Friday, 27 February 2004

Deliverable No 10 - Maltese Lira revision

The Malta Independent

Make a one-off adjustment to our rate of exchange to re-establish our international competitiveness and prepare for joining the EURO at a rate which is sustainable and which attracts FDI and promotes economic growth.

Nothing can restore our international competitiveness as instantly and effectively as a downward revision of the Maltese Lira rate of exchange to account for the over-valuation that has been allowed to creep into its present level by injudicious adjustments to the peg-basket of currencies, and by the tolerance of inflation rates higher than those of our main trading partners.

Yet this measure should be resorted to as a last resort and only if it forms part of an overall package of adjustment on the lines of the 9 deliverables I have indicated in previous contributions in this series. The soft option of taking this measure on its own will unavoidably lead to unsustainable temporary respite that serves only to complicate the long term solution.

It is for this purpose that I kept this measure as the last in a series of 10 deliverables as it can only have be an effective and durable cure if it forms part of a whole package of re-structuring. It is no use resorting to such a measure if the unions flex their muscle to extract wage increases to make up for the one-off price adjustments generated.  It is also of no use if the wage mechanism, which effectively indexes inflationary impulses into statutory wage increases, is kept intact.

A devaluation of the currency, can only be effective if it is accepted for what it is i.e. a general across the board retraction of our standard of living with the rest of the world aimed to restore competitiveness as a basis for future growth.  It is a step back in order to build a solid foundation for taking further steps forward.

From a social point of view I think a devaluation, if accepted for what it truly is, represents a very fair arrangement in spreading the burden of re-structuring across the board so that nobody gets crushed by carrying an unfair part of such an adjustment. It is a process whereby those who remain in employment make a contribution to the adjustment process by taking a small cut in their living standards to give a better chance to those who lose their job, as an unavoidable part of economic re-structuring, to place themselves into competitive employment sooner rather than later.

If framed in this context I am positive that devaluation will be removed from the dirty word dictionary where our politicians and economic managers have placed it. Rate of Exchange adjustments happen all the time in order to account for changing economic realities. The USD has moved from 1.22 Euros in autumn 2000 to its current 0.79 Euro to take account of its huge twin deficits, fiscal and balance of payment. Similar adjustments happen between other currencies even if $ swings are excluded.

Take the softening of the Swiss France vs. the Euro.  No way are the Swiss begrudging this drop. On the contrary they are fearing it could be too short lived.

In the absence of a free currency market to establish the external rate of the Maltese Lira its value is determined by administrative decisions taken political leaders acting jointly or in consultation with monetary policy operators. In the meantime the Monetary Policy Council chaired by the Governor of the Central Bank continues to operate an interest rate policy aimed to prop up the current currency peg forcing us to keep domestic interest rates at a premium to its theoretical composition in the peg-basket of currencies. This has a diametrically opposite effect to the days of rigid exchange control on capital movements when domestic interest rates used to be at a discount, sometimes quite substantial, to international interest rates.

Whilst we should not long for the return of such rigidities which in turn create other problems of inefficient misallocation of resources, one must take note that domestic operators are being rendered less competitive under the new monetary policy regime than under the previous one.

For a wide-open economy like ours where imports and exports form a very large percentage of the GDP one ought indeed be very cautious in recommending exchange rate adjustments.` There is always a grave risk that even if such adjustments are economically needed they are in practice rendered as a soft option to the more painful re-structuring, leading instead to a spiral of inflation and further devaluations in the Italian style` of the 70`s and 80`s.`

However on the eve of our applying to join the ERM II mechanism leading to the fusion of the Maltese Lira into the Euro such risk is much more manageable and forces me to conclude in favour of a one-off adjustment to our rate of exchange before taking the Euro plunge.

By joining the Euro we would be removing a shock absorber of economic stress and hardening the entire public debt from domestic currency into a hard currency. The risks of joining the Euro at too high a rate are unbearably painful, as the German experience shows, and caution should indicate that we should favour joining at a lower competitive rate, imitating the Irish who continue to use the monetary union to their economic delight.

Dogma that rate of exchange policy is untouchable, is, in the current circumstances, misplaced and perilous, risking shift of the whole pain of adjustment onto the employment sector.   

Sunday, 22 February 2004

Privatisation Rewind and Fast Forward

The Malta Independent on Sunday 


I am extremely grateful to the webmaster of my private web-site where I keep a library archiving all my past writings. He makes it so much easier to refer to what I had written about events which in time take certain quite predictable twists.

I had occasion to refer to my past thoughts and writings this week when it was announced that the NZ minority shareholders of Maltapost will be terminating their 2 year management contract which was extended only by 6 months to enable a smooth transition to internal management.

The performance of Maltapost under NZ management was to say the least unimpressive. They lowered postal standards to which the consumer was long accustomed to even when the postal service was run as a government department, milked monopoly profits through exorbitant management fees and expenses, increased monopoly prices for a deteriorating service, sent back to central government excess labour at taxpayers` expense, abused philatelists` loyalty through excessive volume and value of new stamp issues, and failed to pull in any international business as they had promised. And in spite of all this the company, at least going by their own corporate mutterings, has still not achieved operating profitability levels.

Permit me to quote from articles on the matter I had published when the deal was struck some two years ago when the then Parliamentary Secretary had defended himself from wide public criticism on the basis that he has put into the deal corporate vision which critics lack.

It is strategically wrong and economically hopeless. Strategically wrong because it is crazy to buy technology through equity. It is expensive and locks the company into the technology of one provider without the possibility of seeking technical inputs from other more reliable economic sources.` The future as it unfolds brings changes to` the economic fortunes often` turning giants into dwarfs and vice-versa.

It is economically hopeless because selling a 35% stake in Maltapost with a guaranteed monopoly on UPU postal service, with the assurance of 17% increase in postal rates and declaring willingness to privatise the rest in a fractionalised manner leaving the foreign minority shareholder` in the effective control of whole company,` and all this` for a mere` Lm1225000 payable just Lm490,000 in cash and the rest bartered in instalment over highly over-priced technical services, is daylight robbery. Effectively the NZ company are investing part of the profits from the technical services in the cash element of the transaction and securing themselves the right to control Maltapost for posterity.` In` the process they will comfortably` keep charging sizeable technical services each` year to the detriment of the small shareholders and the consumers who will eventually foot the bill through monopoly driven rate increases

And again:

I am annoyed, because I see the country being sold on the cheap with strategic natural monopoly services being regaled through direct arrangements to private interests, in the process exposing the consumer to monopoly abuse.

To make the pasticcio complete, the government did not even reserve the right to buy back the shares in case the Kiwis do not deliver on the management agreement even though they obliged the government to buy back these shares in case of such an event. A one-way agreement if ever there was one.

At a time when internationally the pressure is building, following the Enron debacle, to separate auditing from consulting, the Maltese government has confounded all business gurus by mixing consulting with equity, creating the perfect recipe for conflict of interest. This is the work of incompetent amateurs

I hate to say it but this is exactly where we stand today. I applaud the current Minister who had the guts to start unwinding the mess by terminating the Management Agreement though he still has to unravel the equity tangle that he is locked in.

In the same week we had this rewind to the privatisation of Maltapost we have also had the formalisation of the privatisation of Public Lotto through a seven year monopoly licence to a foreign dominated privately owned consortium of investors. There are too few details in public domain to permit passing objective judgement on this deal though I have sympathy with the structure of definite time license.

However I have reservations on two points which do not seem to have been addressed at all in the privatisation process of the Lotto. The first is whether it makes sense for us to allow foreign investor domination in what is effectively a captive domestic market.  I maintain that it is far more economically efficiency to buy in technology and know-how rather than to barter it for equity. Natural monopolies should be reserved for majority control by domestic investors with strict provisions for State regulation to protect from abuse of monopoly and minimum quality standards.

But even more worrying in the Public Lotto privatisation is the social and macro-economic implications it may have. Exposing a captive domestic market to the exploitation by private investors needing to maximise the return of their investment over a rather short time of 7 years unavoidably leads to the over-exploitation of the gambling trait in the Mediterranean culture.

This will not only lead to social problems which will make Caritas and such like organisations work overtime to cushion the social disaster that the State is abetting to build, but will also lead to serious distortions of consumption patterns leading macro-economic unpleasantries. The retail community can relate such stories whenever the Super 5 snowballs to high figures.

Could we be perpetuating such experience every week? What provisions have been included to guard against such over-exploitation which will cost society much more than we would be gaining through the Lotto privatisation?   

Friday, 20 February 2004

Deliverable No 9 - A cap on social transfer payments

The Malta Independent 

Keep social benefits at their current real level and forget all possibility of giving tax incentives for private pensions before government finance comes in good shape to make this affordable.

As a person coming from the social democratic political school there is nothing I would champion more than the fair distribution of the wealth created through the sustaining of a structure of social benefits to ensure that those who cannot help themselves through economic initiative can still participate in the wealth generation up to a level which keeps them cushioned from poverty and deprivation.

On the other hand I am an economic realist. Social services can only be maintained through economic growth and not through a zero sum game. Wealth has to be created before it can be distributed as otherwise the foundations of economic growth will be eroded and the whole social services structure will crumble leading to untold hardship for those that can least defend themselves.

Consequently I consider that in the current economic state it would be risky and presumptuous to consider any improvements in the social benefits network. Any talk of government taking on any additional burden, through fiscal incentives or otherwise, to solve the pension problem which is accumulating 15 years down the road, is misplaced and irresponsible. We have to solve the current problems before we can be in a position to address and provide for problems with a much longer time horizon.

This does not mean that the pension problem should be neglected. The more we raise awareness to the problem the more it would be possible for those still at a considerable distance from pension age to make their own arrangements to supplement the State pension to ensure that they can enjoy a retirement without having to suffer a large cut in their living standards.` But for the foreseeable future, until we engineer some real economic re-structuring and re-position ourselves on a strong economic growth platform based on new productive investments and exports of good and services, it would be false hope to aspire that the State can contribute fiscally to solve this problem.

On the other hand I find it socially unacceptable that those living on social support, those who genuinely cannot participate in economic activity to earn a living, are being exposed to the risk of having to carry the burden of re-structuring by jeopardising the sustainability of the social support structure. For such people even the slightest straw could break their back. They need protection to keep what they have throughout the re-structuring exercise whilst weeding out the undeserving parasites that suck social transfers they are not entitled to and those who rely on social support as a matter of choice rather than necessity.

This should force us to reconsider certain social transfers that are going to those that do not really need them. In theory one could hypothesise models where benefits are subjected to means testing. I am wary of such models as our means testing mechanism is still very faulty and such system could serve as a betrayal of the interest of the very same sectors of society it is intended to protect.

So I am more in favour of outright and across the board reconsideration of whole systems of transfer payments to those sectors of society who can or should do more to help themselves rather than rely on unsustainable State support. And fairly and squarely in this category fall the whole system we built of paying our students to go to university or receive tertiary education.

Much richer and more resourceful countries do not afford such generous schemes. When Labour government tried to re-design such schemes in 1997/1998 to make them affordable and sustainable they were sabotaged by political opportunism of the then opposition now in government with financial problems that came back to haunt them. But what`s right is right. Is it fair that the State cannot sustain those who really need social support in order to support able-bodied youngsters to be paid for studying? 

At a time when students have earned themselves the freedom to go and practice their acquired profession overseas it is only fair that society demands that they pay back the social support they receive whilst studying, from their earned income in the years of their profession. Something has to give and it is best if what gives is carried by those who can carry it. High time for our student corpse to regain the mantel of being the social conscience of society and not only protest when their financial interests are effected or when parking facilities at university fall below their expectations.   

Friday, 13 February 2004

Deliverable No 8 – No Dew Debt

The Malta Independent - Friday Wisdom

No new debt until we get the debt level down to 60% of the GDP. Any capital expenditure has to be financed by one off revenues (privatisation, sinking fund and similar arrangement) to avoid recourse to new debt issues, other than roll-over of maturing debt.
The official public debt of central government at the end of 2003 is estimated at 69% of GDP and at the end of 2004 it is estimated to increase to 70.5%. Is this too much or too little?
Figures in absolute have little significance. To get a feel for the real state of play one has to use relative benchmarks. Of all the acceding countries to the EU Malta has the biggest relative debt to the GDP followed by Cyprus and Hungary. At the other end Estonia and Latvia are virtually debt-free. Again taken on its own this thus not necessarily mean that we are doing better or worse than the others because much depends on the state and effectiveness of the country’s infrastructure which is the foundation for economic growth. It is no use having low debt ratios if infrastructure development is neglected. What it does mean however is that we have already used much of our debt capacity whereas our competitors still have a lot of their debt powder dry.
One must take into consideration that we have a commitment to join the Euro single currency at some not too distant future point in time and that to gain admittance we have to get our government debt level down to 60%. We can gain an exception to be admitted with a higher debt ratio level but only if we prove that ratio is diminishing sufficiently and approaching the reference value at a satisfactory pace.
At a time of anaemic economic growth no one has yet seriously explained how this is going to be done. A feeble attempt was made in last budget speech where a table was given showing that the debt would remain at 70.5% in 2005 and reduce to 68.4% in 2006. However this is dependant on achieving success in nearly halving the budget deficit from Lm108 million in 2003 to Lm59 million in 2006 and on generation of special one-off revenues amounting to Lm135 million from privatisation of state entities over these 3 years.
Government’s track record offers little room for optimism. Unless the new man at Castille can change the ‘money no problem’ mentality, cultivated by the outgoing Prime Minister, and ensure that the whole cabinet puts its collective weight behind the budget targets and not just force the Finance Minister’s hands to resort to additional taxation at a time when our competitors are relaxing their fiscal stance, we will never hit these targets.
My feeling is that hitting these targets, unlikely as it is, is really not enough. We need to do more. We cannot just play around with figures and argue that we will solve the problems two years down the road. It sounds so much like the smoking addict promising to stop smoking tomorrow. If we mean it we have to start today. And believe me it will not be one day too early.
Whilst the level of debt is worrying when seen in isolation and in comparison to size of the economy, it is far more worrying when one studies the trend line for the accumulation of such debt. In 1992 when the present Minister of Finance presented his first budget and promised us growth based on good financial housekeeping, the government debt was Lm246 million equivalent to 28% of the GDP. When Lino Spiteri in 1996 exposed the camouflaged but worrying state of government finances left behind by the outgoing PN government the public debt was Lm517 million equivalent to 43 % of the GDP. At the end of this year it is projected to reach Lm1288 million being 70.50% of the GDP. And this is not the whole story. At some point in time, government debt hidden in the Treasury Clearance Fund and in the banking sector through non-performing loans covered by the State’s guarantee s will have to be tacked on to the government debt measurement.
The speed of accumulation of the debt is more worrying than the debt level itself. We have increased debt fivefold over a period of 12 years in spite of cushioning the impact by about Lm294 million of extraordinary revenues from privatisations and the winding down of sinking funds.
If we really mean business we cannot just promise to stop ‘smoking’ tomorrow hoping that EU accession and Euro entry can put on us the discipline which we have not been capable of putting on ourselves. We have to stop ‘smoking’ today. Debt accumulation must no longer remain a variable to balance the budget. Until such time that the government debt reverses its growth trend and is steadily heading towards the 60% EMU criteria for Euro entry, the government should change the other variables (especially the expenditure side) to ensure that no new debt is required, whilst maturing debt will keep being rolled-over.

Sunday, 8 February 2004

One for the Road

The Malta Independent on Sunday 

By the time you read this it is probably official that Dr Fenech Adami, having reached age 70 yesterday, is holding on as Prime Minister purely ad interim until the PN elect a new leader in his stead.

For the PN Dr Fenech Adami did more than anyone could have ever expected. Getting an outright majority in five of the six elections he contested and winning government in four of these fives times, is a record which in unlikely to be matched by anyone in my lifetime. He modernised the Party, took it to the mainstream middle class of society and managed to build solid alliances with other power bearers of society which ensured that the PN still looked respectable when it was seriously under-performing and that Labour by contra was painted disrespectful even when operating normally.

As Leader of the Opposition Fenech Adami showed little respect for the right of the majority to rule as democratically mandated. In his three stints as Leader of the Opposition between 1977 and 1981, from 1981 to 1987 and between 1996 and 1998 he showed unwillingness to behave as a responsible and constructive opposition and instead openly obstructed the majority government in the execution of its mandate. Perhaps one should be lenient in judging his such behaviour between 1981 -1987 given that his minority in constitutional terms was in reality a majority in voting terms giving moral authority to question the government`s democratic credentials.

As Prime Minister, and effectively the leader of the country, Dr Fenech Adami`s performance is a mixed bag. He certainly brought to government a more relaxed way of administering showing more respect to democracy when in government than when in opposition. Having total executive power with generally comfortable legislative parliamentary majority and comforted by benign considerations of the other power bearing centres of society, Dr Fenech Adami could afford to loosen the State`s excessive control of the economy ( through free trade policies), the executive (through local councils) and the media ( through private radios and TV stations). This was a refreshing change to the central command style of Labour`s 16 year stint from 1971 - 1987.

However he is leaving behind as legacy an economy which has not been kept competitive and flexible to win in the global market, an economy whose growth is underpinned by unsustainable over-consumption, and with a burden of fast-growing debt which severely restricts his successor`s manoeuvrability to engineer an economic turnaround.

In summary Dr Fenech Adami`s `money no problem ` live for today` style of economic management has exhausted our debt capacity, has burned the proceeds of various privatised assets and left us with little resources to invest in the necessary up-grading of our economic infrastructure.

I can hear shouts of protest over this judgement arguing that the accumulated debt is covered by infrastructure investment which was neglected by Labour administration of the 80`s. I agree that for a time this worked well. The state of the country in 1987 when Dr Fenech Adami took over its leadership was one free from debt and rich in financial resources but significantly poor in its state of infrastructure. There was full justification to incur deficits and debt to up-date our basic infrastructure. But beyond the first term of 1987-1992 the pendulum was allowed to swing too far the other way and certainly we got no infrastructure development which could justify the rapid build-up of debt even in relation to the GDP, let alone in absolute terms.

It is furthermore unfortunate that Dr Fenech Adami`s departure is happening under a cloud of the RCC case.` Recent court judgement inevitably raises the question whether he has intervened beyond prudence and allowed personal emotions to taint his judgement in the granting of the pardons to a self-admitted contract killer who was a former personal bodyguard.

Society did not get fair value for the three presidential pardons given to his ex-bodyguard which only pinned in a definitive manner a drug deal case which the police had caught red-handed and which they could have concluded without the help of presidential pardons.` The major question as to who actually commissioned the contract killing of the Prime Minister`s personal assistant remains unresolved.

It is easy to allow circumstantial evidence to play tricks with imagination and fantasize that the Prime Minister`s judgement in advocating the presidential pardons was not objective and was subject to external pressures which the Leader of the Opposition defined as blackmail.

This is too serious an accusation to levy without solid proof. But now that it has been raised surely we cannot have the issue simply resolved by the odd libel case. Society`s opinion in not necessarily formed in the court rooms.` The discharge of the accused mandator in the RCC case does not prove that he did not actually do it. One cannot prove the negative. It only proves that there was not sufficient evidence to prove that he did it.

In similar vein even if Dr Fenech Adami were to win a libel case against the Leader of the Opposition for his blackmail remark it does not disprove the issue but it would only prove that there is no sufficient corroborating evidence for it.

As a member of society who paid very dearly in granting three presidential pardons to RCC`s self-confessed contract killer with pretty little return, I appeal to the Prime Minister`s good sense of corporate governance to give us one for the road before he leaves. I suggest the appointment of an independent board of enquiry consisting of one or more retired judges(s) to investigate the whole decision making process for granting these pardons and to report whether the executive made the best possible objective decision in the circumstances or whether their judgement was clouded by personal emotions or other pressures caused by the first hand knowledge of both the victim and the beneficiary of the pardons.

George Bush and Tony Blair have agreed to submit to independent investigation their behaviour on matters of substance which have failed to pass the test of public opinion. In this vein it is time that the executive here proves that it is sensitive to public opinion and not just rely on the once every five year mandate which often reflects the demerits of others rather than the merits of the majority choice. 



Friday, 6 February 2004

Deliverable No 7 - Restoring flexibility to the labour market

The Malta Independent 

Rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level to keep the protection for non-unionised employees who normally operate at or near minimum wage levels

No real restructuring exercise can be effective if it focuses solely on restraining government`s share of the economy by economising on expenditure and containing the impact of taxation.` Although government is a very important part of the economy and its actions or inactions have a direct bearing on economic performance, it does not constitute the whole economy.

It is out there in the real economy which produces the goods and services with which we interact with the outside world, given that our smallness renders us highly integrated with the global economy as we export most of what we produce and import most of what we consume, that we really create the wealth that can sustain true economic growth. And this can only come from investment which in turn will only come if we can offer a competitive and vibrant efficient economy.

So it is a virtuous or a vicious circle depending on what we make out of it. If we are competitive we pull in investment that produces growth and makes us even more competitive. If we lose our competitiveness we lose the growth momentum and fail to attract real investment without which we cannot regain competitiveness.

Clearly years of neglect to our international competitiveness has landed us on the vicious side of circle.` Unless we do something pretty extraordinary we cannot stem the momentum of the spiral. To do so we must challenge the things we take for granted, the things we have been accustomed to consider as a right as if someone owes us our living. We must re-evaluate whether systems introduced when we were a low-wage country are still effective in this day and age where we have to compete on value-added rather than cost structures.

One such system is the COLA where each year a general across the board wage increase is legislated by government to supposedly provide an adjustment for the cost of living increases. The general idea was laudable. At a time when union membership was largely restricted to the public sector, the State protected employees in the private sector through such COLA mechanism to preserve the real value of their wages.

In due time this system started to price out our competitiveness. So we have already had to make two major revisions to its applicability. In the first half of the eighties as the economy stalled we had a centrally enforced wage freeze on the whole economy. Rather than free the COLA to more market discipline we froze the whole economy to ensure that the COLA mechanism would not continue to erode our competitiveness.

After the wage freeze was lifted in 1987 we had to revisit the COLA again in 1990 through the Incomes Policy in an attempt to halt its eroding powers. Through this policy the applicability of COLA wage increases was linked to a minimum wage base so that on a percentage basis the overall wage increase legislated by COLA was well below the general inflation level.

We have survived with this system for 14 years so that whilst its eroding power was contained, over such a long term it has accumulated enough baggage to start impinging seriously again on our competitiveness. We have come to a ridiculous situation where people earning upwards of Lm10000 p.a. get a COLA enforced wage increase of 75c0 per week. We have come to a ridiculous situation where people doing a trivial unskilled job, command, through the accumulation of COLAs, twice the market rate for a similarly unskilled new entrant.

Blind believers in adherence to market mechanisms would argue for the total abolishment of COLA and minimum wage. I am not a blind believer in the market and whilst I believe that nothing should be done to compromise our international competitiveness, as no one owes us our living, we have to have a social protection where the least resourceful are kept above the poverty line.  

In the context of a low inflation economy it is time to consider a further adjustment to the COLA so that the annual legislated increase is rendered applicable only to the minimum wage. This is necessary to protect non-unionised employees who normally operate at or near minimum wage levels from suffering a reduction in the real wage value which is just about necessary to keep their body and soul together.

For the rest, wage setting has to be market driven.  Employers and unions are not to be usurped their negotiating position by the State through legislated increases which in no way reflects the reality within the micro-units.