The Press THURSDAY, FEBRUARY 8, 1968. Profligate Trading Year

Press, Volume CVIII, Issue 31598, 8 February 1968, Page 10

The Press THURSDAY, FEBRUARY 8, 1968. Profligate Trading Year

New Zealand’s deficit of $lO7 million on current account last year was a record. The only comparable year was 1961, when the overseas exchange transactions showed a deficit of $lO5 million; but in that year export income was only slightly reduced and substantial increases in imports and in invisible payments were almost entirely responsible for the deficit. By 1962, when import licences were curtailed and credit was tightened, the situation was remedied and a modest surplus—ss million —was shown.

The 1962 remedies will not suffice to turn the 1967 deficit into a surplus. Last year’s deficit followed deficits of $96 million in 1965 and $B7 million in 1966, in spite of buoyant export income in both years —indeed, a record export income in 1966. Even after heavy overseas borrowing in the previous two years, the country’s overseas reserves were sadly depleted by the start of 1967. When the outcome of the country’s external transactions in 1967 was another massive deficit, it was apparent that the economy was in a state of “fundamental disequilibrium”. The November devaluation of the £ sterling gave the New Zealand Government a chance to put its own house in order; New Zealand’s devaluation to parity with Australia was virtually inescapable.

Export income last year was more than $9O million below the 1966 figure. The $lO7 million fall in receipts from wool swallowed all the minor gains in other export receipts; had wool receipts equalled the 1966 figure of $247 million and the terms of trade otherwise remained the same, there would have been no deficit on current account. But of course if there had been no fall in wool receipts last year higher incomes would virtually have ensured an increase in spending on imports. Private imports fell $7O million, Government imports fell $ll million; it was the massive $lB2 million deficit on invisible transactions that brought about the record currentaccount deficit.

Another “record” of dubious long-term value was made last year: the “ surplus on capital account ” of $l4B million, which is $55 million higher than the previous largest in 1958. In plain language, New Zealand had to borrow $l4B million last year to balance its books and hold its cash reserves at a reasonable level. As the capital inflow exceeded the current-account deficit by $4O million, an “ over- “ all surplus ” of this amount appears in the transactions; the figure has little more than statistical significance. New Zealand’s aim over the next two or three years must be to increase its trade surplus, reduce its deficit on invisibles, repay short-term overseas debt, and confine long-term borrowing to projects of undoubted long-term value.

The prospects of achieving these aims are reasonably good; but they will not all be realised in 1968. The wool cheque is the least controllable and least predictable of all the unknowns in the equation. About 750 m lb of wool will be offered for sale this year, and at present prices—averaging about 20c per lb—this would fetch some $l5O million, or $lO million more than last year. The Wool Commission may be able to sell some of its $7O million stockpile before the end of the year, though it would be reluctant to do so before some recovery in prices becomes apparent. The prospects for most other exports are brighter. December returns show higher receipts from the export of meat, butter, “ other ” dairy products (excluding cheese), other animal products, forestry, other primary products, and miscellaneous exports.

December was the first month after devaluation, and several months must elapse before the new exchange rate is fully reflected in higher ?xport receipts. The same is true of import payments. These payments were already falling before devaluation; private imports, at $591 million last year, were 16 per cent lower than the year before; in December alone they were 14 per cent lower. Invisible transactions, too, were less costly last year than might have been expected. The increase in the debit balance was $l2 million, compared with an increase of $25 million the previous year. Freight costs must rise as the volume of exports increases, and unit freight costs have been increased as a result of devaluation. Devaluation should, however, discourage some New Zealanders from travelling abroad and encourage more foreign tourists to visit New Zealand. Some of the minor items in the “ invisible ” category, such as dividends, royalties, and interest payments made by New Zealand companies to foreigners, will be unaffected by devaluation.

It should be remembered, too, that the real cost of servicing New Zealand’s overseas debt is not increased by devaluation. Although a loan of sAustlOO made before devaluation is now equivalent to SNZIOO, instead of SNZBO, New Zealand’s receipts from exports to Australia should increase in roughly the same proportion. But devaluation is no panacea for a “ fundamental disequilibrium ”. Most of the painful readjustments have yet to be made. The private motorist who had hoped to buy an American multicylinder car finds it is up to 24 per cent dearer because of devaluation. If he is not deterred by the price, as many will be, he exacerbates the adverse balance of payments: if he buys a four-cylinder car assembled in New Zealand from English parts, he softens the blow considerably; if he decides to make do with his old car for another year, he is a patriot. Hardships are bound to be caused by devaluation, but the pleas of the real sufferers may be unheard amid the clamour of the special pleaders. Devaluation does not strengthen the arguments for higher university salaries, for reducing the tax on petrol, for subsidising the price of sugar, or any of the other adjustments sought by vested interests. If New Zealand universities recruit fewer foreigners and New Zealand motorists use less petrol for a year or two, that is precisely what devaluation was intended to do.