Tuesday, March 18, 2014

The BoP Current Account: IFSC v non-IFSC

Last week’s slew of economic data from the CSO did little to provide a clear picture of the current direction of the economy.  In the national accounts data, 2013 GDP was down, albeit only slightly, while GNP was up a hefty 3.3 per cent.

GDP is a measure of the output that takes place in a region; GNP is a measure of the income that accrues to residents of a region.  A rise in GNP should be unambiguously good.  However, across the economy there is little to indicate what is driving the increase in income for Irish residents.  Employment is up but little else is.

Also released were the Balance of Payments data and this seems to paint a very positive picture.

BoP Current Account

The turnaround from a 6 per cent of GDP current account deficit in 2008 to a near 7 per cent of GDP current surplus in 2013 is impressive.  This is important for a country with a large foreign debt as one way to repay the debt is to have a net gain from transactions with the rest of the world. [The debt can also be paid down by selling domestic assets to foreigners.]

In part the improvement was driven by the fall in imports after the end of the credit-fuelled consumption and construction boom in 2008.

BoP Merchandise Imports

On issue with this is that the fall was abrupt and was completed by 2009 as construction, car sales and other elements of the economy ground to a halt.  So what has driven the continued improvement in the current account since 2010?

Last year, Prof. John Fitzgerald in a useful note outlined the impact that the retained earnings of companies re-domiciling to Ireland had on the figures.  In essence, when a company moves its headquarters to Ireland any retained earnings it has are counted as Irish “income” at the time the company moves to Ireland.  These are added to GNP as the companies have become Irish resident but they have no impact on the domestic economy.  If the companies subsequently remit them as dividends to their foreign shareholders they will subtract from GNP at that time.

The rise in the inflow of these earnings in 2010 is fairly clear.

BoP Reinvested Earnings

And the net flow due to re-domiciled companies was estimated by John Fitzgerald to be:

JF Redomiciled Companies

Again, one issue with this is the stepped nature of the increase.  This undoubtedly led to an improvement in the current account but in relative terms the current account continued in 2012 and 2013 when the impact of retained earnings seemed to have levelled out (though 2013 figures are not available).

Within the Balance of Payments the CSO provide a breakdown between the “IFSC economy” and the “non-IFSC economy”.  The performance of the current account for each are shown below.

IFSC v non IFSC

In 2012 and 2013 the current account associated with “IFSC” companies has been increasing while that associated with “non-IFSC” companies has been flat.  The “non-IFSC” current account has improved since 2008 – because of the import reduction and also likely because of the re-domiciled firms – and there is only a very small “non-IFSC” surplus.

It is not clear to what extent the re-domiciled firms are “IFSC” or “non-IFSC” but it can be seen that the “IFSC” current account was largely unchanged in 2010 and 2011 when the effect identified by the John Fitzgerald was increasing.  It seems as though the impact of the re-domiciled firms is reflected in the 2010 improvement in the “non-IFSC” current account.

We can further break the “IFSC” balance into that determined by trade (service exports minus service imports) and that attributable to income (income inflows minus income outflows).

IFSC Balances

Both improves in 2013, but the balance of services for “IFSC” companies improved in both 2012 and 2013.  What is noticeable is that the service trade gains for IFSC companies is not reflected in an outflow of IFSC income.  The trading gains are likely accruing to Irish-resident companies and are thus recorded as part of GNP.

If the changes in the IFSC balances were due to the timing of the re-domiciling of companies it would only show up on the income side.  As the IFSC service balance is also improving it is the case that the improvement in the Balance of Payments current account (and thus the improvement in GNP) is down to the activities of IFSC companies. 

There aren’t many who would consider that an improvement in “Irish” income.  There are gains from this as around €1 billion of corporation tax is paid by IFSC companies annually (though this is a claim from the IFSC itself).  All this highlights the difficulties in ascertaining anything about the direction of the Irish economy given the impact things like the IFSC and MNCs have on the national aggregates.

In 2008 and 2009 Ireland’s current account improved because of the large drop in imports.  It seems much of the improvement since then can be attributed to re-domiciled firms (which are foreign owned) and the activities of IFSC companies.  They are unlikely to be of much use in helping to pay down our external debt.

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