Worrying trends in imports, exports and balance of trade

The pre-election economic and fiscal update issued by government on 12 October 2010 indicates some worrying trends which candidates in the election should be mindful of and considering how the issues should be tackled given their relation to election promises.
It is becoming increasingly clear to most candidates that the level of imports is far too high. Well over $100 million flows out of the country and into the pockets of overseas suppliers.
If some of that money was to remain in country by purchasing locally produced goods, banks would have higher deposits and in time might be able to lower interest rates through not having to borrow so much from overseas.
A serious effort needs to be made where exports are concerned. There are overseas markets which will take our exports provided supply can be guaranteed and sustained and high quality maintained.
The ongoing deficit in the balance of trade is now becoming a concern for government. That the deficit is predicted to grow moderately indicates despite the increase in visitor numbers, growth in visitor spending has not been significant. Because we spend more on imports than we earn on exports, we rely on visitor spending to bridge the gap. It has been known for some time that growth in visitors from New Zealand does not equate to a marked growth in revenue.
The following are extracts from the update:

Imports
Contrary to the decline in the economy’s output in the last 3 succeeding calendar years, imports have grown by 40% each consecutive quarter over this period.
Increases in nominal import values were recorded significantly higher than the rise in consumer prices implying an increase in import volumes to the Cook Islands, further reflecting higher consumption levels in machinery, transport and equipment imports.
New Zealand remains the most important trading partner, supplying over 60% of the Cook Islands’ imports, followed distantly by emerging suppliers in Fiji and Australia.
Fuel accounts for a 31.4% of total imports followed by machinery, transport and equipment at around 19.0% of total imports. Trends over the past two years indicate a consistent increase in the import of machines, transport and equipment with 2008 and 2009 being 38.1% and 31.8% higher than the previous calendar year. The significant increase is driven by Government expenditures and is evident of the construction and renovation on infrastructure on Rarotonga as well as the outer islands, this is the renovation of the Rarotonga International Airport, construction of various sporting facilities, and the construction of new wharfs in the outer islands.
On a fiscal year basis, imports are expected to slightly decline over 2010-11 given there is limited new infrastructure projects from the slowing of government investments and further modest growth in consumption patterns in 2010-11. Imports are then expected to grow at the rate of nominal GDP in the outer years.
Exports
The value of exports out of the Cook Islands in 2009 is NZD4.9million which is 15.4% lower than total exports in 2008. This is the second year since 2007 that exports have dropped in comparison to the previous year.
The main exports of goods out of the Cook Islands are fresh fish and pearls which accounts for 50.9% and 24.0% of the total value of exports respectively.
In 2009-10 total growth in fish exports exceeded the previous year’s exports by 21.8% while pearl exports decreased by 28.3%. The trends in the specified export industries are covered in sections 2.4.1 (Fishing) and 2.4.2 (Pearl) of this update. Exports of goods account for a mere 1.7% of imports.
The main issue for Cook Islands trade is supplying the market to meet increasing demands of a ballooning market. Moves to increase production and reduce trade barriers for Cook Islands products will assist in improving the value and income received on exported products. It is expected that exports will grow moderately in line with nominal GDP in the outer two years.
Balance of Trade
The current account balance is expected to be negative over 2009 and 2010 as increases in the price and required amounts of imported products outweigh the value of export of services (tourism).
This is predominantly a one off gap where various large projects were undertaken during this time including catering for international events and the construction required for the upgrading of infrastructure on Rarotonga. However, this is also expected to be partly driven by external inflation in major trading partners’ economies and associated exchange rate movements.
Moves to position the economy towards self sufficiency as much as possible, and/or putting in effect national policies that reduce the price of imported products will assist in reducing the size of a possible deficit over the medium to longer term. As per the status quo, the current account balance is expected to return to a positive given these one off projects, as tourism improves and more moderate price rises.
Given modest growth in domestic consumption is expected and limited programs towards significantly increasing exports over the short to medium term are absent, the trade gap is expected to grow at a moderate rate of 1.9% in 2010-11 and 3.2% in 2011-12.

By Charles Pitt

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