The Malta Independent on Sunday
When Central Banks speak the economic world listens, digests, takes note and acts.
When Alan Greenspan, the Fed Chairman, speaks, even when he speaks in Greenspeak code, even when occasionally he contradicts what he had said not much earlier, the markets stop in awe to listen and decipher the message. His words carry more economic weight than the Treasury Secretary and indeed, even more than the US President.
When J C Trichet, ECB President, addresses the Press Conference after each ECB rate setting meeting, journalist from all over the world congregate to understand the ECB motivations for the decision that would have just been announced regarding the interest rates for the Euro.
When the minutes of the meeting of the Monetary Policy Council of the Bank of England get published, they are pored over by economic journalists who try to infer the weight of the majority for the decision taken and any dissenting view which might be developing. This is often the first sign of the upcoming shift in policy, if the dissent grows larger in subsequent meetings.
How is it then that when the Central Bank of Malta speaks, generally through its Head the Governor, who enjoys autonomy from government through fixed term Presidential appointment, the country takes little or no heed`
We have got used to the annual speech every November just before the budget, where successive governors over more than a decade have reminded us that we cannot continue to amass debt to finance living beyond our means and that reality will catch up with us sooner rather than later. We get the next day coverage in the Press which is forgotten by the day after and the country continues to plod on regardless, sinking deeper into the bad habits that `have turned us into a middle class society living in a poor country.
The Governor communicates with us through the short press release which is issued monthly after each Monetary Policy Council meeting that sets interest rate levels and gives some very succinct economic reasoning for such decision, normally all in three short paragraphs.
Here again the press would simply quote the Press Release verbatim and life goes on regardless.
How can society continue so blatantly to disregard the wisdom coming from the Bank for which it pays handsomely through the engagement of a Governor, a Deputy Governor, five Deputy General Managers, 10 well staffed departments employing some 300 odd full-timers, sixteen part-timers all housed in two fine buildings right at the vehicular entrance to Valletta just a few metres away from the power centre at Castille`
What exactly are all these doing there` With exchange control no longer in force and with banking regulation having migrated to the MFSA,` society is quite entitled to look at the Central Bank, with skepticism, as not exactly the shining example of efficiency that can preach virtues from the top of the mountain. It could well be that for society at large the Central Bank has lost it moral authority to preach reform, painful re-structuring and the need for efficiency gains when it is itself failing in all these aspects.
Frankly I feel that the Central Bank has lost its mission. From its official communications it appears that it considers its sole objective as the stability in the rate of exchange peg of the Maltese Lira and considers itself quite an incidental and indirect contributor to growth for the Maltese economy. Its most important role of conducting monetary policy has now been reduced to simply adjusting the premium on the Maltese Lira that has to be priced in the official interest rate to ensure that the exchange rate peg can be sustained through protection of the external reserves.
Let me try to put this in layman`s language, something that the official releases of the Bank take little effort to do. The Malta Lira is composed of three currencies in varying weightings i.e. Euro 70% GBP sterling 20% and US dollar 10%. The official interest rates of these component currencies are 2%, 4.75% and 1.50% respectively. 70% of 2%, 20% of 4.75%, `and 10% of 1.5% give a theoretical rate for the Maltese lira of 2.50%.` The official rate of interest set by Governor through the Monetary Policy Council is 3% meaning there is currently a `% premium on the Maltese Lira rate of interest.
Why is such a premium necessary, `one may ask.` It is meant to compensate Maltese savers, who free from exchange control now have complete freedom to invest their capital in overseas currencies by drawing on the Central Banks official reserves, for the risk of the Maltese Lira not remaining stable with such overseas currencies. It is meant to stimulate domestic savers to keep their savings in domestic currency by rewarding them with a half percent hike on a like for like basis.
The Governor no longer controls the general trend of interest rates which is set by developments of the foreign currency components of the Maltese Lira basket, mostly the Euro whose weighting will continue to increase as we cruise towards the eventual fusion into the EMU. If Euro rate goes up the rate of interest of the Maltese Lira will have to go up whatever the domestic state of the local economy which could well be in need of lower interest rates. What the Governor decides is the level of the premium necessary on top of the underlying interest rate to protect foreign reserves and keep exchange rate stability.
Once we join the Euro this premium will disappear, the Maltese Lira will be consigned to the books of monetary history and yet one more of the important functions of the Central Bank will cease to exist making it yet more difficult for the Bank to continue to justify the excessive use it is make of national scarce resources.
Frankly I feel that the Central Bank has lost its mission and has detached itself from the society it is meant to serve. No wonder therefore that society takes little heed of the Bank`s warnings like `the need to strengthen support for the exchange rate peg by enhancing the country`s capacity to generate export earnings, particularly by containing wage and other costs and achieving productivity gains` (rate decision press release of 29th July) or `given the relatively large share of labour costs in the overall price structure, increases in wages should be matched by productivity gains` (rate decision press release 26th August).
The Bank`s mission is being lost in the contradiction of its statements. Once the Central Bank own research consistently shows that the Maltese Lira rate of exchange at current levels is 10% over-valued in real terms over the level of 1995 I strongly argue that enhancing the country`s capacity to generate exports earnings need to be restored not only by containing wages and other costs to productivity gains levels, a process that even in the best of circumstances would take a long time to deliver, but also by removing the over-valuation in the Maltese Lira that the Central Bank unwittingly let to sneak in.` Yet the Central Bank disregards its guilt in bringing over this situation and would rather continue to preach the need of exchange peg stability at its uncompetitive level above all else.
I am all for stability.` But stability at an uncompetitive level would lead to the stability of the cemetery. I stand for stability in consistent growth and in restoring and maintaining our international competitiveness. Keeping its high moral grounds by preaching from the mountain top and keeping itself detached from the sufferings of operators who are tasked to maintain and enhance the capacity for export earnings, will continue to render the Central Bank prematurely irrelevant, before it becomes inevitably irrelevant when eventually we join the Euro.
I have one offensive suspicion which I pray is not real. However, experience teaches me to be on the look-out for conflict of interest situations and to guard against even their theoretical risks. Could the inexplicable obstinacy of Central Bank senior executives even to engage in discussion on the correct level for the external value of the Maltese Lira, have anything to do with the fact that their personal financial interest is favoured by maintenance of the peg at its current overvalued level so that the burden is carried by those ground zero private sector operators who will have accept cut in their benefits to preserve the export earning capacity of the country.
The Bank needs to re-discover its mission and to engage in wider discussion to ensure that the issue of the right level for stability of the exchange rate peg is not dominated by internal vested interest.
When Central Banks speak the economic world listens, digests, takes note and acts.
When Alan Greenspan, the Fed Chairman, speaks, even when he speaks in Greenspeak code, even when occasionally he contradicts what he had said not much earlier, the markets stop in awe to listen and decipher the message. His words carry more economic weight than the Treasury Secretary and indeed, even more than the US President.
When J C Trichet, ECB President, addresses the Press Conference after each ECB rate setting meeting, journalist from all over the world congregate to understand the ECB motivations for the decision that would have just been announced regarding the interest rates for the Euro.
When the minutes of the meeting of the Monetary Policy Council of the Bank of England get published, they are pored over by economic journalists who try to infer the weight of the majority for the decision taken and any dissenting view which might be developing. This is often the first sign of the upcoming shift in policy, if the dissent grows larger in subsequent meetings.
How is it then that when the Central Bank of Malta speaks, generally through its Head the Governor, who enjoys autonomy from government through fixed term Presidential appointment, the country takes little or no heed`
We have got used to the annual speech every November just before the budget, where successive governors over more than a decade have reminded us that we cannot continue to amass debt to finance living beyond our means and that reality will catch up with us sooner rather than later. We get the next day coverage in the Press which is forgotten by the day after and the country continues to plod on regardless, sinking deeper into the bad habits that `have turned us into a middle class society living in a poor country.
The Governor communicates with us through the short press release which is issued monthly after each Monetary Policy Council meeting that sets interest rate levels and gives some very succinct economic reasoning for such decision, normally all in three short paragraphs.
Here again the press would simply quote the Press Release verbatim and life goes on regardless.
How can society continue so blatantly to disregard the wisdom coming from the Bank for which it pays handsomely through the engagement of a Governor, a Deputy Governor, five Deputy General Managers, 10 well staffed departments employing some 300 odd full-timers, sixteen part-timers all housed in two fine buildings right at the vehicular entrance to Valletta just a few metres away from the power centre at Castille`
What exactly are all these doing there` With exchange control no longer in force and with banking regulation having migrated to the MFSA,` society is quite entitled to look at the Central Bank, with skepticism, as not exactly the shining example of efficiency that can preach virtues from the top of the mountain. It could well be that for society at large the Central Bank has lost it moral authority to preach reform, painful re-structuring and the need for efficiency gains when it is itself failing in all these aspects.
Frankly I feel that the Central Bank has lost its mission. From its official communications it appears that it considers its sole objective as the stability in the rate of exchange peg of the Maltese Lira and considers itself quite an incidental and indirect contributor to growth for the Maltese economy. Its most important role of conducting monetary policy has now been reduced to simply adjusting the premium on the Maltese Lira that has to be priced in the official interest rate to ensure that the exchange rate peg can be sustained through protection of the external reserves.
Let me try to put this in layman`s language, something that the official releases of the Bank take little effort to do. The Malta Lira is composed of three currencies in varying weightings i.e. Euro 70% GBP sterling 20% and US dollar 10%. The official interest rates of these component currencies are 2%, 4.75% and 1.50% respectively. 70% of 2%, 20% of 4.75%, `and 10% of 1.5% give a theoretical rate for the Maltese lira of 2.50%.` The official rate of interest set by Governor through the Monetary Policy Council is 3% meaning there is currently a `% premium on the Maltese Lira rate of interest.
Why is such a premium necessary, `one may ask.` It is meant to compensate Maltese savers, who free from exchange control now have complete freedom to invest their capital in overseas currencies by drawing on the Central Banks official reserves, for the risk of the Maltese Lira not remaining stable with such overseas currencies. It is meant to stimulate domestic savers to keep their savings in domestic currency by rewarding them with a half percent hike on a like for like basis.
The Governor no longer controls the general trend of interest rates which is set by developments of the foreign currency components of the Maltese Lira basket, mostly the Euro whose weighting will continue to increase as we cruise towards the eventual fusion into the EMU. If Euro rate goes up the rate of interest of the Maltese Lira will have to go up whatever the domestic state of the local economy which could well be in need of lower interest rates. What the Governor decides is the level of the premium necessary on top of the underlying interest rate to protect foreign reserves and keep exchange rate stability.
Once we join the Euro this premium will disappear, the Maltese Lira will be consigned to the books of monetary history and yet one more of the important functions of the Central Bank will cease to exist making it yet more difficult for the Bank to continue to justify the excessive use it is make of national scarce resources.
Frankly I feel that the Central Bank has lost its mission and has detached itself from the society it is meant to serve. No wonder therefore that society takes little heed of the Bank`s warnings like `the need to strengthen support for the exchange rate peg by enhancing the country`s capacity to generate export earnings, particularly by containing wage and other costs and achieving productivity gains` (rate decision press release of 29th July) or `given the relatively large share of labour costs in the overall price structure, increases in wages should be matched by productivity gains` (rate decision press release 26th August).
The Bank`s mission is being lost in the contradiction of its statements. Once the Central Bank own research consistently shows that the Maltese Lira rate of exchange at current levels is 10% over-valued in real terms over the level of 1995 I strongly argue that enhancing the country`s capacity to generate exports earnings need to be restored not only by containing wages and other costs to productivity gains levels, a process that even in the best of circumstances would take a long time to deliver, but also by removing the over-valuation in the Maltese Lira that the Central Bank unwittingly let to sneak in.` Yet the Central Bank disregards its guilt in bringing over this situation and would rather continue to preach the need of exchange peg stability at its uncompetitive level above all else.
I am all for stability.` But stability at an uncompetitive level would lead to the stability of the cemetery. I stand for stability in consistent growth and in restoring and maintaining our international competitiveness. Keeping its high moral grounds by preaching from the mountain top and keeping itself detached from the sufferings of operators who are tasked to maintain and enhance the capacity for export earnings, will continue to render the Central Bank prematurely irrelevant, before it becomes inevitably irrelevant when eventually we join the Euro.
I have one offensive suspicion which I pray is not real. However, experience teaches me to be on the look-out for conflict of interest situations and to guard against even their theoretical risks. Could the inexplicable obstinacy of Central Bank senior executives even to engage in discussion on the correct level for the external value of the Maltese Lira, have anything to do with the fact that their personal financial interest is favoured by maintenance of the peg at its current overvalued level so that the burden is carried by those ground zero private sector operators who will have accept cut in their benefits to preserve the export earning capacity of the country.
The Bank needs to re-discover its mission and to engage in wider discussion to ensure that the issue of the right level for stability of the exchange rate peg is not dominated by internal vested interest.
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