise provided) 1954 1955 1956 1957 1958 1959 1960 1961 Roundwood, million solid cu.m. 3.6 5.0 4.4 4.1 3.9 3.8 4.8 6.0 Sawn timber, 1,000 stds. 733 786 648 719 762 950 1,137 1,106 Plywood and veneers 298 321 230 260 239 296 358 329 Mechanical woodpulp 193 183 186 165 13 139 176 160 Sulphite pulp 580 682 679 697 725 770 919 872 Sulphate pulp 375 447 452 474 476 549 500 569 Fiberboard 59 61 49 60 83 110 128 146 Cardboard, incl. corrugated 103 98 126 135 134 333 563 Newsprint 392 470 537 551 585 576 691 86 Kraftpaper 119 141 142 170 162 219 218 225 All other paper and paper 161 222 255 287 274 329 399 products Source: Central Statistical Office of Finland: Bulletin of Statistics, and Bank of Finland, Institute for Economic Research. Table 18 Geographical Distribution of Foreign Trade (in % of imports c.i.f. and exports f.o.b.) 1956 1957 1958 1959 1960 1961 Imp. s Imp- Exp. I p . En Imp. Exp. Imp. Exp. U.S. and Canada 6.7 6.7 5.7 5.1 5.5 4.7 5.4 5.9 6.0 5.1 6.1 4.5 EFTA countries 32.6 27.h 29.2 28.4 31.3 30.3 31.7 31.3 33.5 34.9 34.7 34.7 of which U.K. 20.4 21.4 17.6 21.7 17.2 22.1 15.7 23.3 15.8 24.5 15.3 22.2 EEC countries 25.9 23.3 25.1 23.8 29.8 26.5 32.0 26.5 34.5 28.1 34.8 31.0 U.S1S.R. 13.9 19.2 17.7 20.0 18.0 17.3 17.8 16.8 14.7 14.2 13.3 12.1 Other East Bloc countries 11.1 8.1 12.9 9.4 7.6 7.5 7.0 6.7 5.9 5.3 5.9 5.9 Rest of the world 9.8 15.3 9.4 13.3 7.8 12.7 6.1 12.8 5.4 12.4 5.2 11.8 'Source: Bank of Finland, Institute for Economic Research. Table 19 Foreign Exchange Position (in million $ equivalent) Bank of Finland Other Banks Total Foreign Exchange Net End of: Gold Assets Liabil- Net Net Assets ities Assets Assets 4 + 5 1 2 3 7T-- 5 6 1954 31.2 178.6 30.5 179.3 18.1 197.4 1955 35.3 182.8 16.7 201.4 26.0 227.4 1956 35.3 138.1 20.0 153.4 18.3 171.7 1957 35.3 135.3 14.3 156.3 18.2 174.5 1958 35.3 214.3 6.7 242.9 20.8 263.7 1959 38.1 277.6 6.6 309.1 16.2 325.3 1960 41.1 284.2 12.6 312.7 27.2 339.9 1961 46.9 296.91/ 4.2 339.6 -2.3 334.3 April 61.5 277.51/ 4.3 334.8 -32.5 302.3 1962 1/ Since October 1960 include foreign securities held by Treasury. These amounted to .11.2 million on December 31, 1960 and '14.3 million on December 31, 1961. Source: International Financial Statistics and Bank of Finland Table 20: FIMLAND - EXTER;AL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DECEM1BER 31, 1961 WITH MAJOR ADDITIONS TO 1AY 31, 1962 (In thousands of U.S. dollar equivalents) Debt outstanding iajor reported Item December 31, 1961 additions Net of Including January 1 - undisbursed undisbursed Ray 31, 1962 TOTAL EXTERNAL PUBLIC DEBT 315,884 381,964 5,203 Publicly-issued bonds 11,086 11,086 Privately-placed debt 8,959 9,92- IBRD loans 78,878 103,081 U.S. Government loans 88,221 88,221 5,203 Export-Import Bank 59,25 69,256 5,203 Other 26 26 1orld War I Debt 5,700 5,700 - Surplus property 9,265 9,265 - ICA 1 o,000 18,0- Loans from other Western governments 98,70 100 361 - Germany 10,844 12,501 - Sweden 87,850 87,850 - France 10 10 - Sino-Soviet Bloc 30,036 69,291 l - /1 Does not include an undisbirsPd amount of '63,849,000 (equivalent) on a credit of '125 rillion granted in 1959 rhich the Bank of Finland estimates will not be drawn down. Statistics Division IBRD-Economic Staff July 6, 1962 Table 21: FINLAND - ESTIMATED CONTRACTUAL SERVICE PAYMITS ON EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UN- DISBURSED AS OF DECEMBER 31, 1961 V.ITH MAJOR REPORTED ADDITIONS JANUARY 1 - MAY 31, 1962 / (In thousands of U. S. dollar equivalents) Page 1 Debt out- Payments during year Debt out- Payments during year standing Payments_during_year_standing Payments_during_year Year plus un- Year plus un- disbursed Amnorti- In- Total disbpuse Amri-n--oa dation terest Tation terest January 1 January 1 Total debt Pulicly-issued bonds 1962 381,954 24,074 14,366 38,440 1962 11,086 588 542 1,130 1963 363,083 23,321 13,831 37,152 1963 10,498 601 510 1,115 1964 339,762 21,925 13,042 34,967 1964 9,897 456 486 942 1965 317,837 35,291 12,221 47,512 1965 9,441 00 463 863 1966 282,546 25,056 10,862 35,918 1966 9,01 380 447 827 1967 257,490 25,580 9,859 35,439 1967 8,661 377 427 804 1968 231,910 26,121 8,839 3X,960 1968 8,284 352 413 765 1969 205,789 26,776 7,790 34,566 1969 7,932 330 394 724 1970 179,013 25,821 6,710 32,531 1970 7,602 306 379 685 1971 153,192 24,615 5,719 30,334 1971 7,296 127 365 492 1972 128,577 25,201 4,743 29,944 1972 7,169 110 359 469 1973 103,376 18,613 3,751 22,364 1973 7,059 108 352 460 1974 84,763 13,741 2,980 16,721 1974 6,951 - 348 348 19?5 71,022 9,446 2,376 11,822 1975 6,951 - 348 348 1976 61,576 15,487 1,999 17,486 1976 6,951 6,951 348 7,299 Privately-placed debt IBRD loans 1962 9,924 3,918 456 6,371 1962 103,081 5,241 5,523 10,766 1963 6,006 1,385 347 1,732 1963 97,840 6,553 5,238 11,791 1964 4,621 458 269 727 1964 91,287 6,881 4,905 11,786 1965 4,163 3,639 248 3,887 1965 84,106 7,387 4,548 11,935 1966 524 297 24 321 1966 77,019 7,779 4,149 11,928 1967 227 194 11 205 1967 69,240 8,194 3,727 11,921 1968 33 6 2 8 1968 61,046 8,633 3,282 11,915 1969 27 6 2 8 1969 52,413 9,091 2,815 11,906 1970 21 6 - 6 1970 43,322 7,837 2,320 10,157 1971 15 6 - 6 1971 35,485 6,484 1,924 8,Uo8 1972 9 6 - 6 1972 29,001 6,853 1,547 8,400 1973 3 3 - 3 1973 22,18 7,243 1,150 8,393 1974 1,905 7,654 729 8,383 1975 7,251 3,838 346 4,182 1976 3,013 3,413 136 3,549 Table 21: FINLAND - ESTIMTED CONTRICTUAL SERVICE P_Y1MNTS ON EXTERNAL FUBLIC DEBT OUTSTANDING INCLUDING UN- DISBURSED AS OF DECEMBER 31, 1961 "ITH HAJOt R6PORTED ADDITIONS JANUARY 1 - MAY 31, 1962 /1 (CONT) (In thousands of U.S. dollar equivalents) Page 2 Debt out- Payments during year Debt out- Payments during year standing standing Year plus un- Amorti- In- Year plus un- Amorti- In- disbursed zation terest Total disbursed zation terest January 1 January 1 U.S. Govt. loans - Total U.S. Govt. loais - Export-Import Bank 1962 88,221 5,533 3,167 8,700 1962 59,296 4,700 2,332 7,032 1963 87,891 5,908 2,980 8,888 1963 59,759 5,056 2,166 7,222 1964 31,983 5,174 2,788 7,962 1964 54,703 4,300 1,995 6,295 1965 76,809 5,353 2,613 7,966 1965 50,403 4,500 1,843 6,33 1966 71,456 6,223 2,431 8,654 1966 45,903 5,350 1,683 7,033 1967 65,233 6,348 2,205 8,553 1967 40,553 5,450 1,480 6,930 1968 58,885 6,571 1,973 8,544 1968 35,103 5,650 1,272 6,922 1969 52,314 6,695 1,736 8,431 1969 29,1453 5,750 1,061 6,811 1970 15,619 6,920 1,493 8,413 1970 23,703 5,950 843 6,793 1971 38,699 7,145 1,241 8,386 1971 17,753 6,150 618 6,768 1972 31,554 7,272 983 8,255 1972 11,603 6,250 386 6,636 1973 24.,282 6,402 722 7,124 1973 5,353 5,353 153 5,506 1974 17,880 1,077 539 1,616 1975 16,803 1,108 509 1,617 1976 15,695 1,132 479 1,611 U.S.Govt. loans - Othmr Loans from other Vestern Governments 1962 28,965 833 835 1168 1962 100,351 3,240 3,2646 1963 28,132 852 814 1,666 1963 97,111 3,320 3,233 6,553 1964 27,280 874 793 1,667 1964 93,791 3,402 3,139 6,541 1965 26,106 853 770 1,623 1965 90,389 4,111 3,043 7,154 1966 25,553 873 748 1,621 1966 86,278 4,823 2,885 7,708 1967 24,680 898 725 1,623 1967 81,1455 4,913 2,703 7,616 1968 23,782 921 701 1,622 1968 76,542 5,005 2,521 7, 126 1969 22,861 945 675 1,620 1969 71,537 5,100 2,335 7,4 5 1970 21,916 970 650 1,620 1970 66,437 5,198 2,168 7, 36 1971 20,946 995 623 1,618 1971 61,239 5,299 1,958 7,257 1972 19,951 1,022 597 1,619 1972 55,940 5,1403 1,762 7,165 1973 18,929 1,049 569 1,618 1973 0.,537 5,510 1,56 7,075 1974 17,880 1,077 539 1,616 1972 65,027 5,010 1,366 6,374 1975 16,803 1,108 509 1,617 1975 410,017 4,500 1,173 5,673 1976 15,695 1,132 79 1,611 1976 35,517 3,991 1,036 5,027 Table 21: FINLAND - ESTIM!ATED CONTRACTUAL SERVICE PAYTENTS ON EXT'RNAL PUBLIC DEBT OUTSTANDING INCI.jDING UN- DISBUiSED AS OF DECEMBER 31, 1961 1IlTH MAJOR REPORTED ADDITIONS JANUARY 1 - MAY 31, 1962 l (CoNT.) (In thousands of U.S. dollar equivalents) Page 3 Debt out- Payments during year standing Payments_during_year Year plus un- disbursed Amorti- In- Total Janury 1 zation terest January 1 Loans from U.S.S.R. I962 69,291 5,554 1,731 7,285 1963 63,737 5,554 1,593 7,147 196b 58,183 5,554 1,454 7,008 1965 52,629 13,751 1,315 15,066 19"6 38,878 5,554 972 6,526 /1 Includes service on all debt listed in 1967 33,324 5,554 833 6,387 Table 19 prepared July 6, 1962 except 1968 27,770 5,554 694 6,248 NF 50,000 ($10,128) Winter-War Loan 1969 22,216 5,554 555 6,109 from Govemment of France, for which no 1970 16,662 5,554 417 5,971 repayment terms have been settled. 1971 11,108 5,554 278 5,832 1972 5,554 5,554 139 5,693 Statistics Division IBRD-Economic Staff July 6, 1962 ADDENDUM STATISTUCAL INFORMATION FOR 1962 I Industrial Production 1954 = loo 1961 1962 January 145 156 February 145 150 March 159 167 April 148 146 II Prices 1954 100 1961 1962 Home Goods January 125 127 February 125 128 March 125 128 April 125 128 Import Type Goods January 136 130 February 136 130 March 136 131 April 136 131 Cost of Living January 136 139 February 136 139 March 136 140 April 136 141 - 2 - III Foreign Trade Billion markkas Exports Imports 1961 1962 1961 1962 January 20.6 2h.0 27.8 32.3 February 20.9 23.1 27.5 31.3 March 22.3 2L.5 33.1 34.0 April 21.6 23.4 29.6 30.5 Commodity Composition January - March Billion markkas Exports Imports 1961 1962 1961 1962 Timber 2.5 2.4 Food and raw Sawnwood and other materials 39.9 44.8 wood products 12.0 11.3 Fuels 8.8 7.6 Pulp and paper 35.7 38.8 Finished ccn- Metal and engineering sumer goods 15.2 16.2 goods 7.2 12.2 Finished pro- Other 5.2 5.7 ducer goods 24.0 28.3 Total 62.6 7OT7 Geographic Distribution Per cent of total January - March Exports Imports 1961 1962 1961-1962 EFTA 34.1 28.9 34.5 36.7 of which:- U.K. 23.1 18.0 15.7 16.0 Sweden 5.2 5.9 10.5 12.5 EEC 29.5 28.7 33.5 36.3 of which: W. Germany 12.4 12.1 20.6 21.0 France 5.1 4.8 4.6 6.1 Eastern Bloc 16.9 22.1 20.3 16.1 of which: Soviet Union 11.3 16.7 15.3 11.6 U.S.A. 5.1 7.2 7.4 6.0 Other 14.4 13.1 4.3 4.9 Total 100.0 100.0 100,0 100.0 - 3 - IV Money and Banking Billion markkas April 1961 December 1961 April 1962 Bank of Finland Rediscounts 18.4 29.5 38.7 Bank deposits 0.6 4.9 6.1 Net position with Treasury -5.3 3.2 -6.3 Net lending to public 19.5 17.5 13.5 Notes in circulation 75.3 83.7 79.5 Other Credit Institutions Sight deposits 63.9 72.0 68.0 Tern deposits 573.1 627.0 650.5 Postal Giro accounts 13.3 15.9 17.4 Advances 656.0 727.8 767.3 V Central Government Finances Billion markkas January - March 1961 1962 Tax revenue 79.0 89.5 Other revenue 4h. 5.6 Capital revenue 4.3 3.2 Total revenue 67.7 9 .7 Current expenditure 65.8 75.9 Capital expenditure 28.2 31.6 Total expenditure 970 lif77 Deficit -6.3 -9.2 Borrowing 8.2 13.4 Redemptions 7.1 7.0 Net borrowing 1.1 6.7 Source: International Financial Statistics. Bank of Finland Monthly Bulletin, June 1962.