STATEI4LNT B3Y THE P'RIME' MRRLii$ ' iPtF;(; HAi1ALW KE, M. P.
The decision to devaluec tho Australian dollar
has be-en takcni against the balckground of continuing
uncertainty rcgdardirig thc-exchange rate. The incoming
Australian Govcrnmont is det~ ermnined to take all necessary
measureG t o end. this iunceprtainty.
In reaching thir, decision, the incoming government
has been facedl with the utvycnt noed to end the damaging and
destabilising effects of speculation against the dollar
deliberately created by loadling maerbers of the Liberal
Natiorial Party Government.
Both the Prime ministor and his Deputy made
repeated statellejit$-d-llv-tjz! m that. ri~ iy governmeit' s election
would result in a devaluation of the dollar. The
outgoing Minister for Industry and Commerce, Mr Peacock,
went to the ext. remes irreq3-cmsibility by quantifying
a devaluation at-
It iE; difficult to exaggerate the irre! sponsibility
of such statemonts made during the course of an election
By contrast, I c-trcfull y and consi-stently refused to
enter int~ o spo--culation regarding tho exchange rate. Any
other cour.;(-would haive bepn highly irresponsible on the part
of the altornativo-Prime blixili . tcr of Australia, as indeed
it was on the part of anYbody holding or seeking high office
in Australia.
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In such reprehensible circumstances, it was
inevitable that market participants would take the
Appropriate precautionary measures and that speculators
in the market would begin to move funds accordingly.
In the two weeks prior to the election when these
stateme-nts were being made, notifications of capital outflows
from Australia exceeded $ 2,500m. ( See Table.) The effect
of the statements by Ministers and of the capital outflows
was to generate further speculation concerning devaluation.
The magnitude of the capital outflows has been such as to
put considerable pressure on short-term money markets and
on financial institutions, thereby generating significant
increases in short-term interest rates and in some market
Oetermined mediumt-term interest rates. The banking system
in particular has been hit by the outflow of funds and has
been actively bidding for deposits in the marketplace at
high rates of interest.
The incoming Government is concerned about the
persistence of this uncertainty in regard to exchange rates
qver the tax run-down period of the next four months.
Continued uncertainty could lead to further pressure on
interest rates and reductions in the availability of funds
to key sectors of the economy over this period. P/ 1
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InformaLion made ava~ i lablc to thle incoming
Government in the lztt two, d1ayLs has made it clear that the
preiGooue rinon1) ; baiidonmnt of responsible. economic
niinagemeiit went far beoyond the matter of the value of the
currency. Official Treastiry esitimates put the Federal
budget deficit at $ 4.3 b. illion in 1982-83, before allowance
for additional expenditure associated with recent bushfires
and floods. On the bas; is of policies of the previous
Government, prior to the colurncncement of the election
campaign, a-reasury estimates put the budget deficit in
1933/ 84 at $ 9.6 billion. Thujs the persistent indications
from the previous Governme~ nt that the doficit on unchanged
policies wouldI be of the ordet-of $ 6 billion can only be
seen as a deliberate aitte-. mpt to mislead the Australian
people. While accepting the figure of $ 9.6 billion as a
reasonable estimate of the prospective .1983/ 84 deficit as a result
of current Government policies, I 6tress that this is not an
estimate of the deficit which will emerge from new policies.
Treasury forecasts on unchanged policiLes indicate a very weak
economy in 1983/ 84, with at least a further lt decline
in employmont and a considerably higher average level of
unemployment in 1983/ 84 than in the present year. It is
because of this dismal py-ospuct, aind particularly its adverse
impact on receipts, that. their deCicit blow-out is predicted.
The ncw Goverximent will use all instruments of economnic policy
to stimulate the economy, and the prospcctive deficit will need
to re-a!, sessed in this ligjht. The incoming Government will
also vigorously re-exami~ ne the c! xpenditure plans of the Fraser
Government.
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In rcaching lts deci. io thle . ricoming Govornment
has givenl the () cl) sest consideraion Lo both the costs and the
benefits of a devaluation. In addition to eliminating the
pos; sibility of currency indluced tightric! 7s in monetary markets
over the next three or four months, it will ensure that interest
rates will be considerably lower than would otherwise have been
the case. This dlecis. ion will also improve the competitive
posiion of Australian proaucers. it will enable beleagjuered
Australian industries to conmpco more effectively against imports
anid it will erncourage our texport induIstrios to make maximum use
of any world recovery emanatH-ing, In particular, from the
United Stateti' economy. Tn these various ways this decision
should ConLribvte to halting the rise in unemployment.
1he devaluation will, however, increase the cost of goods
imPortQd into Australia and will teiid to incroase the local price
of goods sold in both domestic and export. markets. In the
present cl imate of a detc'. orat. ing e,. conomy, however, these
inflationary offects should be both muted and delayed.
I wish to mako these point-. s clear
* This docision to vary the value of the dollar by za
single discreLe change of isj a decision forced on
the GovornumenL by the unique circumstances of the past
f or tnight. Tt-is not intended to signal-any change in
Government policy in rogard to the setting of the
Australian exchange rate. Vict present exchange rate
PianaiqoeknL regime which has opo~ rated since 1977 will continue.
This single discrete change is ta~ ken only in the ligjht: of the
uiiproccden Led circurn~ stancos facing the new Government
and all subsequent movements i~ n the exchange rate-
Si upwards as well as downwards -will follow the
gradualist approach previously in force.
0in spite of the decision to devalue, it remains the
incoming Government view that the fundamental factors
datermining* the Australian exchange rate remain sound.
The balance of trade has improved substantially during
1982/ 83 and on present. inchianged policy forecaofts,
Cthe Curr ent, Account dcficit should, at worst, be no
higher in 1983/ 84 thaii in 1982/ 83. Indeed, with growing
signs of stronger growth emerging in the international
economy$ Australia's trading position could improve
quite substantially in 1983/ 84. This deciuion
restores Autralia's international competitiveness,
as measured by unit wage costs indexes, to at least
the level provailing i-n 1979/ 80.
* In spite ofl the difficulties which it has inherited,
it is the Governv nt's firm view that any policy to
reaLore the.-econ omy and reduce unemployment over the
rtcediui-term must be associatnd with a falling rate
of infl. ation. The incom~ ing Government will take all
steps necessary to easure that nothing, including the
effects of thir, devaluation, Estands in the way of
the achievemnent of such a decline in inflation.
Canberra, A. C. T.
8 March 1983
ATTACHMENT The Reserve BanT;': s cash sales pf foreign
currency since the beginning of February have been as follow4;
Net Sales
Week to 7 February 72.5
14 February 350.7
21 February 83.1
n 28 February 972.8
1 March 303.7
2 March 405.5
3 March 488.3
4 March 358.0
3034.6
On Monday 7th March net nales by the Bank were
approximately $ 200 million. Thus since Mr Peacock's
devaluation statement on 17 February reserves have fallen
by more than $ 2700 million.