IMF urges New Zealand to reduce dependence on foreign funds

9 Feb 16

The International Monetary Fund has encouraged New Zealand to tackle its “chronically low” national saving levels and heavy reliance on offshore funding.

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Houses in Auckland, New Zealand

Houses in Auckland, New Zealand

 

Following an assessment of the country’s economy, the fund warned that its low investment and high dependence on borrowing from abroad mean the country’s foreign liabilities far exceed its assets, amounting to 65% of the country’s gross domestic product.

At the same time, the IMF said rapid house price inflation in Auckland due to lack of supply represents a risk closer to home.

Overall, the IMF said New Zealand’s strong recovery following the financial crisis has recently “waned” due to a fall in dairy prices and a plateau in investment activity from the Canterbury earthquake rebuild.

As a result, the fund said growth is “below potential”. At the same time inflation has dropped and unemployment is on the rise.

However, the IMF concluded that, while the short-term outlook is challenging, New Zealand’s “economy is flexible and resilient, and medium-term prospects remain positive”.

Exports should benefit from the move to consumption-orientated growth in China and rising demand in other Asian countries, New Zealand’s authorities are alert to risks and challenges and policies are supportive and appropriate, the fund said.

With regards to fiscal policy, the IMF said “the planned easing this year and next, including through an acceleration of investment in infrastructure, combined with a resumption of gradual consolidation thereafter, is appropriate”.

The IMF commended efforts already taken to combat the country’s housing crisis. Last month New Zealand’s housing minister declared house construction was at an all-time high, following measures to free up land faster and speed up building work.

However, the fund warned the country to be ready to take additional measures and consider steps to reduce the tax advantage of housing over other forms of investments as well as addressing supply-side bottlenecks.

IMF directors also “agreed that raising national and in particular private saving is crucial to reducing external vulnerabilities from the still heavy reliance on offshore funding”.

They encouraged the government to consider comprehensive policy measures to boost long-term financial savings, including through reform of retirement income policies.

Finally the fund noted that “notwithstanding high living standards, New Zealand incomes lag those of other advanced economies due to relatively low capital intensity and productivity”.

They recommended the country work to boost competition in key service sectors, leverage ICT more intensively and address infrastructure bottlenecks. 

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