N.Z. FINANCES REVIEWED

Press, Volume XCII, Issue 27796, 22 October 1955, Page 8

N.Z. FINANCES REVIEWED

“Worrying Time” Predicted PROBLEM OF RESERVES

(N.Z. Press Association—CopyngM) (Rec. 6 p.m.) LONDON, October 21. ‘‘New Zealand is clearly in for a worrying time, financially,” says the “Financial Times” columnist, “Lombard.” , . In a long review of the Dominion s finances he recalls that Mr Watts (Minister of Finance) emphasised in his Budget statement that official quarters saw- no cause for alarm in the deterioration in the . reserve posi tion. Evidently it'was considered that the ‘ swing’ to a deficit in the country’s external payments that had caused a drain on reserves was largely due to temporary factors and would come to an end before long. “It would -seem, however, that official thinking on this matter in the Dominion has undergone a major change since July,” says “Lombard.” “That is the only conclusion that can be drawn from the vigorous way ill which the New Zealand authorities are now pressing home the attack on the ’ inflation problem, in the belief that by overcoming internal disequilibrium ?hey will also establish the country’s external economic position on a sound basis.** “Lombard” goes on to describe the rise in the bank rate to 7 per cent, as “a figure rarely equalled in any of the main commercial countries of the world in recent decades.” “It is clear from this move and the Reserve Bank’s minimum reserve requirements imposed on commercial banks that the Dominion authorities are now persuaded that the country is now running into relatively serious trouble. It is not hard to see why, for the official gold and foreign exchange holdings have now dropped to below £50,000,000 compared with some £130,000,GG0 in the middle of 1954 Fortunately these holdings do not represent the sum total of reserves at the Government’s disposal, for it is able to press into use at a time of emergency the overseas exchange held by trading banks. But even so, the country’s totai external reserve is now below the level of £80.000,000 long regarded by Dominion authorities as a ‘safety minimum.’ It is possibly not much beyond the £70,(100,000 now.

“The far-reaching credit stringency measures taken should result in an improvement in the balance of payments* position after the beginning of the next year, when seasonal factors will also be operating in favour of the Dominion, but in the interval that must elapse before then, New Zealand is clearly in for a worrying time. “The trouble is that, at this late hour there is little that the Government can do to strengthen the payments position. other than give additional twists to the dearer and tighter money screw. For cuts in import quotas to bring external payments and spendings into balance take about six months to yield any benefit in the case of countries so far from their main sources of supply as New Zealand. Policy changes of this sort would therefore do little to ease the reserve problem in the crucial period immediately ahead. Indeed, any indication that the Dominion Government was turning from monetary policy controls to import restrictions for a solution might well make matters worse for the time being by stimulating a beat-the-ban rush to place orders abroad of the kind experienced by Australia during the last year. “It is a great pity that the Dominion has run into this reserve problem just at a time when it is so difficult to raise funds for overseas account in the London capital market, for the ability to repeat, at the present time, the loan operations they have launched in the London market in recent years would greatly help New Zealand authorities to keep the reserve problem down to manageable proportions while longeiterm remedial measures, already inaugurated, are taking effect. In the circumstances if the situation docs further deteriorate, it would not be surprising to find New Zealand turn--ing to other sterling area governments for assistance in maintaining a gold and foreign exchange holding of sufficient size to provide an adequate defence for the New Zealand £.”