Friday, 1 September 2000

Whither Lira

The Malta Independent

Whither Lira`

It might appear strange that, as a professed doubter about` Malta`s` EU membership bid,` I keep signifying my` concern for the fact that the 42% component of the Maltese Lira basket reserved for the Pound Sterling and the US$ is causing serious handicap to the competitiveness of Maltese exports.

The Euro is again touching record lows on the foreign exchange market and the prospect of its recovery in the near term is not bright. In spite of impressive economic growth record in Euroland this is not matching the productivity increases being registered in the US.` Furthermore interest rate differentials between Euro and the $/Sterling are not expected to narrow as all countries seem to be considering edging up of the respective bank rates to address the threat of their respective economies over-heating into inflation.

Furthermore with price of oil apparently permanently structured above the $30 per barrel, it is feared that this will feed inflationary pressures in Euroland much quicker because of its low currency.` Economic observers fear this could trigger interest rate hikes by the autonomous European Central Bank which would kill off economic growth very early on in the cycle,` compared` to the US and UK that are enjoying record cycles of inflation-controlled economic growth.

In reality this initial weakness of the Euro is a blessing in disguise in the early stages of this fledgling currency.` It is the only practical way 12 disparate economic regions can survive a monetary union until they achieve reasonable approximation of their respective economic cycles.

On the local front the Euro weakness means that the local currency is causing severe loss of competitiveness of our product on our main export market. The inclusion of the US$ in the basket mainly reflects the importation of commodities ( mostly energy and grain products) and the import/export currency of our major foreign trade unit i.e. ST Thomson.

I disagree with the inclusion of the US$ in the basket for three pragmatic reasons. Firstly the basket should be export-trade weighted and not just trade weighted as first we have to export before we can import.` Secondly ST Thomson size has a habit of distorting our economic figures and the Authorities would do well to analyse the economy after excluding ST Thomson`s figure.

ST Thomson are operating in a particular market segment where there exist bottlenecks of supply and where clients pay what they have to pay to secure sufficient supplies of micro-chips. ST good fortune in positioning itself in such a market command situation cannot be allowed to deduce from gross macro-economic reading of statistics,` that all the others can take the Maltese Lira appreciation with the Euro` with the same ease as ST.

Lastly I don`t think that our economy with inflation record well above that of Euroland countries and with efficiency gains surely below it, can afford to sustain a currency which appreciates significantly against the Euro. This argument` will be more pronounced when sooner or later Enemalta will be forced to decide that it cannot continue to absorb the price increases of oil and of the US$ and will have to pass these increases down the line to consumers thus stoking up domestic inflation even further above the Euroland countries average.

Pragmatism demands that the Maltese Lira be` aligned more strictly with the fluctuations of the Euro. And this has nothing to do with our becoming or not a member of EU. It has all to do with safeguarding the export competitiveness of our economic units and not allowing` them at the mercy of international market forces over which they have no control whatsoever.

Alfred Mifsud

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