FOR P SS 32A 1GO: 9 a. m. 3ATiU?. DAY
23 December 1972
( Eastern Sunmer Time)
STATEI UiT 3Y PIMI E MI-ITISTER
TE HON. E. ILAM,. H. P.
2_ ZCKAUG RA. TE OF TIH AUSTRALIAII DOLLA
It has been decided to revalue the Australian dollar. The
International Monetary Fund has been consulted and has concurred with
this decision. The gold parity of the Australian dollar, expressed in terms
of U. S. dollars, will be changed from the present 3US1.2160 0A1 to
$ US1.2750 $ A1, representing an appreciation of 4.85 per cent. At
the same time, the market rate will be fixed until further notice at
the new parity. This will mean an overall appreciation of 7.05 per
cent over the present market rate of SUS1.1910 $ A1.
As well, it has been decided to strengthen the existing
measures to control the volume of capital inflow. The present embargo
on overseas borrowings which are repayable, or carry options to repay,
within two years will be continued and its coverage will be broadened.
This measure will be supplemented as from today by the introduction
of a variable deposit requirement scheme in respect of borrowings with
a maturity in excess of two years. Under this scheme, borrovers will
be required to lodge a proportion of the proceeds of overseas borrowings
in a special account writh the Reserve Bank, on which no interest will
be paid. This deposit will be held frozen until the time of repayment
of the borrowing, at which time it will be released to the borrower.
Initially the deposit requirement will be fixed at 25 per cent.
The Governor of the Reserve Bank will be issuing a
separate statement giving further details.
The purpose of these measures is to correct the fundamental
disequilibrium in Australia's balance of payments. That such a
disequilibrium exists has been clearly evident for the past twelve
months or more. It is taken for granted by Australia's own business
community, and is being increasingly recognised abroad.
In the calendar year now ending, there was an overall
surplus in Australia's balance of payments of some ; 2,000 million.
This huge surplus was attributable both to an excessive rate of
capital inflow, especially in the form of borrowings, and to a large
and unprecendented excess of exports over imports of goods and
services. The outcome of these trends, in combination, has been
to swell our holdings of official reserve assets to almost $ 5,000
million, over three times their level of only two years ago. No
responsible Government could allow such a situation to continue. / 2
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Because they do not necessitate immediate and drastic
solutions in the same way as do the opposite problem of low and
falling reserves, it is sometimes supposed that fast-growing reserves
are not a problem at all. But they are a problem. They represent
a waste of potential resources at our disposal, they are potentially
inflationary, they make more difficult the task of effective economic
management, and in themselves they raise expectations of exchange
rate changes which in turn lead to still further reserve increases.
That being said, I want to make it clear that our decision
to appreciate the exchange rate does not derive principally from the
fast growth in our overall balance of payments surplus and reserves,
which have been heavily influenced by the large inflow of capital
from abroad. Rather, it is a product of developments in our current
account. From a position where, in 1968-69, Australia was incurring
a current account deficit of over 01,000 million, we have moved
progressively into surplus.
The particular strength of the current account at the
present time does, it is true, owe something to the depressed level
of imports which has resulted from the slow-down in the economy
during 1971-72. As overall activity in the economy picks up, so
will the level of imports. But so, we believe will the level of
exports, as our major markets abroad grow apace and their demand
for our products increases. In short, while we both expect and
will welcome the growth in imports that 1973 will bring, we see no
likelihood of the overall current account position being transformed
as a result. The rapid growth of Australia's export and import-competing
industries which underlies this progressive strengthening of our
current account is, in itself, a matter for satisfaction. But the
foreign excchange earned from the proceeds of exports is of no value
to Australians, unless it can be used to enlarge the real resources
actually available for use within our economy. It has been clear
for some time that, with our previous exchange rate, this was
impossible. The appreciation of the Australian dollar will have
differing effects on different sectors of the economy. Some groups
will initially be advantaged, other disadvantaged. Maintaining an
undervalued currency can bring temporary gains to some sectors of
the economy; but in the modium and longer term these gains are
illusory because of the harm which the resulting inflationary
forces inflict on each and every member of the community.
The Government's responsibility is to the Australian
pcooile. It is their interests that we have kept centrally in mind
in taking the decisions I have announced today. Gains and losses
to individual sectors of the community gains and losses which in
any event are of a once-for-all character cannot be allowed to
over-ride this primary consideration.
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The Government recognisos that some of the rural industries,
which are already facing difficulties and problems of adjustment to
changed circumstances, may find it particularly difficult to bear the
consequences of the exchange rate appreciation. Should this prove
to be the case, the Government will be prepared to examine
sympathetically the position of those industries and take such
action as may be necessary, in their case, to ease the processes
of adjustment to new conditions.
In the Government's vier, any appropriate appreciation of
the exchange rate would not in itself be sufficient to deal fully
with the problem of excessive capital inflow, although it is an
essential prerequisite to tackling this problem successfully. That
is why we have also moved specifically to restrain the inflow of
foreign capital by the introduction of the deposit requirement
scheme. That scheme will raise the effective final cost of overseas
borrowings and will thereby deter such borrowings. At the level of
per cent at which the deposit has initially been set, the effective
interest cost of funds borrowed overseas will be increased by onethird.
For example, a borrowing at 6 per cent will now effectively
cost 8 per cent to any borrowers who still wish to proceed.
iction of this kind is long overdue. The former
Government took some steps, three months ago, to discourage some
forms of capital inflow. The action then taken had been long delayed,
it was of a very modest kind, and it dealt with only part of the
problem. The result of this delay has been a build-up of domestic
liquidity to a dangerously excessive level.
This Government will do everything within its power to
remedy this situation. Jo accept the responsibility for managing
Australia's affairs in the interest of Australians, and we are
determined to establish and maintain the conditions that make this
possible. The former Prime 1iinistor announced in September that his
Government was examining further moans of giving effect to the aim of
ensuring that overseas capital was employed in Australia in real
partnership with Australian-owned capital. This Government has a
similar objective: the difference is that we are prepared to take,
and we will take, decisive measures to give effect to that objective.
The impact of the deposit requirement scheme will be on
capital inflow, and the main initial impact of the appreciation of
the exchange rate will also be on the capital account of the balance
of payments. But as I have said, the appreciation of tho Australian
dollar is chiefly directed, in the medium and longer run, towards
adjusting the quite excessive strength of the balance of payments
on current account. / 4
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In the months im. ediately ahead, the effects in this latter
regard will be relatively snall. It has been the recent experience
of all countries adjusting their exchange rates and all of the main
trading countries of the world have done so in recent years that the
chief effects of adjustment on the current account occur only after
some considerable time. This is only to be expected.
In Australia's case the delayed reaction of exports and
imports to the exchange rate change will work to our advantage, because
quick reactions if they were to occur night slow the process of
recovery in economic activity and delay the return to full employment.
Given the time-lags, we do not see that as a danger. I-owover, in the
unlikely event that the reactions were felt more quickly than re
expect, the Government would not hositate in taking appropriate
internal measures to offset any such developments.
In the longer run, of course, the somervhat slower growth
of exports and the rather faster growth in imports which exchange
rate appreciation will bring vill be very much in Australia's total
interests. It will increase the real resources at our disposal, and
will therefore materially assist us, as a Government, in maintaining
the strong forward momentum of the economy and providing the real
resources which will be involved as we come to introduce the policies
and progranmes we have promised to the Australian people.
In recent years, the trends in our balance of payments
have meant that the resources available for use within Australia have
risen more slowly than Australian production. As the Government
progressively establishes conditions in which available resources
can expand more rapidly and the decisions I have announced today
are an essential ingredient of those conditions so it will be
possible for us to improve materially the living conditions of
the Australian people, both in their quantitative and, importantly,
their qualitative aspects. That is the task to which we have set
our hands. Our decisions rhich I have announced today will assist
in its achievement.
CI. BcTA. A. C. T.
23 December 1972