Seanad Éireann debate -
Tuesday, 18 Dec 1990

Vol. 127 No. 3

Exchange Control (Continuance) Bill, 1990: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister of State at the Department of Finance (Mr. Daly)

The purpose of this Bill is to continue the existing exchange control legislation in operation for a further two years. The 1954 Exchange Control Act, as amended by the 1978 Act, forms the legal basis for Irish exchange controls. It had been hoped, when the Act was first introduced, that the controls, which it permitted, would not be required on a long term basis. It was, therefore, given a limited time-span — initially four years. However, in the intervening years it was not found possible to dispense with exchange control. The Act has, therefore, been renewed on a four yearly basis. The last renewal, in 1986, continued the Act in operation until the end of this year.

Since 1986, the situation has changed dramatically. Over the past three years, great progress has been made in phasing out exchange controls and the day is in sight when Ireland will no longer operate a system of exchange control as a matter of continuing policy. The process of dismantling the controls has, of necessity, been a gradual one and we still have some way to go. To provide a legal basis for those controls which are still in operation, we need to renew the legislation for a further period. However, since the Government are firmly committed to completing the liberalisation process by the end of 1992 at the latest, to do so for the customary period of four years would be inappropriate. The Bill before the House today will, therefore, provide a statutory basis for exchange controls for a further two years only.

While the 1954 legislation prohibited a wide range of payments and other financial transactions with non-residents, it gave discretionary power to the Minister for Finance, and by delegation from him to the Central Bank, to grant permissions for individual transactions or ranges of transactions. Thus, down through the years, general permissions have been given which enabled many operations to be conducted freely. Even from the beginning, payments relating to trade, commercial and other current operations could be made without restriction. Such payments were merely supervised, to ensure that unauthorised capital transfers did not take place in the guise of current payments. Many capital operations were also permitted, in particular those which facilitated inflows of capital from abroad. Following our entry to the European Community, Irish residents could freely make direct investments, or real estate investments, in other Community countries.

However, the push for completely free movement of capital did not come until the late 1980s, when it became obvious that this would be one of the principal pillars of the Single European Market. Encouraged by the dramatic turn-around in our economy in 1987, my predecessor was able to announce, in October of that year, the Government's intention to dismantle exchange controls on a phased basis. In June of the following year, the EC Council of Ministers adopted a new directive to finally implement the Treaty of Rome objective of full freedom of capital movements between Community countries. In line with the terms of that directive, the eight stronger member states had achieved full capital liberalisation by July of this year. Ireland, with Greece, Spain and Portugal, has until the end of 1992 to complete the process of dismantling its controls.

Since the Minister's announcement in October 1987, we have come a long way towards achieving that end. Irish residents can now freely invest in medium and long term foreign securities. The rules governing the forward cover market and many of the innovative instruments of the international financial world — like swaps, futures and options — have been greatly eased. Irish financial institutions have considerable freedom to accept Irish pound deposits from non-residents and much of the administrative burden which exchange control imposed on the business and financial communities has been lifted.

In introducing this Bill in Dáil Éireann, I was able to announce another package of relaxation measures which will advance our progress still further. I indicated I proposed to begin relaxing the restrictions on foreign currency accounts. Initially, individual residents will be permitted to operate fixed-term foreign currency accounts with financial institutions in the State. The operation of these accounts will be subject to a number of conditions, including a minimum period of investment of three months. To counter any loss of tax revenue from individuals moving funds into such accounts, I propose, in the 1991 Finance Bill, to extend the deposit interest retention tax to cover interest from these new personal foreign currency accounts held by Irish residents. For this reason, the implementation of this particular measure will be deferred until next year's Finance Bill has been enacted — probably around the end of next May.

The other changes, which I announced will take effect from the beginning of next month. These include: allowing the conversion of Irish pounds for purchases by individual residents of short term foreign securities, subject to a limit of £10,000 per individual and an overall limit of £50 million for 1991; permitting residents to invest freely in foreign undertakings for collective investment in Transferable Securities, commonly known as UCITS. The UCITS in question are those whose policy is to invest in short term foreign securities, or cash deposits, as long as they comply with the European Communities UCITS Regulations of 1989; extending to individual residents the freedom which institutional investors already have to acquire futures and options on foreign securities, for hedging purposes.

The Minister is also proposing to ease restrictions on direct investment and the purchase of personal property in countries outside the EC and to remove altogether the limit of £20,000 which currently applies to gifts and personal loans, made by Irish residents to residents of non-EC countries. Finally, Irish financial institutions will be permitted to issue long term loans to non-residents for purposes other than trade, direct investment and the purchase of property. In this context, long term is taken to mean for periods of five years or more.

In adopting a programme to liberalise exchange controls, we did not do so with our eyes closed. We knew we would have to face certain risks. Even allowing for the strengthening of economic and social cohesion within the Community, there will be greatly increased potential for capital outflows — particularly in the short term as investors seek to diversify their portfolios. Indeed, we saw some of the effects of this in 1989, following the removal of restrictions on medium and long term foreign securities. Happily, the situation was reversed this year when a significant portion of this investment in foreign securities was liquidated and repatriated. We also experienced very large inflows into the banking system when we liberalised Irish pound deposits by non-residents.

Full freedom of capital movements will also increase the volatility of such movements, particularly at times of exchange rate uncertainty. The greater potential for, and the increased volatility of, capital flows are both factors which could put pressure on domestic interest rates, in either direction. Monetary policy will, thus, have to play an increased role in regulating inward and outward flows of capital and in maintaining the stability of the exchange rate. However, in considering these risks, we must bear in mind that the European Community, in adopting full capital liberalisation, did not leave us without safeguards. The Council of Ministers appreciated the difficulties that would be faced by the economically weaker member states in implementing full capital liberalisation. In recognition of this, a somewhat longer transition period was provided for those countries and we have availed of this to phase out exchange controls over a period of time. The Community directive also included a safeguard clause that will allow member states to reintroduce controls on certain capital movements, if short term capital movements of exceptional magnitude lead to serious disturbances in the conduct of monetary and exchange rate policies. In addition, there is an enhanced scheme of medium-term financial support to assist member states who may encounter difficulties as a result of capital liberalisation.

However, I would not like to give the impression that the liberalisation of capital movements has only negative implications. There is also, of course, a very positive side. An international perception of a control-free environment and the closer integration of the European market will enhance our attractiveness as an investment location. Provided our policies are right, we can look forward to increased capital inflows, with obvious beneficial consequences for the economy. The increase in holdings of overseas assets by Irish residents will also generate income from these assets in the years ahead. Furthermore, our business and financial communities will be able to compete more effectively in international markets, as they secure access to all the risk management techniques and means of financing that are available to their foreign counterparts.

I cannot stress strongly enough that the most vital ingredient in our success in all of this will be the continued prudent management of the economy and of the public finances. It is essential that investors, both foreign and domestic, have good reason to be confident in our performance in this regard. In a situation of easier movement of capital, we would be punished very severely for any lapses. We must, therefore, recognise that this new situation will impose new disciplines on our management of the public finances. If we meet this challenge effectively, the potential benefits in the longer term will be very great indeed.

To conclude, I would just say again that we have made, and continue to make, very rapid progress towards our goal of full capital liberalisation. As we do not yet find ourselves in a position to complete the process, it is not possible to dispense now with the legal basis for the remaining exchange controls. Indeed, even when full liberalisation has been achieved, it will still be necessary to have enabling legislation to allow the re-introduction of controls in an emergency situation, for example if we had a severe balance of payments crisis. However, I am conscious that the existing legislation, which is very restrictive in philosophy, would be inappropriate in a fully liberalised situation. It is our intention, therefore, to return to the Oireachtas before the end of 1992 with proposals for simpler and more positively worded legislation. The existing format restricts all transactions, except with the permission of the Minister for Finance. I would envisage that the new legislation would provide that capital movements be unrestricted, unless the Minister ordained otherwise by Statutory Order.

In the meantime, however, it is necessary to renew the existing legislation for a further limited period. I, therefore, commend this Bill for the approval of the House.

Mrs. Doyle

Indeed, all of us who welcome the Single Market and the goals of European economic and monetary union, and perhaps also political union at a later date, must support the Government and our institutions as they try to realise the goal of full capital liberalisation — to use the Minister's own words. This very short Bill here today enables the Government to extend for a couple of years what is left of our exchange control regulations until 1 January 1993 when, hopefully, as the Minister says, the Government will be in a position to abolish all remaining controls. Perhaps that will be easier said than done. There are certain aspects of it that continue to cause concern perhaps only because I and others are ignorant of the exact impact and explanations in many cases might allay the concerns that exist. There was a very interesting debate in the Dáil on this particular issue.

It is a very technical Bill. The real difficulty that faces us would appear to be the fact that over the past few years we have been hand-picking the easier bits to achieve as we go along the road towards capital liberalisation in the European Community. We have left ourselves — which is understandable in some ways — the more difficult bits to put in place now or to remove as the case may be. Some of these aspects were touched on by the Minister today.

I was particularly interested in the Minister's reference to changes he will introduce in next year's budget and Finance Bill to extend the deposit interest retention tax to cover interest from these new personal foreign currency accounts held by Irish residents, to quote his own words. I would ask the Minister in his concluding speech on Second Stage here today to expand somewhat on what he has in mind in this regard. The difficulties in this area are immediate and the Minister would have to abolish DIRT tax or at least dramatically reduce the rate as is now exists in this country, or do something along the lines he is now proposing if he is not to have an outflow of funds from this country when full liberalisation is achieved. Certainly, if savers have small or large sums of money to put on deposit they are not going to put it in an institution and pay 30 per cent tax if they had an option of investing in any of the European countries at either a new rate or a much lower rate of retention tax.

What does the Minister envisage will be the collection system? At what stage will the money be stopped? Will it be stopped at source, or could it be stopped at source given the situation that exists in this country and the procedures that are in place at the moment? I would be very interested in an expansion of the proposals the Minister has in mind for the Finance Bill and I am sure he knows what they are now. At this stage he must know what the Finance Bill will hold. This is one of perhaps two major areas of worry of the post-1992 situation when exchange controls have been removed as we now understand them. An expansion in that area would be very welcome. It may, indeed, allay the fears that exist and that were expressed while the Bill was going through the other House.

The Minister made reference to the UCITS. Indeed, last week in the Companies Bill we had a part referring to UCITS and again this week in the unit trust legislation we will be dealing with UCITS. It is amazing how suddenly those words appear; three or four times in a fortnight we are dealing with a concept that I certainly did not know much about up to a fortnight ago or I would have been hard pressed to define exactly what they were. Yet, in three Bills before the House in the space of eight days we are dealing with UCITS. I just make that point. It is really part of the times we are in.

There is another aspect I would like the Minister to develop, that is, that many of the points he raised and many of the liberalisations are still time-framed. The Minister said that the Irish financial institutions would be permitted to issue long term loans to non-residents for purchases other than trade, direct investment and the purchase of property. He said that in this context "long term" is taken to mean for periods of five years or more. Indeed at the moment, with non-residents accounts in this country, I think there is a three months minimum call-up time. There are other time-frames too. The Minister referred at another point to a time-frame on a certain aspect. My understanding is that in true and full liberalisation in this area the time-frames themselves will have to go also. We are talking about the electronic movement of money. You can take money from Frankfurt and put it into a financial institution in Dublin today, shift it on to somewhere else tomorrow, play the money markets, take benefit of interest rates in different countries and the relative difference in them. Generally, does the Minister envisage our insisting on keeping time-frames of any kind in respect of any aspect of exchange controls in the post-1992 situation? My understanding is that that would not be so.

At the moment, certainly, the Central Bank and the institutions have certain controls. When it comes to fixing the three-month interest rate and even in terms of the monthly interest rate, they have control as to the time-span within which money can be quickly shifted out of the country again. Surely this will not be tenable with full liberalisation in this area. How will we prevent large runs on our central reserves generally? How would we even prevent a regular occurrence of the type we appear to be seeing at the moment in this country when we understand that a lot of money came, in August and September, into our institutions and, indeed, very welcome it was because of the uncertainty in the Gulf and nervousness in financial markets elsewhere. They obviously reckoned we were fairly secure and stable over here. I think £700 million was invested here in August and September. Apparently, most, if not all, of this money has since exited, presumably on a three month call-up of some kind.

We read in today's papers that the chances of a 1 per cent rise in the Central Bank interest rates are fairly certain. The reason given by the financial correspondents appears to be that we have gone below the £3.5 billion reserve which is considered to be the critical level. Some would give a much lower level as being the critical or the trigger level for increasing interest rates. But, conventionally, the £3.5 billion has been accepted as the level below which the Central Bank look to increasing their interest rates so that there is not any further run and to keep the position of this country, relative to other investment countries, favourable.

We read about the threat of an increase in interest rates at the moment because of the £700 million that has exited. Can we expect a much more volatile situation in this area in the Europe of post-1992? How, with the exception of the emergency measures the Minister referred to, will we in fact be able to exact a certain amount of monetary control in our own country? We either fully liberalise or we do not. We will always be susceptible to changes in world financial markets but particularly in the European Community. With the apparent change in Central Bank policy now in relation to our parity with the Deutsche Mark and the knock-on effect that that has had in recent times, what do we learn from it all? What controls does the Minister envisage? Policies in themselves are not the switch of a button type controls. You have to build up to a situation whereby the strength of our economy is a control in itself.

We are vulnerable to outside influences, as we all know. Is there anything, apart from the emergency measures, that would be available to the Central Bank and to the institutions in this country to prevent outflows of money, literally by the pressing of an electronic keyboard in some other financial centre? What are the controls that are envisaged in this type of situation that has given rise to quite a lot of concern in recent times?

The Minister said that the European Community did not leave us without safeguards, particularly the more vulnerable countries like ourselves. The economically strong countries of the Community have full liberalisation in this area since July this year. They call us the objective 1 countries, or some quaint expression like that. We and Greece, Portugal and parts of Spain are all lumped together as slightly also rans when it comes to the economic and monetary situation.

Professor Conroy

Catching up countries.

Mrs. Doyle

Catching up, yes, that sounds better. They are all lumped under this expression. We benefited by being classified as objective 1 when it came to the Structural Funds and extra money in this area. We are, perhaps, also benefiting now in that we are being given extra time gradually to phase out our present exchange controls and come to full liberalisation in this area.

The Minister said that the Community did not leave us without safeguards. I am not quite sure what safeguards, apart from the emergency measures which we could reintroduce to exert control on certain capital movements, if they were of exceptional magnitude leading to serious disturbances in the conduct of monetary and exchange rate policies. Could the Minister expand on what measures there are, apart from the emergency measures, if any? Could he expand also how the emergency measures might, in fact, be triggered off?

The speed of reaction is very important when we are talking about the electronic movement of huge sums of money and preventing runs on our reserves in this country. Will we have to get permission from, or be directed by, the European Central Bank that we talk about arriving on the scene sometime in the future? Will there be some central point in Europe which will authorise the triggering of the reintroduction of controls on certain capital movements in the event of exceptional disturbances in policy in any one member state? How will this be triggered into effect? What other safeguards does the Community envisage? Will they be available to countries such as Ireland in this regard?

I understand that the original exchange control legislation was a war-time measure or was in response to war-time events. As a nation, we should be as experienced as most, if not more experienced than some of our colleagues in the Community, in relation to operating in monetary union, because effectively that is what we did with the UK for so long until some time in the seventies. Others would go further and say that we effectively had economic union as well. With certain trade protection and various other measures in place it was not quite the economic union we envisage for the EC Twelve in the years ahead.

There are enormous questions still to be answered; for instance, in regard to the phasing out of the hardest bits, if you like, on our road to full capital liberalisation and the removal of all exchange controls. How does the Minister envisage the changes in the DIRT tax that he has indicated? I would appreciate it if the Minister could detail that in his response because the implications for DIRT tax and the Exchequer revenue are quite enormous if we do not compensate in some way. Indeed, VAT harmonisation will cost this country a great deal if there is to be parity between ourselves and the rest of Europe, but particularly between ourselves and the UK, which would appear to be the more pertinent issue. If we also had to harmonise retention tax levels, what price does the Minister put on that? Borrowing is not an option, increasing taxes is not an option, increasing personal taxation is not an option. How does the Minister plan to compensate for the losses in these areas which would appear to be necessary if we are not to be put at a disadvantage in terms of investment or indeed VAT and excise disadvantage also in terms of the purchase of goods. I let my case rest there, a Leas-Chathaoirleach.

We will be supporting the Minister this afternoon. I thank him for his comprehensive introduction to Part II in this fairly technical area and for indicating to us the process of dismantling the controls, as he put it himself. I have major concern about the present situation regarding retention tax. As long as funds are free to be invested in any European country or, indeed, elsewhere, how will we compensate? The Minister has hinted there will be something in the Finance Bill. I await his response on that.

I am also concerned, as I indicated, about the effect that full liberalisation might have on interest rates here. If we had a very volatile situation and very free movement of funds into and out of the country without any time framing of that movement of money, what processes will be in place to ensure that we will not get to the crisis situation envisaged, apparently, in the Minister's speech when we can reintroduce emergency controls? Apart from that crisis management of the situation, I have no indication as to what controls can be put in place in this country if there is what we refer to as a run or an exodus of large sums of money such as we have seen in the past few months, and which has resulted in the suggestion in today's national daily papers that we are in for a 1 per cent increase in interest rates because of the outflow of funds. This is just a taste of what we might see in the future if we do not have in place a system of control to ensure that we are not vulnerable in this area.

Mr. O'Keeffe

Discussing this Bill about exchange control reminds me of the time when Castro came to power in Cuba and his Finance Minister absconded with a large sum of money. He was asked the question: "How did you get out with such a large amount of money?" to which he replied: "In a suitcase". I hope that with all the regulations and controls this will not happen here.

In discussing the Bill one would have to advert to Ireland's entry to the EMS and the UK's decision to opt out. For the first time, it made us subject to the volatility of the exchange rate vis-a-vis sterling. We countered that by introducing an amending Act in 1978 to extend coverage of the exchange control system to the UK. Since then the primary twin objectives have been to strengthen the balance of payments and the external reserves, increase the capital available for productive purposes within the State and reduce disruptive currency flows at times of exchange rate uncertainty. While the 1954 Act vested discretionary powers in the Minister for Finance, that is, permission by statutory instrument or administrative decision for individual transactions or ranges of transactions, the responsibility for administering the controls was delegated to the Central Bank itself. This primary responsibility still rests with them today.

The proposal for a single EC Market led to a further easing of controls in October 1987. This move was prompted by a Council of Ministers decision ordaining full freedom of capital movements within the Community and this was to be put in place in the case of Ireland by the end of 1992. The relaxation process commenced in 1988 when the resident investors as were given certain limited freedom to acquire foreign securities. The most important phase of liberalisation came in 1989 when all the remaining restrictions on residents' purchase of medium and long term foreign securities were removed. The result is that the only controls remaining are those pertaining to short-time capital movements.

In order to bring in this relaxation, the Government had to embark on a policy which would yield a stable economy and foster confidence in the economy, thereby encouraging foreign investors to place their capital investment here in Ireland. The Government's policy has been so successful since 1987 that at the end of October the official external reserves stood at £3.7 billion, the highest ever recorded for this country. So strong were our external reserves then that when the German interest rates were increased by half a percentage point, all the commentators expected that Irish interest rates would follow suit, yet they did not.

It must be admitted that since then — certainly since early November and at the moment it is not possible to estimate the exact amount — there has been a fairly significant outflow of funds. What is possible for us to tabulate are the reasons. The German interest rates have gone up again and the Deutsche Mark has strengthened considerably not alone against the Irish currency but also against all other EC currencies. The dollar also has weakened. While it is not possible to estimate whether there will be an increase in interest rates, it is safe to say that the reserves are at a very safe level and not under threat at this particular time.

It is also important to point out that day-to-day management of the financial market is the responsibility of the Central Bank. It decides to intervene in the market in the light of the circumstances that prevail at any particular time, such as conditions in other markets and full flows out of the country. We should remember that year in obligations require us to intervene only at the 2.25 per cent margin from the central rate. The Irish pound has remained well within that range and movement outside the so-called narrower bands, for technical reasons, has not happened.

It is also noteworthy to take our interest rates into account. We had three reductions last year. We had two half per cent increases this year. If we compare our interest rates with Britain, we are 2¾ per cent below the UK rate at the moment. If we compare ourselves with the Deutsche Mark, in 1987 we were something like 9 per cent higher than the German rate. Now we are down to a 2 per cent gap. That must be seen by everybody as being an extremely significant achievement.

Inevitably, the removal of exchange controls carries risks and also opportunities. At the end of 1992 Irish residents will be able to conduct financial transactions world-wide, the same as they would in Ireland, seeking the best return on their investment and the most competitive terms on any investments they make. At the same time it is fair to say there will be a sizeable increase in the volume of funds that can move quickly in and out of the country. Domestic interest rates, therefore, are likely to be much more volatile than we have been used to, and are likely to play a far greater role in regulating these flows and maintaining the exchange value of currency.

Therefore, the degree of confidence in the Irish economic prospects will be of paramount importance. It will be critical in attracting the overseas investment we so badly need and, at the same time, it will encourage domestic savers to invest at home. In other words, how the risks and opportunities arising from dismantling exchange controls balance out will depend on how we conduct our affairs. In the light of the Government's firm commitment to effective management of the economy, I am confident the benefits will continue to outweigh the risks.

It is against that background that I commend the Bill for approval of the House.

Mr. Ross

I would like to join with all parties in this House in giving a general welcome to this Bill. Exchange controls are a very difficult topic for discussion because, to a large extent, we are all shadow-boxing in the dark when we are discussing their effect or the effect of removing them. They are preventive medicine rather than a cure for some sort of disease from which we are already suffering.

The Government are right in taking a cautious view of lifting the exchange controls and making a gradualist approach to this problem. We have had great difficulties as a State in the imposition of exchange controls, particularly since 1977-79 when we had the break with sterling and entry into the EMS. I was familiar with the exchange control ruling at the time. After we entered the EMS, and broke with sterling, there was quite obviously a great ignorance of the effect this would have on the economy and the inflows and outflows of capital.

A very rigid exchange control mechanism was set up which restricted the movement of money out of this country to an excessive extent. It was indicative at the time that when we broke with sterling, whereas we imposed extremely strong, rigid rules against outflows of small amounts of capital from here, particularly against the sterling area, we expected the UK Government to impose the same restrictions against us. That did not happen because they did not have the same attitude to exchange controls as we had. They never imposed exchange controls against us. The reason for that was that their's was a more confident economy. They had more experience of the imposition of exchange control.

After 1979, the result of such stringent exchange control was that artificial markets built up in this country, particularly in the stock market, because there was such a build-up of money in the institutions and amongst individuals that they could not remove it from the country, and they had very few outlets into which to put it. That presented great difficulties for the financial institutions here. It presented difficulties for individuals with small sums of money to invest. As a result, it was very difficult to measure the relative values of the stock market here against the stock market in countries where exchange control was not imposed. It was difficult to measure the relative values of, say, the Irish bank shares against bank shares in the UK and in France, simply because we did not know at the time — and analysts in stockbroking firms and financial institutions did not know — how much money there was in these shares and in Government stocks, simply because it had no where else to go.

There was a feeling at the time that a large amount of money in the Irish market and in Irish investment was being put in at artificial prices because it could not be put anywhere except on deposit — buy Irish property or buy Irish shares.

I do not think this was justified, but it was certainly the current thinking. It was certainly something which was impossible to prove or disprove. It was a measure of the fact that this was not justified that when exchange controls were lifted, with small concessions to pension funds and to individual investors, there was no great rush of money out of the country. Investment advisers certainly told people to make use of their £5,000 limit at the time by spreading their portfolios. But there was no panic. There was no institutional rush of money out of the country to get into anything else except Irish paper.

The restrictions at the time are something that we learned from. They were far too draconian and unnecessary. When the restrictions were lifted in a more tangible way by the Minister for Finance in 1987, there really was a new development in the Irish economy, in that far from money leaving the country, money was coming into the country. I suppose it is one of the litmus tests for confidence in the economy of the country and for overseas investors' confidence in the economy of the country to see, when exchange controls are lifted, whether money goes out and how much money, if controls are not imposed by that country, is coming in from abroad.

It was indicative, and it is to the credit of this Government and the 1987-89 Government, of the confidence which overseas investors felt in the financial measures being taken that money was pouring into Irish Government paper between the years of 1987 and 1989. There is no doubt that the measures being taken by the Government then were responded to by a massive inflow of funds. The corollary of that is that when exchange control was lifted those who had money invested here still regarded it as a safe and sensible place in which to put their money. That remains the situation. It may not be quite as confidently placed in the economy here now as it was then but, by and large, because the economy and the public finances are in a better state, we can be more confident about lifting exchange control.

I would like to ask the Minister one or two specific points about the exchange control regulations which are extremely complex. I find difficult to understand the need for the continued existence of some of them. I see that the Minister intends to lift the restriction on residents in this country investing in foreign security of less than two years' duration. I have never quite understood why this was necessary in the first place. It seems to me anomalous and foolish that individuals can put money in a three year security but they cannot put it in a security which is redeemed within two years. I do not think there is any great demand from individuals to put massive sums in very short based securities. There is some demand. Maybe it is being limited to £10,000 by the Minister in order to test the demand. He is obviously putting a ceiling of, I think, £50 million in order to test the demand. I would like to know what the basis for this is and what the basis for not holding bank accounts overseas is, as well. It seems to be logical that money should be placed in short term securities overseas if they are going to be placed in medium-term securities overseas. I cannot see what the great distinction is.

In addition to this, I note that the Minister said that he intends to implement the DIRT tax on deposits in bank accounts in foreign banks. I do not know how he intends to implement that tax. I would be interested to know how he is going to implement it. I would have thought it would cause him great difficulty to implement DIRT tax on foreign bank accounts. I do not believe it is practical. A lot of the money going into those bank accounts will be "hot" money which is placed there already. I doubt if the Minister finds that this is a source of revenue for him at all. It is an optimistic assertion, but I would like to know actually how it is going to be implemented.

There are several other questions which I would like to ask the Minister, but I will leave them until later. I would like, on Second Stage, to say something about the Central Bank and the policing of exchange controls. It is not my intention in any way to question the integrity, the ability or the good intentions of the Central Bank. I note from the document I have here, the Central Bank's summary of exchange control notices, that it delegates the policing of these measures to various authorities. It seems to me that whereas in many cases, including the case of unit trusts, including this case and many other financial instruments, we have delegated this power to the Central Bank to police these areas, the Central Bank immediately — through no fault of its own — re-delegates them to somebody else. It seems that it is no coincidence — and the Minister can correct me on this — that there have been no prosecutions whatsoever under the Exchange Control Regulations since 1979.

Nobody wants to be alarmist about breaches of exchange control rules. I certainly do not want to be but it is inconceivable that there have not been several serious breaches which have not been detected. These breaches may not be intentional. In the early imposition of the rules in 1979 nobody knew what they were. Those to whom that authority was delegated by the Central Bank did not know what the rules were which they were meant to be imposing at the time. As a result of this, there was a certain amount of regulatory chaos in the financial markets as we settled down to get used to the new financial system and environment in which we were working. The symptom of the real difficulties we were working under was that nobody ever appears to have been reported to the Central Bank — and in many cases they do not have to be referred to the Central Bank — and no action appears to have been taken against offenders. The only conclusion I can draw from that is either that there were no offenders, which I do not believe, or that there is not the manpower to police these rules.

The Minister might ease some of the fears of some Members of this House and some members of the financial community in giving the House some reassurance that these rules and other similar rules will be policed better in the future. It is a difficulty we have with the Unit Trust Bill as well which is coming before us on Thursday. Whereas the Central Bank is given more power, it does not seem to have the will or the resources to exercise that power. Whereas it is delegated to the banks, financial institutions, authorised agents and authorised dealers in the cases of exchange control, it does not seem those delegates were able or willing to take the measures to enforce these very serious rules which the Minister is proposing to us today.

Professor Conroy

This is a very short Bill but it is a very important one. It deserves debate. Before making my own comments on it, this is the first time I have spoken since the new Clerk of the Seanad was appointed. I would like to take this opportunity of putting on the record my appreciation of the privilege we have in this House of such an outstanding person becoming Clerk of the Seanad, and of the courtesy and help she has given us all.

The Bill deals with capital and controls over the movement of capital. Capital is the symbol of wealth, just as the mineral resources are the basic source of wealth internationally. We see this in all sorts of different ways, whether it is in the Bill before us today, in which we are continuing a degree of control over the movement of capital in and out of this country, or whether we consider a book such as Marx's Das Kapital, for so many years was read in many countries throughout the world. We are looking at something very basic and very important. It may be a brief Bill — two sections — but you can say a lot in a very small space, and this Bill says a lot.

It says that this Act is going to continue for another two years control over a basic part of our economic foundation. It implies a lot by the fact that now at long last it has a time limit which is shorter than the routine extensions of four years. That also says an enormous amount about the economic development, the maturity and the ability of this country to compete which has developed over the past few years.

We also see that this Bill is continuing on the Exchange Control Act, 1954, a time when most of the population of this country were not born. Those years long ago were very much the days of exchange control. Governments were under the illusion that they could in some manner attempt to control this basic economic matter of capital simply by saying: We will pass regulations to control it".

Senator O'Keeffe referred in a jocose but also a serious manner to the difficulty in practice to sustain such controls. Even to this day in many parts of the world they are evaded. The damage which exchange controls have done during the years to the economies of countries must be enormous. They are always imposed with the best of intentions but usually they have the reverse effect. I am delighted to see that at long last, even though it will be two years into the future, we intend to abolish them completely. Over the past three years we have been quite rapidly dismantling them and not only have there been few, if any, negative effects but there have been a number of positive ones.

The general principle of attempting to control exchange is very attractive in that in some way or other we could control our capital and let other people come in and invest here, but not let our own citizens move their money and invest it elsewhere. If our small company were to adopt that attitude in overall terms, the tuppence-worth of capital we might export elsewhere would not be of the slightest relevance when what, in practice, we would be doing would be discouraging everyone else from investing in this country. We would discourage them from setting up enterprises and creating jobs in this country. That would be the ultimate effect. The short term effect would be very attractive but the long term effect could be disastrous to our economy and to the economies of countries that have attempted to maintain exchange controls.

For many years we had, effectively, a free currency between ourselves and the United Kingdom, and we succeeded very well. The circumstances were unusual, but we succeeded very well during that period. The United Kingdom, tried to maintain exchange controls as was the great fashion of the fifties. The socialist idea was that in some sense or other if you had controls on capital that prevented it from leaving the country and you could improve your economy and hold it in, but it never worked out that way. They had people who walked out with suitcases full of money and other more sophisticated electronic methods were used. People will not put money in if there is the slightest question in the mind of an outside person that in some manner or means his capital may not be retrievable. There is no way in which he or she will invest in that country or jurisdiction in such circumstances. If we are going to say to our own citizens: "You can only invest in Ireland" that is a very narrow and, ultimately, a self-defeating attitude. It is very attractive in some ways, but the ultimate effects are disastrous.

We are seeing some of those effects in eastern Europe today. We have read about it. Those of us who have visited there realise that their roubles and zlotys are worthless to the unfortunate citizens of those countries. They will give almost anything for any foreign currency at all.

The artificial control which they had over exchange control resulted in the ruination of their economy, their jobs, the competitive structure of their industry and that catastrophic effect is getting worse every year. In the short term exchange controls have a certain attractiveness. If you want to control your economy or, in the case of a very weak economy, it would be very attractive to say that we will maintain controls and not allow people to move capital from a weak or controlled economy but it does not work that way. Usually the capital leaves and the economy collapses, rapidly or slowly as the case may be, but inevitably it collapses.

It is hard to realise that less than 100 years ago Switzerland was regarded as the poor country of Europe. People made sneering jokes about the Swiss and the land of the cowbells and so on. Switzerland has continued to develp its economy. It took some very far-sighted and sensible decisions which at the time were revolutionary and totally outside the general fashionable attitude. One of them basically was that capital would move freely, that they would not have exchange control regulations. Today it is difficult to realise that this was the position. It is difficult to even consider that Switzerland would require exchange control regulations. If there is any country in the world into which people want to put money, it is probably Switzerland. Money can be moved more freely from there than from any other country in the world.

Of course, Switzerland is a very effective, economically competitive and prosperous country with one of the highest living standards in the world. But let us not think of it as just being a very unusual example, that a country like Switzerland has some magic, that it is situated in the centre of Europe and that is has a very sophisticated population. We can take a totally different example.

We tend to think of the poverty of Asia. God knows, it is bad enough there with people literally starving to death but there are a few examples where it is not so, where they have economies that are not only thriving but are highly competitive and that are attracting capital. One very obvious example is Hong Kong. Again, some 20 or 30 years ago it was almost a joke to say, "Made in Hong Kong" but it is very different today. Today the worry for that huge country, China, is whether in its takeover of Hong Kong, it can somehow manage to balance the benefits of a free economy, of an economy where perhaps the main feature is the absence of exchange controls. To this very day, even though it will be returned to China in 1997, people are still investing money in Hong Kong.

One can take very different examples. One saying that is consistent is that if you do not have exchange controls you have a hope of a prosperous economy, that it certainly does not hurt the economy. If you have exchange controls, usually there is no benefit to the economy and it may hurt it very severely. It is not an easy thing to do. There is a vicious circle. If the economy is weak, the temptation is to make exchange controls even more stringent, the economy gets weaker so you are more afraid to relax your controls.

One of the tremendous things that has occurred over the past two or three years is that at long last we have begun to get our economic basis and our financial controls right and to have some hope of competing. If we can continue that process, there is no reason Ireland should not be a very prosperous country, one of the few countries in western Europe where one could genuinely come close to full employment. It seems something one dare not even dream of today but if we could get our economy right, if we could be competitive, if we could be up there in the upper market niche, we would have a tremendous opportunity.

Short as this Bill is, it is a crucial and essential move in the direction of at least allowing the possibility of our economy developing and our young people having the sort of jobs which they are perfectly capable of carrying out and which they do in many economies throughout the world. However, they must have the chance to compete. This Bill today, abstruce though it may seem, brief though it may seem, technical though it may seem, it is an essential component of this move forward and I am delighted to welcome it today.

Mr. O'Toole

On the issue of the legislation we are dealing with today, it seems to be somewhat unnecesary that we have been listening to Government Ministers and to those who know the economic scene telling us about the need to prepare for 1992. It appears unnecessary to have a further two years of exchange controls. I do not see any reason given in the Minister's speech for not moving straight into the position where we hope to be in 1992. The reality is that in many ways we have been sold a pup on the whole question of exchange controls, the need to have controls over capital movement and so on.

There are three or four different perspectives here. The reality is that if one walks into a bank tomorrow morning to open a bank account, despite the fact that one might have a broad Kerry, Donegal or Sligo accent, the first thing one will be asked is if one is a resident or non-resident. To me that is answer enough to the way this legislation, the laws governing finances and the movement of capital from one country to another in the Community are being flouted. We do not have any control and we ceased a long time ago to have control over the outflow or movement of capital from this country to any other country in the Community. We appear to have control but it has never really affected those people who wanted, for whatever reason, to move money in or out of the country.

It might also be worthwhile bringing to the Minister's attention that some of the banks in Ireland at the moment are providing special deals for non-residents — when I say non-residents I mean people who live outside the jurisdiction with large buckets of loose money which they need to place in one way or another. Many banks are now preparing special deals for some of those people. I also understand — and I ask the Minister to respond to this — that in many cases non-residents who lodge money in non-resident accounts in the Republic, in the event of the account holder becoming deceased, the money can be paid straight back into the estate of the main beneficiary without going through the normal probate arrangements. What is the precise position on that?

I have always held the view that the same law should apply to all aspects of the Community. Is it the position now that a non-resident, because he or she happens to live along the Border — and that is precisely the issue I am dealing with at the moment — can open a non-resident's account in the State and in the event of the death of the account holder that money is paid directly into the estate of the main beneficiary of the non-resident account holder, without going through any of the Irish probate laws? How is that controlled? Who controls that? When is it controlled? Which jurisdiction controls that kind of an arrangement? I do not understand how it can operate and it seems to go against all we understand.

The main question to be raised from this legislation is that the Treaty of Rome is now a number of years old and the first issue the Treaty of Rome dealt with was the free movement of capital. People might wonder why I am raising the need for the free movement of capital. I raise it because in the trade union movement we have been misled down through the years about all the different things that affect the movement of capital, interest rates and inflation. The reality is that as and from 1992 only one issue will affect our interest rates and that will be the movement of capital.

We have the outflow of capital from the reserves at the moment and if that continues it will eventually affect the interest rates. Nothing else will affect them. We have seen an economic equation in which the variables have been held constant and after all we heard ten years ago about the need to get our inflation rate down to controllable levels, we have now the lowest inflation rate in Europe. Nevertheless, our interest rate will be determined, not by our inflation rate at the moment, but simply by the movement of capital within and between the states in the European Community and the sooner we get into that position the better.

Let us call a spade a spade, know exactly where we are going and attempt to control it at that point. In doing that we will be in a position of strength because I believe the Irish economy has come round, not least because of the major investment made by the social partners in the Government policy over the last three years, and we are now in a position where we can reap the benefits. We do not need this kind of protection which, at the end of the day, is not in anybody's best interests.

Are the Government afraid to deal with this issue? Why do they need two more years of exchange controls? As Senator Conroy said, if the Hong Kong experience is such a good one and if they have free movement why can we not do the same? I have not heard an explanation of the need for this legislation. Government Ministers are going around the country telling us of the need to be prepared for 1992. Is it not a fact that this legislation is contrary to what we are trying to achieve in 1992? It slows down the operation; 1992 is not the time when things will happen.

The Minister for Finance, speaking in this House less than a year ago made it very clear that we are talking of changes that will take place before 1992 or changes which will have taken place by 1992 but the thrust is changing. The thrust in this legislation is that we should hold everything until 1992 and then make the changes. That was not what we had in mind when we discussed the Cecchini report and the other reports on a new and full market. We did not have those things in mind. We believed we would make the changes in the meantime.

This is a Bill for those with millions. This is legislation to look after the wealthy. I do not see anything in it for the poor of the country, long term, short term or medium term. The sooner we get involved economically to the full extent in the European Community the better off our people will be. I have asked time and again that we make very definite connections and relationships with other aspects of the European Community. The Belgian economy is a very small one, somewhat like our own. Two years ago the Belgian Government decided they would align their exchange mechanism and exchange changes with the Deutsche Mark and I believe we should do something similiar. Why do we not tie ourselves into the strong currencies? Why do we not tie ourselves into the major movements and the major influencing currencies in the world? That is open to us at this stage and we should do it.

The Minister for Finance is telling us, in different words, that we are moving towards a European central bank. I do not know how that will operate. I do not understand how a European central bank will work in terms of the requirement that national government would have certain inputs and influences over what happens to the currency. Nevertheless, in the past week an Inter-governmental Committee was set up to work at precisely achieving that. However, is it not fair to say that this Bill is working precisely in the opposite direction to the proposal the Taoiseach outlined following the meeting in Rome at the weekend. That is my reading of it. I cannot understand it any other way.

It appears we are running scared from this issue. We need to loosen things, not to tighten things. We have now got a strong economy, small but strong. We have an economy that will have to take its place in the Europe of 1992 and we are better off doing so now than waiting until everything is in place in two or three years' time. This Bill is regressive. Normally these arrangements are put into place for four years but this time the Minister is asking that it be for two years. Why do it for two years? Why not just take away the legislation or do it for a year or six months? Why do it right up until 1992? The Minister is creating another "Big Bang" situation where everything changes in 1992. Let us get in there before the others. Let us anticipate events before they happen.

We should think again about the need to have such strict controls in place over the next two years when the trend is towards the breaking down of all controls, in every other aspect. The Minister will be talking next month about the need to bring our VAT arrangements into line with the rest of Europe. He mentioned the need to have the deposit interest retention tax brought into line and changed, amended and modified. I completely agree with this. These are the kind of measures we would prefer to hear from the Minister today. There will be enough change in 1992.

Time and again we have heard about the changes that must take place before 1992. This is a reversal of Government policy because what the Minister is doing here is ensuring that there will not be any changes before 1992. In fact, he is saying that we should put everything on hold until then and let us all fall into the milieu of European currency exchange controls and capital movement at that time over which there will be no control. Why drop all our defences at that time? Why not move towards it between now and then? I fail to see the need for this legislation at this time.

Mr. Mooney

It had not been my intention to comment on some of the points that Senator O'Toole had made but as he is a distinguished Member of the House and as a University Senator his comments will probably reach the media quicker than mine——

Mr. O'Toole

Some of us do not have our own media.

Mr. Mooney

——and despite his background as a teacher his words will no doubt find their way into the quality newspapers. They may have a detrimental effect on those who read them and they may interpret what he said as being received wisdom from on-high. I do not mean in any way to be churlish or petty about his comments but I could not help but pick up one or two little pearls of wisdom. For example, Senator O'Toole said there was nothing in this legislation for the poor. He then went on to berate the Government for not moving towards the completion of the internal market faster and creating a better economic climate. I would have thought that much of this legislation is about creating a better economic climate and that ultimately it would help the poor, at least that would be my interpretation of it. I could not help but think that perhaps there were people like Senator O'Toole many years ago in Japan, Malaysia and Hong Kong and, even as Senator Conroy said earlier, in Switzerland, who were prophets of doom and who berated their Governments for introducing legislation of a financial nature on the grounds that it would not help the poor.

Mr. O'Toole

On a point of order, would it be fair to say that the Senator has not a speech prepared and all that he has to do is criticise what I have said?

Acting Chairman (Mr. Farrell)

No interruptions, please.

Mr. Mooney

I am delighted that Senator O'Toole has risen to debate. It is not often he does. I will surprise the Senator. I actually had something of greater substance prepared but I felt that in the circumstances as it is much more likely that your comments will find their way into the media than mine, what he said was a slight distortion of the truth and I felt that the record should be corrected.

I also think it important that I should address your comments about overseas accounts or about non-resident accounts——

Mr. O'Toole

It certainly is a point of order that the Senator should speak through the Chair.

Acting Chairman

Senator Mooney, without interruption.

Mr. Mooney

I am glad we have injected a lively note into this otherwise quiet debate.

Mr. O'Toole

Are you both from the same constituency and the same county?

Mr. Mooney

I will address the comments about non-resident accounts. Great strides have been made by the financial institutions here to attract non-resident accounts into this country and so benefit the economy as a whole. As someone who lived outside this country for several years and who did not have a non-resident account but who is familiar with many people who have such accounts. I would have to advise caution in the area of suggesting that there should be any proposal regarding further controls in this area. For example, one of the questions raised by Senator O'Toole was according to his information why on the death of the holder of a non-resident account the money in their account would go back to the estate without the normal probate process.

Mr. O'Toole

I never said that.

Mr. Mooney

At least that was my interpretation of what he said but I will bow to the Senator's comments. It was certainly my interpretation that he was questioning the money going back to the estate. All I wanted to say on that point was that if any suggestion emanated from this Chamber and found its way to the UK, where much of the non-resident money lodged in this country comes from, those people would run scared and pull their money out. It has always been a problem wherever questions of mobility of finance is concerned, that the people who have the finance usually like to have reasonably cast iron guarantees about their money going into accounts, particularly overseas accounts. While I would like to think that most former Irish residents would have an altruistic approach to putting their money into Irish banking circles, the sad reality is that they go wherever the highest interest rates are, wherever the money is guaranteed, wherever the confidentiality is guaranteed and, importantly, wherever the withdrawal process is simple and straightforward. It is important that I should make those points and if I misunderstood the Senator I am certainly not being malicious or mischievous.

I am concerned about one or two aspects of this legislation. For example in relation to the definition of "short term securities", I understand that under the proposed regulations potential investors may not be permitted to invest their money in futures funds, particularly those carrying promissory notes. I am referring to an increasing number of such funds which are high risk but in order to attract nervous investors, 60 per cent or thereabouts of the principal is invested under a promissory note guaranteeing the original sum invested. Those funds have a lifespan of approximately five to seven years, at the end of which the original investor will most certainly have their original sum invested returned to them but due to the nature of those funds they are high risk and extremely speculative. Of course, over a period of five to seven years, taking inflation into account, even though they do get a guarantee of the return of their principal, in real terms their money value has reduced considerably.

I understand that under the proposed Bill such funds are being referred to as "short term securities" when plainly they are far from that and have attached to them a high element of risk and speculation. In that context I suggest to the Minister that since the original 1954 Act, and even the more recent Act of 1978 were passed, the financial markets have changed drastically. The futures markets are now the norm or certainly are increasingly seen as the outlet for most investors' funds. They will increasingly be the method used by investors as the decade continues and into the next century. Consequently, I would be grateful if the Minister would address himself to this seeming anomaly in the legislation and recognise the futures fund as a short term security. It seems from the information available to me that there is some confusion in this legislation and with the changes as I have outlined regarding futures funds, the legislation does not clarify the matter and the term "fund" is not actually used in the original legislation.

I am aware that the Minister will permit investors to acquire futures and options on foreign securities for hedging purposes but the information available to me suggests that brokers are experiencing difficulties with the Central Bank in allowing investment on futures funds for hedging purposes as well. This is an area which, in the context of the proposed legislation, the Minister might examine. It seems it is causing some difficulties with the financial houses here. I am not a financial expert but it was explained to me that if one, for example, were to purchase dollars for futures purposes and that the dollar, as it has been for some time, was rather volatile and therefore the value of the investment would be extremely volatile, depending on the ups and downs of the dollar, under this legislation one will be allowed, to use the financial term, "go long or short on the dollar". However, one would not be allowed to take one's money out of dollars and put it into another futures funds for hedging purposes. That is a rather technical matter but this Bill is of a technical nature. That certainly has a bearing on the motivation of potential investors and brokers would be anxious if, for example, the terminology was to be clarified and the question of funds would be treated as short term securities.

I would also like to take this opportunity to encourage the Minister in his efforts to increase the trading capacity of the Financial Services Centre. One positive initiative would be expeditious setting up of more managed futures funds.

The Financial Services Centre has been moving along in a very encouraging manner since it was first mooted. It is always a pleasure to note, as someone coming up from the country and passing that location twice a week, that practically every week there is some additional building there. Those buildings house important financial institutions and we hear ongoing announcements from the Department of Finance, through the Minister for Finance, of yet further acquisitions and further locations in the financial centre. All of this is to be encouraged and, indeed, this debate is an opportunity for me to single out the Department of Finance, the Minister for Finance and all of the Ministers there who, along with the Taoiseach, took this initiative some years ago. It is obviously now beginning to bear fruit.

In the context of the ongoing development of the Financial Services Centre, Ireland is the ideal and preferred location by many international futures traders. However, some foot-dragging, permitting the expansion of several important managed futures funds has resulted in fund managers looking to other locations, particularly the Channel Islands, the Isle of Man and, more recently Luxembourg. I am sure the Minister is aware that Luxembourg is seen as being in direct competition with this country in attracting more managed funds and especially managed future funds.

I am not suggesting in any way that the alleged foot-dragging is in any way malicious or mischievous. Perhaps within the overall scheme of things, the general development of the Financial Services Centres and the speed at which many of the innovations have been executed, the question of the managed futures funds has been put on the back burner. I am attempting here to articulate the views of people in financial services in this city towards expediting the setting up of those particular funds. I would like to impress upon the Minister the need for urgency in this area. With the speedy and orderly development of several managed futures funds, the resultant increased financial activity will generate hundreds of new jobs and facilitate the setting up of an international futures trading exchange which would most definitely put Dublin and Ireland on the international financial services map. Here, again, is another response to my distinguished colleague Senator O'Toole. I am not sure whether he would class people working in the Financial Services Centre as being poor but certainly if there——

Mr. O'Toole

Those working on the building certainly are poor.

Mr. Mooney

——is a valuable, ongoing and expansive outlet for talented young people who wish to spend their careers in financial services without having to leave this country, as many of them have done over the last decade and have found fame, fortune and glory in the London Financial Services Centre and elsewhere, then I welcome any development which would encourage them and create more jobs in the Financial Services Centre. It is in that context that I make the point that the expeditious establishment of more managed funds in the Financial Services Centre, with the relaxation proposals in this legislation, would result, ultimately, in more jobs in that part of Dublin and, of course, would benefit the economy generally.

In general terms, like my colleagues on all sides of the House, I welcome this latest easing of exchange control regulations. I do not believe that it would be in the best interest of this country that exchange controls should be totally liberalised at present. The Government have chosen a wise and prudent road towards the ultimate easing of the remaining exchange control regulations. Certainly, like many Members on both sides of the House — indeed Senator Doyle in her initial address referred to the possibility of an increase in interest rates — I believe that speculations of the type which we have seen in the last couple of days, and especially today, in relation to a proposed hike in interest rates by the Central Bank, are not helpful. It is not at all helpful that we should be subjected to this type of speculation in unpublished figures.

My understanding is that the Government operate on the most recent Central Bank figures for external reserves, which were published at the end of October when the reserves stood at £3.7 billion. The speculative nature of new accounts which indicate that the external reserves have now been reduced as a result of the outflow of funds in the last six to eight weeks, will necessitate an interest rate hike, which is not helpful. Certainly in the week before Christmas I would urge the Minister — I do not think he needs urging — to dampen down this speculation in the interest of our image abroad. More importantly, the knock-on effect of any interest rate hike by the Central Bank would be an increase in mortgage rates. Considering the downward spiral of mortgage and interest rates in the last 12 months it would certainly take away Santa Claus's big day if we were to be faced with the possibility of a mortgage increase in the days leading up to Christmas.

Overall, I welcome the thrust and the content of the Bill and I look forward to seeing the Minister introduce further Bills of this nature between now and 1992 to bring us into line with the hopeful expansion and completion of the internal market.

Acting Chairman

I call on the Minister to conclude.

Minister of State at the Department of Finance (Mr. Daly)

I would like to express my thanks to the Senators who have spoken for their constructive contribution to the debate on this Bill. The Bill, as has been pointed out by a number of speakers, is essentially a technical one but it does provoke thought about the wide setting in which it is embedded, namely, the Single European Community Market and the EMU. Certainly it was very gratifying to note that the Senators saw the Bill in this context and that they showed such a keen appreciation of the major issues involved in this legislation.

I will endeavour in the time at my disposal, to deal with some of the points raised. May I refer to Senator O'Toole and say that while we have 1992 and the legislation, we would be anxious to proceed as speedily as possible within that time frame——

Mr. O'Toole

I am going to help you with an amendment.

Mr. Daly

I do not feel an amendment is really necessary. A number of speakers dealt at length with the question of interest rates. The level of interest rates is, of course, primarily a matter for the Central Bank in their efforts to maintain a firm exchange rate policy within the European Monetary System. It is the bank's principal concern, and it will seek to keep the level of interest rates as low as possible, consistent with that aim. In the day-to-day management of interest rates the bank must take into account a number of factors, including the level of official external reserves, currency movements and credit growth. In the final analysis, however, interest rates are determined by the market and the Central Bank cannot hold rates at any particular level against the established market trends.

Recent events in regard to European interest rates have put pressure on Irish interest rates. For example, key German, Belgian and Dutch money market interest rates have all increased by about one percentage point or more, since the end of October. As a result, the Dublin bank rates have increased sharply in recent days. The Government do, of course, play an important role in relation to interest rates. That role is to provide sound and effective management of the economy and of public finances. In so doing, they will foster the confidence necessary to support the strong exchange rate policy which will continue to attract overseas investment and persuade domestic savers to invest at home.

A continuing adequate level of investment here is, of course, vital to the maintenance of low interest rates. The measure of the success of the kind of policies being implemented is the performance of Irish market rates since 1987 relative to those in other countries. It may be important to indicate these. In March 1987 — to take the key three-month rate as the example — Irish interest rates were about 9 per cent higher than the corresponding German rate. This differential has been reduced to less than 2 per cent.

Mr. O'Toole

What effect does it have?

Mr. Daly

The corresponding differential between Irish and UK rates has also improved by about six percentage points, with the result that Irish rates are now considerably lower than UK ones. Of course, as you know, it will put us in a much better competitive position to deal——

Mr. O'Toole

Not at all; money is running out of the country. How can that put us in a better position?

Acting Chairman

Senator, allow the Minister to continue without interruption, please.

Mr. Daly

I am referring to the specific impact which the liberalisation of exchange controls has had and will have on the external reserves and, hence, on interest rates. The removal of restrictions on foreign security investments in 1989 undoubtedly led to outflows as investors moved to restructure their portfolios. However, there was a welcome reversal of this trend this year when the easing of controls on non-resident deposits with Irish financial institutions led to very substantial inflows. We cannot say to what extent these movements of capital contributed to interest rate increases in 1989 or, indeed, to reductions in 1990, since it is impossible to divorce their effects from other factors, both international and domestic, which affect the level of reserves. There was, for example, a strong trend towards higher interest rates in Europe generally in 1989. The Irish interest rates were influenced by this.

What we can say is that, since the major relaxation of exchange controls on 1 January 1989, differentials between Irish interest rates and rates in some low interest rate EMS countries have fallen. For example, Irish three-month interbank rates during this period have fallen, relative to corresponding rates in Germany and the Netherlands, by about 1.25 and 1 per cent respectively. In the same way, it is impossible to quantify the effects which the complete removal of exchange controls will have on interest rates in the future.

However, as I pointed out in my opening remarks, the new situation will undoubtedly increase still further the potential for capital to flow into and out of the country. In so doing, it will impose new disciplines on our management of the economy. These are disciplines which we certainly do not wish to shirk from or will not shirk from.

Senator Ross wondered why we have allowed our residents to invest in longer term foreign securities, for example, in shares and bonds while not permitting them free access to short term securities or allowing them to place bank deposits abroad. You will appreciate that these short term capital movements have greater potential for allowing speculation against a currency particularly when the exchange rate may be under pressure.

Senator Doyle referred to the time frames and sought confirmation that in the post-1992 situation the distinction between time frames for particular capital movements will disappear. I can confirm that. The point I want to make is that, when controls have been fully dismantled by the end of 1992, freedom of capital movement will apply to all investments, irrespective of maturity. We have dealt first with the shorter-term ones and we will deal with this on a step-by-step basis.

Mrs. Doyle

You imposed a new five year limit in your Bill. Why bother for three years?

Mr. Daly

Dismantling will be on a phase-by-phase basis, dealing with the ones which are easier to deal with, initially, and then coming to those that create the greatest problems for us. Senator Ross and others mentioned DIRT tax and personal foreign currency accounts. The present DIRT tax applies to all Irish currency accounts held by Irish residents, whether by companies or individuals. Foreign currency accounts can only be held by non-residents of Irish resident companies which are operating for trade purposes only and DIRT does not apply in either case. Under the next phase of the abolition of exchange controls, Irish resident individuals who at present cannot open foreign currency accounts will be permitted to open foreign currency accounts with Irish institutions, subject to certain conditions.

No change is proposed at this point in the ability of Irish companies to operate foreign currency accounts. They will still be confined to accounts for trade purposes since interest on foreign currency accounts is not subject to DIRT tax. Permitting resident Irish individuals to open foreign currency accounts with Irish institutions could, under present legislation, lead to tax evasion. In order to prevent such evasion, interest on personal foreign currency accounts must be made subject to DIRT tax and provisions for the application of DIRT tax will be made in the 1991 Finance Bill. Permission for the opening of new accounts will not be introduced until after enactment of the Bill which is expected to take place at the end of May.

Foreign curency accounts held by non-residents or by Irish companies for trade purposes will remain free of DIRT tax. Application of DIRT tax to the new personal foreign currency accounts will not change the position in regard to these accounts.

Senator Ross and others referred to the policing of exchange controls by the Central Bank. They seem to be suggesting that additional resources are necessary in this regard. Senator Ross also referred to the reliance by the Central Bank on authorised dealers, approved agents and others to implement the controls. The 1954 Act provided for the delegation of powers by the Minister and, in turn, for the Minister to authorise the delegation of powers under the Act to other persons. The provision was necessary to enable normal day-to-day transactions to be undertaken. Indeed the Exchange Control Regulations, 1959, gave general exemptions from the requirement for virtually every foreign exchange transaction to be referred in advance to the Minister for Finance, a draconian method of doing business.

In the powers delegated to the Central Bank in 1965 the Minister authorised the bank to delegate powers in consultation with the Minister, to bankers, etc., and I am sure the Senator would not wish to see a return to the situation where each and every transaction would be referred in advance to the Central Bank. I do not think that that would be the Senator's intention.

With regard to resources, it is beyond question that exchange controls are being phased out. In February of this year the Minister announced a series of administrative changes to reduce the bureaucracy and it resulted in a reduction in the number of exchange control forms from 17 to five. The consequent reduction in correspondence regarding exchange controls with which the Central Bank has to deal, has enabled the bank to apply staff resources towards monitoring the important aspects of the remaining controls and towards carrying out the various additional and very important functions allotted to it by the Oireachtas under the Central Banks Act, 1989, the Building Societies Act, 1989 and the Undertakings for Collective Investment Regulations, 1989.

Senator Doyle referred to safeguard measures which would be available in the future. These will permit us to reintroduce certain exchange controls for temporary periods, in the event of, for instance, a severe balance of payments crisis, or short term capital outflows which necessitated action and which were imposing strains on the efficient operation of the exchange rate policy generally. In this kind of situation it would be envisaged that temporary controls would be put in place. While the directive indicates that the approval of the European Commission at the Council of Ministers will be necessary for such measures, this cannot necessarily be secured in retrospect. If we need to take action as a matter of urgency, we would of course ensure that the measures will not become——

Mrs. Doyle

Who will determine the urgency — the European Central Bank or the national Central Bank?

Mr. Daly

I think the Government would determine the urgency. I am confident anyway that if we can continue the same effective management of the economy, we shall continue to maintain the progressive developments we have seen in this economy over the past few years and this would not then be necessary.

I have covered most of the points that have been raised. I would like to thank the Senators for the very constructive comments made here this afternoon on what is a very detailed and technical measure which raised many issues we had to deal with in the time at our disposal.

Question put and agreed to.

Agreed to take remaining Stages today.