Exchange rate and house prices overvalued: IMF

The International Monetary Fund’s (IMF) report on New Zealand has revealed that New Zealand’s exchange rate is overvalued by 5 to 20 percent and house prices are overvalued by 15 to 25 percent. These figures show that little progress has been made to rebalance the economy and much more significant policy change is required say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “It is glaringly obvious that our policy framework promotes a high exchange rate and investment in land and buildings. This leads to high debt levels, poor tradeable sector returns and as a result low investment in productive activity. It is good to see the IMF issuing this advice and it is for the Government to listen”

“In fact the exchange rate figure is probably a bit underdone as the 5 percent end of the spectrum relies on our terms of trade remaining well above previous levels and we are starting to see some easing in commodity prices.”

The IMF recommended:
• “continuing efforts to broaden the tax base by looking at capital gains tax settings and introducing a land tax to fund growth-enhancing tax rate reductions.”
• The Core Funding Ratio “should be increased more than planned over time to reduce short-term external debt further.”
• “Some other measures such as countercyclical capital requirements and loan-to- value ratios could be introduced”

“A realistic exchange rate improves returns to export activity, that will tend to swing investment toward the tradeable sector,” says Mr Walley. “Land and/or capital gains taxes and shifts in capital requirements will help address asset bubbles and to set a realistic exchange rate that will provide better returns to the tradeable sector. So far we have only seen tinkering around the edges from the Government, now is the time for some decisive change.”

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