Balance of payment crises
New Zealand has always been heavily reliant on international trade and capital inflows to fund new investment. Because of this, the balance of payments is an important indicator of the country’s economic health.
New Zealand has periodically experienced balance of payments crises. These were episodes of economic instability when overseas income fell sharply, or overseas payments rose sharply, with the risk that the country would be unable to make interest payments on debt or pay for all its imports. Resolution of these crises was painful and featured high interest rates, import controls and sometimes currency depreciation. The threat of such crises weighed heavily on policymakers and the nation.
Price and quantity causes
For much of New Zealand’s history, the balance of trade was virtually equivalent to the current account balance, and so a trade crisis implied a balance of payments crisis.
There were two causes of trade crises:
- Price crises were caused by a collapse in New Zealand’s terms of trade, which is the difference between the relative price of exports and imports. For example, increases in the price of oil (an import) or decreases in the price of wool (an export) hurt the country’s terms of trade.
- Quantity crises were caused by New Zealand’s inability to supply an export such as wool or meat, usually because of adverse weather, or by a sharp increase in imports following an economic boom.
Before 1890, despite successful exports of wool and gold, New Zealand’s export income was almost always less than its import spending. The colony borrowed large sums of money from overseas to cover the difference. It became difficult to borrow money in the 1880s; the government cut its spending and banks restricted credit to meet interest payments.
As colonial treasurer and premier for most of the period between 1869 and 1876, Julius Vogel tried to kick-start the development of the New Zealand economy with an ambitious plan to increase immigration, purchase Māori land and invest in roads and bridges. To finance these schemes he had to borrow overseas. Twice during these years he went to England to negotiate foreign loans, and from 1876 to 1880 he was agent general in London, where much of his time was spent arranging loans. The need to pay interest on these loans was an additional burden when New Zealand’s export income fell.
1890 to 1945
Between 1890 and 1930 export income usually exceeded import payments. However, in 1908, 1920 and 1926 the reverse was the case and the government again introduced policies to alleviate the problem.
In 1930/31 export income collapsed, but banks and the government acted so swiftly that there was no payments crisis until the end of 1931, when the government temporarily controlled all export income to ensure it could make loan payments.
In the next payments crisis, in 1938/39, the Labour government – New Zealand’s first – took control of both foreign exchange and imports (by requiring licences for the latter). This system was maintained through the Second World War and after. The immediate crisis was alleviated by the onset of war, which increased demand for exports and limited imports.
1945 to 1985
High wool prices in the early 1950s led to a surplus in the balance of payments, but by 1957/58 wool and butter prices had fallen and there was another crisis.
Balance of payments crises became increasingly severe from the late 1960s, partly on account of oil shocks (sharp price increases), but also because New Zealand’s export economy was not growing as fast as in earlier years. The last year there was a surplus on the current account was 1973. Between 1967 and 1984 the New Zealand dollar was devalued a number of times in an effort to redress the balance, as it made exports more competitive and imports more costly.
In 1985 the New Zealand dollar was floated, with the aim of ensuring an automatic correction of current account deficits. However, in practice, during periods of expansion such as the mid-1990s and the early 2000s, there were sharp increases in current account deficits.