Sunday, 31 October 2004

Mater Dei Humiliation

The Malta Independent on Sunday 

As a citizen this week I was humiliated by the meeting which my Prime Minister held at his request with the Chairman and Chief Executive of Skanksa regarding` the performance of their obligations as project Managers of the Mater Dei Hospital.

It is absolutely unheard of that a Prime Minister of a sovereign nation, that is now also an EU member, stoops so low beneath his status by seeking a direct encounter with the representative of a commercial organisation that holds a commercial contract of sorts with the government through an autonomous or semi-official body controlled by the government.

What is the use, may I ask, of creating such Organisations, Foundations, Authorities or whatever they may happen to be called, if then problems are referred back up to the Prime Minister for his direct intervention Even from a negotiating tactic viewpoint it makes weak posturing for the Prime Minister to enter into such direct negotiations. Protocol would have demanded negotiations to be conducted by the Chairman of Foundation of Medical Studies (FMS) assisted by technical experts and legal advisers, if necessary from the Attorney General`s Office.`

If such meetings have already been held without success and one needed a further attempt from more heavyweight representation, one could at most have involved the Permanent Secretary of the responsible ministry or at most the Permanent Secretary at the Prime Minister`s Office.` Beyond that it is a humiliation which implies weakness in government`s or FMS`s` legal position vis-`-vis the contractor, to have the Prime Minister engaging at his own initiative to weigh-in the stature of his position in direct negotiations. By so doing one risks being re-buffed, politely or otherwise, by a CEO of an international company who seems comfortable with its rights under the commercial contracts that were authorised by Cabinet, of which the current Prime Minister formed part, and signed by the FMS. Such re-buff is not only humiliating for the Prime Minister in persona but is offensive to the government, the State and its citizens.

If government has legal rights to fault the contractor on its performance, negotiating tactics would have demanded threatening and if necessary executing such rights and consequent remedies, leaving it to the contractor to seek high level meetings for reaching a compromise settlement.

If on the other hand FMS legal rights are questionable enough to force our Prime Minister`s misjudgement to get involved directly with the risk of grave humiliation, then the Prime Minister should instead be meeting all those responsible for signing the original agreement with the contractor, from the Minister to the advisers, from the Chairman and Board of FMS past and present to the lawyers who advised on such agreements, and demand explanations why were agreements signed in way exposing the nation to such grave risk of cost overruns, delayed time lines and poor accountability.

Once internal responsibilities are clarified and heads are made to roll as necessary, the Prime Minister`s responsibility, rather than through personal engagements in negotiations with contractors, is to appoint capable and trusted hands who can make the best out of a difficult position to bring this project to conclusion within the boundaries of` legal restrictions in existing contracts with outside suppliers, enforcing our rights and seeking concessions even beyond what is legally enforceable.

Mater Dei project is well set on course to becoming a white elephant that dwarfs Malta Shipbuilding proportions. Can anyone explain the logic of such an investment which seems set to sail well past the Lm200 million mark (if is ever finished, that is) if at the end it will have less hospital beds than are currently available at St Luke`s Hospital` Can anyone explain why five years after agreeing the latest configuration and the appointment of Skanska as project managers by direct cabinet decision (which has been criticised for lack of transparency and lack of accountability) we still have no idea how much it would cost when finished, when it will be finished, and how much it would cost to run it`

Can we afford the running expenses of the new outfit, or would its operations mean that universal entitlement to free acute interventions in public service hospitals will have to be foregone`

Coming to head in the last week of October such matters unavoidably raise nostalgia of what it could have been if the Labour government, elected so handsomely eight years ago, were to be still in power now approaching the end of its second term. One could blame Labour for many shortcomings and indeed I question the wisdom of the decision it took to extend the inherited San Raffaele project to amalgamate both operations of San Raffaele and St Luke`s Hospital into one operation eventually re-named Mater Dei. Having one operations rather than two separate ones makes economic sense but I still think that it would have been better to focus such unified operation in a re-defined and gradually re-developed and extended St Lukes rather than at Mater Dei. I would have much preferred if a line was drawn under the inherited San Raffaele until one could decide what exactly one could make of it.

What`s for sure however, is that a Labour Government would have never signed a contract like the one Skanska have, permitting them legal comfort to humiliate our Prime Minister.` A labour government would never have accepted to pay off people sending them home in early retirement changing a ` Repubblika mibnja fuq ix-xoghol` into a `Repubblika mibnija fuq il-hela`.

Confidently I would say that given more time a Labour government would have addressed the deficit problem which still haunts us till today and would have saved us the horrifying accumulation of debt that we have incurred since 1998. It would have strengthened our tourism and gave us a strong economy that would have been much better prepared to face the challenges of EU membership and the Euro.

But that is water under the bridge. Eight years after its 1996 victory, Labour is still languishing in its sixth consecutive year in opposition under failed leadership. The consequences of not just a reckless government but also of an uninspiring opposition, find tangible explanation in the Mater Dei mess which seems to benefit only its supply contractors.   

Friday, 29 October 2004

Oil News Management

The Malta Independent 

Unless you have blanked yourself out of all news media these last two weeks you must be aware that government is preparing a substantial hike in energy and utilities prices.

Such measures will cut through the standard of living of most of the population, including the large swath of middle class that politicians are most sensitive to. In order to shape public opinion for their acceptance we have been bombarded with news about consequences oil prices are leaving on Enemalta`s and Air Malta`s commercial fortunes. We have been told in no uncertain manner that other countries have had to pass price increases down the line to consumer and that Malta will unavoidably have to do the same.

A laughable suggestion was made from high government sources.` It argued that the envisaged price increases are meant to strengthen the economy.` Now I can understand claims that price increases could be unavoidable (though one could argue that they need not necessarily be so).` But to be expected to believe that price increases that cut our standard living whilst feeding inflation and making us less competitive globally will be for the good of the economy, is stretching it to the point of insulting our intelligence.

This country went through oil price shocks before. In particular the oil price shock of 1973/1974 and the replica of 1979 were as painful as they were sudden. The current record nominal price of oil of US$ 55 per barrel is in real terms much lower than the real record price of 1979 which in current money terms would be equivalent to US$ 88 per barrel.

Furthermore the oil price shocks of the seventies were different in nature form the current price surge. The seventies shocks were mostly supply driven as political reasons drove OPEC to restrict oil output in order to organise a strategic, not just cyclical, terms of trade adjustment transferring wealth from consumers to producers. The seventies oil price shocks were irreversible for as long as the eye could see.

The current oil price surge is different. It is mostly demand driven as world economy surges ahead at a sustained rate and as China registers high growth rate creating demand pressures for most commodities. Furthermore Iraq war instability is forcing many countries to increase their strategic reserves due to risk of the instability spreading to Saudi Arabia, the world major oil exporter. This adds a further artificial layer of oil demand on top of the economic cyclical upswing consumption patterns which then attracts a further additional layer of demand from speculative commodity dealers. Producers are pumping oil to full capacity and have a declared policy to drive down the price to a target range of between US$ 22 - 28 per barrel if the demand could recede to permit price stability.

Clearly such happenings are outside our sphere of influence but we should not just hope for the best.` The first thing our economic managers have to do, before taking the easy way out and just pass the prices down the line to the consumer, is form an opinion as to whether the current oil price surge is cyclical or strategic. Our response thereto will have to be different depending on our assessment. If the current surge is considered strategic than price adjustments down the line to the consumer are inevitable as long-term subsidies lead to wasteful practices that we can ill-afford. Furthermore such increases would not negatively affect our global competitiveness as our competitors are subjected to similar pressures.

However, if as I believe, the current price surge is cyclical and we can reasonably expect a price of oil, post-winter, and hopefully post-Bush, at under USD 40 per barrel at dollar rate of exchange which is expected to worsen even further than current low level, than government`s response could be different from simply passing on price increases to the consumer. If we had a comfortable fiscal position, as some of our competitors do, then we could take counter-cyclical measures like reducing energy consumption taxes to mitigate the imported price increases. Clearly our fiscal position does not allow such latitudes but these circumstances underline the need for sound fiscal policies to allow room for manoeuvrability to cushion cyclical downturns.

Furthermore cyclical price increases cannot be charged down the line without taking account of its impact on global competitiveness and social consequences.` One should therefore protect sensitive areas like industry, tourism, public transport and domestic water and electricity consumption up to reasonable non-wastage level. Such protection should focus on the non-discretionary spending on energy prices.

Obviously the cost of such protection will have to borne elsewhere and the most evident outlet for this would be prices of fuel at the pump and the cost of household utilities beyond the non-discretionary element. Such measures will also help to instigate more environmentally friendly energy consumption patterns through more diffused use of public transport and installation of domestic solar heating systems. Nothing influences consumption habits better than the price.

Government ought to use its energy to protect social structure and economic competitiveness from cyclical oil price surges rather than simply manage the news about it.

Friday, 22 October 2004

Squaring the Circle

The Malta Independent 

 Attempting to address a chronic fiscal deficit, bringing it down to near balance from 6.5% of GDP deficit, in the short space of three years, whilst at the same time stimulating economic growth in not unlike attempting to square a circle.

If this has to be attempted at a time of unkind external forces over which we have no control, like the doubling of international price of oil in the space of 12 months, than the job becomes even more complicated as in addition o squaring the circle one has to make look like a triangle.

The forthcoming budget will be a litmus test for government to prove that it is up to scratch for the difficult task that awaits us if we have to address our problems rather than just keep throwing money uselessly at them. Time for accounting fudges is over. Pretensions that problems are not real or that they can be indefinitely carried forward into the future by irresponsible financing will just not pass the test.

The only magic word that can effectively square the circle and even make it look like a triangle is growth; solid economic growth based on real and judicious investment aimed for competitive export.` Nothing else will deliver. Additional taxes beyond what is necessary to make up for imported external pressures, will simply stifle rather than promote growth. Additional government spending will complicate the deficit problem without delivering the necessary growth.

The messages sent by government so far are a mixed bag which leans substantially to the negative.` The purchase of Malta House in Brussels, irrespective of the long term investment criteria of the deal and the corporate governance or lack of it, surrounding the decision making process for this investment, sends the wrong signal about government serious intentions to address the deficit and to perform its part by economising on its discretionary expenditures.

Declarations that government will continue to engage workers to replace those retiring from central government employment raise doubt about real commitment to address its excess expenditure by at least allowing natural wastage to reduce its excessive utilisation of human resources.

Yet another agreement for subsidies to public transport services without obtaining real commitment to make the service reliable and appealing to a much wider sector of the population leads me to think that after all we are heading for more of the same. More profession of good intentions but with actions which lead in the opposite direction by simply financing problems rather addressing them.

The obstinate refusal to accept public statistics showing` that our rate of exchange is overvalued in real terms and that consequently` it would be immensely dangerous and painful to lock ourselves into the Euro mechanism at an uncompetitive rate, indicates that government is not seriously exploring all dimensions for a co-ordinated solution to our economic ills.

On the other hand the resolve to remove unnecessary monopolies which increase operating costs augurs well for the injection of flexibility into the economy. There are many other areas which need an injection dose of flexibility to help restore our international competitiveness. These include our outdated wage setting mechanism for cost of living increases which has far outlived its useful economic life and is trying to address yesterday`s problems rather than tomorrow`s challenges.

But ultimately growth comes from investment which government cannot afford if it is to address its fiscal deficit. Which means that growth can materialise if the private sector, local and foreign, is stimulated to take up the slack left by government as it withdraws from the investment scene while finisihing off` existing projects without starting new ones.

Investment is not generated by diktat or expression of wishes. Exhortations that government should do more to stimulate investment are often useless platitudes and generalisations when what is needed is specific measures to stimulate the supply side of our economy, particularly that oriented towards foreign markets.

There is not a single measure which would switch on a flow of investments. It is a total approach, indeed a new mind-set to render all processes conducive to the stimulation of private investments. But certainly critical is the access of SME`s to traditional bank finance, both for working capital as well as for non-property based investments.` Unfortunately our banks, driven totally by competitive market forces, find that SME`s carry an unattractive risk reward ratio forcing them to deny SME access to the necessary financing of job creation projects.

More than just figures the next budget must carry a moral suasion exercise, with threat of discipline fiscal measures in case of non-co-operation, for our banks to look at SME sector beyond the immediate impact to their current year`s profit performance.

Sunday, 17 October 2004

Open Letter to President George W. Bush

The Malta Independent on Sunday 

  Dear Mr. President:

As professors of economics and business, we are concerned that U.S. economic policy has taken a dangerous turn under your stewardship. Nearly every major economic indicator has deteriorated since you took office in January 2001. Real GDP growth during your term is the lowest of any presidential term in recent memory. Total non-farm employment has contracted and the unemployment rate has increased. Bankruptcies are up sharply, as is our dependence on foreign capital to finance an exploding current account deficit. All three major stock indexes are lower now than at the time of your inauguration. The percentage of Americans in poverty has increased, real median income has declined, and income inequality has grown.

The data make clear that your policy of slashing taxes ` primarily for those at the upper reaches of the income distribution ` has not worked. The fiscal reversal that has taken place under your leadership is so extreme that it would have been unimaginable just a few years ago. The federal budget surplus of over $200 billion that we enjoyed in the year 2000 has disappeared, and we are now facing a massive annual deficit of over $400 billion. In fact, if transfers from the Social Security trust fund are excluded, the federal deficit is even worse ` well in excess of a half a trillion dollars this year alone. Although some members of your administration have suggested that the mountain of new debt accumulated on your watch is mainly the consequence of 9-11 and the war on terror, budget experts know that this is simply false. Your economic policies have played a significant role in driving this fiscal collapse. And the economic proposals you have suggested for a potential second term ` from diverting Social Security contributions into private accounts to making the recent tax cuts permanent ` only promise to exacerbate the crisis by further narrowing the federal revenue base.

These sorts of deficits crowd out private investment and are politically addictive. They also place a heavy burden on monetary policy ` and create additional pressure for higher interest rates ` by stoking inflationary expectations. If your economic advisers are telling you that these deficits can be defeated through further reductions in tax rates, then you need new advisers. More robust economic growth could certainly help, but nearly every one of your administration`s economic forecasts ` both before and after 9-11 ` has proved overly optimistic. Expenditure cuts could be part of the answer, but your record so far has been one of increasing expenditures, not reducing them.

What is called for, we believe, is a dramatic reorientation of fiscal policy, including sustantial reversals of your tax policy. Running a budget deficit in response to a short bout of recession is one thing. But running large structural deficits over a long period is something else entirely. We therefore urge you to consider the fiscal realities we now face and the substantial burden they are placing on our economy.

We also urge you to consider the distributional consequences of your policies. Under your administration, the income gap between the most affluent Americans and everyone else has widened. Although the latest data reveal that real household incomes have dropped across the board since you took office, low and middle income households have experienced steeper declines than upper income households. To be sure, the general phenomenon of mounting inequality preceded your administration, but it has continued (and, by some accounts, intensified) over the past three and a half years.

Some degree of inequality is inherent in any free market economy, creating positive incentives for economic and technological advancement. But when inequality becomes extreme, it can be socially corrosive and economically dysfunctional. Problems of this sort are visible throughout much of the developing world. At the moment, the most commonly accepted measure of inequality ` the so-called Gini coefficient ` is far higher in the United States than in any other developed country and is continuing to move upward. We don`t know where the breakpoint is for the U.S., but we would rather not find out. With all due respect, we believe your tax policy has exacerbated the problem of inequality in the United States, which has worrisome implications for the economy as a whole. We very much hope you will take this threat to our nation into account as you consider new fiscal approaches to address the nation`s most pressing economic problems.

Sensible and farsighted economic management requires true discipline, compassion, and courage ` not just slogans. Given the tenuous state of the American economy, we believe that the time for an honest assessment of the problem and for genuine corrective action is now. Ignoring the fiscal crisis that has taken hold during your presidency may seem politically appealing in the short run, but we fear it could ultimately prove disastrous. From a policy standpoint, the clear message is that more of the same won`t work. The warning signs are already visible, and it is incumbent upon all of us to pay attention.

Respectfully submitted,

Dated 4th October 2004 and signed by 150 economy professors from America`s best business school and universities. A full list of signatories can be found on

The editor will forgive me for reproducing this open letter rather than scripting my own thoughts on the subject. But I think the message cannot be appreciated well enough except by a total reproduction. Nor is it my attention to expect readers to have any particular wish to be briefed about US economic structural imbalances although given the strength of the US these unavoidably come to bear on the rest of the world as well.

But it is heartening to see how professionals can remain faithful to their profession and speak out loud and clear without fear or favour even during sensitive times of US presidential elections. Unfortunately in Malta too few of us have been willing to pass such responsible judgements on the economic performance of our political leaders. I dare say that quite often the academia prefers silence if not submission to political wishes.

Many of the identified weaknesses apply to us as well though the causes are different.` US imbalances know their main source in aggressive tax cuts. Our imbalances are worse as they were created through uncontrolled expenditure in spite of higher tax burden.

We need many such courageous open letters.   

Friday, 15 October 2004

Irrational Exuberance

The Malta Independent 

Just when the US and international stock markets were reaching the peak of their meteoric rise in the spring of 2000 Professor Robert Schiller published his now epic book `Irrational Exuberance` where he predicted that the market `had become dominated by unrealistically optimistic expectations that were driving share prices to a level totally detached from their intrinsic values. Schiller confidently and correctly predicted that the market will undergo a wild self-correction to bring equity prices more in line with their underlying reality and it will be a painful exercise spanning many years before the markets can regain such peaks in an orderly and sustainable manner.

The phrase Irrational Exuberance was originally attributed to Federal Reserve chairman Alan Greenspan who in 1996 coined it to express his uneasiness with the then perceived high level of equity prices. Greenspan is in fact often criticised why he publicly expressed his feelings about irrational exuberance in the market in 1996 and then kept expressing confidence in 1999/2000, when prices went way over the top, that their then inflated `valuations possibly reflected the tremendous efficiency gains that applied technology was delivering.

Schiller on the other hand claims copyright for the Irrational Exuberance term saying that he used it during his various private conversations with Greenspan.

But more importantly for us than who is the rightful inventor of the phrase, it is whether the local stock market is currently undergoing a fresh bout of such irrational exuberance. Last week the Malta Stock Exchange Index closed just under 3000 which gives it 38% up for the year, 60% up for 2 years and 52% up for 5 years.

Five years ago this time was the start of the extreme irrational exuberance cycle and one therefore should rightly query whether the continued strength of equity prices during the current week has in fact landed us in such slippery territory.

One of the equities mostly contributing to this position is that of Bank of Valletta. The share price closed at Lm4.75c0 on Wednesday being 13.6% up from last week`s close and 85% up from its end of 2003 value.

At Lm 4.75 Bank of Valletta `s share price is very very close to its 2000 all time peak of Lm5.80 which for comparison purposes should be adjusted down to Lm4.83c0 to account for the one in five bonus shares issued since then.

If this level proved to be irrational in 2000 what circumstances could justify it in 2004 or is it simply a case of short memories and quick return to a state of irrationality`

Price bubbles are obviously much easier to identify in hindsight.` We can now positively ascertain that the 2000 equity prices where unjustified, unsustainable and detached from reality but in those get rich quick days the existence of the bubble was less visible, obfuscated as it was with great expectations for future profit growth and the inevitable momentum of the market. There were few exceptional characters like Schiller who had the courage to call a bubble by its true name.

In contrast with international equity prices that seem too cautious to shake off the post-bubble pain and are demanding solid not just isolated evidence of sustained corporate profitability growth before crawling forward anywhere near their 2000 peaks, locally we are now very much rushing versus a year 2000-like situation.` What criteria can we use to distinguish whether equity prices are justified by actual past experience and` fair future expectations, or whether we are dangerously in unsustainable irrational exuberance territory`

Time will be the best judge, `but consider this. Nothing much has actually happened so far which could justify an 85% increase in Bank of Valletta`s share price since last December. The 6 months interim results published in spring for the current financial year do not on their own justify such price explosion. This week`s further price notch up can be directly related to the announcement that government and Banco di Sicilia have reached agreement to offload their joint 40% stake in Bank of Valletta to a strategic partner. This in itself was hardly a new development as government has long been making it public knowledge that it means to divest its remaining stake in Bank of Valletta.

At Lm4.75c0 Bank of Valletta `s share price is trading at 25 times last year`s earnings per share.` Internationally the price earnings ratio for the financial sector would average anything between 10 and 15 with 12.5 being a fair overall average. This means that for the price earnings ratio of Bank of Valletta to come back within international averages that a strategic partner would expect to pay for such acquisition, the Bank would have to announce a 100% increase in its profit for 2004 over 2003.` Unlikely to say the least!

There is no clear logic in equity pricing and share prices have been known to deviate from their true underlying value quite widely and extensively. There is no assurance that the momentum of irrational exuberance will not push Bank of Valletta share price and the Malta Stock Exchange index higher further away from reality.` This does not however negate my view that at least in case of Bank of Valletta, the share price is being driven by irrational exuberance and illogical analogies from the experience of past privatisations.

Friday, 8 October 2004

Pull the Other One

The Malta Independent - Friday Wisdom

So the Freeport operation has finally been privatised. The immoveable remains the property of the State as do all liabilities, including a foreign bond for $250 million taken for a 30-year duration to part finance the investment in Terminal No. 2.

To impress, government sources claimed that through the privatisation deal the government would net $421 million. Not too bad, you might think, even though we have invested much more than that since the project started being developed originally as Marsaxlokk harbour way back in the early 1980s. But since after 30 years the property will revert to the government free and encumbered, then we could afford to get in less what than we originally invested.

But hold your breath. The impressive $421 million is not being received in cash, just as we paid out for the investment in Marsaxlokk/Freeport. We are told that the $421 million will be paid over the 30-year lease period and this includes the lease of the terminal, the sale of equipment and increase in duty from sale of fuel, as well as $5 million for the provision of security for the first five years.

If this is meant to pull our leg, then they may just as well pull the other one, as such deals give problems standing on two feet, let alone on one. So if all goes according to plan, over the next 30 years we will net $421 million from this deal, less the cost of providing the security services.

However, over the next 30 years we have to pay interest on the foreign loan of $18.125 million each year. Multiply that by 30 and you will find out that by way of interest alone on part of the investment in just Terminal 2 of the project we will be paying $544 million. And to make sure you understand it correctly, this is just the interest. The capital of $250 million would have to be repaid in addition.

So over the next 30 years the privatisation could provide us with a cumulative cash flow deficiency of at least $377 million. Rather than just the cash inflow part of the picture, why do our political leaders find it so difficult to give us the full picture and why is the media so incapable of extracting the full story out of secretive politicians?

How many times have we heard that our
Freeport is a success story? Someone even once suggested erecting a monument to the former chairman of the Freeport to acknowledge his efforts to get the project up and running. Remember the public open days and free giveaways?

Ultimately time is the best judge of success or otherwise. Here we are, 10 years after the
Freeport went operational, and we have the result. Firstly, the Freeport has never earned enough money even to pay its interest expenses and each year the government had to advance, among other things, $18.125 million to ensure that the Freeport does not default on the interest payment on its sovereign guaranteed international bond.

Secondly, the
Freeport has not generated enough cash flow from operations to replace the equipment which is now well depreciated and practically past its economic life so much so that we needed to pass on the operation to private investors to make the necessary replacement and additional investment.

Where, may I ask, is the success story of the
Freeport? If it were a success story, why is it being privatised on such unfavourable terms?

The Maltese nation has invested too many, far too many, millions in this project to see it privatised in this way without being given a full account of what has brought us to the state that we have to sing victory for such a poor deal.

Questions beg answers, answers that unfortunately are hard to come by. Why has the
Freeport been transferred to a shipping line rather than a port operator? What confidence can we have that other shipping lines would do business with a port managed directly or indirectly by a competing shipping line which will no doubt have a first claim on resources? What financial assurance do we have on the financial integrity and stability of the operator to whom we are entrusting in care one of our most expensive “treasures”?

The private shipping line that won the privatisation bid for running the
Freeport operation for the next 30 years was also the Freeport’s main client.

The fact that the
Freeport did not achieve commercial viability in spite of being used to full capacity could mean that it was charging uneconomic rates for the main benefit of this operator. What assurance can we be offered that the private investor is not, in fact, beating all logic by having the cake even after it has already eaten it?

Because, if this private shipping operator has been eating our cake by being charged uneconomic rates which brought the Freeport to the point of being a huge financial cash flow burden on the State, it is now having the cake by being given full operational control over the Freeport for the next 30 years on very favourable terms.

Let me relate a first hand experience I had about the
Freeport in 1998. When the Port Authority of Singapore conducted a deep due diligence exercise about the Freeport to see in what way they could be interested in its operations, they politely sent back a short letter saying they did not have any interest.

When I insisted on being given a reason for such a curt no thank you reply, the message came back from unofficial channels that at the rates the
Freeport facilities were contracted out, no operator could make a fair commercial return. It seems that Singapore knew very well what they were talking about.

I can understand that mistakes are made in good faith and things do not always turn out the way they are intended. But singing glory in the face of such a financial disaster make me feel worse than having both my legs pulled.


Sunday, 3 October 2004

A Better Place without Bush

The Malta Independent of Sunday

Last Sunday’s editorial in this newspaper boldly proclaimed that ‘The world needs Bush’. The logic behind this bold assertion is that “he and he alone stood steadfast when the world was still reeling in the wake of 11 September” and that “he alone had the guts to lead the wounded nation to war and he alone realised that words, resolutions and conferences amount to little when the free world is facing a huge threat”.

I have not met with such bold defence of Bush’s infamous unilateralism and dangerous policy of pre-emption even in the most conservative US publications. It is strange that one discovers such views in
Malta when, across the whole political board, we have embraced neutrality as a national policy and condone war only under the aegis of the United Nations, and as a means of last resort when all else fails and the danger is too imminent and serious to ignore.

Opinion outside the US, including those countries forming part of the ‘coalition of the willing’ in Iraq such as Britain and Australia, shows that Bush would stand no chance of re-
election if the electorate of such countries were given a chance to express a view on the choice of the next US president. The editor of The Malta Independent on Sunday is therefore strongly at odds with the widely held opinion outside the US on the merits of George W. Bush to be re-tasked to lead the US for another four year term. Even inside the US, while Bush commands a slim lead in opinion polls over Kerry (so slim that much depends on the performance of the contestants in the three direct debates, the first of which would have already taken place by the time this contribution is published) when it comes to rating performance over the last four years Bush rarely goes past the 50 per cent mark. Basically, the US electorate seems to think that Bush has not performed well but it is dangerous to change the Commander-in-Chief in the middle of a war as it would sound like an admittance of a premature defeat.

One can understand why Bush tries to avoid the domestic issues of healthcare, employment and law and order in the campaign and depicts himself as a “war President”, justifying the war on Iraq as a war on terror even though not the tiniest scrap of evidence was produced that the Iraq regime had anything to do with international terrorist events of the last 10 years, 9/11 included.

In a month’s time the US electorate will have to make a fundamental choice not just for the US but for the whole world. It is an undisputed reality that the outcome of the US election will have an influence on territories much farther than the US shores and it is almost unfair that the citizens of the world outside the US have no say in decisions which affect them directly.

The US is the world’s only superpower. It is important for the world, for peace and prosperity, that such a uniquely powerful position in terms of material power is counter-balanced by a spread of moral power. Such checks and balances are normally performed through UN mechanisms where the use of military power it conditioned by moral endorsements or restrictions of the paramount supra-national organisation on the planet.

The US had successfully made use of the UN checks and balances in the past when events forced it to use military power to defend itself and world order. In 1990 the Gulf War was conducted by George Bush Sr under the aegis of UN endorsement, and the US shared the burden and the responsibility with the largest world coalition ever put together.

Even George W. Bush had no problem getting UN endorsement for the war on Afghanistan following 9/11. The coalition was not as wide as that of the Gulf War only because the US thought it unnecessary to spend time forming the coalition before attacking Afghanistan some six weeks after 9/11.

For some reason, which is not yet well understood, George W. Bush decided to go it alone on Iraq in 2003. The US adopted the policy of pre-emption and decided that UN approval is not necessary in the pursuit of such policy. It lost focus on the war in Afghanistan where the true perpetrators of the 9/11 atrocities are still holed up orchestrating the spread of terrorist recruiting grounds to new places like Iraq where the US has made itself extremely and unjustly unpopular. The
US instead decided for a unilateral regime change in Iraq, seriously underestimating the price of winning the peace after winning the war.

No matter how distasteful the
Iraq regime had been, it was no imminent threat to the world. Countries like Iran and North Korea, by their own admittance, constitute much real perils for the proliferation of WMDs including nuclear capabilities than Iraq could have been at the point when the US-led coalition decided to invade it.

For those who argue that the existence or otherwise of WMDs in Iraq could not be proven without invasion and that it is always easy to be wise after the event, I suggest they read a book titled Disarming Iraq – the search for weapons of mass destruction by Hans Blix, former Director General of International Atomic Energy Agency (IAEA) and at the time of the 2003 Iraq invasion Chairman of the UN Monitoring, Verification and Inspection Commission (UNMOVIC) tasked with completing the filed inspections for WMD in Iraq.

Certainly no-one can contradict the assertions by Blix that given time and the real threat by the UN security council to authorise the US invasion, the Iraqi regime was opening up to fill the gaps which could have enabled the IAEA and UNMOVIC to certify Iraq free from WMDs. Maybe Bush was so pre-determined to enforce regime change in Iraq that he was afraid UN inspections would remove the main platform justifying the invasion. But the editor of The Malta Independent on Sunday must be the only person in the world who has credited Bush with finding the WMD. He argues that the WMD is “the blackness of terrorism which leads suicide bombers to blow up civilians…”

This logic escapes me. There were no such terrorists in Iraq before the invasion. Nobody was blowing up innocent people The regime was distasteful and needed change but such change ought not be done by foreign invasion but by helping the Iraqis to bring about regime change themselves, just as the people of
Eastern Europe brought about their own change when Communism had eroded itself from the core.

It is the US invasion of Iraq and the inability of the invading forces to give post-war protection and security that has rendered Iraq the powder keg it is today, where it has become the best training ground for tomorrow’s terrorists.

No-one knows if John Kerry can deliver an orderly exit of the coalition from Iraq. Certainly a cut and run policy is dangerous and counter-productive and Kerry is not suggesting it. But certainly Kerry would have better credentials than Bush to seek and obtain UN coverage for the coalition presence in Iraq and consequently a widening of the representation and resources of the coalition to defeat the black forces that have been unleashed by the unauthorised invasion of Iraq.

The choice facing the US electorate next month is whether they believe the US should continue the dangerous policy of unilaterism, a policy which in the short term might appeal to the national pride so much as to render a mere UN mention to lead to a cheer of deprecation at the Republican National Convention, or to come back to legalism and accept that their undisputed fire-power has to be used within the norm of international regulations.

Otherwise what is the difference between the
Iraq illegal invasion of Kuwait in August 1990 and the US illegal invasion of Iraq in 2003? Not much except that the Kuwait invasion was corrected by the force of the only superpower acting under the authority of the UN, while absence of a bigger superpower to correct the illegal invasion of Iraq is forcing misguided people in such failed states to dangerously embrace the logic of terrorism.

Frankly, the world would be a better place without Bush and I pray that Kerry will have the capacity, wisdom and ability to overcome terrorism not only by fighting its symptoms head-on without any concessions, but equally to devote maximum energies to address the roots of terrorism by installing hope of a fairer world order.

Friday, 1 October 2004

A Decisive Quarter

The Malta Independent 

Today we start a decisive quarter; a quarter that waves good-bye to cheap summer talk and chatter and forces us to look at ourselves critically to see whether we are measuring up to the EU challenge and whether we really mean to tackle our problems at source.
At face value the figures for pubic finance for the eight months to August seem to indicate that the sharp deterioration in public accounts experienced during 2003 has been halted and we are registering a marginal improvement. The deficit, at Lm113 million for the first eight months of 2004, is superficially Lm13 million better than the deficit registered at the same point in 2003. 
In 2003, the last four months of the year were cash flow positive for the government to the tune of Lm21 million. If government achieves a similar performance in the last four months of 2004, the final deficit for the year would be Lm92 million – in line with the Lm95 million budgeted.

But scratching beneath the surface it is easy to see that things are not what they seem to be. The government's financial position at a given point in time can be influenced positively or negatively by the timing of collections due to government and the payments of dues by government.

Total expenditure as at August 2004 was 61.8 per cent of the year’s total. At the same point last year, the percentage outlay of the year’s total was 66.94 per cent. A like with like comparison would seem to indicate that five per cent of the annual budget expenditure is being delayed, helping to present a more positive interim picture which may not result, as the postponed expenditure has unavoidably to be paid.

Even if one makes adjustment for a compensating two per cent delay in collection on the revenue side, a net three per cent delay would amount to nearly Lm30 million, dwindling the Lm13 million superficial improvement.

The fiscal deficit cannot be addressed by the temporary postponement of payments. If anything, given the huge impact of government operations on the rest of the economy, these causes serious cash-flow problems to suppliers who depend on government’s prompt payment on contracted terms – something that medicine suppliers and construction contractors assert has become a rarity, with the norm being several months’ delay.

But there are more worrying trends which demand attention. The public debt has grown from Lm1,031 million two years ago to Lm1,351 million this August, a whopping increase of Lm320 million in two years, equivalent to 31 per cent. The speed of debt accumulation is even more worrying than its size. It would be extremely dangerous to the stability of the financial system for the government to continue to borrow at this pace. Unlike what many seem to think, debt and deficits do matter.

Indeed, we are lucky that international economic conditions have permitted us the luxury of financing these debts domestically at quite cheap rates on a long-term basis. This notwithstanding, pure interest servicing of the public debt is amounting to no less than Lm80 million per annum, which brings the average interest on public debt to a low rate of less than six per cent.

Just imagine what a burden we will have to carry if we continue to accumulate debt far outstripping the rate of economic growth and if we are forced by international economic conditions to finance new borrowings and re-finance maturing ones at a rate higher than we are carrying at present. International interest rates will not remain at such low levels for ever.

All this will bring us to the real test that Prime Minister Gonzi will face as he presents the first budget of his administration later this quarter. This will be a real test to prove whether Gonzi really means business or whether he will persist in his predecessor’s ingrained habit of avoiding hard decisions, opting instead for easy problem financing options which have blown our national debt to its current horrendous levels without much really to show for it.

This will be the quarter where one expects the government to take serious measures to address the lack of competitiveness of our product on the global market. All this is very much tied to the decision to enter into the waiting room of the Exchange Rate Mechanism, where we will have to spend a few years proving that we can maintain exchange rate stability in the context of stable macro-economics conditions, to graduate for Euro membership sometime after 2007.

The hard choices here will involve whether we can take measures to make the economy more flexible and competitive, meaning that the burden of adjustments will continue to be carried by private sectors of employees who are finding employers more intent on rolling back past concessions than considering new ones, or whether the process can be aided by macro-economic adjustment to our rate of exchange regime, to spread the burden of adjustment across all sectors, even public sector employees who are not subject to the competitive pressures of the global village.

At the end of this crucial quarter we will be in a better position to pass judgement on the true colours of the Gonzi administration. So far we have had nice words which have been contradicted by the real deeds, as in the case of the
Brussels property acquisition. These may be forgiven as honeymoon follies. But as from today, for Dr Gonzi the honeymoon is over.