Committee Reports > List of Committees > Dáil > 1990 > Committee of Public Accounts > Final Report - Appropriation Accounts 1988

APPENDIX 30

EXCHANGE RISK COVER

1. The Government has in the past operated a number of schemes for the provision of exchange risk cover in respect of low interest loans denominated in foreign currencies, in situations where an appreciable difference existed between the rates attaching to such loans and domestic rates, and where particular circumstances warranted the granting of such aid. Schemes in the past have applied in respect of loans to industry, agriculture, tourism, energy conservation, fisheries etc. They have in the main been operated with the co-operation and assistance of the ICC, the ACC, the Associated Banks and the Building Societies. The Bord na Mona scheme, which involved borrowings of Ir£25 million, and to which reference was made at the Committee’s meeting of 19 July 1990 was one such.

2. The rationale for providing the cover in question is to enable individuals or corporate bodies who in their particular circumstances would face difficulties in raising funds at relatively higher Irish rates (where such is the case) to take advantage of funds available at more affordable rates without themselves incurring the risk attaching to possible adverse exchange rate movements. This risk is assumed, in most cases for a defined period, and subject to certain conditions, by the Exchequer. In some cases the conditions would include a contribution from the beneficiary towards funding the cost of any exchange losses which might arise.

3. The advantages accruing to the beneficiaries of such schemes and, to some extent at least, the wider economy in which they operate, are obvious. The Exchequer is also spared the necessity of providing funding “up front”. A major drawback, however, in the employment of exchange risk cover as an instrument of assistance is the uncertainty which attaches to the ultimate cost (hence the difficulty in estimation which gave rise to the excess on the Subhead in question on the Energy Vote, to which the Committee drew attention). Even in cases where a termination date is stipulated, the Exchequer’s ultimate liability is contingent on unpredictable exchange rate movements over the period of operation of the scheme in question. It is, in theory, possible that the Exchequer could gain in the short term as a result of favourable exchange rate movements, but experience has shown this to be a rare occurence. Any consideration of exchange rate guarantees would also need to bear in mind the fact that such schemes tend to undermine the economic purpose of interest rates i.e. the allocation of resources between consumption and saving and between various sectors of the economy.

DEPARTMENT OF FINANCE.