Vol. 393 No. 8
asked the Minister for Finance if he will make a statement on the amount of capital outflows from Ireland which have taken place for each accounting period in 1989 for which figures are available; the extent to which the external reserves have been depleted as a result, comparing these figures with the comparable figures for 1988; the implications of these figures for interest rates and inflation; and the action, if any, he proposes to take in the matter.
17.
(Limerick East) asked the Minister for Finance if his attention has been drawn to the strong capital outflows from the country and the upward pressures which this is putting on interest rates; and if he will make a statement on the matter.
I propose to take Questions Nos. 14 and 17 together.
The most recent information on balance of payments flows published by the Central Statistics Office relates to the first quarter of 1989.
In contrast to an increase of £254 million in the first quarter of 1988 the reserves fell by £425 million during the first quarter of 1989. This was due mainly to a reduction of £448 million in official foreign borrowing, due mostly to debt repayments by the intervention agency in line with reductions in the value of its stocks, and to an estimated portfolio adjustment of £236 million following the relaxation of exchange controls with effect from 1 January last. As both these developments were well anticipated and as the end-1988 reserves were at a comfortable level, the fall in the reserves during the first quarter of 1989 did not impact significantly on either interest rates or inflation.
The Central Bank have published figures for the official external reserves up to the end of the third quarter. These show that while the reserves fell by £238 million during the second quarter, they increased by £389 million during the third quarter. At 30 September 1989 they stood at £2,887 million. This was a satisfactory rate of recovery. The official external reserves peaked in June 1988 at £3.5 billion and fell back to £3.3 billion at end-September and £3.2 billion at end-December 1988 as the Exchequer repaid foreign currency debt.
The Central Bank are due to publish the end-October 1989 figure for the official external reserves shortly. The weakness of sterling has given rise to some additional demand for foreign exchange. However, the official external reserves remain at an adequate level and the bulk of this additional demand should be reversed once sterling settles down. Additional demand for foreign exchange exerts upward pressure on interest rates and it is a matter for judgment by the Central Bank, which is primarily responsible for the level of interest rates, to decide the appropriate response.
So far this year there have been three one percentage point increases in domestic interest rates, largely to maintain differentials with rates in other EMS countries. Notwithstanding these interest rate increases the differential between key Irish and UK interest rates has improved by up to 6½ percentage points since 31 March 1987 and the corresponding differential with German rates has improved by 5¾ percentage points.
This is a dramatic improvement in our competitive position arising directly from good economic management. In the medium to long term both the fall in the value of sterling and the higher level of interest rates will put downward pressure on inflation. This Government intend to continue to improve the underlying economy and this will ensure that we will be in a position to take advantage of favourable developments in the international interest rate environment.
I should like to thank the Minister for his detailed reply. Will the Minister agree that during the last month or two the fall in the value of sterling has given rise to an increasing and continued drain on Ireland's foreign currency reserves? Will the Minister agree that that is likely to increase as time goes on if the position of sterling remains the same? Is it the Minister's intention to allow free market forces to operate here, to allow this increase on interest rates to continue in the country with the consequences that will have on inflation and unemployment?
What the Deputy has said in relation to upward pressure for more foreign exchange in relation to the weakness of sterling is true and that is caused by exporters, and importers, buying forward to protect their position. That is a temporary phenomenon in that that money would go out anyway over a period of time rather than in the short period of one to two weeks. The Central Bank, with prime responsibility for the protection of our currency, will make the appropriate response if an occasion arises for a response from them.
(Limerick East): Arising out of the Minister's reply to my Question No. 17, I should like to point out that the Taoiseach yesterday expressed the view that interest rates would come down in the short term. Does the Minister agree with that? Could the Minister inform the House what domestic or international conditions would give rise to this decrease in interest rates?
I do not think the Deputy is quoting the Taoiseach correctly. What the Taoiseach said — and I am sure the Deputy is aware of it — is that there is downward pressure on interest rates in the United States. That trend may well take place in Germany as this is possibly expected in the early part of next year and certainly towards the mid term of next year.
I wish to ask two brief questions. First, is the Minister at all concerned that the foreign currency reserves have dropped from their peak of £3,500 million to £2,887 million? Second, so far as the 1989 outflows are concerned, can the Minister say how much of that figure is attributable to the so-called black hole repatriation of profits by multinational corporations?
The black hole is no more, is that not right? Fianna Fáil are back in power.
Of course.
Deputy Carey ought not to intervene in priority questions as the supplementaries are confined.
As I have already explained in my reply, the reserves peaked in June 1988 and fell during the second half of the year when £512 million of foreign currency debt was repaid by the Exchequer. The fall in reserves during the first quarter of this year were a portfolio of adjustment of £236 million, following the relaxation of exchange controls with effect from 1 January last and a reduction in official foreign borrowing due mainly to repayments of £300 million by the intervention agency in the reduction of the value of the stocks. The Central Bank, which is the appropriate authority in this regard, considers the level of our reserves adequate and they represent 2.9 months of imports.
How much has gone out by-way of the black hole?
I do not have that information available at present but it will be published later on in the year and when it becomes available I will be only too delighted to send it to the Deputy.
(Limerick East): Is the Minister satisfied that there is sufficient information available from the Central Statistics Office to explain the black hole, which has emerged in the first quarter of this year and is likely to emerge in the last quarter, due to the continuing capital outflows? Has the Minister looked at the procedures in the Central Statistics Office to ensure that he has the information on which to base policy, because I do not think he has?
The Deputy should know all about that.
We are constantly trying to update procedures to get more information from both the Central Statistics Office and the Central Bank and the position with regard to outflows is being constantly monitored. The Central Bank carried out a survey very recently, but were not satisfied with certain aspects of it, and they are trying to get more information.
Fiddling around with the figures.
I now call Question No. 15. We will seek to dispose of the remaining priority questions.
