Maltese Euro

The Malta Independent

Maltese Euro

How are Maltese exporters to the Euroland countries supposed to remain competitive when the Maltese Lira has strengthened by 7% against the Euro over` the last 12 months whilst running a higher level of domestic inflation`

All this is the result of our ill-conceived policy of basing the external value of the Maltese Lira on the basket of `supposedly trade weighted currencies including the Euro, the US Dollar and the Pound Sterling.

This method has two big defects. The first is that it takes trade weighting to include imports, including imports of commodities which are ordinarily priced in the US Dollar as invoicing currency rather than because they are imported from the` US. Secondly no allowance is made to the fact that one particular industry, ST Thomson, dominates the industrial import and export scene, in a way that statistics are falsified by their dominance. If ST Thomson does exceptionally well and everybody else performs poorly, the overall trade statistics could still reveal a satisfactory performance when reality outside Kirkop is very different.

No matter how important ST Thomson is, it would be wrong to discard the rest. I have often argued that Malta should produce two sets of trade and economic statistics, one including and one excluding ST Thomson.` After all whilst ST Thomson handles` more than half of our exports, their share of manufacturing employment and value added is much more restrained.

Through the current` exchange rate system we are allowing the strength of the US Dollar, over which we have not the remotest control, to undermine the competitiveness of the larger part of our export productive base` for goods and services to our major Euroland` markets. Can we allow our exporting sector to be hostage to events outside our control` Is this not a repeat of the horrible 1982-1985 recessionary experience`

As a small resourceless country we need to export before we can import. The composition of our rate of exchange reference basket has to be export weighted and not simply trade-weighted. And exports have to be measured in value added not in gross invoice terms.

I am convinced that if this measure is adopted the US Dollar will drop out of the basket of currencies which will be restricted to just Euro and Sterling and eventually just Euro. This is not the same as saying we must have a monetary union with Euroland. The flexibility to change the composition and adjust the parity remains an important part of our economic tool-set which cannot as yet be given up.

As to the appropriate level for the exchange value of the Maltese Lira I would take as a reference point our last year of economic equilibrium which goes back to 1994 when the average exchange rate with the Euro was 2.23 compared to the current 2.50,` a variance of 12%. This over-valuation is to some extent also borne out by the Central bank`s measurement of the real exchange rate level.

Isn`t this` a case where our Central Bank is showing insensitivity or inertia which is `sustaining `imported consumption at the expense of fundamental erosion of our production and export earning capacity.

Alfred Mifsud