Friday, 31 December 2004


The Malta Independent - Friday Wisdom

Now we all know what a tsunami is. Not just the huge waves but the devastation and destruction, as man and technology stand powerless against the might of huge water energy released by sub-marine earth tremors.

As a nation, we can count our blessings that the calamity has happened way out from where it could expose us to such dangers, even though we worry about fellow nationals who were in the eye of the storm and suffered injuries and in some cases have not yet been located to confirm their well-being.

However, as citizens of the world we cannot but show compassion and solidarity with the victims of such natural disasters, whatever their nationality, creed or colour. We must send all possible help to ease the pain and deprivation at this great hour of need by so many, possibly millions, who have lost their loved ones and/or their material belongings.

Our simple human mind might tend to question the logic of the Almighty in the first place for permitting such acts of God (as so aptly described in insurance terms) and then for locating the disaster in areas already enduring great suffering through poverty and sub-standard living standards.

Many of the affected areas depend on tourism as their main economic source. Beyond the immediate loss and material damage, these relatively poor countries could soon find out that they have also lost their main source of livelihood, as tourists become wary of visiting such destinations until events fade from memory. By rough justice, the
Mediterranean, Malta included, could well benefit from a positive impulse of tourism as Europeans re-design their long-haul holiday destination plans to somewhere closer home. This does not mean that Malta is safe from tsunami risks. However, we are risking more a financial and economic tsunami than a geo-physical one as that so harshly experienced by south-east Asian countries.

As usual wise after the event, many have queried why tsunami alarm systems were not in place to give advance warning to the people in coastal areas to head for higher ground. Probably such systems will now be installed and kept on alert, even though we hope that these are once in a century events.

However, for our financial tsunami risks, the alarm system is already in place and ringing quite loudly. Amber and red lights are flashing all over the economic scenario. We have had no real economic growth over the last four years, 2001-2004. A high public deficit position is ending its ninth consecutive year and little improvement is planned for next year. Higher taxes have just financed higher expenditure and more of the same is planned for 2005, with some theoretical improvement postponed till 2006 and 2007. Public debt has doubled these last six years in spite of anaemic growth. Privatisation revenues continue to be lost in the fiscal wash.

New productive investment is nowhere near the levels needed to put us on a renewed growth trajectory; our inflation is higher than that of our competitors and our culture of savings has practically dwindled to zero as we try to keep our standard of living by dipping into past savings and incurring consumer debt.

And despite so many advance signals warning us that we could be risking a financial tsunami if we continue to ignore the problems, we cannot even bring ourselves to agree on a trivial measure regarding a reduction of public holidays and an increase in working days without additional compensation, which is nowhere near the real adjustment necessary to bring our standard of living back to within affordable terms and plan its consistent growth based on productivity and earnings rather than on consumption and debt.

Rather than address the issue at source and reverse the measures so capriciously taken by a PN government in 1987 to increase public holidays and vacation leave as a reward to the electorate for endorsing a PN government with their majority, the government tries to hide behind its own shadow by fudging legislation which declares Christmas in 2005 as not being a public holiday.

Unions, on the other hand, try to defend the indefensible, thinking that we can continue to holiday ourselves through our economic problems.

It is equivalent to the unfortunate holiday-makers on the
beach of Phuket, had they been given the chance to be fully aware of the impending arrival of the gigantic waves, wasting precious time arguing about the queue to use the showers rather than just run to reach inland safe places.

If we continue to tear this country apart by conflicts about the totally inadequate measure of reversing a few meaningless public holidays, we are risking the accelerated arrival of the financial tsunami which will just wash us all away, with most of the suffering reserved for those who can least defend themselves.

When this happens, we certainly cannot raise claims about the absence of economic warning signals to give us pre-advise in good time to avert the crisis. We will have no one but ourselves to blame.

Sunday, 26 December 2004

Assessment and Resolutions

The Malta Independent on Sunday 

As another year bites the dust and we start the 41st calendar year after independence, we ought to make an honest national assessment of where we really stand. On the axiom that life begins at forty we should then proceed to make a resolution about where we are economically going to take this country, whether to the dogs or to where its true potential lies.

If we look at ourselves through the economic mirror it is quite obvious that most of us, excluding those 15% or so who are living near or below the poverty line, are like pimps living off the economic prostitution of the country while complaining about its lost virginity and values.

Are we not enjoying a better standard of living at the expense of our national competitiveness through our over-valued rate of exchange` Are we not all individually better off as the country finances consumption and pseudo investments through borrowed money which is pumped into the economy creating artificial and unsustainable demand`

Are not most of us enjoying the economic benefit of increased residential property values as low interest rate policy, aimed to help government to finance its recurrent shortfalls with minimum pain, together with increased liquidity generated by the same government borrowing, against a background of dearth of investment opportunities, has forced real estate prices to dizzy height levels`

Whilst the country has experienced four consecutive years of no real economic growth we have individually continued to improve our standard of living through artificial transfer of wealth from the public to the private sector resulting in a massive public debt build-up even whilst the economy was stagnant or outright contracting.` Like the pimp we have been taking a larger share of the prostitute`s stagnant earnings forcing the prostitute to borrow to keep us happy and in the process failing to plough back earnings to sustain economic regeneration.

Basically we have rendered ourselves as rich citizens in a poor country. That this is unsustainable is stating the obvious.` At which point such unsustainability will snap is anybody`s guess as much depends on the psychological stress on people`s trust in our financial system. For as long as the government can continue to finance our `sins` of over-consumption through easy, long-term, cheap domestic borrowing the situation can be carried for quite some time.

But carrying the situation through debt build-up far in excess of economic growth is no durable solution. Financing the problem does not equate to resolving it.` As some point the excessive debt build up will start worrying investors on the sustainability of the financial system and as they demand higher rewards for the perceived higher risks of government funding, the whole system will crash like a tall cardboard structure. So unless we want to leave our children a legacy of worthless financial assets as the state will be forced to roll back the rich citizen to poor country ratio, we must act now before it is too late. After all when we chose to become members of the EU and celebrated the event with glitzy lights and flowing champagne, we also took upon us the obligation to wear the financial discipline of Euro membership.

A discipline to bring the government financial budget to a neutral position, with temporary deficits within 3% of GDP.` A discipline to reduce our national debt to within 60% of the GDP. A discipline to bring down the inflation level to the best practice of existing Euro members. What this discipline means in practice is that we have taken a commitment to reduce our standard of living to within a sustainable level to ensure we can leave a larger share of the national cake to be re-invested to grow the economy and bring a better balance between the macro and micro financial health situations.

This adjustment following long years of benign neglect cannot be either painless or conducted without strong leadership. Clearly we are very mentally and psychologically ill-prepared for the adjustment pain and we have no leadership to take us through the difficult patch where we get motivated to keep our eyes on the prize as we withstand the temporary adjustment pain.

The much talked about and elusive social pact is in reality nothing else than a programmed adjustment pain sharing exercise.` The absence of clear leadership from the government side has meant that the social partners could not agree on any such pain sharing exercise. The totally inadequate measure to forfeit extra days of leave for public holidays that fall on weekend has created a government instigated clash between unions and employers who are committed otherwise through signed collective agreements.

It is no perceived leadership on government side to force social partners to direct clashes to avoid taking real measures that could have temporary political negative fallout. Leadership comes from re-definition of public holidays `and from acceptance that the 1987 decision to re-instate public holidays that were previously abolished was economically capricious and unsustainable.

It is no perceived leadership to demand sacrifices from the social partners, especially from the union side, and then father capricious projects like Dar Malta, or `give away Maltese patrimony like Chambray ( where Memmo & co are getting paid handsomely for giving us back what we originally gave them for free and failed to develop -` a replica of what had happened years earlier on a smaller scale on what is now the Bay Point Radisson project originally given to French investors). It is no perceived leadership to `privatise the Freeport for maximum potential income that does not even cover our interest expenses for a loan raised to finance a small part of the privatised project, or resist making an alpha to omega independent investigation as to why the Mater Dei Project is going to be completed so much out of time, out of budget and on the basis that its high operational cost will mean the sure death of our free public health service.

It is no perceived leadership to promise us curtailment of government expenditure in 2006 and 2007.` If the chain smoker really means to stop smoking he has to do it today and get prepared for managing effectively the nicotine withdrawal symptoms. Promises to stop smoking tomorrow often remain unfulfilled pious wishes.

A honest and equitable pain sharing economic regeneration exercise can only by brokered by a government with` strong leadership qualities which is ready to admit its past faults and show us the way to the future now ( not next year of the year after) accepting in the process to carry part of the pain through politically unpopular measures.

For the new year, rather than a resolution I offer a prayer for this country`s leadership to acquire the qualities desperately needed and so far miserably unexhibited.` Acquisition of such true leadership qualities is the best method to transform into tangible economic progress my otherwise pious good wishes for a Happy New Year to all.

Friday, 24 December 2004

Yes We Can

The Malta Independent 

It is not just because on Christmas Eve one has to try to be positive. It is mainly because I do believe that for all the economic travails that are finally widely acknowledged, we can, if we really want to, return to a sustainable growth path within a relatively short time, I would say anything between 18 to 36 months.

However we need to look at problems in the face and apply solutions at their source not at their symptoms. And most of all we have to accept that solutions cannot be either painless or entirely equitable.

The problem is that this country has for quite a few years been living beyond its means and this is showing up in stagnation of economic growth and rapid build up of public and private debt just as savings ratio, hitherto our strongest economic point, has fallen dramatically.

The only truly effective solution is to bring this country back to living within its means and then promote economic growth which would permit a sustainable improvement in living standards based on productivity rather than on debt based consumption.

Politicians are promising us that they can do this gradually so that the pain is minimised. The government is suggesting a gradual plan which reduces government expenditure substantially in the years 2006-2007 just before the 2008 elections.` The opposition, or at least its leader, has proposed a gradual depreciation of the currency.

My concern is that politicians cannot be trusted with gradualist programmes. At some point during the next year we will be crossing the mid-term legislature divide.` Experience shows that beyond this point, politicians eyes are on the next elections. The cautious economic approach of the first half of the legislature is often thrown to wind and the economy becomes once again hostage to the politicians` fortunes. Problems start being hidden rather than addressed and all objectives become centred on the need to appear bright and polished for the election date irrespective of the problems hidden beneath the thin polished surface; problems which emerge with cruel reality as soon as the election is over.

It could be so different if we find the courage to do what has to be done with determination sourced by inspired leadership.` It is for this reason that I have argued over the last four years that a solution which excludes on a matter of principle the use of the exchange rate policy will simply fail to deliver.` I re-iterate that nominal exchange rate adjustment on its own will not deliver the bacon, but its exclusion from a sensible cure package will also similarly fail.

We need to acknowledge that time is not on our side especially if we mean to embrace the discipline of ERM II in 2005 and eventually of the Euro fusion sometime not far beyond 2007.

The only policy that can deliver instant restoration of our international competitiveness is the instant downward revision of the nominal rate of exchange by anything between 10% to 15%, principally to remove the real overvaluation that has been allowed to accumulate since 1995 through negative inflation differentials, and also to ensure that we enter ERM II at a sustainable rate.

We have had the Prime Minister and various Ministers preaching that this is an economic heresy and that it would spell financial disaster. They frankly know not what they are talking about and are probably repeating what economists detached from the real economy are telling them.

Reality is that such instant removal of the over-valuation in our rate of exchange will give a boost to the productive sector, restore the competitiveness of our export and tourist product, generate growth and employment based on sensible economic realities and reward the productive employees in the private sector who can negotiate better pay with their employers based on the latter`s improved profitability.

Obviously nothing comes without a price. The public sector, which is unquestionably over-manned and inefficient, must accept that no compensatory wage increases are available and that the reduction in their real wages is meant to price into their package the extreme job security they enjoy free from competition pressures. In no uncertain terms they have to be told that the measure is meant to build market mechanism to inspire an orderly shift of human resources from public to private sector employment where better compensation awaits those who can find the courage to show that that can perform just as well in a competitive environment. This shift would reduce government recurring expenditure where it matters, and generate the rewards for the investments made to deliver government services through IT.

Clearly there remains the not economically active segment (pensioners, genuine unemployed and social cases) that need to be helped to have the cost of living impact of devaluation cushioned. This can be done through one-off transfer payments which government can fund from windfall revenues it can lay its hands upon as it neutralises the windfall gains made by the financial sector through the devaluation measure.

Yes we can do it, but only if our leaders inspire us to look the problems in the face and get on with the real cure that will get us back on the road to economic growth much sooner than is otherwise possible. Given a challenge and directed by inspired leadership who can keep our eyes on the prize as we go through the unavoidable pain we can do it as good or even better than anyone else. We would then celebrate many happy Christmases with the pride of achievement.

Sunday, 19 December 2004

Safeguarding the Lira`s Reputation

The Sunday Times of Malta 

Economists Prof Lino Briguglio and Gordon Cordina (The Sunday Times 12th December 2004 ` Some common sense about the exchange rate and competitiveness) give us a text book lecture on why the exchange rate policy should not be considered as part of a cure package to address our economic ills.

Regretfully they seem detached from economic reality as being experienced in the real economy, particularly in the productive sector that has to compete and win globally.

Briguglio and Cordina argue that the Central Bank would be breaking its promise if it endorses a devaluation of the lira. They argue that the ultimate aim of the rate of exchange policy should be to maintain currency stability. I totally agree with this but question whether stability should be kept in the nominal rate of exchange or in the real rate of exchange.

The Central Bank adamantly keeps the nominal rate of exchange pegged and seems unconcerned that our real rate of exchange has overvalued itself by 11% (until July 2004) over its 1995 base and is likely to continue spiralling upwards as our inflation exceeds that of competitor countries.

So whilst I fully agree that we should never have brought ourselves to the point where we require a devaluation of the lira to regain competitiveness, the fact is that we are in a state where the lira is seriously misaligned against its real value because the Central Bank broke its promise to keep domestic inflation rate at a competitive level. And it did so in betrayal of its autonomous charter as its reduced interest rates to levels not justified by the huge fiscal deficit in order to make it easy government to borrow and delay the discipline to address the unsustainable fiscal imbalances.

I cannot therefore agree with Briguglio and Cordina`s appeal to leave the exchange rate policy in the hands of independent and capable central bankers. Experience shows that their claims for such attributes is at best doubtful.

Temporary exchange rate misalignments could normally be addressed by adopting anti-inflationary measures in order to gain an inflation advantage over competitors and regain competitiveness without the need to change the nominal rate of exchange computation. With international inflation at very low levels it is impossible to adopt this approach for three reasons. Firstly because if we go below the low inflation levels of our competitors we practically enter Japanese style deflation which is hardly an auspicious way to regain competitiveness.` Secondly because the misalignment is too big to address by attempting reversal of inflation differentials and it would take an inordinately long time to regain competitiveness without adjusting the nominal rate. And lastly there is nothing to suggest we can effectively regain an inflation advantage as the priority to address the fiscal deficit will generate impulses of price increases as subsidies get removed ( e.g kerosene measures in the last budget whose effect still have to show up in the retail price index).

When we have the sort of double percentage digit misalignment between the nominal rate and the real rate of exchange it is foolish and economically suicidal to continue denying the need to use the exchange rate policy as part of a package to regain competitiveness. Argentina`s experience in defending a fixed currency board between the peso and the US Dollar is a recent reminder of such failed policies.` Britain`s experience in ERM I which had to be aborted in 1992 is a more distant but equally suitable lesson from the past.

Cordina and Briguglio argue that devaluation benefits would be lost because wages would rise in response to cost of living impulses generated by the devaluation itself. These are unproven assertions.` Whilst such assumptions would hold if our economy were growing at a fast rate we have an economy which has not grown at all these last four years and which is running well below capacity.` The competitive gains generated by the devaluation would, I contend, in the large part be preserved as the economy has first to make use of its idle spare capacity before transmitting price increases down the line to the final consumer.

To a large extent the preservation of the competitive benefits flowing from a devaluation would largely depend on government taking other complimentary measures. Particularly as a major employer of a large unproductive sector, the government should lead by example and ensure that it does not give in to pressures to grant compensatory wage increases. Such stance could hopefully address part of the imbalances which exist between employment in the public sector, where the least productive are most protected, and the private sector where the most productive are the least protected. The excess protection of public sector employment should reflect itself in lower real wages, stimulating the shift of human resources to the private sector as the increased competitiveness of the latter gained through the devaluation stimulates demand for new employment.

Finally Briguglio and Cordina are kidding us when they state that our foreign reserves offer 109% coverage of foreign reserves for every Lm1 the Central Bank issued in the economy. The reserves are meant to service not just the balance sheet of the Central Bank but that of the entire banking sector.` The adequacy of the reserves should therefore be judged in comparison to the broad money supply as it is such money supply that has `the freedom to demand changeover from Lm to foreign currency. The percentage coverage here is low and falling and doubtfully sufficient to organise a smooth changeover to the Euro during the ERM II period.

Whilst I agree that exchange rate policy on its own would not produce a lasting solution I am afraid that in the situation we have been led into, without proper use of rate of exchange policy, any package that may be agreed would be missing an indispensable component for achieving real lasting solution.

On the other hand I can understand that those who want just cosmetics, holding their safe ground whilst blaming others for doing the same, are inclined to continue preaching from the mountain top that the nominal exchange rate is untouchable.

Friday, 17 December 2004

Re-Thinking Budget Measures

The Malta Independent - Friday Wisdom

Having analysed, in past contributions, the general orientation of the 2005 budget and its insufficiency to even come anywhere near addressing our economic ailments, I propose today to comment specifically on two budget measures which appear to have been thought through quite scantily.

The doubling of the airport tax from Lm10 to Lm20 has come in for particular criticism from various quarters. Not that any form of increased taxation ever finds wide or even narrow support, but this particular fiscal measure has jarred across the board.

Whatever its legal niceties it is a discriminatory tax against
Malta resident air travellers. Coming so soon after gaining the freedom to do business and work without barriers throughout the EU, it is not just a pinch on our pockets; it is a moral slap on the face.

MEP Dr Simon Busuttil (PN) wrote a detailed and learned opinion this week in The Times explaining that under various criteria this measure could be challenged under EU law. Such an opinion, coming from quarters that are actually representing the party in government in the European Parliament, could only be discarded with disdain.

Travelling out of
Malta through its sole airport was already expensive as it was with Lm6 airport charge (levied by MIA plc) being dwarfed by a Lm10 airport fiscal tax. Government could certainly have found a better source to raise the additional fiscal revenue that this measure is intended to raise. I can name half-a-dozen such sources in one breath but that would make me six times more unpopular than is really necessary. Government would do well to reconsider replacing this fiscal measure with something less challengeable and less morally offensive.

The other measure, which seems easily challengeable, is the removal of the days of leave-in-lieu to replace public holidays that fall on a weekend. Not that such a measure is unreasonable. But many collective agreements are locked into such a measure and employers are unlikely to have the appetite to challenge the legality of such agreements that they have signed.

Maybe there is scope for this measure to be re-packaged to achieve the same aim without entering legal minefields which will annihilate its intended benefits.

Ultimately, the solution must be focused on a re-definition of public holidays. We must be the only country in the world that celebrates five national days with public holidays. Let’s celebrate five national days if it helps to achieve consensus across the political spectrum. But do we need to have them all as public holidays?

I suggest that serious consideration be given to the celebration of one national day each year as a public holiday. This could be done on a rotation basis to avoid entering into political minefields regarding the choice of the one to celebrate. The other four are then celebrated on the weekend nearest to the actual day.

Is it such a big deal if, in the spirit of redeeming the country from the economic morass we have driven into, we give up four fifths of our statehood celebrations and work them through to ensure that we protect the economic viability of such statehood?

Such re-definition of the national day public holidays would not infringe the collective agreements signed between unions and employers and would avoid the legal quagmire as to whether government has a right to upset what was specifically contracted in such agreements. Collective agreements generally provide for official public holidays to be paid holidays and for public holidays that fall on weekends to be compensated by extra days of leave. They do not bind government’s hands in the definition and quantity of public holidays.

The proposed measure would produce four extra working days each year, which is a much bigger contribution to enhanced competitiveness than the measure announced in the budget as it currently stands.

And once we are at it, we should also consider whether, excluding some very date-specific public holidays (basically Christmas, New Year’s day, Good Friday, First of May and 15th August), we should negotiate a package whereby employers are given the option to work the other public holidays and compensate by giving extra days of optional leave or shut-down.

Without changing the quantity of hours of work, such a measure would greatly increase the efficiency of the production flow which is quite often interrupted by mid-week holidays.

It is never too late to admit not having thought through measures well enough and that some adjustment would make them more acceptable and more effective.

Sunday, 12 December 2004

Roll Back the Sleaze

The Malta Independent on Sunday 


Quoting from Bloomberg last Friday: `Oil in New York has declined 26 percent from a record of $55.67 on Oct. 25.2004.Crude oil for January delivery fell $1.48, or 3.5 percent, to $41.05 a barrel at 1:09 p.m. on the New York Mercantile Exchange.

The Prime Minister in his budget speech on 24th November 2004 stated `This year the international price of crude oil exceeded US$50 (per barrel)` thereby implying that the 17% surcharge` on utility bill is the direct result of such an increase in the price of crude oil.

If this were truly so the Prime Minister could announce the withdrawal of the surcharge as the price of crude oil has dropped by 18% from the US$ 50 mentioned in the budget speech and by more if compared to the more than US$50` benchmark. Since budget day the US$ has depreciated by 1.26% against the Maltese Lira so in Lm terms the price of crude oil has dropped by 19%.

But reality is that notwithstanding the impressions given in the budget speech, the surcharge has nothing much to do with the price of crude oil and much much more to do with the fact that the adjustment made to honour easy electoral promises to roll back the increased utility rates that brought down a Labour government in 1998, is proving unsustainable. Equally the measure of withdrawal of all subsidies relating to kerosene which was depicted so unsocial by the PN opposition when proposed by Labour government of 1998 and immediately rolled back upon re-election, is now no longer unsocial and needs to be re-instated exactly as Labour had proposed in 1998.

Rather than promises of roll-back, for political self-interest, of tough measures taken by Labour governments in order to avoid waste and maintain competitiveness, we now have to roll-back our sleaze.

The very first thing a new PN government did when elected in 1987 was the restoration of` six public holidays that Labour had abolished when it had legislated the four weeks minimum leave entitlement in the conditions of employment act. Furthermore plans were announced to increase the annual vacation leave by 5 days, one each year over a period of five years. Eventually one was taken away when `sette gugno` was elevated to the national day status and an extra public holiday was instituted. So now we have 24 days leave ( those working five day week) and 13 public holidays, a minimum of 37 work ` free days apart from weekends.

17 years later we are now being told that we can`t afford so much holidays and we have to start rolling them back. I agree, but it is fair to remind that political opportunism has cost us dearly in terms of global competitiveness and that it was irresponsible to give such easy promises purely to gain access to power through the abuse of those voters who misguidedly believe that governments have the power to overcome the rules of economics and behave like Santa the whole year round. Again we have to roll-back our sleaze.

Now I agree that measures like the ones announced in the Budget, for public holidays that fall on weekends not be replaced by additional vacation leave as the law presently stipulates, is much less than the minimum required to truly make a difference to our competitiveness. On the other hand I appreciate that the Unions cannot be expected to subscribe voluntarily to such measure.

However, given the grim economic situation of which the Unions are aware more than most, I would expect the Unions to condone or tolerate the measure, under protest and against their wishes, as a token gesture by the workers to re-establish national competitiveness.

This gives rise to an interesting point of reflection. The social democratic system of which we are so proud has an inherent defect.` Every time that the economy passes through a bad patch, either because of external forces or because of bad internal management , the workers have to carry a disproportionate share of the load that has to be carried to get the economy back in shape again. It is not fair, but that`s how it is, inevitably.

Attempting to shift the burden of adjustment on the entrepreneurial class, the investment providers and risk-takers, proves counter-productive as they would withhold the investment needed to kick-start the economy. Quite often rather than forced to carry an additional burden they have to be caressed with tax breaks and incentives to stimulate their participation through their increased investments.

Shifting the burden of adjustment on the not economically active, the pensioners, the sick and the unemployed is socially irresponsible, unacceptable in a social democracy and conducive to serious loss of social cohesiveness without which investment will hold back.

So all that`s left in the middle is the whole body of workers, the economically active, who will have to roll back their past gains in order to restore the country`s international competitiveness. This could come in many forms. It could come in the form of a wage freeze where workers are expected to become more productive without expecting wage increases. It could come in the form of increased hours of work without additional pay. The proposal for non replacement of public holidays that come on weekends fall in this category. This very same week the French government rolled back the 35 hour week introduced by the former socialist government and re-established the longer week between 40 -48 hours as agreed at company level without any automatic pay increases for the additional working hours. In Germany, unions at Siemens and Volkswagen had to make similar concessions to dissuade these corporations from moving their plant to lower cost locations.

It could come in the form of devaluation of the currency which reduces the real value of the wages or it could come through acceptance of additional work, more flexibility and wider responsibility without additional compensation.

In whatever form or shape it comes, the workers, unjustly but inevitably, have to carry the brunt of the adjustment.

So the next time workers are offered by loose talking politicians a free lunch in the form utility bills below their real cost, additional holidays without loss of pay or similar Santa Claus bonanza, it would be very appropriate for the workers to remind themselves that free lunches don`t exist and that ultimately they will have to pay the price of adjustment through the loss of their job or rollback in their standard of living.

When they have to choose between sleaze and serious talk, workers could opt for sleaze only at their own expense.

Friday, 10 December 2004

Stop the Lira Circus

The Malta Independent 

The external value of the currency is the flavour of the month on the political circus. Each Sunday morning the Prime Minister includes in his ritualistic sermon in some PN club somewhere, strong assertions that the mere idea of devaluation is economic blasphemy and that his government will not even give a second thought to the matter, sure as it is that our economy is on the mend under its own steam, aided by the measures taken in the 2005 budget.  
It matters not in the least to our Prime Minister that surveys show that the large majority of the population is not at all convinced that the budget makes any significant contribution to addressing our economic ills.

Just as predictably, the leader of the opposition blesses our Sunday new bulletins and Monday morning papers with explanations about the difference between devaluation and depreciation and asserts that the latter will have no adverse impact on the cost of living.

This would be comic if it weren’t tragic. I strongly advise both the Prime Minister and the leader of the opposition to stop this charade and find some other flavour of the month on which they can speak with better authority. Then if both of them truly have the strong views they express on the rate of exchange issue, they should meet quietly face to face with their economic experts and argue the case away from the headlines.

Otherwise, public discussion of this very sensitive and important issue will unavoidably lead to a hardening of the respective positions, making it difficult for parties to adjust their position following an objective review of the situation aided by some qualified, expert and independent advice from international sources.

The last source for such advice should be the Central Bank of
Malta. It is unfortunate that this is so but reality is what it is and the Central Bank has a vested interest to defend, which precludes it from giving objective advice on the matter.

Chart 5.4 on page 43 of the September 2004 CBM Quarterly Review explains why. The Central Bank is charged with ensuring that our domestic inflation remains low and does not exceed that of competing countries. Because the Central Bank has failed to do so over a considerable number of years, during which interest rates were kept low to accommodate excessive government borrowing, our inflation has quite consistently exceeded that of our competitors. Consequently the real value of the Maltese lira rate of exchange was as at last July 11 per cent higher than it was in its 1995 base.

With hefty price increases in the pipeline for utility bills and public transport, among others, it is logical to assume that the inflation negative differential will continue to widen and the over-valuation in the real rate of exchange will continue to harden.

When the Governor of the Central Bank occasionally makes the point that their primary tool for the control of inflation is the defence of the fixed rate of exchange peg against the chosen basket of currency, he is missing the point that the objective ought to be the stability of the real not just the nominal rate of exchange.

If the Central Bank tolerates higher domestic inflation it is economically hazardous to try to address the excessive inflation through a fixed nominal rate of exchange which tends to get progressively more out of line, with its true underlying value threatening, as it is doing, the international competitiveness of Malta Inc.

For me, the issue of the need to address the over-valuation in the real rate of exchange of our currency is not the flavour of the month. I have been arguing in favour of serious discussion on the matter since early in 2001 when the real over-valuation shot from six per cent to 12 per cent in the space of a few months.

On 2 March 2001, in this same column, I commented as follows in a contribution titled Prognosis without prescription, following a business breakfast addressed by the Governor of the Central Bank:

“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 per cent was in the prescription for the identified malady. If the country is living beyond its means then 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.”

Nearly four years after I wrote this and several similar contributions since then, it is certainly not too early to open serious consideration of using the rate of exchange policy to address the chronic faults which have developed in our economy. Hopefully, it is not too late either.

Friday, 3 December 2004

Oily Contempt

The Malta Independent 


Utility rates are very politically sensitive. Labour government came to an untimely abrupt end in 1998 partly because it did not manage well the utility rates increases announced in that year`s budget.

Public opinion was not shaped up in advance for the unavoidability of increasing utility prices, given the precarious state of public finances and the losses then being incurred by Enemalta. The present government when faced with the hard reality that lowered utility rates that brought it back into power in 1998 are no longer sustainable, did not fail to learn the lesson on the need to shape up public opinion for the expected increases.

We have had a good two months run-up to the budget being constantly reminded that the price of oil was reaching record levels and that this makes utility rates upward revision absolutely unavoidable. Then in presenting the budget the Prime Minister told us that Enemalta was absorbing more than half the increased cost of Lm16 million and the announced utility raised revisions will only cover 48% of the increased procurement cost of imported energy. (How Enemalta can afford to carry this subsidy when it is virtually bankrupt remains to be seen.)

This is all well and good except that the facts have been misrepresented and we have clearly been treated with contempt. Are we stupid idiots expected to swallow whatever propaganda government decides to throw at us to justify the hard measures which are being taken for very different reasons than those stated. 

Let me start with the price of oil. The oft quoted price of crude oil is irrelevant to our case. Enemalta does not import crude oil. Enemalta imports refined products. The correlation between the prices of crude oil and the prices of refined products is tenuous. For example between August 2003 and November 2004 the cost of crude oil increased in US dollar terms by 48%. On the contrary the cost of Fuel Oil, one of the main refined products imported by Enemalta to generate electricity, went down by 15% in case of the High Sulphur version and by 4% in case of the low sulphur version.

Dollar depreciation in the meantime means that every Lm1, one gets 17% more US dollars now than one used to get in August 2003. So in Maltese lira terms the Fuel OiI that Enemalta burns to generate electricity is cheaper than it was in August 2003. It is also cheaper though by a lesser margin than the price levels for such fuel oil in Lm terms as at January 2004.

So why on earth are we being fed false information forcing to us accept utility rate increases on the basis of increased acquisition cost of crude oil which we do not import, when in fact the finished refined products we do import are cheaper than they were last year`

The truth, for those who want to know the truth, is that because of EU regulations we are being obliged to burn low sulphur fuel oil which is far less environmentally offensive than high sulphur fuel oil. The problem is that low sulphur fuel oil is about 40% more expensive (approx. US dollars 50 more per metric ton), and this on its own runs up an increased import bill of some Lm7 million more.

Of course I agree we should welcome the use of more environmentally friendly fuel; but we should call a spade a spade and say it costs more and not hide behind the irrelevance of increase in crude oil prices.

Government`s contempt doubles up when one realises that whilst the consumers are being loaded with the expense burden of this environmental measure, the government is lining up its pockets by netting Lm3 million more in 2005 in excise duties on imported petroleum, probably due to he application of excise duty on kerosene or the expected shift of use from kerosene to diesel.

So while we all have to pay surcharges on our utility bills, higher prices on kerosene which saw its subsidy abolished (this was socially atrocious when Labour did it in 1998 only to be reversed by the PN government for political convenience; now it has become socially responsible), and industry is having to pay 50% more for Light Heating Oil apart from additional cost in the utility tariff, government on the other hand is loading on an additional excise tax of Lm3 million. Rather than soften the blow it is actually accentuating it.

Seeing all this misrepresentation, what value can the consumer give to the assurance that the surcharge on utility bill will be removed once oil prices return to normality Prices of imported refined oil products used for electricity generation are already quite normal in Lm terms and the major cost difference is due to the use of more environmentally friendly low sulphur oil. So how, may I ask, can we hope for the abolishment of the utilities surcharges` Certainly we cannot go back to use high sulphur fuel oil!

And if the government truly believes in accountability why not publish the benchmarks costs of the imported products (with specifications of such costs i.e. whether they are spot prices, monthly averages or quarterly averages) and of the applicable US dollar rate vs the Maltese Lira. Only through publication of such information can we hold government accountable to the promise to reduce or remove the surcharges when procurement costs in Lm terms recede.

The Minister responsible for Enemalta was reported as saying that the corporation has no expertise in using hedging techniques for energy imports and other financial derivatives.` If this is so than I regret that for all the expensive new recruitments at senior level Enemalta has lost rather than gained expertise in these sectors. I well remember the period when in 1998 as chairman of Mid-Med Bank I was being consulted on the hedging offers Enemalta was considering, we had concluded deals which eventually rewarded Enemalta not just with certainty of costs but with substantial savings both on the price of imported refined oils as well on its foreign exchange transactions and balance sheet exposures. There certainly seemed to be no lack of such expertise within Enemalta`s ranks at that time.

I appreciate these could be quite complex matters and the Minister can pontificate with impunity when there is no one to correct his misstatements; but that does not mean that we, as citizens and consumers who are being forced to carry the burden of his decisions, are not being treated with utter contempt.

Sunday, 28 November 2004

Budget 2005 - Nibbling at Problems

The Malta Independent on Sunday 

If decisions like removal of leave days in lieu for public holidays falling on weekends are considered as bold, then we have no idea of the magnitude of the economic problem we have and what`s really necessary to address them.

If passing on to the consumer half the additional energy import cost due to the rise in the international price of oil is considered harsh, then we are only kidding ourselves and are still thinking that someone owes us a living.

Government announced in the budget speech that Enemalta will be absorbing Lm8.3 million of the increased cost of Lm16 million whereas Lm7.7 million are being passed on as a surcharge to the consumer.` Who is Enemalta` It is you and I. It is the organisation that in the `bad old` Labour days used to contribute substantial profits to the Exchequer to finance part of the national social costs.` Enemalta`s latest published financial statements show a company burdened with heavy debts and hardly in a position to make ends meet let alone absorb Lm8.3 million of imported cost. Give us explanations please and respect our intelligence.

The Budget pretends to be addressing the fiscal deficit problem. I am a bit cynical of any multi year programme purporting to be addressing the fiscal deficit as inevitably it results that` politicians` will-power to stay the course is very short and practically disappears the moment the next election appears within a two year horizon. If you wish any proof of this just read the budget speech for 1999 and the medium term financial strategy presented therewith explaining in detailed figures how gradually by 2004 we were due to achieve very healthy economic growth and strong public finance position.

Yet here we are five years later being promised another medium term programme explaining that what was not done between 1999 and 2004 will now be done between 2005 and 2007. Between 1999 and 2004` we have had to` finance an accumulation of annual deficits amounting to nothing less than Lm723 million which has practically doubled our national debt in the short space of five years and frittered away privatisation revenues of some Lm120 million.

Should we have any confidence that this time it will be different` Should we believe the chain smoker that he will stop smoking tomorrow. Hardly, and judging by the actual performance of 2004, there is little to suggest that the new hands on the tiller is leaving any positive effect.

The deficit for 2003 excluding the one-off Drydocks financing operations was Lm117 million using the new EU concept of extended government. The projected deficit for the current year 2004 is estimated at Lm99 million. An improvement of Lm18 million is an achievement, you might think.` However I argue that this figure needs to be corrected to take into account Lm 7 million exceptional income in 2004 from the privatisation through licence of public lotto, and by a further Lm 3 million being capital expenditure postponed net of the corresponding inflow of grant revenues.` The real corresponding deficit of 2004 is more like Lm109 million which while Lm 8 million lower than 2003 it is exactly the average deficit we had for the period 2000 - 2002.  

  Considering that fiscal revenue increased by Lm44 million in 2004 over 2003 is it not disappointing that of this only Lm 8 million went to reduce the deficit back to the 2002 level Does it lend credence to the new medium term programme showing that by 2007 the fiscal revenue will increase by Lm96 million and this will be applied to reduce the deficit by Lm78 million. 

  Permit my cynicism but I can only state that I`ll believe when I`ll see it. And with good reason. The government determination to solve the problems by turning on the fiscal screw year in year out will just not deliver. This year the fiscal screw touched cigarettes as usual, mobile phone usage,` and unbelievably foreign travel. Rather than making it easier to travel given that our island characteristics make travelling much more expensive without the need for additional help by fiscal measures, we are being further discouraged to travel. The travel fiscal charge was increased 100% from Lm10 to Lm20.

The budget pretends that the announced measures will help to restore our international competitiveness. The public holidays measures will largely be neutralised by the Lm1.75 legislated wage increase and the increased costs of communications, travel and utilities. By and large we will at best stay were we are which is better than falling further back but not good enough to become competitive again.

I have long been arguing that competitiveness cannot be restored without addressing the exchange rate policy which has hardened our currency by some 10% from its 1995 base.` The Central Bank quarterly for September just published shows on page 43 that as at last July this overvaluation increased to 11% due the continued negative inflation differentials.  

  Quite surprisingly and at grave political risk, the Leader of the Opposition indicated he is willing to lend consensus to government to regain competitiveness by tackling the problems at its rate of exchange source. But unbelievably rather than grab this opportunity to build consensus round the most effective measure to restore competitiveness and economic growth, government played the political game and off-handedly dismissed the suggestion because of its bad effect on inflation.

If we discard effective measures because of their bad effect on inflation then why increase utility bills, why raise public transport fees and why take all the other fiscal measures which inevitably lead to increased consumer prices` Of course the rate of exchange policy has some pain. Long neglected problems do not come with painless solutions. But should the sick patient refuse surgery because he could be in more pain during convalescence` Should the supposed doctor in charge of treating the malady rather than encourage the patient to face surgery with courage and determination with assurance of the long term benefit, scare the patient with the immediate impact convalescence pain of a devaluation. 

And finally we had the Governor of the Central Bank engaging in the technical discussion of the appropriateness of addressing the accumulated increase in the real rate of exchange since 1995. This is a discussion which was started by yours truly and recently extended through the participation of most respected economists like Prof Edward Scicluna and Lino Spiteri.

The Governor`s determined refusal to address the issue is scandalous and illogical. His first argument that there is no guarantee that the 1995 base was a correct benchmark to measure progress with, was feeble and he himself conceded it. There are studies to prove that the positive effect on competitiveness of the devaluation of 1992 was lost by 1994 due to failure to take accompanying measures to prevent the price inflation spiral. There is no argument that the 1995 base was not therefore a low base or` that the present high exchange rate level could be the right one.` I feel that 1995 is a good benchmark as it is the last year of good economic growth without structural fiscal imbalances which developed in and since 1996.

The Governor then defended the current exchange rate level on the basis that this reflects the efficiency gains in our economy since then, implying that these efficiency gains were superior to those of our competitors. He must be joking. If we had such efficiency gains they would show in higher growth and lower inflation. We have had lower growth and higher inflation.

China is registering double digit growth and huge efficiency gains but is still insisting on pegging its exchange rate to the dollar. Tiny economically stagnant Malta is however unperturbed that its rate versus the US dollar in 1995 averaging 2.84 is currently 3.07 being 8% harder.

Nibbling at problems will make the mountain deliver mice.   

Friday, 26 November 2004

Budget with Three Spirits

The Malta Independent 

Like Dicken`s Christmas Carol, this week`s budget, the first under the Gonzi administration, is a brush with three spirits.

Unavoidably we meet spirits from the past. If we have a budget deficit that needs priority above all else it is because in the past the `money no problem` culture has landed us in a situation where further accumulation of debt will prejudice the strength of our financial structure and deny us the presumed benefit of early participation in the Euro monetary system.

It brings memories of the many times that we have been told in the past that problems were being addressed only to find out that they were merely being financed.` It makes me recall the various instances when medium term financial targets were laid out explaining how the deficit problem will be addressed over a medium term period of a few years only to find out that things only got worse. `In particular I recall the budget for 1999, the first after the short Labour government interval, where the then Minister of Finance laid out a medium term plan explaining that by 2004 government finance would be in good shape, a reassurance that was repeated with emphasis in the election campaign of April 2003.

The spirit of budget past makes my heart bleed remembering the money wasted in roads done and redone, in hospital that cost three times more than it should, in useless subsidies given to avoid the inconvenience of serious restructuring which in any case had to be undertaken when things ultimately got of hand, only at much higher cost and deeper pain.

In handing over the encounter to the spirit of budget present, it raises the obvious question as to why should we be in the situation we are in, a situation of high debts and no growth, experiencing the disillusionment of competitor EU countries beating us on growth and in the attraction of investment.` It makes me marvel how a government in office for consecutive 17 years bar 2, could speak about problems without subscribing to their paternity and without accepting the blame for the measures which can no longer be avoided.

The spirit of budget present brings with it a high dosage of rare consensus.` We have consensus on serious structural faults in our economy which need to be addressed. That we have lost our international competitiveness and restoring it means rolling back the standard of living that we have taken for granted. We have no agreement on the measures which need to be taken to make the roll-back burden equitably spread and ultimately the government has to do what it has been elected to do, without expecting the social partners to join in to share the burden of the measures chosen.

The spirit of budget present comes with a spectrum of measures which in their generality rolls back the standard of living of each and every household family. It comes in the form of higher utility bills, higher public transport fees, higher airport fiscal charge and additional working days without additional compensation.

All this is understandable. A sick patient needs sour medicine or painful surgery.` Confetti will just not work. What is less understandable is why in 1998 a legitimately elected government was forced to resign for taking timely measures meant to prevent the need to take the much more painful measures which now have to be taken, following the additional accumulation of several hundred million of debt.

And as these reflections hand us over the spirit of budget future I remain incredulous whether the measures taken are in any way appropriate and/or sufficient in order to achieve the objectives which are undisputedly clear and desirable. We need to address the fiscal deficit in a serious and consistent manner. We need to invest more in education to foster the ability of self-help rather than the continued reliance on government support; and we need to preserve and enhance our environment before we harm it irreparably.

What the spirit of budget future fails to convince me about is that this is not just another half baked attempt which will be irresponsibly abandoned as electoral pressures erode the fiscal sanity which is generally cultivated in the first half of every legislature.

Politicians` record in their staying power on medium term fiscal sanitisation programme is particularly disappointing.` There is no reason to presume that this time it will be different , except may be, and I underline may be, that this time the discipline to join the Euro could overcome the temptation to revert to old habits of` switching priorities again as elections approach

Wednesday, 24 November 2004

A Plea for Liberation

The Malta Independent - Friday Wisdom

If you sit quietly in silence today you can hear the economy’s plea for liberation. It has been strangled for many successive years through multiple burdens of huge public finance deficit, dearth of productive investment, over-valued rate of exchange and rigidity of labour markets.

The result of this strangled economy is showing in low or no growth, loss of international competitiveness, and rising debts (public and private) and falling savings.

This is not to suggest that the economy is about to collapse. For as long as citizens continue to show faith in funding the public deficit by over-subscribing long term public debt issues at cheap interest rates, then the situation can be carried forward for quite some more time.

But doing so will not be solving our underlying economic problems. Financing them does not equate to solving them. It equates to postponing them, making the unavoidable eventual appointment with reality much harder and more painful to resolve.

On this first budget under the administration of Prime Minister Gonzi the economy’s crying plea for liberation sounds louder and more desperate.

Of course the government had to go through the motions of trying to put together a social pact where measures are taken by consensus. But if it had any dose of realism it should have known that a patient is unlikely to prescribe his own medicine. It is unrealistic to expect the unions to subscribe on a nation-wide basis rollback to conditions obtained or given in the past.

As is happening in
Germany, unions have to make such concessions at specific industry level where the choice between such rollback or redundancies is more stark. But expecting them to subscribe to such measures at macro-economic level was like expecting the unions to write their own suicide note.

When the government gained political premium by extending the annual leave from 20 to 25 days and restored public holidays that where removed when the minimum four weeks leave was legislated to all, it did not seek to share its glory with the social partners.

It cannot expect to get away with a policy of ‘glory for keeps, sacrifices to share’ by having the social partners voluntarily subscribe to the rollback of such economically ill-conceived but politically convenient policies.

Prime Minister Gonzi has repeatedly stated that with consensus or without it, he will have to take the decisions to get the economy out of its state of sclerosis and to prepare it for joining the Euro at the earliest possible date, probably in 2008.

He stated, and I quite agree, that we would be disadvantaged if competing member states join the Euro before we do.

Now that we are EU members we cannot negate ourselves the benefit of the external discipline that EU membership, and in particular Euro membership, place on our political leaders to stop shortchanging the long term health of our economy for egoistic political benefits.

Of course Prime Minister Gonzi realises that for some time, hard measures will translate themselves in political unpopularity. But this is not enough reason to avoid doing what the economy is crying out for. And there are also two political reasons for not doing so.

Firstly is that if we administer the medicine now with determination and correct dosage, an economic regeneration could be engineered to show benefits in time for the next general election challenge.

Losing some electoral bouts at local council level would be a relatively small price to pay.

Secondly, Prime Minister Gonzi is blessed by the comfort of wide opinion polls showing that whereas the electorate is prepared to continue giving him a chance to prove that he can deliver, the same cannot be said about the Leader of the Opposition who remains very unpopular even with the electoral segment wishing a change of government at the next time of asking.

Perhaps unconsciously, the Leader of the Opposition through his unpopularity, is serving the national interest by giving government the confidence to apply the sour medicine the economy needs without risking unduly its electoral fortunes.

Tonight is the real test for the Gonzi administration. Unless it hears the pleas of the economy for liberation from its stranglehold there will be no another opportunity.

At next budget the lead-time to the next election will be too short to engineer a timely economic turnaround.

The economy is pleading the government to cut the chains of legislated working conditions and restore these to micro-negotiations at industry level between employers and unions.

It is pleading for government to declare its strong intention, as a major employer of the least productive economic segment, to cap its labour costs and drive efficiency gains to do justice to the employees in private sector whose tax payments are sourced from earnings in jobs competing with the rest of the world.

It is pleading for the rate of exchange over-valuation to be addressed before crisis hits. Tonight we will see whether the economy’s pleas are heard or whether we will have just another medium term plan, promise of more studies and discussions which are nothing if not euphemism for more escapism on the road leading to economic wilderness.

Friday, 19 November 2004

Glory for Keeps, Sacrifices to Share

The Malta Independent - Friday Wisdom

After months of shop talk round the MCESD table, ultimately, when it came down to hammering the specifics of a much wished-for social pact meant to restore the international competitiveness that has long slipped through our fingers, the necessary consensus was found wanting. This is hardly surprising. In fact, I labelled these negotiations in one of my recent writings as the “dialogue of the deaf”.

Global competitiveness can be restored in one of two ways. It can be addressed by means of an instant adjustment to the exchange rate value of the Maltese lira. This is a high-powered tool with immediate positive impact on global competitiveness. Equally it carries the negative impact of reduction in the real value, as against the nominal value which remains intact, of fixed income earnings and financial assets denominated in domestic currency.

For an open economy like ours, where we import most of what we consume and export most of what we produce, such an exchange rate measure is normally avoided on the grounds that the instant benefit to competitiveness is quickly eroded by the price inflation generated by the higher cost of imports.

I would subscribe to such an argument in normal circumstances. But our circumstances are not normal. We are suffering from structural economic fatigue, where growth is at best anaemic. We have structural disequilibrium in public finances. We have a wide consensus that the country is living beyond its means and that this can only be effectively and quickly addressed by a roll-back, hopefully very temporary, in the general standard of living.

We have studies which show that main cause of loss of competitiveness is an artificial real over-valuation of our exchange rate in the region of some 10 per cent, accumulated over the last 10 years by tolerating inflation rates higher than those of our global competitors. And above all we are on the eve of taking a once in a lifetime irreversible decision to fuse our currency into the Euro single currency system, which would remove the potential to use the rate of exchange policy as an economic management tool. Furthermore we have clear case studies showing that countries that joined the Euro at a competitive rate (a rate which is equivalent or below the purchasing parity equilibrium rate) have fared much better than countries that joined the Euro at an over-valued rate. Among the former one can typify
Ireland while the latter are typified by Germany.

I continue to make the case that the possibility of using the rate of exchange as an economic policy tool to immediately restore our global competitiveness should in the current circumstances be seriously considered as a feasible alternative to the much wished-for but quite elusive social pact.

The leader of the opposition gave this policy a nod of approval in parliament this week, even though his suggestion to phase the adjustment over a number of years seems unworkable. A phased approach would extend the period of destabilisation, forcing the Central Bank to substantially increase the premium for domestic interest rates to compensate local savers for the programmed rate of exchange adjustment spread over an extended period. However, implementation method apart, there could be a rare but precious consensus between the government and opposition on the need to use the rate of exchange policy to regain global competitiveness. It should not be discarded too lightly.

Not least, because even in the event of a social pact, but particularly without it, the default alternative could be much more painful. If we fail to regain competitiveness, the market will itself make its own adjustment. Not only we will fail to attract the much needed new productive investment to generate growth at a rate faster than that of our competitors to catch up to their standard of living, but we could lose existing investment as globalisation pressures force employers to seek more competitive locations.

Alternatively, or concurrently, there will be a micro social pact reached at company level, where the unions have to concede the retrenchment of benefits secured in the past in order to deflect employers from the temptation of relocating.

This is happening in
Germany, where the use of exchange rate policy as a tool of economic policy is no longer possible, since the Deustchemark has been fused into the Euro. In Germany, employers like Siemens, Volkswagen and BMW have forced unions to concede extended working hours without additional pay in return for limited no-redundancy guarantees.

Given the local situation, is it any wonder that unions cannot subscribe to a reduction in leave and the forfeiture of overtime entitlements? When the nationalist government of 1987 was elected on the promise of the restoration of seven public holidays formerly abolished by a Labour government and an increase in leave entitlement from 20 to 25 days, the government took unto itself all the ensuing glory and political premium. Now that there are sacrifices to proclaim, is it feasible to expect the unions to subscribe to a government policy of “glory we keep, sacrifices we share”?

In the final analysis, government has the democratic responsibility to govern, to take the measures necessary to address economic ills, with consensus or without it. Trying to restore

competitiveness by rolling back specific measures could be politically unfeasible and should be left to negotiations between employers and unions.

As an employer, government will have ample opportunity to set an example when re-negotiating the collective agreement for public sector employees.

On the other hand, the route to regained global competitiveness through the exchange rate policy route should be not only more politically feasible, but in the current circumstances it spreads the burden of adjustment more equitably.

Its instant impact is an advantage not to be discarded because, frankly speaking, if we go for a gradual medium-term solution, I am not too sure whether we have enough economic oxygen left to see this gradualist approach through.

Sunday, 14 November 2004

Dialogue of the Deaf

The Malta Independent on Sunday 

 About this time every year most financial practitioners assemble for a formal dinner organised by the Institute of Financial Services, Malta Branch, in a opulent setting serving food which expands the waist and narrows blood vessels.

It is timed before the budget for the key guest speaker at such an occasion is the Central Bank`s Governor who normally takes the opportunity to review the performance of the Maltese economy during the year drawing to a close and for the foreseeable future, and to offer some words of wisdom to the Minister of Finance for the proper orientation of the Budget which would be in the final phase of preparation.

Those who, like myself, attend such annual event almost without fail, know that the Governor`s speech is becoming a rather boring repetition and a growing list of complaints that his advices of previous years have been largely ignored; that the problems have if anything compounded themselves through the passage of time and the evident inertia of those responsible for leading us to economic prosperity.

With similar monotony there is unfailingly the replica of the Minister of Finance who broadly acknowledges the problems highlighted by the Governor but positively re-assures that the next budget will be the start of a medium term programme which addresses such problems, with particular reference to the fiscal deficit, within a few years.

Almost unfailingly, events between one annual dinner and another unfold to prove that problems are being avoided rather than addressed and that measures taken are generally cosmetic and do not go to the root of the problem. The end result is that failures and misses are financed by loading another odd hundred million liri to the national debt, reducing the ever diminishing residual debt capacity, complicating the problem for the ensuing year by increasing the debt servicing costs by a few additional million liri, forcing us to borrow more to pay interest on the burgeoning public debt.

Last Thursday`s annual dinner of the Institute of Financial Services was basically more of the same. The noticeable difference was that the replica to the Governor`s critical speech was delivered by the Prime Minister who is directly responsible for the budget portfolio and who in spite of the odds of mathematics insisted that the budget deficit will be addressed in the short time of two years, by 2006, so that that Malta could join the Euro with the first wave of new members in the EMU sometime in 2008.

Old age and experience force people like me to take such assurances with a bucketful of salt and to express matter of factly that we prefer to judge on deeds rather than assertions. As it happened sitting at the same table there was a representative of the `private sector who is privy to the ongoing negotiations within the MCESD regarding the much desired social pact, and I could confirm my suspicions that these negotiations are basically the dialogue of the deaf.` A dialogue where each side states and defends it position expecting the other side to offer concession to bridge the gap by pulling the other side to its own point of view. With the government and Central Bank offering no leadership it appears likely that negotiations within the MCESD will either lead to no agreement or to a botched up deal which in no way makes real and effective contribution to restoring the lost global competitiveness which plagues our economy, forcing us to anaemic growth based on unsustainable consumption whilst the world around is growing fast based on investment and production.

And this dialogue of the deaf is continuing throughout the economy where on the eve of deciding whether to join the Exchange Rate Mechanism of the Euro, no one dares to even suggest at what level such docking into the Euro should take place.

Now every country in the world worries when its rate of exchange is taken by market forces to high levels. Just this week we had Jean Claude Trichet, Governor of the European Central Bank, expressing publicly his concern for the rapid appreciation of the Euro against the US dollar reaching a peak of 1.29 dollars per one euro and calling the rapid adjustment as brutal and undesirable.

How come therefore that our monetary authorities, the government and the parties round the MCESD table do not feel concerned with the fact, confirmed statistically by the Central Bank`s own research (Quarterly Review 2004:2 page 39 Chart 5.4) that the real exchange value of the Maltese Lira is 10% over-valued compared to its 1995 base because of negative differentials between our domestic inflation and that our main trading partners`

The argument is often made that removing this over-valuation through an exchange rate adjustment, whilst restoring competitiveness with instant impact, will not have a lasting effect as the inflation generated by such measures will feed back into the system eroding the gained competitiveness and risking a spiral of exchange rates adjustments and additional inflation feeding on each other.

This argument could have applied in the past but certainly should not be a pervasive show stopper in the current circumstances. By joining the Exchange Rate Mechanism at a chosen central rate we would be making a public declaration that the chosen central rate will be very very close to the eventual fusion rate of the Maltese Lira into the Euro. Further depreciations would be out of question and if necessary other monetary policy instruments would have to be used to defend the chosen rate.

The risk of fusion into the Euro at an over-valued rate cannot be over-estimated and if we have to err we would better err on the side of under rather than over-valuation. Just see the fortunes of Ireland who joined the Euro at a competitive rate and compare them to those of Germany who joined the Euro at an overvalued rate.

The risk of doing nothing is huge. As people`s minds gets focussed on the Euro project, Central Bank own admission of the Maltese Lira real overvaluation will make early conversion into the Euro a one-way bet.` An accumulating avalanche of people who anticipate the Euro fusion will force the Central Bank to defend its reserve position and the chosen peg by raising `interest rates way beyond the level needed to stimulate the tempo of economic growth. The recent experience of Hungary should be an eye-opener.

If this country is to regain global competitiveness any time soon and to catapult itself to fast economic growth rates necessary to catch up with our competitors, the parties around the MCESD table, government and Central Bank included, cannot passively await the Unions and Employers to come up with some elusive magic formula. They need to do their part and offer the necessary leadership and remove taboos and red lines from all economic policies, rate of exchange policy included. By doing so the Governor would gain some credibility for next year`s speech as otherwise we can anticipate as of now that next year he can just as well re-read this year`s speech or that of five year ago.

Friday, 12 November 2004

Ora pro Nobis

The Malta Independent 

  'Mater Dei` ora pro nobis! Mother of God` Pray for us.
We need every bit of prayer to survive the new hospital saga. We had mortally dangerous political spin at its best this week, when the government announced the agreement reached with Skanska for completion of the project.
Not that it does not have some positive factors! At least we now have a fixed completion date and capped construction expenditure, with Skanksa being responsible for delivering the hospital by that date and at that price. Lm145 million for delivery on 1 July 2007. At least that`s what we were told! 
Then somewhat less eloquently we were also informed that this price does not include the medical equipment, furniture, IT and other movables, for which there will have to be provided a separate budget of some Lm40 million. In addition, one has to pile on the cost of finance for a project that has been dragging on for more than 10 years in the development stage, and the cost of re-location from St Luke’s to Mater Dei.

Without including any notional cost for the valuable land that has been dedicated to the project, the Lm200 million mark for the completed project seems well within reach. And that is by no means the end of the story, as any failure in reciprocal obligations could involve further revisions.

Government’s political spinners have been very emphatic in claiming that the new agreement has saved about Lm25 million of costs that would have been incurred if the project were to have been completed without renegotiating the deal with Skanska. This assertion is difficult to prove or disprove and therefore one could easily cheer as much as demure over it. It provides rich fertile ground for political spinners who, rather than help us to analyse the deal objectively on the basis of what in fact we are effectively paying, deflect public attention to hypothetical savings, real or imaginary.

I would rather analyse on the certitudes of what we are actually due to pay rather than on what we are supposedly saving. So in the end we are going to have a modern hospital with 800 beds that at completion stage is coming with a price tag of Lm200 million and counting. Making a rough calculation, that comes at an overall absorption cost of Lm250,000 per hospital bed or Lm200,000 per bed if the specialised hospital equipment is excluded.

Now let’s be generous and take the lower figure of Lm200,000 per bed. And let’s be even more generous and assume that each hospital bed will be in a separate room so it is equivalent to 800 rooms. This is not really the case, as many beds will be in duplex rooms or small wards.

Don’t you think that Lm200,000 per bed/room in a new hospital, excluding the cost of medical equipment and the cost of the land, is quite over the top? I certainly think so and I base myself on a simple calculation.

Excluding the specialised medical equipment, building a hospital should be cheaper than building a five-star de-luxe hotel. Firstly, because hotels don’t come in a configuration of 800 rooms but rather anything between 250 and 450 rooms. There are, consequently, fewer rooms over which to spread the common costs.

Secondly, because a five-star de-luxe hotel has to be finished to a superior standard of luxury than a hospital, especially if it has to carry an international brand name like Hilton, Westin or Intercontinental. Thirdly, because a hotel has to have huge catering and auxiliary facilities to provide banquet and food and beverage business to non-residents, which is not applicable to a hospital.

So you would expect that a five-star de-luxe internationally branded hotel room normally having two beds would cost somewhat more on a total absorption basis, excluding the cost of the land, than the cost of Lm200,000 per bed/room which will be the final bill at our new hospital, excluding the cost of the medical equipment.

Having some experience in the matter, I can categorically confirm that even using the highest specifications and amortising on much smaller number of rooms, all the central public areas, food and beverage, resort and sports facilities which normally go with such a hotel, the total absorption cost per room should never exceed Lm60,000. And this is on the high side and has a good margin for error.

This is by no means something particular to
Malta. If you build a similar hotel in central London, excluding the cost of acquiring the site, you can expect to complete it with a cost equivalent to Lm60,000 per room.

Spinning aside, therefore, can anyone please explain why we should be invited to celebrate for having to pay more than three times the cost of development of a top-class hotel room for a bed in our new hospital when, in fact, we should be paying somewhat less than the cost of such a hotel room?

And can anyone please explain how finishing, and presumably paying for, this project by 2007 squares up with the fiscal objective to balance the budget by that date? And how we are going to finance the much higher operating cost of the new hospital without prejudicing the entitlement to free health services in state hospitals?

Rather than joining government spinners in celebrating hypothetical savings, the independent press should be clamouring for a true value-for-money audit for the entire new hospital project from alpha to omega. It’s a pity the independent press shrugs its duty and like the litany in the holy rosary, submissively professes “ora pro nobis” to the government’s spinners shameful exhortations.

Friday, 5 November 2004

Sledgehammer Politics

The Malta Independent 

The sudden` resignation `for personal reasons` of Bank of Valletta`s Chairman Mr Zahra this week must be connected to the sledgehammer politics of Minister Austin Gatt who brashly criticised the Bank`s breach of customer confidentiality regarding an issue related to Malta Freeport`s involvement in a port operation in Brindisi.

Let me make it clear that any breach of client`s confidentiality on the part of a bank is a very serious matter and should be investigated with diligence. However firing wild accusations before having concrete proof of such breach of confidentiality is equally serious especially if it comes from a senior member of the cabinet who is in the process of selling through privatisation an influential equity stake in the same bank.

Every letter has a sender and a receiver and quite often the action demanded by such letter involves a number of other parties who must necessarily get privy to the document. Breach of confidentiality cannot be lightly pinned upon the receiver without first conducting diligence investigations.

And a time when the nation is expecting to get the best terms from its equity stake in Bank of Valletta, any such investigations should be conducted quietly and covertly to ensure that the gem put up for privatisation sale remains polished in the eyes of potential bidders rather than being purposely tarnished for political self-interest at the nation`s expense.

On the eve of privatisation, when the acquirer would expect to appoint its own chairman and other directors on the board of Bank of Valletta to obtain a strong operational control of the Bank, it is in our interest to ensure that the Bank projects an image of stability, progress and continuity.` `The sudden departure of the Bank`s chairman, even before the December annual general meeting where such orderly transitional changes would normally take place, cannot but place a shadow on Bank`s privatisation process.

Mr Zahra was steady hands at Bank of Valletta and he would have been a re-assurance for potential investors that they can rely on an informative and professional hand-over process without any interruption of continuity.` Probably this can still be done given the strong executive team that Zahra has built and is leaving behind, but the perception cannot be the same with Mr Zahra as without him.

Let it be realised that Bank of Valletta`s privatisation is not going to be a piece of cake. Let`s not make false comparison with the sale of Mid-Med Bank. In case of Bank of Valletta the market price of the shares on the Exchange richly values the Bank`s underlying value. At a price earnings ratio exceeding 20 Bank of Valletta`s share price is well above international sector averages for the financial services institutions especially those whose profits come from retail banking rather than private banking/wealth management and investment banking.

In short, the current market price of Bank of Valletta prices in substantial future profit growth and does not carry the bargain tag that Mid-Med sale had when the Bank was sold at a price earnings ratio of less than 10 and at a price just above its book value.

Furthermore the interest in Bank of Valletta from large international banks could be diluted by the fact that they find it unattractive to control less than 50% of the equity but be practically responsible for the total operation including the need to fund the Bank 100% if it should ever need such funding.` Quite a contrast with the sale of Mid-Med Bank when HSBC acquired 70% and were given positive indicators that the private shareholders would be forced to sell out to obtain full control.

Given these circumstances, Ministers would do well to uphold the national interest of obtaining the best from BOV`s equity sale, rather than involve BOV in the political quagmire to deflect attention from the core issues being discussed in the national arena.

Ministers should be wary of invoking professional secrecy to avoid conducting financial matters related to public institutions with transparency. The public has a right to know whether its purse has been forced to incur a cost of several million liri by an irresponsible involvement in a foreign investment by a publicly owned organisation. Deflection attempts to debate whether this cost was incurred by acquiring worthless shares or by taking over a liability of a bankrupt investee company, changes nothing from the substance that we go hit for Lm4 million which are difficult to recover even in the best of circumstances.

Attempts to lay blame on a Labour government of 1998 for conception of this involvement in the Brindisi project is quite like blaming Hitler`s parents for Hitler`s atrocities. A brilliant conceptual idea can still be hopelessly executed and the faults of the poor executive cannot be lightly shifted on the concept creators.

Sledgehammer politics is the last thing this country needs in the quest for consensual approach to national problems.