As Deputies will be aware, the Supplementary Estimate which has been moved by the Minister for Finance and which I am now following up on this morning arises from the Government's decision to immediately establish a market development fund of £50 million for the period up to the end of March 1993 to assist firms which have been seriously affected by the recent turmoil in exchange rates within the exchange rate mechanism.
The recent currency crisis was not precipitated by the Irish Government. For several years we have pursued a consistent line in regard to our exchange rate policy. We have sought to maintain a firm and stable exchange rate within the narrow band of the EMS. We have lent credibility to this approach by adopting a set of economic policies which are consistent with membership of a strong currency regime.
This approach has paid dividends. From 1987 wage and price inflation reduced sharply to facilitate the achievement of significant gains in the competitiveness of the traded sector of the economy. This improvement in competitiveness coincided with reasonably favourable increases in import demand from our main trading partners, particularly the UK, as economic growth achieved a modest acceleration. This gave a major boost to exports to sustain a record surplus on our balance of trade and balance of payments in recent years. I realise I am repeating what is known to the House, but it is important to sketch the economic context and background to this morning's debate.
Inflation was brought down to the less than 3 per cent annual rate that prevails at present. Interest rates, which soared almost ten percentage points above the German rates in the mid 1980s, fell to less than one percentage point above those rates just before the recent currency crisis. The Exchequer borrowing requirement has been reduced from 13 per cent of GNP in 1986 to the 2 per cent rate now prevailing. Government debt as a percentage of GNP has come down by about a quarter over the last four to five years. Significant progress in the reform of our taxation system has also been achieved, especially over the past three years, thereby engendering investor confidence and a growth in numbers in nonagricultural employment.
Ireland's, capability to sustain a stable position within the ERM has been recognised consistently by our Community partners. The recent tensions within the European Monetary System have led, through, to speculative attacks on the EMS currencies on a scale not previously contemplated. The withdrawal of sterling and the lira from the exchange rate mechanism of the EMS and the devaluation of the peseta has created further fears in the market that the EMS might break up, thereby fuelling further speculation against the Irish pound as well as other EMS currencies.
There are many good reasons why it is important that Ireland remain part of a hard currency regime within the ERM. In the time available I will refer to a number which are important from an industrial development point of view. First, the obvious reason. Firm currency policies in recent years have contributed to competitiveness and allowed our trade with the rest of Europe to increase dramatically. Certainty and the assurance of stability contribute to trade growth. Uncertainty and the risk of fluctuation undermine trade and serve to inhibit firms from undertaking costly and potentially high risk marketing initiatives in new markets.
Secondly, nearly £8.9 billion of our national debt is denominated in currencies other than sterling; accordingly, a devaluation of our currency would increase the cost of servicing our national debt by almost £1 billion per year if the Irish pound devalues to the extent of the recent devaluation of sterling. This would considerably constrain the Government's objective of achieving a continuation of the tax reforms initiated in recent years, which aim to encourage enterprise and employment creation.
Thirdly, a devaluation of the Irish pound now would lead to similar expectations at times of future currency instability and would very definitely drive away future investment. It would add a higher risk premium to interest rates in future and would discourage industry from taking the actions required to expand in future years.
Fourthly, our membership of the ERM and adherence to its disciplines has facilitated a significant improvement in the state of our national finances. It has contributed greatly to the improved rate of employment. While recognising that much more must be done to sustain and increase employment, we cannot jettison recent progress by now going for a devaluation option.
The degree of dependence of Irish industry on the UK market in particular as a location for overseas sales, has greatly exacerbated the difficulties faced by manufacturers here. Since we joined the European Community, our reliance on the UK market has almost halved, from 61 per cent of total exports in 1972 to 32 per cent last year. However, even though we have achieved that remarkable progress, one can only shudder at the thought of what would have happened had progress not been achieved in the diminution of dependency on the UK market, but it still remains a dominant market for us.
An Bord Tráchtála calculate that in 1991 indigenous industry exported some 43 per cent of its output to the UK market. It is therefore not surprising that the dramatic fall in the value of sterling in recent weeks and days caused immense difficulties for a wide range of industrial firms.
In response to the growing crisis facing many industrial firms, the Government established a working group representing the main Departments of State and State-sponsored bodies to look at the nature and extent of the problems arising for firms and to make recommendations.
The working group drew strongly on the information available from representative bodies of exporters, industry and trade unions, as well as many individual firms, in evaluating the extent and nature of the problems.
I should like to pay tribute to the representatives of industry, trade promotions groups, individual firms and trade unions for the open way they conducted their business and their lobbying with me, the Minister for Industry and Commerce, the Minister for Finance and the Government. There was a realisation that something had to be done and a clear recognition that the Government meant to do something. There was a common point of view and it was possible, therefore, to work out the plan.
On the basis of the information available to them the working group concluded that the devaluation of a number of EC currencies, in particular sterling, has caused significant potential problems for some firms notably in the UK market where the cash receivables in Irish punt terms have fallen by over 10 per cent; on the domestic market where there is high import penetration from UK firms and in certain third markets which take a high proportion of exports and in which there is serious price competition from UK firms.
The firms under greatest pressure have some or all of the following main characteristics: a high level of dependence on markets where the forces of competition have changed radically because of recent currency instability; existing low margins; high gearing; a high level of debtor exposure and little or no forward cover. Some have all those components, some have one or two but they all share those common characteristics. The Government accept that the short term impact of the currency crisis holds very serious consequences for a large number of Irish trading firms because of its suddenness, intensity and the size of devaluation which has occurred. They also recognise that the first responsibility for responding to the consequential and fundamental change in the market place rests with each individual firm affected and that the essential role of Government is to support firms in doing this.
I know from speaking with many firms in recent days that this process of adjustment is already taking place. Firms are exploring ways in which they can reduce production and distribution costs and are taking action to improve the products and services they offer customers to justify an increase in prices to help maintain margins. Many are also looking at the opportunities available in markets whose currencies have not devalued such as Germany and the Netherlands.
The Government, and their agencies, will provide significant assistance to help firms to help themselves in the current difficult situation which many of them face. That is the purpose of this debate today and this Estimate.
The market development fund has been introduced as a support which is quick, flexible and concentrated on those firms that require support to put into place the adjustment measures needed to survive and expand in the changed marketplaces which they serve and wish to serve.
The Government have ruled out a blanket provision of employment or other subsidies which would apply to firms irrespective of their needs or of the actions they were putting into place to maintain competitiveness and market share.
The market development fund will be operated on a number of general principles first, it is a temporary support measure. Firms must be expected to take measures to maintain competitiveness in order to adapt to the new exchange rates. The fund will last for no more than six months and there will be a detailed review at the end of this year, at the half way stage. The Government have also directed that the fund will be subject to ongoing monitoring, particularly in the light of currency movements. In the event of a significant revaluation of sterling and other recently devalued currencies the underlying necessity for the fund would require immediate re-examination. Second, the fund has a limit of £50 million. The provision of this level of Government support over a six month period is a generous response by the Government to the difficulties of business and this has been recognised by the representative bodies and individual firms. Third, the fund will be targeted at firms which demonstrate a willingness and an ability to manage their way out of their difficulties which would have difficulty surviving without assistance and, as far as possible, maintaining employment during the six month period of the action.
The establishment and management of the fund is being supervised and directed by a management board comprising the managing directors or chief executives of An Bord Tráchtála, the IDA, and FÁS together with representatives of the Departments of Agriculture and Food, Finance, Industry and Commerce, Labour and the Marine and a representative from the industry/employer bodies and from the Irish Congress of Trade Unions.
The administration of the scheme is being carried out by a special management team drawn from experienced executives from a number of State bodies. The team are responsible for the day-to-day running of the fund, the operation of the eligibility criteria and all decisions on whether applicants qualify for support and the level of support, if any, to be made available. The management team are being led by an assistant chief executive from An Bord Tráchtála and the team members are located in An Bord Tráchtála's head office in Dublin. Payments to successful applicants will be made by An Bord Tráchtála.
Yesterday, at another gathering in the offices of An Bord Tráchtála, I had occasion to see the plan in action, so to speak. I was very impressed by it. All the agencies were working together, phone inquiries were received, forms were being returned and there was a great air of activity. There was a very committed response from the public sector involvement. I was particularly struck by the way the various agencies and Departments were working together to ensure that the help firms need was being given with the minimum of fuss and bureaucracy. I say: "Well done to those involved in that team."