NZ currency debate highlights importance of international competitiveness and productivity, new Treasury head says

By Alex Tarrant

The current debate on the floating New Zealand dollar, or whether controls are needed, has highlighted the importance of New Zealand improving its international competitiveness and local productivity, the new head of the Treasury says.

In the past month, the New Zealand dollar hit a post-float high of 83 US cents, fuelling cries from exporters for policy makers to change the way New Zealand manages its exchange rate. However those cries have been met by resistance along the lines that the current policy was working well for the economy as a whole, as prices of imported goods (including some of exporters' input prices) fell due to a rising currency.

In an interview with interest.co.nz on his first day on the job, Gabriel Makhlouf said he was cautious about asserting whether New Zealand had 'best practice' in terms of a free-floating exchange rate. Although the status quo had helped during the Global Financial Crisis, there were still lessons New Zealand could learn from its international counterparts, but Makhlouf was weary of currency control systems used particularly by Singapore and Hong Kong.

“Singapore’s a fascinating place. But it’s Singapore. There are some things I’m sure that we can learn from Singapore in the way it runs its public service, for example," Makhlouf said.

“But its currency management system’s pretty unique. It’s an economy that’s quite unusual – a lot of the foreign goods that travel into Singapore travel straight back out of Singapore. The whole country could fit in Lake Taupo," he said.

"But I think we can probably build a stronger relationship with Singapore than we’ve had in the past, as a Treasury, and exchange views and ideas and learn from each other.”

Makhlouf was "very cautious" about asserting whether New Zealand had reached perfect best practice in terms of its currency policy.

"When it comes to currency, I’m probably in the world of who it was who talked about democracy being the least worst form of politics," he said.

“I think the floating currency that we have here has given us great advantages in the time of the GFC [Global Financial Crisis]. I’m not sure we could really work with the sort of system the Singapore government has got. I’m not particularly keen on a currency board/peg like Hong Kong."

'It's really about competitiveness and productivity'

The current issues being had with the currency just highlighted the importance of New Zealand's competitiveness with the rest of the world, with a focus needed on productivity in the economy.

"There’s big pressure on exporters, but actually, as an economy, we need to become more competitive than we are. I think what the currency is doing is putting even greater focus on that,” Makhlouf said.

Becoming more productive relied on improving New Zealand's international connections through schemes like ultra-fast broadband, and making sure the skill set of the labour force fit with what New Zealand wanted to focus its economy on.

“Some of the basics, before you even get there [are] around making sure you’ve got a stable macro framework, that we’ve got our debt under control – all those things are fundamentals, which I take that as read [for New Zealand]," Makhlouf said.

“I think we need to, over the longer term, make sure our skills levels are right for what we’ve got to do. I think we’ve got to [overcome] the so called tyranny of distance, which I think is disappearing because of things like ultra-fast broadband. I think we have to be at the leading edge of a lot of stuff – we’ve got to be the leading edge of a lot of policy ideas and concepts," he said.

"There is no silver bullet on productivity. There’s definitely a challenge. It’s not for the Treasury or for anybody in particular to decide what the answer is. It’s about a community of people working together to debate these ideas and hopefully develop the right set of advice for Ministers to make decisions.

“Exports, and export-led growth is an important part of the productivity issue,” Makhlouf said.

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