The high kiwi dollar is preventing the long overdue rebalancing of our economy according to Reserve Bank Governor, Dr Alan Bollard.
Dr Bollard made those comments in June 2009 to his Board when the kiwi dollar was worth US$0.63 and the Trade Weighted Index (TWI) was at 60. Since this time, the kiwi dollar has appreciated 28 percent against the US dollar to US$0.81 while the TWI is up 21 percent to 72.6.
The New Zealand economy has been seriously unbalanced for years. It has had large current account deficits and, in order to pay for those deficits, it has built up high levels of external debt and overseas ownership of the economy. The only way out of this downward spiral is to rebalance the economy towards the tradeable sector so that it can perform much better, but that needs a lower exchange rate.
As I showed last week, the Business Operations Survey provided plenty of evidence of how the high and volatile exchange rate is hurting our export industry with close to half of all New Zealand export companies saying it is the most important factor constraining their exports.
We need to have a national discussion on measures that can stabilise our exchange rate at levels our export industry can thrive in. Overseas governments have been taking this issue very seriously.
For example, in Switzerland, their Reserve Bank has been using quantitative easing to keep their franc lower, their export industry in business. The IMF recently backed the Swiss move to effectively “print money” saying the measure was “appropriate” in the circumstances.
So there are practical steps a small trading nation like New Zealand can take that can help.
Besides empowering the Reserve Bank with a mandate beyond inflation control to include managing exchange rate levels and volatility, we could also institute a tax on capital gains (excluding the family home) which would also act to ease upward pressure on the exchange rate.
It’s way past time to start having the conversation.