IMF calls for lower Australian dollar and budget cuts

An International Monetary Fund review of Australia released today recommends the Aussie dollar should trade at “low US80c” and backs the federal government’s anticipated budget cuts.

The Australian dollar closed yesterday at US90.63c and the IMF’s review was prepared when it was US89c, but the IMF still characterised the Australian dollar as too high and 5% to 10% higher than it should be.

The IMF model suggests the Aussie dollar should be between US80c and US85c.

"Australia's floating exchange rate has been a vital shock absorber for the economy during the upswing of the mining investment boom," the IMF report says.

But more recently as minerals prices have fallen, "the exchange rate did not depreciate as would normally be expected".

It says government officials have expressed surprise that the exchange rate has remained as high as it has and Reserve Bank staff have told it that market intervention remains "part of the policy toolkit, although more recently used only at times of market dysfunction".

Export Council of Australia general manager Peter Mace told SmartCompany there is “a bit of consensus” around exporters that around 80c to 85c would be an appropriate level for the dollar to be at.

“A lower dollar as a general rule is good for exports,” he says.

“There are a lot of vagaries in terms of the drivers on trade, certainly the commodities side of export has an impact.”

But Mace cautions that exporters’ competitiveness is not just reliant on the dollar.

“It’s built on international supply and demand structures, which is dependent how our trading partners are pricing items,” he says.

The IMF report recommends budget deficit reduction as a means to “take pressure off the dollar over the medium term”.

“Staff supported the broad aim of improving the budget position over the medium term, which would help rebuild fiscal buffers and increase the policy scope to deal with adverse shocks, but cautioned that it should be done in a way that does not disrupt growth prospects in the near term,” the report says.

The IMF calculates Australia will have the largest spending growth among 17 advanced economies between 2012 and 2018.

Outlays are expected to rise by more than 15% after inflation taking into account the upcoming government spending surge involving expensive promises on education, disability services and paid parental leave.

“Achieving and sustaining a surplus over the next decade will be challenging in light of current social spending commitments,” the IMF says.

“Early decisions on policy changes required to ensure the medium-term consistency of fiscal policy goals would help to preserve policy flexibility.”

This article first appeared on SmartCompany.