IMF Executive Board Concludes 2011 Article IV Consultation with New Zealand

Public Information Notice (PIN) No. 11/52
May 9, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with New Zealand is also available.

On May 9, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with New Zealand.1


New Zealand’s recovery has stalled since mid-2010, reflecting soft domestic demand and the adverse impact of two large earthquakes. Domestic demand has remained soft, as cautious households and businesses look to strengthen their balance sheets by slowing debt accumulation amid a weak housing market and an uncertain outlook. Moreover, the earthquakes have caused substantial damage and hurt confidence. Spare capacity has helped contain inflation. The unemployment rate hovered between 6–7 percent over the past year, limiting labor cost growth.

Following signs of recovery, the Reserve Bank of New Zealand (RBNZ) lifted its policy rate from a record low of 2.5 percent to 3 percent in mid-2010. As the recovery softened, the policy rate was kept on hold in late 2010 and early 2011. In mid-March 2011, the RBNZ reduced the policy rate by 50 basis points to limit downside risks as a result of the February earthquake.

Permanent income tax cuts and spending increases that were announced before the global crisis and introduced in late 2008 provided a stimulus, but worsened the fiscal outlook. The fiscal deficit is projected to increase sharply to about 8 percent of GDP in 2010/11, reflecting the impact of the earthquakes and slower-than-expected economic recovery.

Banks remain profitable and capital adequacy has improved. Nonperforming loans have increased to 2 percent of total loans, still low by advanced country standards, and sound regulation and supervision helped maintain stability. Prudential measures and market pressures have led to a reduction in banks’ sizable short-term wholesale borrowing.

The current account deficit narrowed to 2¼ percent of GDP in 2010, well below the levels of about 8 percent of GDP in 2005–08. This reflects weak domestic demand, terms of trade gains, and reinsurance inflows, following the first earthquake. Net foreign liabilities have declined since 2008 but remained high at 82 percent of GDP at end-2010. The trade-weighted exchange rate appreciated by about 30 percent from the trough in early 2009 to April 2011, driven by higher commodity prices.

Large uncertainty surrounds the economic outlook, particularly related to the size and timing of reconstruction from the earthquakes. In the near term, the earthquakes will slow activity, with real GDP growth projected at 1 percent in 2011. For 2012, growth is projected to rise to 4 percent, led by reconstruction. Risks are tilted to the downside, including a faltering of emerging Asia’s rapidly growing demand for commodities and a possible rise in long-term interest rates.

Executive Board Assessment

Executive Directors expressed sympathy for the loss of life and extensive damage inflicted by two recent earthquakes. Despite the near-term disruption from the earthquakes, New Zealand’s increasing ties with fast growing Asian economies and sound macroeconomic framework bode well for its economic prospects. Directors noted that continued policy efforts are needed to achieve sustained growth rates and reduce the vulnerabilities associated with low national saving and large net foreign liabilities.

Directors considered the current accommodative monetary policy stance appropriate. The cut in the policy interest rate in March 2011 has helped limit the negative economic impact of the second earthquake. Directors agreed that the RBNZ will have to balance the need to support the recovery with that of keeping medium-term inflation expectations well anchored. Directors concurred that, in case of a delayed recovery, the RBNZ would have room to cut the policy rate.

Although fiscal policy should remain supportive of growth and reconstruction efforts in the near term, Directors welcomed the authorities’ intention to return to fiscal surpluses as soon as possible. Fiscal consolidation would build a buffer against future shocks, relieve pressure on monetary policy and the exchange rate, and contain the rise of the current account deficit. Directors encouraged the authorities to take concrete measures to strengthen the credibility of their fiscal plans. In particular, they saw scope to trim transfers to middle-income households, rationalize capital spending, and improve the efficiency of public service provision.

Directors observed that banks remain profitable and have strengthened their capital buffers, but are exposed to highly indebted households and farmers as well as rollover risks stemming from sizeable short-term offshore borrowing. They welcomed the adoption of a core funding ratio that has contributed to a substantial reduction in banks’ short-term offshore borrowing and enhanced stability of the banking system. Directors encouraged the authorities to continue to be vigilant to financial sector risks, including through strengthening bank stress testing, and welcomed the continued collaboration with the Australian authorities. Most Directors encouraged the authorities to consider the merits of gradually raising bank capital to levels well above the Basel III requirements.

Directors noted the vulnerabilities arising from New Zealand’s large net foreign liabilities and sizeable short-term external debt. They stressed the importance of policy measures to lift national saving and improve productivity, including through fiscal consolidation, tax and welfare reform, and streamlining regulation. Directors welcomed the RBNZ’s continued work on macro-prudential measures.

Directors noted the staff’s assessment that the exchange rate is moderately overvalued, while recognizing the uncertainty around those estimates. They concurred that the free-floating exchange rate has served New Zealand well by providing an effective buffer against shocks.

New Zealand: Selected Economic and Financial Indicators, 2007–12
  2007 2008 2009 2010 2011 2012
          Proj. Proj.

Real growth (percent change)


GDP (production basis)

2.8 -0.2 -2.1 1.5 0.9 4.0

   Final domestic demand

4.6 -0.1 -3.5 2.4 1.9 4.5

   Inventories 1/

0.3 0.4 -2.4 1.7 0.1 0.0

   Exports of goods and services

3.9 -1.7 1.9 2.8 4.1 4.5

   Imports of goods and services

8.7 2.6 -14.9 10.0 6.8 6.1

   Output gap

1.6 -0.3 -3.2 -3.1 -2.9 -1.3

Headline CPI inflation (percent change)

2.4 4.0 2.1 2.3 4.1 2.7

End of period (percent change)

3.2 3.4 2.0 4.0 2.8 2.5

Unemployment rate (period average, in percent)

3.7 4.2 6.2 6.5 6.7 6.2

Investment and saving (in percent of GDP)








23.8 23.1 19.1 19.9 19.6 21.6

National saving 2/

15.6 15.2 16.3 17.7 19.4 17.3

Public finance (in percent of GDP) 3/








33.8 33.7 32.1 29.7 28.9 29.7


31.4 31.1 34.5 33.8 36.7 34.4

Operating balance 4/

3.8 2.1 -3.2 -3.7 -6.8 -4.0

Operating balance before gains and losses

3.4 3.1 -2.1 -3.3 -8.1 -3.8

Net Crown debt excluding $NZ Fund and advances

7.7 5.6 9.2 14.1 21.9 26.3

Money and credit (end of period)







Resident M3 (percent change) 5/

12.0 9.1 1.9 3.9 6.2 ...

Private domestic credit (percent change) 5/

13.4 8.3 1.7 0.5 1.6 ...

Interest rates (period average)




Interest rate (90-day, in percent) 6/

8.3 8.0 3.0 3.2 2.9

Government bond yield (10-year, in percent) 6/

6.3 6.1 5.5 5.5 5.6

Balance of payments (in percent of GDP)







Current account

-8.0 -8.7 -2.9 -2.2 -0.2 -4.3

Trade balance (goods)

-1.3 -1.3 1.3 1.8 2.4 2.0

Terms of trade (percent change)

6.0 7.4 -10.1 10.3 4.4 -0.5

Foreign assets and liabilities ($NZ billion)







Net international investment position

-148.7 -161.0 -160.7 -159.0 -159.1 -167.8

   (In percent of GDP)

-83.3 -87.2 -86.5 -81.7 -77.9 -78.2

Official reserves 5/

22.3 19.1 21.6 21.7 24.7

Exchange rate (period average)







U.S. dollar per New Zealand dollar 6/

0.74 0.71 0.64 0.72 0.76

Trade-weighted index (June 1979 = 100) 6/

70.9 65.7 60.0 64.6 67.5

Nominal effective exchange rate 7/

97.8 91.1 84.1 92.2 92.3

Real effective exchange rate 7/

98.7 92.0 86.4 94.2 96.9

Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.

1/ Contribution in percent of GDP.

2/ Based on national accounts data.

3/ Fiscal years ending June 30.

4/ Equals revenue less expenditure plus net surplus of state-owned enterprises and Crown entities.

5/ Data for 2011 are for March.

6/ Data for 2011 are for January-April.

7/ IMF Information Notice System index (2000 = 100). Data for 2011 are for January–March

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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