Fooling no-one on overseas debt

Press, 13 December 1986, Page 24

Fooling no-one on overseas debt

By

W. ROSENBERG,

formerly a reader in economics at

the University of Canterbury

The office of the Minister of Finance issues an “Economic Newsletter.” It is a thinly disguised propaganda sheet for Rogernomics.

In reference to New Zealand’s foreign debt, the following remarkable paragraph appears in the newsletter dated November, 1986.

“Government overseas debt has not increased one cent under Labour, except to build up reserves and pay for National’s Think Big disasters.”

The facts are, of course, that Government overseas debt increased from less than SNZ 1 billion in 1975, when Sir Robert (then Mr Muldoon) took over the Government, to about SNZI6 billion after 10 years of import relaxation and “restructuring.” Between July 1984, and today — in about years — the international debt owed by New Zealand and private New Zealanders has doubled again. It now stands at more than SNZ3O billion.

Mr Roger Douglas ; has achieved in a quarter of the time, what took Sir Robert Muldoon 10 years. Indeed New Zealand’s overseas debt at the end of 1986 represents about three times our export earnings and about 63 per

cent of our gross domestic product

In estimating this debt we must distinguish between Government debt (now also including the debt of Government corporations) and private debt.

Government debt is now more than SNZ23 billion, private debt exceeds SNZ27 billion. Whether the debt is Government or privately denominated, the service on that debt has to be found out of export proceeds. That service represents a first mortgage on all our export proceeds and to that extent reduces our ability to Import — unless we borrow further. Gross “International Investment” service for the year to September 30, 1986, was SNZ274I million.

Instead of telling the public that “Government overseas debt has not increased one cent,, except...” Mr Douglas should’ point out that the Government’sforeign borrowing policy has changed under Finance Minister Douglas from making available foreign exchange exclusively through the Reserve Bank and the banking system as its agents, to a system of private disposal of New Zealand’s foreign exchange earnings, supplemented by official reserves.

Importers who cannot supply their own foreign exchange still

have to draw on official reserves. The maintenance of official reserves is, therefore, a reflection of the shortage of foreign exchange available from exports. Consequently to say that the Government has not borrowed a cent "except to build up reserves” is a meaningless statement.

Our balance of payments keeps on requiring huge amounts of supplementation, by borrowing abroad, to pay for imports for which we have not the means to pay — a combined deficit of more than SNZ6.6 billion if we add the deficits of March years 1985, 1986 and six months to September, 30, 1986. The country must borrow to pay not only for the goods required to keep this free-wheeling economy supplied, but even for the interest and profits which we have to pay our foreign creditors on past and present borrowing. We must borrow to pay interest on the debt which we must borrow.

If we add to our inability to pay our own way — under conditions of encouragement of importing and destruction of most import controls and protection — the rapidly accelerating outflow of capital through investment companies offering investments abroad rather than in the over-extended New Zealand share market, it becomes evident that it is the Government policy of deregulation which is responsible for the ever-spiralling

foreign debt. Huge amounts from abroad have indeed been necessary to finance the deregulated economy. Net apparent capital inflow in the year ended September 30, 1985 was SNZ3.2 billion, in the year ended September 30, 1986, it was SNZ4.4 billion.

One may well ask how it was possible to attract such huge amounts. The answer is clear: by offering foreign creditors interest rates which exceed anything they might expect elsewhere.

Our astronomical interest rates, which choke off local productive investment and thus undermine future productivity and international competitiveness are largely the result of the policy of unrestricted importing of goods and services from abroad.

Mr Douglas likes to blame Think Big projects for our growing indebtedness. The New Zealand institute for Economic Research in its December, 1986, ‘Quarterly Predictions” estimates that in 1985/86 the major projects, purchase of Boeing aircraft, and Post Office imports cost SNZI.4 billion (out of a total of SNZIS.2 billion). For 1986/87 the cost of these projects is, estimated at SNZO.B billion only. On the other hand, a basic import growth in 1987/88 of almost SNZ2 billion is anticipated. There is no evidence that policies now pursued — which do not even finance importsubstituting projects such as New

Zealand indigenous oil and energy production — ; will result in smaller import surpluses. When Mr Douglas came to power in July, 1984, he told us that all that was necessary was to devalue the exchange rate and thus encourage exports and discourage imports. Experience has shown that devaluation in a free market does not necessarily create an exchange rate attractive enough for exporters. To ignore the need for a reduction of imports when we cannot earn enough to pay for them and, on the contrary, to encourage them by destruction of import-substituting industries which might produce goods more costly than imported ones, but save foreign exchange, is a recipe for international bankruptcy.

It is no accident that New Zealand’s international credit rating has been continuously reduced from an earlier treble A, to AA*, and now to AA. In the words of the American analysts dealing with this reduction: “The adjustment reflects continued external imbalances and a rising external debt burden which have diminished the level of protection afforded to debt holders.” The Minister’s office newsletter can fool only the uninformed. Our foreign exchange problem is not under control and Government policies of deregulation, far from improving the situation, are merely pushing the problem under the carpet.