MONDAY, AUGUST 22, 1966. Overseas Reserves

Press, Volume CVI, Issue 31144, 22 August 1966, Page 12

MONDAY, AUGUST 22, 1966. Overseas Reserves

The Minister of Finance (Mr Lake) could hardly be accused of attempting to mislead members of the Canterbury division of the New Zealand Institute of Management last week when he defined the Dominion’s overseas reserves in such a way as to claim that they amount to £135 million. The criticism in Parliament of this figure simply turned on the difference between the term “ net overseas “ assets ” and the total funds available to meet deficits between overseas receipts and payments. Our overseas reserves have varying degrees of availability: and for the purposes of his argument on the need for reserves Mr Lake included more than the most liquid, the most readily available, cash and investment reserves. These are the net overseas assets of the banking system and, as the first line of reserves, they provide the most commonly quoted figure for overseas resources. At present this is about £6l million. These assets vary from day to day with overseas transactions and they represent accumulated surpluses and deficits on overseas trading. Last year they were bolstered by £22 million borrowed from the International Monetary Fund. Overseas investments by the Government, represented by foreign securities held by the Treasury, are also part of New Zealand’s reserves. Mr Lake included them in his calculation. At the end of June balances in the Public Account totalled £57 million; of this sum £3l million was invested in overseas securities. For the purposes of assessing the reserves available for the payment of debts in foreign currency, £6 million invested overseas from the Earthquake and War Damage Fund is not included. Mr Lake said in Parliament that it would be true to say that all New Zealand’s overseas reserves were borrowed money. This is certainly true to the extent that the £3l million in overseas securities is part of the public debt converted into overseas assets and to the extent that the £22 million from the I.M.F. is borrowed money. It is difficult to see how the net assets of the banking system are “ borrowed ” except when they represent overseas capital investment in New Zealand.

The Reserve Bank's holdings of gold have always formed part of the State’s external resources. These holdings are now valued at £140,000. By a payment of New Zealand currency and by lodging £11.2 million worth of gold with the I.M.F. in 1961 New Zealand converted the bulk of its gold assets into the right to draw overseas exchange from the fund. This right, available to correct temporary balance-of-payments problems, extends to a quota of £70.6 million. Although the unused drawing rights now amount to about £45 million, the I.M.F. attaches special conditions to the exercise of these rights. The fund would require measures in New Zealand to correct the circumstances which made assistance necessary. By combining these rights with the conventional components of “ overseas reserves ” Mr Lake came to a legitimate, if unfamiliar figure. He argued that overseas reserves existed for a purpose and should be used, when necessary, for that purpose. That is exactly what has been happening; but it can continue to happen only so long as there are reserves. Last year, after a current-account deficit of £54.2 million, a net inflow of capital—overseas money from loans, from the 1.M.F., and from the sale of Government-held securities, less loan repayments—left £l9 million to be financed from the overseas assets of the banking system. Without the I.M.F. drawings the banks’ assets would have been reduced by £4l millioh; and the £22 million must eventually be repaid. This depletion of reserves is one of the costs of a high rate of importing for New Zealand’s expansion. It is the premium on optimism—a good quality in business affairs if they are basically sound. Reserves are not inexhaustible. The Government’s cheerful gamble on better returns from exports must soon succeed, or the next year must see much tighter control on overseas spending. The Government’s policy of lightly restrained expansion has meant a high level of internal prosperity. The expansion has still to pay for itself abroad.