Is devaluation so dirty

Maltastar

Is devaluation so dirty`

Devaluation of Maltese Lira is anathema. Not just for the government, but for a large cross-section of society including the unions and those who inspired the economic policy of the last Labour government of the 1980`s. To these and to others` devaluation should not even be mentioned.

Now this is quite strange. In a world of fluctuating exchange rates among the major economic blocks, exchange rate policy` is still an important tool of economic management.

Thus the euro area saw their currency devalue some 26% against the USD since the official launch of the euro currency on 1st January 1999. The Japanese yen lost 15% of its value against the USD during the last 3 months. Nobody screamed crisis, nobody obstructed, nobody suggested that such a thing is undoable. It was done by the market in an orderly fashion to reflect the relative difference inthe level of domestic inflation and in the level of productivity.

If Japan and Euro have problems of slow economic growth (for the euroland area) or outright recession (for Japan) just imagine how much more compounded these problems would be if they were operating under fixed exchange rates regime.

I admit, in Malta`s case devaluation could be much economically and socially disruptive. Being a small minute economy substantially integrated with the global economy (so that our imports and exports reach a much higher percentage of the gross domestic product than larger economies with much bigger domestic market) devaluation on its own is no panacea and ought to be avoided if at all possible. But is it possible` Should we at least discuss the issue soberly without being looked at suspiciously as if I am` suggesting bringing down the roof on the whole government edifice built as it is,` on the shaky foundation of debt` and on cardboard walls of consumption based growth.

I compare devaluation to a very sour medicine which is desperately needed by a sick patient.` The medicine on its own might not give a 100% remedy and has to be accompanied by regular exercises, healthy eating,` total stoppage of smoking and excessive drinking and other precautions.` But without the sour medicine recovery would just not start.

In such a situation should the application of the sour medicine be completely ruled out` purely on the basis that it is just too sour. Should` the sick patient be left to` rot in his malady`

So when government ministers issue outright denial statement that devaluation of the Maltese Lira should not even be talked about , let alone considered or proposed, are they saying that the country is not economically sick or are they saying that in spite of the economic sickness acknowledged by one and all,` we should not give the patient the needed medicine just because it tastes so bad`

So the argument should be: is the economy sick enough to make devaluation a remedy to be considered`

Not all sickness require the same type of medicine.` Devaluation is the sort of medicine that economic managers should consider when they have enough proof that the country has lost its competitiveness with the rest of the world and is suffering from lack of inward investment and lack of export led-growth and possibly from balance of payment problems.

Applying this to Malta`s case our competitiveness with the rest of the world is measured technically by what is referred to as REER( real effective exchange rate).` REER is derived by taking the NEER ( nominal effective exchange rate) which is based on a trade-weighted average of changes in the exchange rate of the Maltese Lira against the currencies of our major competitor countries, including our trading partners,` and adjusting it for relative movements in consumer prices.

May be its too technical to explain in one paragraph but take it from me REER is an effective measure of competitiveness with the rest of the world. The graph herewith is reproduced form the December 2001 quarterly of the Central Bank of Malta (page 31) and shows that since 1995 we have lost 10% of our competitiveness with our trading partners. The REER was at 100 in 1995 and exceeded` 110 as at September 2001. Without the slightest doubt we have lost our competitiveness which is keeping away foreign investment; except from those industries that are already established here and that,` more often than not, keep` investing` to remain competitive by` reducing labour cost and shed off employment rather than to create new opportunities.

I have no doubt that Malta`s` economy is sick because we lost our international competitiveness.` The solution cannot exclude a devaluation although I grant it that on its own it would produce very short term benefits complicating the search for the durable true solution. But as a part of an overall recovery package devaluation cannot be excluded provided its is managed by capable hands, adequately dosed and supported by an array of other compensating measures, social, fiscal and moral. This is too complicated for the current administration that continues to seek simple solution in amassing horrible debt and shocking privatisations.` So the government prefers letting the economically sick patient rot in its malady.

Devaluation is a dirty word only to whoever` cannot use it as part of an effective recovery plan.

Alfred Mifsud