Falling Exchange Rates Are Not a Universal Panacea For Exporters (March 2006) 

I was somewhat concerned to read Phil Goff’s comments on the impact of a weakening exchange rate (Goff highlights benefit of dollar’s drop against US – BusinessDay, March 18, 2006), as, in common with many commentators, he incorrectly suggests that a weakening exchange rate is of benefit to all exporters.

Undoubtedly, exporters of primary produce can benefit from a weakening exchange rate. This is not the case for all exporters, however.

A high percentage of manufactured exports contain an element of imported content, whether that be raw materials or specialised components incorporated into the main product. A weakening exchange rate increases the cost of these items and exporters may not gain the full benefits arising from a fall in the exchange rate.

At the same time, a falling exchange rate can significantly increase the New Zealand dollar price of oil, leading to significantly increased transportation costs, both domestic and international. This will inevitably feed through as an increase in the cost of delivering product to the end user; a lift in the rate of inflation; a consequent increase in the cost of domestic inputs; and a likely increase in demand for wage increases. None of these factors help increase competitiveness of our exports.

A falling exchange rate also has an effect on the cost of imported plant and machinery. Manufacturers are being exhorted to improve productivity. This, by definition, requires that they regularly upgrade plant and machinery. A falling exchange rate increases the cost of imported plant and machinery, discouraging manufacturers from making necessary investment.

A weakening exchange rate can also discourage manufacturers from taking action to improve productivity. As the dollar weakens, the price of imported goods increases, lessening the need for local manufacturers to become more competitive in the domestic market. In comparison, a strong currency caused many manufacturers to reassess their cost structure and production methods in a bid to remain competitive.

What is evident from Phil Goff’s comments is that many in New Zealand still do not fully understand the impact that movements in the exchange rate have on the various components of our economy. My particular concern is that we should recognise the detrimental effects that a weak currency can have on the growth of our economy and on the current and future ability of our manufacturers to compete in international markets.