THE PRESS MONDAY, SEPTEMBER 26, 1988. The weight of debt

Press, 26 September 1988, Page 20

THE PRESS MONDAY, SEPTEMBER 26, 1988. The weight of debt

New Zealand’s overseas debt burden has assumed huge proportions in the thinking about the country’s economic problems. In the first few lines of the New Zealand Planning Council’s pamphlet, “Overseas debt — an assessment,” by David Webber, is a reminder that, before- the mid-19705, New Zealand did not have an external debt problem. In some periods, New Zealand certainly had a sizeable external debt; it has even been as high in relation to Gross Domestic Product as it is now in 1988; but the country was eventually able to reduce debt to more comfortable proportions. External debt at present runs to about $43 billion. This includes $23 billion of official debt, owed by the Government, and about $2O billion owed by the private sector. The costs of servicing this debt are causing living standards in the country to be lower than they would be without it. This is simply because, in addition to paying for imports, we have to pay interest upon the capital borrowed for past imports.

David Webber is writing about external debt, not the public debt. He discusses public debt merely as it affects external debt. The external debt is the total indebtedness of the country to overseas lenders; the public debt is the indebtedness of the Government and its agencies to lenders within New Zealand and overseas. The distinction is important, as David Webber explains, because it is highly relevant to the question of attempting to reduce debt by selling Government assets. One of the strongest points made in the booklet is that the sale of Government assets to New Zealanders is unlikely to reduce the total external debt, although it can reduce the State’s over-all indebtedness. This is because, when the Government sells a large asset, it is most likely that a big company will buy the asset To finance the deal the company may borrow the money abroad; this actually increases the overseas debt, though the public debt owed by the State has been reduced. If the Government paid off the equivalent sum in its foreign debt, without further borrowing to get the currency to do so, overseas debt would remain static. In selling shares in, say, Air New Zealand to an overseas airline the Government receives foreign currency and the country is able to pay off overseas debts.

In deciding how prudent it is to lend to any country, the international market takes into account both the Government and the private sector indebtedness, leading to the

single notion of “country risk.” The market looks particularly at the earning power of the borrowing country and since Governments generally are not creators of wealth, but consumers of it, the focus is on the viability of the private sector and the productive use to which it puts borrowed capital. The lenders do not ignore Government policy. The soundness and trustworthiness of Governments are important to them; so is the attitude of a Government towards its over-all public debt, for this has a direct bearing on taxation and consumer expenditure. Asset sales by the State or, more particularly, the profitable sales of assets, should reduce Government indebtedness. The sales do not, however, necessarily increase the country’s wealth or its ability to earn foreign currency. David Webber does not advocate the sale of assets; he observes that a huge volume would have to be sold abroad to restore overseas debt to a comfortable level and, even then, the earnings from the assets would have to be transferred abroad. An example would be the sale of the national airline: the taxpayer would lose the dividends from the airline and the earnings would go to the new overseas proprietor. He presents a number of scenarios of what is likely to happen to New Zealand’s external debt. Even the most favourable ones suggest a slow improvement and he sees that a growth in exports is the soundest way to lower the external debt. 'ln those circumstances it is none too soon for the Prime Minister, Mr Lange, to become enthusiastic about exports as he did in his recent meeting with exporters. When it comes down to it, New Zealand has always depended on exports to pay its way in the world. If the exchange rates and interest rates remain reasonably stable, New Zealand should be able to look to exports to save the country from some of the dreadful fates that befall those who cannot pay their debts. The Government must not lose sight of the country’s dependence on exports. Having pursued a policy that upset export interests, a policy founded on the notion that these industries must be more appropriate to export needs and more efficient and selfsufficient in meeting these needs, the Government has an urgent duty. This is to minimise the barriers to successful exporting. This duty is not related just to reducing foreign debt; it has to do with employment and the whole country’s standard of living.