savenaca narube : balance of payments - a central banker ’ s view opening address by mr savenaca narube, governor of the reserve bank of fiji, at the regional course on balance of payments and international investment position, suva, 11 - 22 april 2005. * * * introduction mr jon craig and mr michael andrews at pftac our course facilitators - mr jens reinke of the imf, mr mahinder gill - a former division chief of the balance of payments and external debt at the imf ) and mr paul mahoney of the australian bureau of statistics. distinguished delegates on behalf of the government of fiji and the reserve bank i would like to welcome you to and the workshop participants to this regional training course on balance of payments. this is the first regional course and supplements the existing courses held by the imf in washington d. c. and at the singapore training institute. i would like to extend my appreciation to the imf and pftac or organizing this course. these forums provide an excellent opportunity for statisticians and economists in the region to exchange knowledge and experiences. why is the balance of payments important? the balance of payments show a country ’ s transactions with the rest of the world. the balance of payments records all the flows of goods and services of a country with the rest of the world, and flows of other types of income into and out of the country. the current account brings all these flows together. it is important for domestic policy making because it shows that calls on a country ’ s foreign savings equals net savings in the domestic economy. so a deficit can reflect domestic conditions. this may be good - if it comes about because investment exceeds domestic savings, but it ’ s bad if its due to excess consumption. regardless of the cause of a deficit, a deficit has impact on debt and this can lead to crisis if debt becomes too large and reserves become too low. debt and reserves are recorded in the international investment position. so the balance of payments system is vital in economic policy making, because of the important relationship between external and domestic economic developments, timely, reliable, and comprehensive balance of payments statistics are an indispensable tool for economic analysis and policy making. indeed, with the growing interdependence of the world ’ s economies, the need for such statistics - which reflects in part the underlying movement towards greater liberalization and integration of markets - has increased over time. also, balance of

in front of you. i mean, of course, the view that monetary policy killed the new economy. so let me begin the story of the slowdown where it started – that is, with monetary policy. an important question about the economic performance over the period from 1996 to mid - 2000 – and a question of key importance to monetary policymakers – was whether it was sustainable. to be sure, if the higher rate of productivity growth continued, growth could remain elevated compared to its average rate over the previous two decades. but even if the new, higher rate of structural productivity growth were to persist, could aggregate demand grow faster than the upward - revised rate of increase in supply, and could the unemployment rate fall indefinitely, without the economy overheating and inflation rising? in other words, did new - economy forces eliminate the risks of overheating and higher inflation that were so much a part of the " old " economy? my unambiguous answer was " no. " and that answer was shared by the fomc, motivating the monetary policy tightening that began in the middle of 1999. given the uncertainties about a sustainable configuration of unemployment, output growth and inflation, we lacked a precise roadmap of where we needed to go. while we didn't know precisely what trend growth was, we knew for certain that growth had been persistently above trend – given the continuing decline in the unemployment rate from 1996 though mid - 1999. so it seemed prudent to slow growth in an attempt to move toward trend and that, i believe, was the intent as monetary policy began to tighten in mid - 1999. some, at least, worried about a second set of concerns related to sustainability. were prevailing equity valuations sustainable? if not, a correction could occur. was the high and rising current account deficit sustainable? if not, the dollar could decline sharply. was the increase in the ratio of debt service to income and the low, even negative, personal saving rate sustainable? if not, consumer spending could slow sharply. the late herb stein, a very wise economist, once said that if something isn't sustainable, it won't continue! but it is often the case that unsustainable developments do not spontaneously unwind. instead, they often reverse or correct only when a change in behavior is triggered by some external event – for example, a global financial crisis, an unexpected policy development, or an unforeseen deterioration in broader conditions. iv