The Malta Independent on Sunday
If decisions like removal of leave days in lieu for public holidays falling on weekends are considered as bold, then we have no idea of the magnitude of the economic problem we have and what`s really necessary to address them.
If passing on to the consumer half the additional energy import cost due to the rise in the international price of oil is considered harsh, then we are only kidding ourselves and are still thinking that someone owes us a living.
Government announced in the budget speech that Enemalta will be absorbing Lm8.3 million of the increased cost of Lm16 million whereas Lm7.7 million are being passed on as a surcharge to the consumer.` Who is Enemalta` It is you and I. It is the organisation that in the `bad old` Labour days used to contribute substantial profits to the Exchequer to finance part of the national social costs.` Enemalta`s latest published financial statements show a company burdened with heavy debts and hardly in a position to make ends meet let alone absorb Lm8.3 million of imported cost. Give us explanations please and respect our intelligence.
The Budget pretends to be addressing the fiscal deficit problem. I am a bit cynical of any multi year programme purporting to be addressing the fiscal deficit as inevitably it results that` politicians` will-power to stay the course is very short and practically disappears the moment the next election appears within a two year horizon. If you wish any proof of this just read the budget speech for 1999 and the medium term financial strategy presented therewith explaining in detailed figures how gradually by 2004 we were due to achieve very healthy economic growth and strong public finance position.
Yet here we are five years later being promised another medium term programme explaining that what was not done between 1999 and 2004 will now be done between 2005 and 2007. Between 1999 and 2004` we have had to` finance an accumulation of annual deficits amounting to nothing less than Lm723 million which has practically doubled our national debt in the short space of five years and frittered away privatisation revenues of some Lm120 million.
Should we have any confidence that this time it will be different` Should we believe the chain smoker that he will stop smoking tomorrow. Hardly, and judging by the actual performance of 2004, there is little to suggest that the new hands on the tiller is leaving any positive effect.
The deficit for 2003 excluding the one-off Drydocks financing operations was Lm117 million using the new EU concept of extended government. The projected deficit for the current year 2004 is estimated at Lm99 million. An improvement of Lm18 million is an achievement, you might think.` However I argue that this figure needs to be corrected to take into account Lm 7 million exceptional income in 2004 from the privatisation through licence of public lotto, and by a further Lm 3 million being capital expenditure postponed net of the corresponding inflow of grant revenues.` The real corresponding deficit of 2004 is more like Lm109 million which while Lm 8 million lower than 2003 it is exactly the average deficit we had for the period 2000 - 2002.
Considering that fiscal revenue increased by Lm44 million in 2004 over 2003 is it not disappointing that of this only Lm 8 million went to reduce the deficit back to the 2002 level Does it lend credence to the new medium term programme showing that by 2007 the fiscal revenue will increase by Lm96 million and this will be applied to reduce the deficit by Lm78 million.
Permit my cynicism but I can only state that I`ll believe when I`ll see it. And with good reason. The government determination to solve the problems by turning on the fiscal screw year in year out will just not deliver. This year the fiscal screw touched cigarettes as usual, mobile phone usage,` and unbelievably foreign travel. Rather than making it easier to travel given that our island characteristics make travelling much more expensive without the need for additional help by fiscal measures, we are being further discouraged to travel. The travel fiscal charge was increased 100% from Lm10 to Lm20.
The budget pretends that the announced measures will help to restore our international competitiveness. The public holidays measures will largely be neutralised by the Lm1.75 legislated wage increase and the increased costs of communications, travel and utilities. By and large we will at best stay were we are which is better than falling further back but not good enough to become competitive again.
I have long been arguing that competitiveness cannot be restored without addressing the exchange rate policy which has hardened our currency by some 10% from its 1995 base.` The Central Bank quarterly for September just published shows on page 43 that as at last July this overvaluation increased to 11% due the continued negative inflation differentials.
Quite surprisingly and at grave political risk, the Leader of the Opposition indicated he is willing to lend consensus to government to regain competitiveness by tackling the problems at its rate of exchange source. But unbelievably rather than grab this opportunity to build consensus round the most effective measure to restore competitiveness and economic growth, government played the political game and off-handedly dismissed the suggestion because of its bad effect on inflation.
If we discard effective measures because of their bad effect on inflation then why increase utility bills, why raise public transport fees and why take all the other fiscal measures which inevitably lead to increased consumer prices` Of course the rate of exchange policy has some pain. Long neglected problems do not come with painless solutions. But should the sick patient refuse surgery because he could be in more pain during convalescence` Should the supposed doctor in charge of treating the malady rather than encourage the patient to face surgery with courage and determination with assurance of the long term benefit, scare the patient with the immediate impact convalescence pain of a devaluation.
And finally we had the Governor of the Central Bank engaging in the technical discussion of the appropriateness of addressing the accumulated increase in the real rate of exchange since 1995. This is a discussion which was started by yours truly and recently extended through the participation of most respected economists like Prof Edward Scicluna and Lino Spiteri.
The Governor`s determined refusal to address the issue is scandalous and illogical. His first argument that there is no guarantee that the 1995 base was a correct benchmark to measure progress with, was feeble and he himself conceded it. There are studies to prove that the positive effect on competitiveness of the devaluation of 1992 was lost by 1994 due to failure to take accompanying measures to prevent the price inflation spiral. There is no argument that the 1995 base was not therefore a low base or` that the present high exchange rate level could be the right one.` I feel that 1995 is a good benchmark as it is the last year of good economic growth without structural fiscal imbalances which developed in and since 1996.
The Governor then defended the current exchange rate level on the basis that this reflects the efficiency gains in our economy since then, implying that these efficiency gains were superior to those of our competitors. He must be joking. If we had such efficiency gains they would show in higher growth and lower inflation. We have had lower growth and higher inflation.
China is registering double digit growth and huge efficiency gains but is still insisting on pegging its exchange rate to the dollar. Tiny economically stagnant Malta is however unperturbed that its rate versus the US dollar in 1995 averaging 2.84 is currently 3.07 being 8% harder.
Nibbling at problems will make the mountain deliver mice.
If decisions like removal of leave days in lieu for public holidays falling on weekends are considered as bold, then we have no idea of the magnitude of the economic problem we have and what`s really necessary to address them.
If passing on to the consumer half the additional energy import cost due to the rise in the international price of oil is considered harsh, then we are only kidding ourselves and are still thinking that someone owes us a living.
Government announced in the budget speech that Enemalta will be absorbing Lm8.3 million of the increased cost of Lm16 million whereas Lm7.7 million are being passed on as a surcharge to the consumer.` Who is Enemalta` It is you and I. It is the organisation that in the `bad old` Labour days used to contribute substantial profits to the Exchequer to finance part of the national social costs.` Enemalta`s latest published financial statements show a company burdened with heavy debts and hardly in a position to make ends meet let alone absorb Lm8.3 million of imported cost. Give us explanations please and respect our intelligence.
The Budget pretends to be addressing the fiscal deficit problem. I am a bit cynical of any multi year programme purporting to be addressing the fiscal deficit as inevitably it results that` politicians` will-power to stay the course is very short and practically disappears the moment the next election appears within a two year horizon. If you wish any proof of this just read the budget speech for 1999 and the medium term financial strategy presented therewith explaining in detailed figures how gradually by 2004 we were due to achieve very healthy economic growth and strong public finance position.
Yet here we are five years later being promised another medium term programme explaining that what was not done between 1999 and 2004 will now be done between 2005 and 2007. Between 1999 and 2004` we have had to` finance an accumulation of annual deficits amounting to nothing less than Lm723 million which has practically doubled our national debt in the short space of five years and frittered away privatisation revenues of some Lm120 million.
Should we have any confidence that this time it will be different` Should we believe the chain smoker that he will stop smoking tomorrow. Hardly, and judging by the actual performance of 2004, there is little to suggest that the new hands on the tiller is leaving any positive effect.
The deficit for 2003 excluding the one-off Drydocks financing operations was Lm117 million using the new EU concept of extended government. The projected deficit for the current year 2004 is estimated at Lm99 million. An improvement of Lm18 million is an achievement, you might think.` However I argue that this figure needs to be corrected to take into account Lm 7 million exceptional income in 2004 from the privatisation through licence of public lotto, and by a further Lm 3 million being capital expenditure postponed net of the corresponding inflow of grant revenues.` The real corresponding deficit of 2004 is more like Lm109 million which while Lm 8 million lower than 2003 it is exactly the average deficit we had for the period 2000 - 2002.
Considering that fiscal revenue increased by Lm44 million in 2004 over 2003 is it not disappointing that of this only Lm 8 million went to reduce the deficit back to the 2002 level Does it lend credence to the new medium term programme showing that by 2007 the fiscal revenue will increase by Lm96 million and this will be applied to reduce the deficit by Lm78 million.
Permit my cynicism but I can only state that I`ll believe when I`ll see it. And with good reason. The government determination to solve the problems by turning on the fiscal screw year in year out will just not deliver. This year the fiscal screw touched cigarettes as usual, mobile phone usage,` and unbelievably foreign travel. Rather than making it easier to travel given that our island characteristics make travelling much more expensive without the need for additional help by fiscal measures, we are being further discouraged to travel. The travel fiscal charge was increased 100% from Lm10 to Lm20.
The budget pretends that the announced measures will help to restore our international competitiveness. The public holidays measures will largely be neutralised by the Lm1.75 legislated wage increase and the increased costs of communications, travel and utilities. By and large we will at best stay were we are which is better than falling further back but not good enough to become competitive again.
I have long been arguing that competitiveness cannot be restored without addressing the exchange rate policy which has hardened our currency by some 10% from its 1995 base.` The Central Bank quarterly for September just published shows on page 43 that as at last July this overvaluation increased to 11% due the continued negative inflation differentials.
Quite surprisingly and at grave political risk, the Leader of the Opposition indicated he is willing to lend consensus to government to regain competitiveness by tackling the problems at its rate of exchange source. But unbelievably rather than grab this opportunity to build consensus round the most effective measure to restore competitiveness and economic growth, government played the political game and off-handedly dismissed the suggestion because of its bad effect on inflation.
If we discard effective measures because of their bad effect on inflation then why increase utility bills, why raise public transport fees and why take all the other fiscal measures which inevitably lead to increased consumer prices` Of course the rate of exchange policy has some pain. Long neglected problems do not come with painless solutions. But should the sick patient refuse surgery because he could be in more pain during convalescence` Should the supposed doctor in charge of treating the malady rather than encourage the patient to face surgery with courage and determination with assurance of the long term benefit, scare the patient with the immediate impact convalescence pain of a devaluation.
And finally we had the Governor of the Central Bank engaging in the technical discussion of the appropriateness of addressing the accumulated increase in the real rate of exchange since 1995. This is a discussion which was started by yours truly and recently extended through the participation of most respected economists like Prof Edward Scicluna and Lino Spiteri.
The Governor`s determined refusal to address the issue is scandalous and illogical. His first argument that there is no guarantee that the 1995 base was a correct benchmark to measure progress with, was feeble and he himself conceded it. There are studies to prove that the positive effect on competitiveness of the devaluation of 1992 was lost by 1994 due to failure to take accompanying measures to prevent the price inflation spiral. There is no argument that the 1995 base was not therefore a low base or` that the present high exchange rate level could be the right one.` I feel that 1995 is a good benchmark as it is the last year of good economic growth without structural fiscal imbalances which developed in and since 1996.
The Governor then defended the current exchange rate level on the basis that this reflects the efficiency gains in our economy since then, implying that these efficiency gains were superior to those of our competitors. He must be joking. If we had such efficiency gains they would show in higher growth and lower inflation. We have had lower growth and higher inflation.
China is registering double digit growth and huge efficiency gains but is still insisting on pegging its exchange rate to the dollar. Tiny economically stagnant Malta is however unperturbed that its rate versus the US dollar in 1995 averaging 2.84 is currently 3.07 being 8% harder.
Nibbling at problems will make the mountain deliver mice.
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