Irish premier rules out devaluation--but doubts continue
When Fieldcrest Mills Inc. recently abandoned its 50 percent stake in its Irish operations in County Kilkenny, among the reasons the company gave was that it considered the Irish currency overvalued.
In spite of such pressures from businessmen and bankers to devalue the Irish punt, the new prime minister, Charles J. Haughey, said the currency would not be devalued. In a speech before the Economics Club of New York the evening of March 15, he explained that because of the major role of imports and exports in Ireland's economy, ''. . .it has been, since we joined the European monetary system, the firm policy of the Irish government to maintain the value of the currency within that system.''
Doing this, however, is becoming increasingly difficult for the Irish. The inflation rate now stands at 22 percent and the balance-of-payments deficit is the equivalent of 16 percent of the gross domestic product.
The prime interest rate commercial banks charge their most creditworthy customers officially stands at 20 percent (though bankers will unofficially lend money overnight at rates up to 27 percent), and the budget deficit for calendar year 1981 was $1.218 billion. Mr. Haughey has said he would aim for a budget deficit of $1.057 billion in this calendar year. This was the same Irish target in 1981.
''I think the prime minister must do something over the short term,'' commented one banker with the Bank of Ireland after the prime minister's speech. And, in fact, one observer notes that government leaders often have stated they will strenuously defend their currencies before actually devaluing them.
For example, recently the Belgian government said it would defend the franc and two days later devalued it.
Phillips & Drew, an international investment banking house based in London, in a recent report said it saw little reason to expect pressure to ease on the Irish currency. With wage settlements ranging from 15 to 17 percent in the private sector and 10 to 12 pecent in the public sector, inflation will remain at double-digit levels. Fieldcrest Mills, in fact, complained publicly about the inflation rate in pulling out of Ireland. Other US manufacturers based there add that the high inflation rate makes it difficult to continue to export, particularly to countries with lower inflation.
The inflation factor alone should cause some realignment of the Irish currency, says one US banker. ''Given the differentials of Ireland with a 22 percent inflation rate and Germany with an inflation rate one-third of that, we feel another realignment of the currency rates is necessary,'' the banker says.
In his speech before the economics club, Mr. Haughey said, ''One of the primary objectives of our economic management is to bring down our rate of inflation especially at a time when the world trend in inflation is moderating.'' Exactly how Mr. Haughey will do this, however, is unclear. The prior government, under Garrett FitzGerald, was voted out of power when it presented a budget that appeared too tough for Parliament.
Mr. Haughey said he hoped to lower the inflation rate ''over a period of years.'' And, he added, the country's balance-of-payments and inflation rate should be helped some this year by the reduction in the price of oil. Ireland imports 90 percent of its energy requirements.
However, it will have to continue to borrow abroad to finance both interest payments on existing debt and to make principal payments. The country's foreign debt stood at $5.882 billion as of the end of the year, up about $1 billion during 1981, and its currency reserves were $2.326 billion, down roughly $100 million.