Kerry McDonald says exporters are losing 10-40% of the value from their exports because of an over-valued currency. He suggests shifting from using banks to convert US$ to NZ$ to using fintech and blockchain instead

By Kerry McDonald*

Under the current system exporters do not receive full value for their exports. In fact, the system simply shares the value with non-exporters who receive a windfall gain – a substantial subsidy, to the detriment of exporters.

This means that exporters’ incomes are significantly lower than they should be, non-exporters arbitrarily gain significant benefit from the subsidy, the market price signals for new investment in export activities are less positive than they should be and there is a range of other unintended consequences.

Given the critical role of exports in the economy and the various arbitrary and unintended consequences this is a serious issue that must be remedied. New Zealand is a very small economy, which is highly dependent on imports for the many goods and services (and capital) that it can’t produce economically.

The only sustainable means of financing imports is by exports. Borrowing incurs interest costs, increases debt, has a limited capacity and has to be repaid; and the capacity to sell assets or spend foreign currency savings is also limited. Neither is an economic or sustainable source of import financing. Consequently, export growth is critical for efficient, sustainable economic growth and higher living standards; and exports per capita is a critical indicator of the economy’s performance – alongside productivity though you wouldn’t know it from public commentary on the economy..

The core problem is that the foreign currency receipts of exporters are undervalued when converted to New Zealand dollars. And, this is fundamentally a structural problem, not a cyclical one. Export (including tourism) transactions largely generate revenue in foreign currencies, which is effectively owned by the exporter (allowing for intermediary transactions).

Generally, the foreign currency is converted to New Zealand dollars (NZD). But, the foreign exchange market does not properly value export receipts when they are converted to NZD as the export revenue transactions are a very small part of the total transactions in the market, which are mainly of a financial nature and irrelevant in this context.

In fact, an efficient FX market should convert the foreign currency export earnings to NZD at a rate which reflects the economic value of the export earnings to the New Zealand. This economic value should be primarily based on the value to the economy of the imports that they finance; and the cost to finance them by other than exports. This “opportunity” perspective is a fundamental principle in economics - and cost-benefit analysis.

'Importing consumers get the benefits'

The current system means that the benefits of the exports are shared by all New Zealand residents. It reflects the assumption that the full value of the exports is reflected in the financial returns to exporters, which is clearly not the case – their value loss could be between 10% and 40%, or more. You get a good sense of this value if you think of the loss from taking away the last NZ$1bn of imports from the New Zealand economy; or of trying to finance imports by other than exports.

Imagine an auction of foreign currency from export earnings, to be bought in NZD to pay for imports, including intermediate goods, consumer durables, capital goods, consumables, etc.; when the other possible means of payment are borrowings, foreign currency savings or asset sales. Then imagine the auction taking place every day for the foreseeable future, to pay for our ongoing import requirements. That gives a good sense of what the true value of export earnings in foreign currency looks like.

So, what should be done?

First exporters should exercise more effective control over their foreign currency receipts and ensure that their conversion to NZD realises their full economic value. Control will probably be best achieved by establishing an alternative to the current system, probably by innovation – block chain might be applicable, which should be achievable with minimum Government involvement.

However, there are alternatives, including fiscally via income taxation. Establishing more effective control over the export revenue stream would then allow more realistic NZD values to be determined for export revenues, ideally by some form of a market based process.

Or there are more radical options.

Realistically, it will up to exporters to lead the change process. It is, after all their revenue and incomes that we are talking about. However, regional and exporter organisations should be strongly supportive. Most export production and tourism is in the regions, which often suffer from lower incomes, poorer access to service and amenities and higher costs and which will benefit from the change.

In Summary:

  • The present arrangements favour importers over exporters, which is good politics but poor economics. A strong export sector is critical for New Zealand’s future.
  • The more favourable price signal for new investment in export production growth will be important, given the critical role of exports and the Government’s failure to make progress with its export growth agenda.
  • Importantly, the changed prices signals should lead to various other adjustments, including in financial markets. For example, changes in incomes will reflect in credit worthiness and borrowing capacity, putting activities which add real economic value in a stronger position.
  • The changed price signals will also impact on value adding processing, the economics of which are too often poorly understood and executed.
  • This change will be much more effective that the current token regional development policies. o In contrast Auckland produces relatively few exports on a per capita basis and is the major beneficiary of the subsidy from the regions.
  • Few immigrants produce above average exports per capita, which means they have a negative impact on the living standards of New Zealanders.
  • Fiscal policy etc. in some other economies is likely to be more reflective of the real economics of different industries and activities, including the value of exports. There is no sign of New Zealand interest in that data.
  • Exporters are often criticised for the impact/cost they impose on the environment, but do not pay for. However this should be considered partial compensation for the subsidy they give to non-exporters to pay for imports. A more realistic level of payment to exporters for their exports will allow them to meet these costs directly – and remove the hidden subsidies to others.
  • So exporters – saddle up. It’s time for some changes!


* Kerry McDonald is an economist and company director. He is the former Managing Director of Comalco NZ (1988-2003) and a former director and chairman of BNZ (1997-2008), as well as being a director National Australia Bank (2005-08). This paper was the basis for a speech to Livestrands, Winton, 8 December, 2016.

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Kerry...... I don't really like the " exporter subsidizing importer " storyline.

I do agree that there is a structural flaw in current Global Monetary system..

The Bretton woods Monetary system was supposed to balance trade.. ie. currency fluctuations would result in balanced trade..
USA abused their position.... They did away with the idea... ( death blow in 1971).
Global Monetary sysem has been adhoc since then

NZ.. floated our exchange rate back in the 1980s' ...
The big benefit of that was the growth in Capital flows and liquidity.. ( AND.... this has been a very good thing for exporters as well as everyone else. )
The simple truth is that exchange rates reflect the value of far more than just imports vs exports.
We live in a financialized world.... and it is this "financialized world" that drives currency movements...sadly.
( In that regards ...the FX market is very efficient )

When was the last time our chronic current acct deficit was front page news...???

I agree with you that borrowing money to pay for our lifestyle is unsustainable.... and I'm thinking this game will carry on until we hit the wall... and then there will be some change..

In summary:
Simply arguing that exporters are subsidizing Importers, and thats' unfair... will not get you far..!
Just my view....

Are you saying that it would be as simple as exporters only accepting foreign currency for their products, then auctioning it to the importers? If so it is a great idea as it would seem to considerably balance up the balance of payments and direct our focus to export earning endeavours.
Would it be that simple though? What would stop people just going to the bank and changing the currency. This proposal implies a disciplined relationship between export dollars earned and import dollars spent. Presumably loans must be raised to cover the difference at the moment. What would stop that continuing?

A very clever and exciting prospect but I wonder how this idea might be received by the banking fraternity?

I think he was using that idea to make a point....??? ( that exports subsidize imports )
I don't think that he is saying that its' a good idea..?? ie.. that it is a solution..

Unless we go back to Capital flow controls why would anyone pay more for $US from an exporter if they can get it much cheaper via the FX mkts...??

I reminisce back to the 1970s' when I needed reserve bank approval to send money to USA to buy a book... ( I think thats true... memory is not so clear..!! )

Our perennially overvalued exchange rate, and related multi decade current account deficit, is a good subject to raise, even if the subject likely to be lost in the end of year "silly season".
To the extent I understand Mr McDonald's solutions, I don't believe they would or could work. Importers would not buy foreign exchange off exporters at a higher price than they could buy it at an open market.
We should in my view look at the fundamental causes of the overvalued exchange rate. To accept that the finance markets trade in billions and disregard trade and other fundamentals has to be incorrect over the long term. Some say that the cause is a shortage of saving vs investment; that we culturally are too willing to borrow and spend. That is only partly true in my view, and is led by government and Reserve Bank policies. Rather in my view we have an excess of foreign investment, that forces the too high exchange rate, that gives the price signals, that McDonald talks of, to exporters and importers to have the shortfall we do.
Foreign investment coming in to buy houses and farms and businesses drives up the exchange rate, that then inevitably leads to an excess of consumer spending on foreign goods.
Some other central banks make their exchange rate a key part of their monetary policy, and will either borrow locally in local currency, or print, to keep the exchange rate at a level where exports are more competitive. Other governments have more restrictions on foreign investment into land in particular; or on immigration, which often leads to the same thing. The Treasury should not be borrowing from foreigners to fund infrastructure when the exchange rate is too high. It can be funded locally. Note that most definitely such investment should be happening.
Anyway, it is good to see Mr McDonald raising the issue, even if his solutions seem pie in the sky.

Stephen... I thinks it is in the..."too hard" basket.. We are a small fish in a big pond.
Our Govt signs up to free trade agreements with a complete disregard to exchange rates and currency manipulations... ( China is a BIG example )
USA is another... I bet with TPPA, there was nothing said about exchange rates and monetary systems.??

NZ is very small fish in a big pond.. At some point we will hit the wall and will then make meaningful change... ( hopefully the countires we owe money to won't bully us... if/when we hit the wall..?? )

What makes you think we'll be able to make meaningful change once we 'hit the wall'? I'd say quite the contrary - that being, one can only make positive change whilst there is the latitude to do so.

I think what u suggest is how it should be... but from what i've seen of history, thats not how it is.

Meaningful change happens when we hit the wall...
At that point everyone has the desire and will for change..
At that point the forces of the "staus quo" are at their weakest...

Until then, while there is still latitude there is not the desire nor will for change ..... ie. the staus quo forces are stronger..??

just my view of things..

You are just a nihilist Roelof, you may as well go and kill yourself.

Although when you start to examine and understand human behaviours that underpin the system it is hard to reach any other conclusion. It is all about the masses, and the masses constitute 70-80%. Nothing really moves until weight of numbers moves it. A bit like the financial investment world, you can't fight what 80% are doing. It will break before the 80% change course because they are locked expectation of infinite free lunches. Hey, as long as the free lunch keeps coming why would you change?

I agree Roelof - we are at the mercy of the big sea.
The "foreign investment" really refers to supplying our REAL resources for US fiat currency ... the cost of not being the biggest bully in the playground.
Meaningful change is a pipe dream ... there is only the current way then collapse.

Kerry, I'm trying to find where in the article you talk about why there is an imbalance in the FX market between importers (selling NZD) and exporters (buying NZD).
The only part I can find is this:
"the foreign exchange market does not properly value export receipts when they are converted to NZD as the export revenue transactions are a very small part of the total transactions in the market".
So I gather what you mean is that because exporters make a whole bunch of small transactions, they don't individually have bargaining power with the banks?
Even then however, we are only talking about the margin that the banks charge aren't we? As the supply and demand dynamics of the market work on aggregate.
And then I'm not sure why importers are any different in this regard?

I think he's talking about this problem;

one of the more notable features of the kiwi is that it has the lowest percentage of its currency traded at home. In April, about 10 per cent of the total daily transactions of US$105 billion were conducted in New Zealand, the rest were done overseas.

So looking at the drivers of the currency value, the most notable seems to be the fact that because we have high relative interest rates, overseas investors are attracted to the NZD for the yield. I guess the point of your quote is that this shows just how much of the trading in NZD is related to this and/or speculation? Not sure.

And the reason we have high relative interest rates is because we have a low savings rate.
Presumably also the foreign investors are attracted not only to higher yields but also to property market gains. It would be good to get an idea of the relative weightings of the various components to have any sort of idea.

I gather the solution being offered here is to effectively ring-fence all transactions that relate to trade. How would you police that?

Otherwise we could try and address the factors that bid up the NZD. Foreign investment into high-yielding bonds and stocks and property should theoretically be equalled by investment from NZers overseas, so this brings me back to the fact that we have a low savings rate.

Sorry, meant to reply to your post - see below.

How would you police that?

Policing is not the suggestion, rather he suggests using some sort of market mechanism such as a daily auction of export earned NZD for the local market of NZD purchasers (importers). You could have a re-defined regulatory mechanism whereby should a local importer instead choose to purchase NZD outside the local market, a FTT would be charged (unless the daily available allocation of export earned NZD available has been exceeded).

Just thinking out loud - not thought through - but you'll get the gist.

It requires innovative re-thinking, as the author suggests.