tag:theconversation.com,2011:/id/topics/balance-of-payments-4690/articlesBalance of payments – The Conversation2020-07-28T13:05:30Ztag:theconversation.com,2011:article/1435532020-07-28T13:05:30Z2020-07-28T13:05:30ZThe IMF’s $4bn loan for South Africa: the pros, cons and potential pitfalls<figure><img src="https://images.theconversation.com/files/349884/original/file-20200728-15-19u89b5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's finance minister Tito Mboweni says the IMF loan will limit the country's economic vulnerabilities which have been exacerbated by COVID-19.</span> <span class="attribution"><span class="source">Gallo Images/Brenton Geach</span></span></figcaption></figure><p><em>The International Monetary Fund (IMF) has approved a R70 billion (US$4.3 billion) loan for South Africa to help the country manage the immediate consequences of the fallout from COVID-19. The Conversation Africa’s editor, Caroline Southey, asked Danny Bradlow to shed some light on what South Africans should expect.</em></p>
<h2>What conditions has the IMF attached to the disbursement?</h2>
<p>The IMF has provided the funding through its <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/19/55/Rapid-Financing-Instrument">Rapid Financing Instrument</a>. This is designed to support countries facing an urgent need for financing due to a crisis such as the COVID-19 pandemic. The goal is to help the country face the immediate financial consequences of the crisis. As a result the IMF provides the financing quickly and without strict conditions. The country merely needs to show the IMF that it is facing a crisis, that it will use the funds to deal with the crisis, that it will cooperate with the IMF to solve the balance of payments problems caused by the crisis and to describe the economic policies that it proposes to follow. </p>
<p>In some cases, the IMF may require the country to undertake certain policy actions before it can access the funds.</p>
<p>In South Africa’s case, the country’s payments problem relates to the fact that the economy is expected to contract by about 7% this year and the budget deficit to increase to <a href="https://www.gov.za/speeches/minister-tito-mboweni-2020-supplementary-budget-speech-24-jun-2020-0000">about 15% of GDP</a>. This means that the government will need to increase the amount it has to borrow. Given that it has been <a href="https://www.fitchratings.com/research/islamic-finance/fitch-downgrades-south-africa-to-bb-outlook-negative-03-04-2020">downgraded</a> by <a href="https://www.reuters.com/article/safrica-ratings/moodys-downgrades-south-africa-sovereign-rating-to-junk-idUSL8N2BK8M5">credit rating agencies</a>, and that the economy is in bad shape, there is a substantial risk that both local and foreign investors will have a limited appetite for South African debt. This will complicate the government’s efforts to finance the deficit. </p>
<p>The IMF loan helps resolve this problem. </p>
<p>South Africa provided the requisite information to the IMF in the form of a letter of intent signed by the minister of finance and the governor of the Reserve Bank. The letter has not yet been made public. But, according to the <a href="https://www.imf.org/en/News/Articles/2020/07/27/pr20271-south-africa-imf-executive-board-approves-us-billion-emergency-support-covid-19-pandemic">IMF press release</a>, South Africa seems to have informed the IMF that it intends to take certain steps to stabilise the country’s finances. This means that the government will cut government spending to reduce its need to borrow. The current disputes over public sector wages and funding for state owned enterprises are examples of steps it could take. The government has also said it will improve the governance of state owned enterprises, and introduce reforms to stimulate a growing and inclusive economy. These reforms could include measures to improve competition in different sectors of the economy. </p>
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<a href="https://theconversation.com/south-africans-should-accept-that-the-imf-is-neither-their-worst-enemy-nor-their-saviour-143199">South Africans should accept that the IMF is neither their worst enemy nor their saviour</a>
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<p>South Africa made these undertakings in last October’s <a href="http://www.treasury.gov.za/documents/mtbps/2019/mtbps/FullMTBPS.pdf">medium term budget statement</a> and in the supplementary budget statement in <a href="https://www.gov.za/speeches/minister-tito-mboweni-2020-supplementary-budget-speech-24-jun-2020-0000">June this year</a>. </p>
<p>This suggests that the IMF is merely expecting the country to implement the policies already announced by the government.</p>
<h2>How will the money be disbursed?</h2>
<p>This kind of financing is provided in one payment. The IMF press statement doesn’t say when the funds will be disbursed but the goal is to make the funds available “rapidly”. That could be as early as August. </p>
<p>Once the funds are disbursed, the government will be free to spend them. According to the national treasury’s <a href="https://www.gov.za/speeches/treasury-imf-approval-us43-billion-financial-support-south-africa-deal-coronavirus-covid-19">statement</a>, it plans to use the money to support health and frontline services, to protect the vulnerable, drive job creation, support economic reform and stabilise public debt. </p>
<p>These are all consistent with the purpose of the Rapid Financing Instrument and the government’s stated intentions. </p>
<p>But these purposes are very general and we will need to see more detail about what exactly the government will spend the funds on.</p>
<h2>What restrictions are there on the government’s ability to use the money?</h2>
<p>The IMF loan <em>does not</em> impose any conditions over and above what is in South African law on how the funds can be used. Consequently, the funds will be subject to the same procurement and accounting requirements as all other budgetary expenditure. </p>
<p>In addition, the government will have to account in its future budget statements and reports to parliament on how the funds have been used. South Africans will also be able to demand that the government demonstrate that the funds have been spent consistently with the requirements of the constitution and bill of rights. This means the government should show that it is using the maximum available resources, from whatever source, to help realise all the rights that the constitution and South Africa’s international commitments grant to South Africans.</p>
<p>The IMF requires that South Africa repay the funds to the IMF over 20 months beginning 40 months after the loan is disbursed. This means that South Africans will need to ensure that the funds to repay the IMF are properly budgeted for.</p>
<h2>What are the upsides of the loan?</h2>
<p>The most important benefit is that South Africa is getting $4.2 billion at about 1.1% interest. This is a very cheap source of funds. If the government tried to raise the same amount either on domestic markets or from other international sources it would pay a considerably higher interest rate – the current rate for government bonds of comparable maturity is about <a href="http://www.worldgovernmentbonds.com/country/south-africa/#:%7E:text=The%20South%20Africa%2010Y%20Government%20Bond%20has%20a%209.155%25%20yield.&text=Normal%20Convexity%20in%20Long-Term,last%20modification%20in%20July%202020">7%</a>.</p>
<p>The second potential benefit is that the IMF loan will catalyse other funds for the country. In other words investors in South Africa and abroad will interpret the IMF’s action as an expression of support for South Africa and this will give them the confidence to invest in South African debt. Given that foreign investors hold about <a href="https://sec.report/Document/0001104659-20-044565/">30% of South African government’s rand denominated debt</a> this boost to confidence could be important. It will both reduce the incentive of these investors to sell their government bonds, potentially pushing up interest rates, and enable the government to issue new debt if needed.</p>
<p>The third benefit is that by helping to stabilise South Africa’s situation, it will limit the damage that may be inflicted on the neighbouring countries. This, in turn, could help South African exports and thus help preserve jobs and income in South Africa.</p>
<h2>What are the downsides?</h2>
<p>The most significant downside is that the loan is denominated in foreign exchange. Thus South Africa has to bear the risk that if the rand depreciates, the loan and the interest on it will become more expensive. Given the state of the South African economy, this is not an insignificant risk. </p>
<p>But it’s important to keep in mind that the IMF denominates the loan and the repayment obligations in Special Drawing Rights. These are the IMF’s special form of money and its value is made up of a composite of a basket of currencies. These include the US dollar, the euro, the Japanese yen, the Chinese renminbi and the pound sterling. The values of these currencies tend to fluctuate against each other so that some appreciate while others depreciate. This helps mitigate the foreign exchange risk that South Africa must bear.</p>
<p>The second risk is that if South Africa does not use the funds from the IMF wisely, the country’s economic situation will deteriorate and it will struggle to pay back the debt. </p>
<p>If this happens or the pandemic lasts longer than anticipated, the country could be forced to seek additional support. In either case South Africa’s negotiating position would be significantly weaker.</p><img src="https://counter.theconversation.com/content/143553/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow's SARCHI chair is funded by the National Research Foundation. He also has a grant from the Open Society Initiative of Southern Africa (OSISA) for a project on sovereign debt in the SADC region. </span></em></p>The IMF loan does not impose any conditions over and above what is in South African law on how the funds can be used; it only seems to expect the country to implement policies already announced.Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1018512018-08-21T12:41:39Z2018-08-21T12:41:39ZExplainer: why some current account imbalances are fine but others are catastrophic<figure><img src="https://images.theconversation.com/files/232892/original/file-20180821-149487-16ehqnj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ins and outs. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/shipping-delivery-car-ship-plane-transport-682767424">MNBB Studio</a></span></figcaption></figure><p>In the recent economic crises in <a href="https://www.livemint.com/Politics/GAHXSO1M9uMVm1aOa4QHOO/Moodys-SP-cut-downgrade-Turkey-further-recession-likely.html">Turkey</a> and <a href="https://www.itau.com.br/itaubba-en/economic-analysis/publications/macro-latam/argentina-current-account-deficit-hits-20-year-high">Argentina</a>, there was much talk about how current account deficits played a big part in their problems. Nothing unusual in that, of course: many economic crises are associated with such deficits. It’s one reason why the business press focuses on the current account as one of the key measures of a country’s macroeconomic performance. </p>
<p>The current account balance is primarily the difference between a country’s total exports and imports of goods and services, usually measured as a share of GDP. Surpluses tend to be reported as “good” or “healthy”, while deficits are often regarded as “bad”. While the deficits run up in Turkey and Argentina certainly did cause problems, this way of looking at current accounts is <a href="https://www.econlib.org/library/Enc/BalanceofPayments.html">fundamentally flawed</a>. </p>
<p>Most people probably tend to think of exports and imports in terms of products being bought and sold by a country. In reality, they <a href="https://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm">also refer</a> to the amount of capital flowing in and out to finance government and business spending. When a country has a current account surplus, it is exporting capital to the rest of the world. Consequently, it is a net lender. Countries with deficits are the opposite: they import capital from the rest of the world and are net borrowers. </p>
<p>The point is that being a net borrower or net lender is not usually bad in itself – it depends on what is happening to the money. Take the US and Australia, whose current accounts as a percentage of GDP since 1980 are in the chart below. The US has been running persistent deficits for almost the entire period. </p>
<p><strong>US and Australia current accounts</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232887/original/file-20180821-149466-pu52my.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://data.oecd.org">OECD</a></span>
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<p>The US deficit peaked at about 5% of GDP in the mid-2000s, just before the outbreak of the global financial crisis. Yet US economic growth <a href="https://www.theglobaleconomy.com/compare-countries/">has been</a> comparable or better than that of many other large economies for much of this period. </p>
<p>While that is true, some economists <a href="http://theweek.com/articles/759509/dethroning-dollar">argue that</a> deficits are not sustainable in the long run. The US, they say, has only been able to run one for so long because of the unique role of the US dollar as the international reserve currency. </p>
<p>Yet what about Australia? The Australian dollar has no such special status and that country has been running more sizeable deficits than the US over the same time period. Australia finances this by selling domestic assets to foreigners, such as wealthy Chinese families buying expensive apartments in Sydney. Australia clearly has enough space to build more and more real estate to keep financing its imports. Whether this is socially desirable is a different question, of course. </p>
<h2>Surplus troubles</h2>
<p>In some situations, running excessive imbalances over a prolonged period of time might be more problematic. Some economists <a href="https://eml.berkeley.edu/%7Eobstfeld/santabarbara.pdf">believe</a> that the long-term imbalances in the world economy that were partly thanks to America’s deficits caused the financial crisis and the great recession that followed. </p>
<p>Yet surpluses can be troublesome, too. The world’s biggest surplus countries in recent years have been China, Germany and Japan. Germany has seen a large increase in its current account surplus in recent years and has been criticised by the likes of <a href="https://www.reuters.com/article/us-germany-economy-imf/imf-presses-german-government-to-invest-more-to-reduce-trade-surplus-idUSKCN1IF1CE">the IMF</a> for not investing enough at home. The country is currently exporting capital of more than €250 billion a year to the rest of the world, helping to finance unstable imbalances elsewhere, while Germany’s infrastructure <a href="https://www.economist.com/europe/2017/06/17/germanys-low-investment-rate-leaves-its-infrastructure-creaking">seems to be</a> in dire need of additional funding. </p>
<p><strong>Leading surplus offenders</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232888/original/file-20180821-149472-r439ur.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://data.oecd.org">OECD</a></span>
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<p>China started running a massive surplus in excess of 8% in the early 2000s after becoming more integrated with the world economy and exporting goods heavily on the back of ultra-low manufacturing costs. China, too, <a href="https://www.ft.com/content/f4696136-4caa-11df-9977-00144feab49a">came under</a> international pressure for helping to cause global imbalances. While China’s trading position has <a href="https://www.livemint.com/Politics/nooie4BvcPsU6uwWVzGKQK/China-records-first-current-account-deficit-in-20-years-in-H.html">now swung</a> almost towards being balanced, it still has a substantial surplus with the US, which <a href="https://www.nytimes.com/2018/03/05/us/politics/trade-deficit-tariffs-economists-trump.html">explains</a> Donald Trump’s recent trade war with Beijing. </p>
<h2>Turkish blight</h2>
<p>Current account deficits are more dangerous if the inflow of capital does not represent productive long-term investments, but rather short-term “<a href="https://www.investopedia.com/ask/answers/09/hot-money.asp">hot money</a>”. Capital flows can rapidly reverse as foreign lenders abruptly start withdrawing their money. This can make the country’s currency plummet, culminating in a financial crisis if domestic banks, businesses and even consumers have been borrowing in foreign currency and the repayments are suddenly beyond their reach. </p>
<p>This is exactly what has happened in <a href="https://www.counterpunch.org/2018/05/15/argentinas-peso-crisis-capital-flows-and-financial-fragility-in-emerging-markets/">Argentina</a> and <a href="http://www.hurriyetdailynews.com/opinion/ugur-gurses/drug-like-effects-of-capital-inflows-to-turkey-128881">Turkey</a> this year. Turkey’s persistent deficits were a sign of the country’s reliance on foreign borrowing to fuel its domestic consumption boom under the Erdoğan regime, which came unstuck as the West called time on quantitative easing and started raising interest rates. </p>
<p><strong>Emerging economy deficits</strong></p>
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<a href="https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232874/original/file-20180821-149472-q7y11d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://data.oecd.org">OECD</a></span>
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<p>Indonesia and South Africa are two more emerging markets whose current account balances have been shifting. Both the Indonesian rupiah and South African rand have depreciated by about 10% against the US dollar over the last year. </p>
<p>While economists mostly agree that floating exchange rates and mild depreciations can be rather helpful in absorbing macroeconomic shocks, both <a href="https://businesstech.co.za/news/finance/247987/heres-why-some-emerging-markets-including-south-africa-are-suddenly-vulnerable-to-a-melt-down/">countries</a> look <a href="http://jakartaglobe.id/economy/fitch-indonesia-vulnerable-capital-outflows-fed-rate-hike/">potentially</a> vulnerable in a similar way to Turkey and Argentina – particularly if the rand or rupiah were to experience a “run” similar to the one on the Turkish lira. Unfortunately, just like a banking panic, currency crises and financial contagion are usually unpredictable beforehand. </p>
<p>At any rate, it’s important to be more accurate about current account imbalances. Large and continuous deficits or surpluses can either be totally benign or the result of some underlying economic problem. Still, some people persist in seeing only the bad in deficits. Donald Trump is a good example: he <a href="https://thinkprogress.org/trump-deficit-breaks-promises-aafedb5302c1/">promised to</a> eliminate America’s deficit during the presidential campaign and <a href="http://uk.businessinsider.com/ivanka-trump-tax-cuts-deregulation-eliminate-debt-2017-12">believes</a> his massive tax cut will produce a growth surge that will achieve that goal in the years ahead. The irony, of course, is that in all probability it will achieve precisely the opposite.</p><img src="https://counter.theconversation.com/content/101851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julius Probst is indirectly funded by the Wallenberg Foundation. </span></em></p>Watch out, Indonesia and South Africa.Julius Probst, Doctoral Researcher in Economic History, Lund UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/275422014-06-11T04:33:38Z2014-06-11T04:33:38ZEnergy efficient homes could help Treasury balance the books<figure><img src="https://images.theconversation.com/files/50732/original/d4mztsyc-1402427526.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Britain's Energy Performance Certificate - could do better.</span> <span class="attribution"><span class="source">Grant Wilson/National Grid</span></span></figcaption></figure><p>We’ve just been through an unusually mild winter for the UK. Despite the <a href="https://theconversation.com/explainer-what-causes-winter-storms-21863">excessive rain and storms</a>, the warmer temperatures meant we’ve needed less energy to heat our homes. </p>
<p>This has reduced household energy bills, providing a welcome respite from <a href="https://theconversation.com/rising-energy-bills-require-brave-leadership-not-cuts-19680">ever increasing prices</a>. But the weather has also had an undoubted benefit for the British economy, as we’ve had to import significantly less energy than would normally be the case. </p>
<p>Weather patterns are not under the control of legislators. But measures to promote energy efficiency are and could, if implemented on a large enough scale, produce an effect similar to a mild winter: warmer homes and less energy required to heat them. So just how big a difference did the weather make?</p>
<h2>Mild winters are cheaper to run</h2>
<p>Data released late last month from the Department of Energy and Climate Change (DECC) allows us to compare energy use during the two recent and contrasting winters: October 2013 to March 2014, which was <a href="http://www.metoffice.gov.uk/climate/uk/summaries/2014/winter">unusually mild</a> and the same period for 2012-13, which was <a href="http://www.metoffice.gov.uk/climate/uk/summaries/2013/winter">colder than average</a>. The data also enables us to compare the reduction in imports of primary energy during these periods, particularly coal and natural gas. These two fossil fuels are associated with electricity generation and heating – the areas most impacted by energy efficiency improvements in buildings.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/50601/original/ww3s9m8t-1402357961.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">UK daily energy use. A cool and mild winter compared.</span>
<span class="attribution"><span class="source">Grant Wilson, National Grid</span></span>
</figcaption>
</figure>
<p>The <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/314841/et2_6.xls">DECC data</a> shows that companies generating electricity used nearly 5.6m less tonnes of coal during winter 2013-14, compared to winter 2012-13.</p>
<p>If we estimate, conservatively, that about 75% of the coal consumed is imported (there are only <a href="http://www.ukcoal.com/modern-mining.html">two deep coal mines</a> still operational in Britain, Kellingley in Yorkshire and Thoresby in Nottinghamshire), this works out as a cut in coal imports of 3.9m tonnes, equivalent to 28,100 gigawatt hours (GWh) of thermal energy. At a cost of <a href="http://www.ft.com/cms/s/0/f4854c98-9346-11e3-b07c-00144feab7de.html">£70 per tonne</a>, this represents a financial saving to the UK of £280m.</p>
<p>The reduction in demand for electricity was also felt by gas-fired and nuclear power stations, but to a less significant degree than coal, and the amount of electricity generated from wind increased. The reduction in the use of coal to generate electricity was due to a genuine overall drop in electrical demand, not just substitution of one fuel for others.</p>
<p>Other <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/314869/et4_2.xls">DECC data</a> show a reduction of 83,000 GWh of natural gas consumed by the UK during the 2013-14 winter compared to 2012-13. The department’s statistics provide further detail on this reduction to show that overall imports were down by 60,000 GWh. This comprised 33,000 GWh less through the pipeline which runs across the Channel from Belgium, 19,000 GWh less from Norway, and 8,000 GWh less in the form of liquid natural gas by ship from Qatar. With wholesale natural gas costing around <a href="http://www.lse.co.uk/FinanceNews.asp?code=wl2kan2x&headline=UK_GASWithinday_prices_ease_on_lower_demand_healthy_LNG_supply">1.5p per kWh</a>, this adds up to a £900m saving from reduced natural gas imports. </p>
<p>Put the savings from coal and gas together, and we estimate that warmer-than-usual weather saved the UK nearly £1.2 billion in energy imports over the comparable six month period. This is a not inconsiderable sum – 3.5% of the 2012 <a href="http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/2013/index.html">UK trade deficit of £33.9 billion</a>.</p>
<h2>Why rely on the weather?</h2>
<p>So if the vagaries of the British weather can cut primary energy imports and result in a clear economic benefit to the UK by reducing its trade deficit, this is to be rightly welcomed. Especially as the UK becomes even more dependent on imports for its primary energy supplies.</p>
<p>Why not then strive to ensure that these benefits are not just left to the weather, but could be enjoyed every year by improving buildings’ energy efficiency? It would seem an aim worthy of cross-party political support: reduce energy imports, improve the trade deficit, improve the UK’s housing stock and reduce fuel poverty.</p>
<p>Maybe it is time that the wider macro-economic benefits were included in the debate around energy efficiency. Given the potential for significant and lasting improvements to UK’s trade deficit, why shouldn’t the Bank of England provide long-term funding to support energy efficiency measures? Like an energy efficiency equivalent of a <a href="https://images.nationalarchives.gov.uk/assetbank-nationalarchives/action/browseItems?categoryId=73&categoryTypeId=1&allCats=0">War Bond</a>.</p>
<p>While cost is a major factor in the uptake of energy efficiency measures, there are also many <a href="https://theconversation.com/the-green-deal-can-be-saved-but-only-by-the-community-24440">non-financial barriers</a> that have plagued schemes such as the Green Deal. Money spent on researching these factors for the <a href="http://eng.janrosenow.com/uploads/4/7/1/2/4712328/rosenow_and_eyre_2013_the_green_deal_and_the_energy.pdf">benefit of advising legislators</a> would be money well spent.</p>
<p>If greater energy efficiency could produce the £1.2 billion saving equivalent to the mild winter, but every year – regardless of the weather, the Treasury should recognise <a href="https://theconversation.com/high-bills-the-cheapest-energy-is-energy-we-dont-use-20732">the value of energy efficiency</a> and give it the same political support as it would to increase UK exports by £1.2 billion. And the more energy the UK has to import in the future, the more valuable this saving may become.</p>
<p>If ever there’s been a case of spend to save, this is it.</p><img src="https://counter.theconversation.com/content/27542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grant Wilson receives funding from the Energy and Physical Sciences Research Council under grant EP/K002252/1 - Energy Storage for Low Carbon Grids, and EP/K000292/1 - SPECIFIC Tranche 1: Buildings as Power Stations</span></em></p>We’ve just been through an unusually mild winter for the UK. Despite the excessive rain and storms, the warmer temperatures meant we’ve needed less energy to heat our homes. This has reduced household…Grant Wilson, Research Associate, Environmental and Energy Engineering Research Group, Chemical and Biological Engineering, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/149972013-06-13T20:36:58Z2013-06-13T20:36:58ZThe trouble with singing the debt song is the tune may change<figure><img src="https://images.theconversation.com/files/25452/original/mddy76yx-1371082895.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Debt mantra: Sloganeering around a single economic issue can help win elections</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Election campaigns in Australia often seem to crystallise around the dire performance of a single economic indicator.</p>
<p>In the 1996 election, it was the size of Australia’s foreign debt (Peter Costello argued that it was catastrophically high).</p>
<p>In the 2004 election, it was the interest rate (as John Howard put it, “I will guarantee that interest rates are always going to be lower under a Coalition government”).</p>
<p>Presently it is the government budget deficit (as Tony Abbott would have it, we have a “budget emergency”).</p>
<p>Sloganeering of this kind, faithfully reported by an uncritical media, is useful. It helps win elections.</p>
<p>But the focus often shifts after the election. Incoming governments soon realise that foreign debt, interest rates and, in the short run budget deficits, are determined by factors outside their direct control. There is also implicit acknowledgement that, despite their earlier assertions to the contrary, single-number measures are an inadequate measure of economic success or failure; the costs of achieving these single-number targets outweigh the benefits.</p>
<p>Take foreign debt as an example. Net foreign debt measures the net amount Australians – business, government, and private individuals – owe foreigners (overall net foreign liabilities are a larger amount as it also includes equity investments). In March 1996, net foreign debt stood at $192 billion, or 37% of GDP. By September 2007, just before the Howard government lost office, it had risen to $577 billion, or 53% of GDP. It currently stands at 51% of GDP.</p>
<p>Were a government committed to cutting foreign liabilities, a starting point would be to recognise that the increment to foreign liabilities is the balance on the current account of the balance of payments – the difference between current receipts from foreigners for goods, services and income, minus current payments to foreigners.</p>
<p>Absent short-term valuation effects arising from exchange rate changes, a reduction in foreign liabilities requires a positive balance on the current account. In turn, the size of the current account balance depends on the interest payments on the existing debt, and the difference between exports and imports of goods and services.</p>
<p>Not much can be done about flows of interest payments. The stock of debt is the result of past decisions, while interest payments on the debt are determined by the rates required by foreign lenders.</p>
<p>What about the trade balance – the balance between exports and imports?</p>
<p>In an open trading economy like Australia’s, with low tariffs and export assistance, increasing the trade balance means that domestic demand must be restrained while exports grow. This politically unpalatable situation “works” because soft domestic demand generally implies lower imports.</p>
<p>This combination of events has recently been illustrated with the release of the March national accounts. In the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0">March quarter</a>, exports of goods and services increased, while imports fell. It was this turnaround in the trade balance which underpinned real GDP growth.</p>
<p>Although the trade balance recorded a small surplus, it wasn’t large enough to offset the outflow of interest payments on our existing debt; the current account remains in deficit, and the stock of net foreign liabilities continues to rise.</p>
<p>As the accounts show, continued low levels of domestic demand, pursued with sufficient vigour, might be effective in generating a current account surplus, but at a high political cost.</p>
<p>This brings us to the second reason why election slogans sometimes fade away. Maybe the indicator – foreign debt in the present example – wasn’t so problematic after all.</p>
<p>In the early 1990s there was a lively debate in academic circles, led by <a href="http://catalogue.nla.gov.au/Record/1567932">John Pitchford at the ANU</a>, which supported this view. He started from the perspective that prices at which borrowing and lending decisions are made generally reflect the corresponding social costs and benefits. </p>
<p>To illustrate the argument in a standard mortgage market, if the lender and borrower are both fully aware of their financial circumstances, and the terms of the loan are set accordingly, then it is not clear why an increase in household indebtedness is cause for concern.</p>
<p>Applying this argument to international credit markets, the <a href="http://books.google.com.au/books?id=Ai3n-AxMFKoC&pg=PA62&lpg=PA62&dq=john+pitchford+and+consenting+adults&source=bl&ots=8zZz9EddvX&sig=WGdT7FbkA64jXdoK0H1GIDZVq2E&hl=en&sa=X&ei=4CK5UYzbEKe4iQf7q4CwCQ&ved=0CEIQ6AEwAw#v=onepage&q=john%20pitchford%20and%20consenting%20adults&f=false">“consenting adults” view</a> of Australia’s foreign debt was that, providing the terms are correctly priced, reducing foreign debt should not be a target for policy.</p>
<p>Whether Mr Costello relied on this argument for his change of heart is not clear.</p>
<p>What is clear is that the premise on which the consenting adults view is based – that terms are correctly priced – does not always apply.</p>
<p>This is particularly the case with borrowing by Australian banks and the States and Territories. Being regarded as too big to fail, the big four Australian banks enjoy the benefits of an implicit government guarantee which enables them to borrow on better terms than would otherwise be the case. Similarly for the states.</p>
<p>During the global financial crisis, these guarantees became explicit. State and bank borrowing was guaranteed by the federal government. Banks were charged a fee for this service with the larger banks paying a lower fee than smaller, regional banks.</p>
<p>In some respects, this is a curious way to run an insurance scheme. After all, most insurance companies are justifiably reluctant to write household insurance policies as the bushfire comes over the hill.</p>
<p>The “consenting adults” view and Costello’s benign neglect of foreign debt would have greater force if the terms on which the banks and states borrow on international markets more closely reflected social costs. For the banks, the costs would be shared between shareholders and customers, rather than having risks borne by taxpayers.</p>
<p>If the Coalition wins government in September it may well be that, as with Mr Costello’s earlier change of views on foreign debt, Mr Hockey takes a more nuanced approach to the federal budget deficit and government debt. </p>
<p>The costs and benefits of deficit reduction will get more careful analysis, particularly as deficit reduction measures are likely to be more costly in a slowing economy. One can only hope that the debate will move on from whether or not particular forecasts have been met.</p><img src="https://counter.theconversation.com/content/14997/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Wells does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Election campaigns in Australia often seem to crystallise around the dire performance of a single economic indicator. In the 1996 election, it was the size of Australia’s foreign debt (Peter Costello argued…Graeme Wells, University Associate, School of Economics and Finance, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/118282013-02-01T03:45:12Z2013-02-01T03:45:12ZLimiting Australia’s ballooning coal exports is good for the economy<figure><img src="https://images.theconversation.com/files/19711/original/hnwsdj9p-1359520760.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coal mining is crowding out industries that could bring more benefits to more Australians.</span> <span class="attribution"><span class="source">AAP Image/Dave Hunt</span></span></figcaption></figure><p>Last week, Greenpeace released a report calling for a halt to Australia’s burgeoning coal exports and pointing to the catastrophic climate impacts they would cause. <a href="http://www.theage.com.au/opinion/political-news/australian-coal-mining-threatens-co2-target-20130122-2d5ck.html">In response</a>, Mitch Hooke, chief executive of the Minerals Council of Australia, took a standard industry line: “the proposal to stop Australian coal exports won’t stop global coal use - it will just send Australian jobs offshore and deprive state and federal governments of billions in revenue”.</p>
<p>Arguments that the strength of the Australian economy is heavily dependent on digging up and shipping out as much coal as possible, as quickly as possible, are common. Of course, they also imply that economic arguments trump any concerns about contributions to climate change. </p>
<p>But leaving that aside, how true is it? Would slowing or halting Australia’s coal exports really deprive Australians? What would it mean for Australian jobs?</p>
<p>Research by The Australia Institute suggests that slowing down the pace of coal exports would actually result in <a href="https://www.tai.org.au/index.php?q=node%2F19&pubid=984&act=display">enormous benefits to the Australian economy</a>. It would allow our other key export industries - including manufacturing, tourism, education and agriculture - to expand, employing more people and paying more tax.</p>
<p>Because these industries are all far more labour intensive than mining, less subsidised and mostly better taxpayers than mining, it would lead to <a href="https://www.tai.org.au/index.php?q=node%2F19&pubid=982&act=display">more jobs</a> and increasing state and federal revenue in the long run.</p>
<p>It’s no accident that the unprecedented expansion of mining in Australia has been accompanied by a sharp decline in many of our most important long-term export industries.</p>
<p>The relentless stream of manufacturing job losses, decline in tourist arrivals and overseas students, and declining agricultural exports are the collateral damage of allowing a breakneck mining expansion without regard to its impact on the rest of the economy.</p>
<p>The problem is that the more mining you have, the less you have of everything else.</p>
<p>For two decades from the early 1980s, exports from Australia’s non-mining industries were steadily increasing as a percentage of our GDP. This was a sign of an increasingly healthy diversified economy, better able to pay its way in the world. Then in the early 2000s, with the onset of the mining boom, something changed, and these industries have been heading south ever since.</p>
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<p>The reason is that mining “crowds out” other exporting industries, which flows onto the rest of the economy, creating what we call the “two-speed economy”.</p>
<p>It has done this primarily through driving up the exchange rate, and creating an acute skills shortage.</p>
<p>The unprecedented rise in the Australian dollar is primarily driven by increasing commodity prices, and the massive $260 billion influx of foreign capital to fund the construction of mines and gas fields.</p>
<p>A further cause is that Australia has high interest rates relative to other developed countries, which means it attracts more overseas investment and further drives up the dollar. The Reserve Bank has cited the mining boom as a reason for every interest rate rise since 2005.</p>
<p>This has had a devastating impact on our non-mining exporters. Manufacturers who were receiving $100 for a product sold into the American market a few years ago now receive less than $70 for the equivalent item. The dollar has also appreciated by a similar amount relative to most of our other markets. Hotel rooms, meals and tours and university courses are similarly more expensive for those thinking of visiting Australia.</p>
<p>Australian tourism visitors have dropped by around 250,000 over the last decade, as more Australians holiday overseas, and overseas tourists go elsewhere. This is during a 20% boom in global tourism over the last decade.</p>
<p>Since the beginning of the mining boom, Australia’s rural sector has lost $43.5 billion in export income. This includes $14.9 billion in 2010-11 alone. These losses have occurred because the mining boom has <a href="https://www.tai.org.au/index.php?q=node%2F19&pubid=1060&act=display">forced the Australian dollar to historic highs</a>. The beef industry took a $2 billion dollar hit last year alone.</p>
<p>Manufacturing job losses are announced with depressing regularity, with well over 120,000 manufacturing jobs disappearing since the GFC.</p>
<p>Adding fuel to the fire, the mining boom has created an acute skills shortage. This is simple supply and demand. If you plan to build $260 billion dollars’ worth of mining projects at once, it will create enormous demand for a narrow set of skills that are also important to other industries. This makes it much harder for other businesses to recruit and retain employees. </p>
<p>These businesses will also have to compete with the inflated wages being offered by the miners. The economic consultants for Clive Palmer’s China First mine acknowledged this impact alone would cost around 3000 jobs in manufacturing and tourism, and that’s just one mine!</p>
<p>Hooke’s concern about Australian jobs is especially interesting when you consider that the coal mining industry is highly capital intensive, and a very small employer. It employs around 38,000 people nationally, less than a third of one percent of the workforce, compared to around one million in manufacturing, half a million in tourism and 327,000 in agriculture.</p>
<p>With a capital-intensive industry crowding out labour-intensive industries, it seems likely that the net effect of the expansion of the coal industry will be job losses for Australia as a whole.</p>
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<p>Crowding out of these industries also means a loss of tax that these industries would have been paying. The mining industry pays an effective corporate tax rate of around 13.9%, compared to the industry average of 21%.</p>
<p>To take the latest year available, 2009-10, mining companies paid $6.8 billion in company tax, amounting to just 2.2% of government receipts.</p>
<p>The coal industry also pays around $4 billion dollars a year in royalties to the states. Although royalties are technically considered taxes, the minerals are the raw materials of mining in the same way that wheat is for a baker, or bricks to a builder. Bakers and builders pay market prices for their raw materials, and the costs are not considered as a tax.</p>
<p>The difference is that the Australian people own those minerals, and the state government sells the minerals to mining companies on our behalf. It is hard to imagine that if the minerals were owned by a private company, like bricks or wheat, they would be sold for around 7% of their market value. This special treatment of the mining industry could be seen as a huge subsidy in itself.</p>
<p>As it stands mining is highly subsidised, to the tune of at least $5 billion dollars a year, which makes subsidies to manufacturing look modest.</p>
<p>Mitch Hooke’s claim that “the proposal to stop Australian coal exports won’t stop global coal use” is true, as far as it goes. But no one would seriously suggest that it would. Other countries will continue to export coal.</p>
<p>What it will do is drive up the coal price considerably, because Australia is the world’s largest coal exporter. In fact, Australia has a larger share of the world’s coal exports than Saudi Arabia does of oil, and no one would doubt the effect on global oil prices of Saudi Arabia reducing its oil exports.</p>
<p>This will have the effect of our customer countries - primarily Japan, Taiwan and India - reconsidering investing in coal for their energy infrastructure.</p>
<p>Luckily they already are. India has had to <a href="http://thinkprogress.org/climate/2012/07/31/613161/massive-blackout-leaves-620-million-indians-without-power-demonstrating-dangers-of-relying-on-outdated-coal-system/">scrap huge coal power plants</a> due to coal price fluctuations and difficulties in securing enough coal that have led to massive blackouts. This has led to rapid ramping up of solar targets to <a href="http://www.bloomberg.com/news/2011-11-10/india-doubles-solar-power-installation-target-as-industry-booms.html">10GW by 2017</a>.</p>
<p>This shift to renewable energy is gaining pace around the globe with renewable energy investment <a href="http://www.bloomberg.com/news/2011-11-25/fossil-fuels-beaten-by-renewables-for-first-time-as-climate-talks-founder.html">exceeding fossil fuel in 2011</a>. This is an unstoppable trend, and is great for the developing nations who will be able to avoid dependence on volatile and ever increasing fossil fuel prices, and the myriad of health and pollution problems associated with burning coal.</p>
<p><em>This article was co-authored by Mark Ogge. Mark is the Public Engagement Officer at Canberra-based think tank, The Australia Institute. His work involves communication of key research findings about the impacts of the mining industry on other crucial sectors of the Australian economy, especially manufacturing, tourism, education and agriculture.</em></p><img src="https://counter.theconversation.com/content/11828/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Denniss is Executive Director of the Australia Institute. The Australia Institute is funded by memberships and donations from philanthropic trusts and individuals to our Research Fund. Where particular pieces of research are commissioned, this information is disclosed as part of the research.
</span></em></p>Last week, Greenpeace released a report calling for a halt to Australia’s burgeoning coal exports and pointing to the catastrophic climate impacts they would cause. In response, Mitch Hooke, chief executive…Richard Denniss, Adjunct professor, Crawford School, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.