Vol. 384 No. 1
asked the Minister for Finance if he has satisfied himself that the substantial relaxation in exchange controls recently announced will not lead to a major outflow of investment funds from this country; the reason this decision was taken at this time; and if he will make a statement on the matter.
62.
(Limerick East): asked the Minister for Finance if he was aware in advance of the issue of the joint communique, following the visit of Commissioner Delors to this country, that the communique would announce the virtual removal of exchange controls; if he will outline the consequences of this decision; and if he will make a statement on the matter.
I propose to take Questions Nos. 13 and 62 together. The joint declaration to which Deputy Noonan refers was prepared with my knowledge and approval.
This declaration did not announce the virtual removal of exchange controls. It confirmed Ireland's commitment to the complete removal of controls, in accordance with our EC obligations, by the end of 1992. It also stated that restrictions on the purchase of medium- and long-term foreign securities by Irish residents will be removed from the end of this year. This change by no means amounts to the virtual removal of exchange controls as Deputy Noonan's question implies.
Restrictions on investment in foreign securities by Irish residents were already eased significantly at the beginning of this year. Residents are now permitted to invest in medium- and long-term securities subject to an annual maximum of £5,000 for private investors and 12½ per cent of cash flow for institutional investors. For 1988, an overall ceiling of £30 million has been imposed on such investment by individuals but, in the event, investment so far this year under this heading has fallen well short of this ceiling. Likewise, investment by institutions is well short of the permitted ceiling.
These ceilings are now being removed. There is no good reason to anticipate that this change will have a significant adverse effect on capital flows because there is no pent-up demand for such outward investment. A further reason for confidence is the improvement in economic fundamentals here and the continuing attractive opportunities for investment in Irish markets. This is demonstrated by the increasing interest on the part of nonresidents in our gilt market. In the first nine months of this year the net nonresident investment in gilts and Exchequer Bills has amounted to £741 million compared with a total of £460 million for the whole of 1987.
I would point out that commentators have been unanimous in their approval of the changes that are now being introduced. There is a consensus that these can only be in the long-term interest of our economy. The practical commitment to the gradual lowering of controls can only enhance the international perception of Irish markets. I would also point out that, if these changes were not made now, it would be necessary before the end of the year to seek a continuing derogation from our EC obligations. Community directives already in force require that there should be freedom, without restriction, throughout the Community, to buy and sell medium- and long-term foreign securities. We could hardly expect agreement to a further derogation at a time when some other member states of the community are moving much faster than us in dismantling their controls and at a time when there has been such a marked improvement in our balance of payments. In this context, it must be noted that the criteria on which our derogation is based are difficulties, or the threat of difficulties, in a country's balance of payments.
Continuing prudent management of the economy is, of course, the crucial element if we are to reap the benefits from capital liberalisation. Movement towards liberalisation should be seen both as a reflection of existing confidence in the economy and as an assurance of the Government's firm commitment to continuing sound economic management.
(Limerick East): I would like to thank the Minister for his very full reply. I have no objection to the policy he is following in this respect. I would like to ask him three supplementaries. First, was the Central Bank informed in advance of the contents of the communique and if so, at what level? Second, does the Minister have a timetable in mind for the elimination of exchange controls on short-term investments rather than on medium and long term that he has said will now be removed from 1 January? Third, would the Minister agree that the probability is that the reason there was no particular pressure on the ceiling of £30 million was that people who wanted to engage in this activity were able to evade the particular control that was in place anyway?
In relation to the first part of the question, the Central Bank were consulted and fully approved of the matter. In regard to the second part of the question, the exchange controls involved in the short term movements will be removed as agreed by end-1992. Most other countries of the EC must remove them in 1990. Greece, Spain, Portugal and Ireland will remove them by end-1992. In relation to the third part of the question, I emphatically deny that people could have got the money out in other ways. The amounts that could have gone were substantially more than actually did go in the processes I have outlined.
(Limerick East): There is a further point of clarification. I asked the Minister if the Central Bank had been informed in advance and at what level. The Minister did not deal with “at what level”. The other point I would like to raise by way of clarification is if the Minister is categorically stating now that those exchange controls which continue in place after 1 January next will remain in place until 1992.
We do not have to do anything more than what has been announced and which will come into effect on 1 January regarding the medium and long term investments. The rest concerns short term investments and that need not come into play, according to our EC obligations, until 1992.
(Limerick East): I realise that, but what I am asking the Minister is if there is any intention on the part of the Government to act unilaterally ahead of their obligation?
I do not expect that there is. We are making such massive progress in relation to the easement I announced at the start of this year that we were in a position to do what we are doing now on 1 January next without looking for a further derogation. As long as we continue to manage our resources as efficiently and as effectively as we have been doing for the last two years there are absolutely no problems. There is a long time between now and 1992 but if a situation arises where it might be in our interests to do so we can look at that possibility in regard to the short term securities. As of now it does not arise because our obligations to the Community only apply in 1992.
I have two supplementaries. First, would the Minister not agree that it may well be that the reason the £30 million was not taken up was that would-be investors might have regarded a limit of £5,000 as restrictive, whereas now that the limit is being removed altogether it would be a different situation? Second, would the Minister not consider that there is a very serious risk that higher interest rates obtainable in Britain and elsewhere might well induce very substantial amounts of capital to fly out of the country, with possible consequences for employment? Has the Minister made any assessment as to what the likely outflow will be during 1989 and, if so, what is the amount of his assessment?
The answer to the first part of the Deputy's question is no. I do not think that the £5,000 restriction had anything to do with it. All that went out was £12 million out of the £30 million. There was plenty of scope for much more to go if people felt that way inclined. They did not. The reverse has been the case. We are getting inward investment.
In relation to the second part of the question in regard to higher interest rates in the UK, is it not great to see it? We thought we would never see the day, that it would never happen. It has happened. It has not led to any outflow because not only interest rate factors are taken into account in relation to the movement of capital. A more important factor has been and will remain, that is, exchange rates and general stability in a particular currency. So far as we are concerned, because of the excellent management and the massive results we have clocked up over the last few years, they are queuing up to invest in this economy.
May I ask the Minister——
I am sorry, Deputy Taylor, we have encroached into the time allocated for priority questions to some considerable extent.
The Minister did not answer the question about whether he has made an assessment of the amount of the outflow.
I said in my reply that it would be negligible.
You say it would be negligible?
Yes.
The Minister is in for a rude shock.
The amount that could have gone out this year was £30 million. Only £12 million went out for the private investors.
On a limit of £5,000.
Institutions could have invested £170 million approximately but only £54 million went out. We have absolutely nothing to fear and I would not like to think that statements are being made by people like the Deputy and others outside this House trying to undermine and jeopardise confidence in this economy. He will not succeed.
What we want is real confidence, not false confidence.
Other independent commentators have been very positive in their announcements on this.
Let us face it, our biggest export is people.
The Irish papers have been commenting favourably on it for the last number of weeks since the announcement was made. The Wall Street Journal of yesterday said that the Government's plan to lift controls on residents' holdings of medium- and long-term securities at the end of the year most likely will lead to only a net trickle of money out of Ireland's own security markets. The Deputy does not have to take my word for it. He can read the editorial in the Wall Street Journal.
I must now call Question No. 61.
