For discussion FCR(95-96)132
on 8 March 1996

ITEM FOR FINANCE COMMITTEE

HEAD 188 - TREASURY
Subhead 188 Difference in exchange

Members are invited to approve supplementary provision of $20 million under Subhead 188 Difference in exchange.

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PROBLEM
PROPOSAL
JUSTIFICATION
FINANCIAL IMPLICATIONS
BACKGROUND INFORMATION

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PROBLEM

The approved provision of $5 million under Subhead 188 Difference in exchange is insufficient to meet the estimated book losses resulting from movements in exchange rates in 1995-96.

PROPOSAL

2. The Director of Accounting Services (DAS) proposes supplementary provision of $20 million under this subhead.

JUSTIFICATION

3. The provision of $5 million under Subhead 188 is a token sum to cover losses resulting from movements in exchange rates in respect of transactions involving foreign currencies. The recent appreciation of the US dollar and hence downward movements in exchange rates of foreign currencies against the US dollar has resulted in diminution in the value of the following -

1. balance of the foreign currencies held in Government’s interest-bearing deposit accounts in Hong Kong; and
2. balance of imprests held by overseas offices and advances held by overseas agents.

In addition, movements in exchange rates in the course of the year have led to exchange losses in respect of the running expenses of overseas government offices, as well as payments and receipts involving foreign currencies made on behalf of other government departments through various overseas government offices and overseas agents.

4. On the basis of the actual expenditure as at 31 January 1996 and the prevailing and forecast exchange rates of foreign currencies against the US dollar, DAS estimates that the net exchange loss for the financial year 1995-96 will exceed the approved provision by $20 million, calculated as follows -

5. As regards paragraph 4(b), the further loss of $7,066,000 represents our best estimate of the loss on exchange that we might incur between now and the end of the financial year 1995-96 based on the assumption that the US dollar will strengthen further against other foreign currencies. As it is difficult to predict movements in exchange rates, this estimated loss may not materialise in full as much will depend on the exchange rates prevailing at the end of the financial year.

FINANCIAL IMPLICATIONS

6. We are seeking supplementary provision of $20 million under Subhead 188. If Members approve the proposal, we shall offset the supplementary provision required by deleting an equivalent amount under Head 106 Miscellaneous Services Subhead 251 Additional commitments.

BACKGROUND INFORMATION

7. There are ten overseas government offices located in Brussels, Geneva, Washington, New York, San Francisco, Tokyo, Toronto, London, Singapore and Sydney. In accordance with normal practice, to protect against currency fluctuations in the course of the year, DAS purchased non-US foreign currencies at spot rate at the time of preparing the 1995-96 draft Estimates to cover the running expenses of non-US based overseas offices. He held these foreign currencies in interest-bearing deposit accounts in Hong Kong and made remittances from these deposit accounts, either fortnightly or monthly, to the overseas offices for payment of the expenses incurred. As at 31 January 1996, the balance of the foreign currencies held in deposit accounts was equivalent to HK$155.4 million, as detailed in the Enclosure.

8. In addition, each overseas office holds an imprest to meet its running expenses. These imprests, together with some advances held by overseas agents, amounted to HK$52.8 million as at 31 January 1996, as detailed in the Enclosure.

9. DAS revalues the foreign currencies at the end of each month, with exchange gains credited to a deposit account and exchange losses debited to an advance account monthly. At the end of the financial year, he will bring these two accounts together to ascertain a net gain or a net loss for the year. He will credit any net gain to Revenue Head 11 Fees and Charges Subhead 188 Treasury Item 030 Difference in exchange, and debit any net loss to Expenditure Head 188 Treasury Subhead 188 Difference in exchange. He has recorded a net gain in three out of the past five financial years, as follows -

Finance Branch
February 1996

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Enclosure to FCR(95-96)132

Foreign Currencies held by the Treasury as at 31 January 1996 (all currencies in ’000)

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