Friday, 2 March 2001

Porgnosis without prescription

The Malta Independent

Prognosis without prescription

For stating the obvious that the country has been living beyond its means for years on end, I and fellow writers who owe nothing to the government and refuse all accommodation meant to prejudice our freedom to criticise with objectivity, have been labelled as Geremiahs and Cassandras by this administration.

We have now been joined by` the Central Bank Governor Mr Michael Bonello. In reality former Governors Galdes and Vassallo had during their tenure issued similar warnings which clearly went unheeded.

Last November I had Criticised Governor Bonello for failing to address this serious issue in the presence of the Minister of Finance during the bankers annual dinner just before the budget.` I had exactly written:

..the Governor offered little or no views on the present state of the economy. The continued creep in Government recurrent expenditure, the widening gap in the balance of trade, the lacklustre tourism performance, the dearth of new foreign direct investment, the falling productivity of labour resources as the employed ranks continue to swell in a disproportional relationship to economic growth, the unfunded pension obligations,` all these for the Governor were unworthy of his good advice to the government.

This is a serious omission. The Central bank`s primary objectives of price stability and healthy financial system can only be achieved in an effective manner if the economy grows in a sustainable well balanced manner. This would avoid the need for the Central Bank to tighten its monetary policy to make up for excesses in government`s fiscal policy.

During last week public breakfast talk Governor Bonello made up for half his former omission. The correct half was a frank and emphatic identification of the problem of living beyond our means with resulting chronic deficits in the public budget and the country`s balance of payment. Governor Bonello, welcome to the rank of Geremiah and Cassandra!

The missing 50% was in the prescription for the identified malady. If the country is living beyond its means than it can only address the problem if it cuts back its life style to within its means.` One of the most effective ways of doing this is by using the devaluation tool. No other economic tool is more powerful and effective provided devaluation is` accepted for what it is, a reduction in the country`s standard of living versus the rest of the world.

Rather than reject outright the devaluation tool the Governor should have underlined that this would only be really effective and lasting if it forms part of a national economic re-structuring package which wins the support of the Unions. This would avoid` wage claims which would turn devaluation into an inflationary spiral requiring further devaluation. Rejecting devaluation outright is indicative of absence of real determination to tackle the problem until a crisis forces us to the unavoidable.

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