The Press MONDAY, OCTOBER 30, 1972. The pound and the N.Z. dollar

Press, Volume CXII, Issue 33060, 30 October 1972, Page 14

The Press MONDAY, OCTOBER 30, 1972. The pound and the N.Z. dollar

Last week the pound sterling fetched as little as $U52.325 on the exchange markets, the lowest value yet placed on it. Although the exchange rate later recovered to $2,343, most bankers, traders, and economists now expect a lower par value—perhaps as low as $2.25 —to be established before Britain’s accession to the European Economic Community on January 1. The “ official ” exchange rate is still £1 to $U52.606; this is the rate established as part of the multilateral adjustment last December of exchange rates—the “ Smithsonian ” agreement. But since June this year, when the pound was set free from this rate and allowed to find its own level, it has drifted down below the pre-Smithsonian rate of $2.40.

The latest weakness of the pound has been ascribed partly to a strengthening of the United States dollar and partly to fears of an increased balance-of-payments deficit in Britain. Britain’s accession to the European Economic Community will almost certainly put an end to the floating exchange rate and require Britain to announce a fixed rate. The adverse trend in the balance of payments suggests that an exchange rate lower than $2.40 will be needed if the trade deficit is to be kept in bounds. As British tariffs against European imports are progressively lowered after Britain’s entry to the E.E.C., British manufacturers will face stiffer competition on their home market. Further devaluation before entry would make European exports to Britain more expensive than at present and would make British exports to Europe more competitive on that market. The establishment of an exchange rate of, say, $2.25, would represent a legal devaluation of 13.65 per cent—taking the Smithsonian rate as the basis—or a drop of about 5 per cent compared with the latest market rate. The sterling exchange rate is still of considerable importance to New Zealand, despite the severance, in December last year, of the formal link between the pound and the New Zealand dollar. The New Zealand dollar’s par value is now established in relation to the United States dollar, so that a devaluation of sterling in relation to the United States dollar is still, in effect, a devaluation in relation to the New Zealand dollar. From December last year until June this year New Zealand exporters to the United Kingdom were receiving SUS 2.60 —$NZ2.19 —for every £1 of sales, and since then they have received less than SUS2.4O—SNZ2.O2. A rate of $U52.25 would return the New Zealand exporter only SNZI.B9 for every £1 of sales in the United Kingdom.

The effect on New Zealand’s trading with the United Kingdom of a further devaluation of the pound would be to encourage New Zealand traders to try to divert exports to other markets and to divert the purchase of imports from other sources to Britain. That would be a permanent, but gradual, shift in New Zealand’s trading account. By contrast, the effect on New Zealand’s “ balance sheet ” would be immediate: this country’s assets and liabilities in sterling would both be reduced, in terms of New Zealand currency. Official debt domiciled in the United Kingdom totalled nearly SNZSOO million at March 31 this year, when the exchange rate was £1 to SNZ2.I9; a 13.65 per cent devaluation would reduce this debt by nearly $7O million.

New Zealand’s official overseas reserves are protected against a sterling devaluation by a 1968 agreement, for the purposes of which the relevant exchange rate is £1 to SUS2.4O. An exchange rate of $U52.25 would reouire Britain to pay New Zealand a minimum of SNZ27 million in compensation. These “ balance sheet ” changes, however, are of less importance than the long-term effects on New Zealand’s trading. The return of sterling to a fixed exchange rate is likely to be one of the urgent matters requiring the attention of the New Zealand Government after the election; in particular, the Government should examine ways of diversifying New Zealand’s exports and of compensating the losers, notably the dairy farmers.