Friday, 9 March 2001

Ignoring the Bank

The Malta Independent

Ignoring the Bank

Central Bank autonomy is the backbone of` freedom of movement of capital, one of the basic four freedoms of EU membership.` All EU member countries, not just those that join the Euro mechanism, have to ensure that their Central Banks are in a position to make their own independent assessment of the economy and to implement their monetary policy independently of the government. This` in line with the objective of` economic stability and low inflation targets.

Indeed those countries that join the Euro go one step further and delegate this authority to be exercised in a collective manner by the European Central Bank and not by the domestic central bank.

Central Bank autonomy is an important gear in the checks and balances mechanism of the democratic system. Indeed in Germany the President of the Bundesbank was at times regarded with temerity even by the politicians who would not disregard the Central Bank`s counsel without giving due account to the electorate. The same is true in US where like likes of Volker and Greenspan carry more weight in their assessment of the economy and influence upon` the important variable of perception and confidence than the Treasury Secretary or indeed the President himself.

Malta is an exception. Not only the Central Bank Act` still gives possibility for the Minister to impose his views on those of the Bank but the Bank`s assessment of the economy is either ignored by the government or in certain cases openly challenged by the Minister for Economic Services.

Successive governors of the Central Banks have been issuing regular warnings since the early 1990`s on the aggravating situation of the structural deficit in public finances.` `The Minister of Finance has ignored such warnings with monotonous regularity so that a promised reduction of the fiscal deficit to within 3% of the GDP by 1996 was in fact quadrupled to nearly 12%.` The problem has become so chronic that rigorous tax measures which have slumped domestic demand are leaving little effect on the deficit which obstinately persists due to uncontrolled growth in public recurrent expenditure.

The recent outburst of the current Governor went beyond the public sector fiscal deficit. It also rang the alarm bells regarding the development of the country`s balance of payment deficit with consequent loss of official foreign exchange reserves. With good reason too. Whereas in 1999 during the first 9 months foreign reserves increased by Lm56 million,` in the same period of 2000 reserves contracted by Lm35 million.` In the same period the balance of payments current account swung from a surplus of Lm10 million to a deficit of Lm85 million.`

Reporting on this trend the Dec 2000 Quarterly of the Central Bank states that during the period the surplus on the services account was down by Lm32 million, the surplus on the travel account was down by Lm8 million whilst net investment income was down by Lm9 million. All this against disquieting news that the company which accounts for half of our manufacturing exports is passing through a cyclical contraction leading to unavoidable loss of both nominal exports as well as net value added.

In the face of all this the Minister for Economic Services finds no problems in disregarding the warnings of our Central Bank and takes consolation that the deficit in the Balance of Payments represents mostly higher imports of capital goods.

This is the very reason why Central bank real autonomy is an indispensable component of democratic checks and balances. The Minister has to please an electorate that is keeping him accountable for lightly given easy money promises. The Central Bank has to defend the real value of our money irrespective of the government of the day and has the tools at its disposal to ensure that devaluation of the lira does not become the unavoidable measure which it is in fact fast becoming.

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