The Malta Independent on Sunday
Government`s arguments to rubbish the view that the rate of exchange of the Maltese Lira ought to be brought down to more competitive level as part of a re-structuring package and before we take the point of no return decision to fuse our currency into the Euro, are getting puerile and ridiculous.
Government is playing cheap politics with a very serious matter which politicians should ideally not discuss in public lest they destabilise the financial structure on which we so much depend.
My position is clear and has been made repeatedly for the last four years. In normal circumstances a small open economy like ours should avoid resorting to nominal adjustments in the rate of exchange value. There is much to argue in favour of the virtues of rate of exchange stability. But like all virtues they could turn into vices if sustained regardlessly and obstinately when circumstances around us change from the normal to the abnormal. The latest example of this was Argentina who tried insensibly to defend a currency board of the Argentinean Peso with the US dollar before the whole financial structure collapsed in December 2001.
And circumstances are far from normal.` We have had four consecutive years of little or no real growth whilst competitor countries, especially those who joined the EU in membership from East Europe have experienced accelerated growth and a sharp inflow of foreign direct investment which here was only noticeable by its absence.
We have had a galloping increase in our national debt which has exceeded all limits of prudence in its relation to the GDP and this at a time when one-off revenues from privatisation and dismantling of sinking funds held against national debt were simply lost in the fiscal wash.
But more than that we have statistical evidence published by the Central Bank of Malta that the real value of the Malta Lira exchange rate has appreciated by 11% since 1995 because we have sustained negative inflation differentials compared with the inflation experience by competitor countries.`
So those who argue the virtue of stability in the rate of exchange should in reality be arguing for a nominal devaluation to regain such stability in the real value rather than argue against a nominal adjustment which would sustain the instability in the real value that has been allowed to creep in.
I would very much have preferred if our economic policy was more effective in the control of inflation to ensure that our nominal rate of exchange remains aligned stably with the real value of our currency.` But this has not happened and the monetary authorities and the government are at liberty to argue how to apportion the blame for this failure between themselves.`
It really makes no difference to us whether this has happened because of lax monetary policy accommodating fiscal extravagance or because fiscal extravagance made monetary policy ineffective in the control of inflation. What makes a difference to us is that the current rate of exchange is at a level which is at least 11% (and growing) harder in real terms than it was in 1995 and that this is making our export and tourism product uncompetitive.
My position has always maintained that such measure should not be taken on its own as if it was a magic cure to all our problems but has to be part of a well devised package of measures meant to enhance flexibility in our economy, especially in the wage setting and labour allocation mechanisms, to ensure that the benefits of such a rate of exchange adjustments do not drain themselves away quickly in the inflation wash.
And on the eve of our embarking on a project to adopt the Euro as our national currency, involving the loss of two very important economic tools (monetary policy and exchange rate policy) it is a matter of crucial importance that we have a good look at our current exchange rate level and ensure that it truly reflects our economic fundamentals lest we get locked into an unsustainable exchange regime over which we will have no future control, transferring all the strain of adjustment on the real economy, mostly on the employment sector.
By no means these can be considered normal circumstances.
And whilst I faulted the Leader of the Opposition for making public his view in favour of a devaluation [1] it is insensible and self defeating for the government to rule out of hand the use of such a policy in all circumstances.
And the arguments brought against it are absolutely puerile and opportunistic. Like all medicine a devaluation is no piece of cake. But scaring the sick patient from taking the medicine or surgery he needs purely because the convalescence could be quite painful is no way to treat a malady.
If government thinks that just knocking off two public holidays and talking positively about restructuring will do the trick it is grossly mistaken. The pain of doing nothing and avoiding the medicine will be loss of jobs and continued economic stagnation which could be much more painful that the adjustment pain of restructuring.
Arguments that a 10% devaluation would increase the cost of living by 10% would probably bring you the lowest failure mark in the GCE O level economics. Arguments that a 10% devaluation would knock off 10% in the real value of domestic deposits are wide off the mark.
Devaluation if properly executed in conjunction with other measures could project the economy on a new growth path creating sustainable growth and attracting new investment leading to development and innovation. Devaluation could be a socially acceptable way to execute the restructuring as its spreads the burden of adjustment even on those who keep their jobs rather load it all on those who lose their job and have difficulty finding a new one, thus becoming a drain on public finances.
The best thing the government could do is just shut up on the matter and seek to reach consensus with the opposition on a set of economic measures that are needed to get the economy out of the dire straits it is in.` The opposition has every interest to co-operate as if it expects to be in government beyond 2008 it is far better to inherit a restructured economy rather than one that still awaits the administration of painful measures.
Government`s arguments to rubbish the view that the rate of exchange of the Maltese Lira ought to be brought down to more competitive level as part of a re-structuring package and before we take the point of no return decision to fuse our currency into the Euro, are getting puerile and ridiculous. Government is playing cheap politics with a very serious matter which politicians should ideally not discuss in public lest they destabilise the financial structure on which we so much depend.
My position is clear and has been made repeatedly for the last four years. In normal circumstances a small open economy like ours should avoid resorting to nominal adjustments in the rate of exchange value. There is much to argue in favour of the virtues of rate of exchange stability. But like all virtues they could turn into vices if sustained regardlessly and obstinately when circumstances around us change from the normal to the abnormal. The latest example of this was Argentina who tried insensibly to defend a currency board of the Argentinean Peso with the US dollar before the whole financial structure collapsed in December 2001.
And circumstances are far from normal.` We have had four consecutive years of little or no real growth whilst competitor countries, especially those who joined the EU in membership from East Europe have experienced accelerated growth and a sharp inflow of foreign direct investment which here was only noticeable by its absence.
We have had a galloping increase in our national debt which has exceeded all limits of prudence in its relation to the GDP and this at a time when one-off revenues from privatisation and dismantling of sinking funds held against national debt were simply lost in the fiscal wash.
But more than that we have statistical evidence published by the Central Bank of Malta that the real value of the Malta Lira exchange rate has appreciated by 11% since 1995 because we have sustained negative inflation differentials compared with the inflation experience by competitor countries.`
So those who argue the virtue of stability in the rate of exchange should in reality be arguing for a nominal devaluation to regain such stability in the real value rather than argue against a nominal adjustment which would sustain the instability in the real value that has been allowed to creep in.
I would very much have preferred if our economic policy was more effective in the control of inflation to ensure that our nominal rate of exchange remains aligned stably with the real value of our currency.` But this has not happened and the monetary authorities and the government are at liberty to argue how to apportion the blame for this failure between themselves.`
It really makes no difference to us whether this has happened because of lax monetary policy accommodating fiscal extravagance or because fiscal extravagance made monetary policy ineffective in the control of inflation. What makes a difference to us is that the current rate of exchange is at a level which is at least 11% (and growing) harder in real terms than it was in 1995 and that this is making our export and tourism product uncompetitive.
My position has always maintained that such measure should not be taken on its own as if it was a magic cure to all our problems but has to be part of a well devised package of measures meant to enhance flexibility in our economy, especially in the wage setting and labour allocation mechanisms, to ensure that the benefits of such a rate of exchange adjustments do not drain themselves away quickly in the inflation wash.
And on the eve of our embarking on a project to adopt the Euro as our national currency, involving the loss of two very important economic tools (monetary policy and exchange rate policy) it is a matter of crucial importance that we have a good look at our current exchange rate level and ensure that it truly reflects our economic fundamentals lest we get locked into an unsustainable exchange regime over which we will have no future control, transferring all the strain of adjustment on the real economy, mostly on the employment sector.
By no means these can be considered normal circumstances.
And whilst I faulted the Leader of the Opposition for making public his view in favour of a devaluation [1] it is insensible and self defeating for the government to rule out of hand the use of such a policy in all circumstances.
And the arguments brought against it are absolutely puerile and opportunistic. Like all medicine a devaluation is no piece of cake. But scaring the sick patient from taking the medicine or surgery he needs purely because the convalescence could be quite painful is no way to treat a malady.
If government thinks that just knocking off two public holidays and talking positively about restructuring will do the trick it is grossly mistaken. The pain of doing nothing and avoiding the medicine will be loss of jobs and continued economic stagnation which could be much more painful that the adjustment pain of restructuring.
Arguments that a 10% devaluation would increase the cost of living by 10% would probably bring you the lowest failure mark in the GCE O level economics. Arguments that a 10% devaluation would knock off 10% in the real value of domestic deposits are wide off the mark.
Devaluation if properly executed in conjunction with other measures could project the economy on a new growth path creating sustainable growth and attracting new investment leading to development and innovation. Devaluation could be a socially acceptable way to execute the restructuring as its spreads the burden of adjustment even on those who keep their jobs rather load it all on those who lose their job and have difficulty finding a new one, thus becoming a drain on public finances.
The best thing the government could do is just shut up on the matter and seek to reach consensus with the opposition on a set of economic measures that are needed to get the economy out of the dire straits it is in.` The opposition has every interest to co-operate as if it expects to be in government beyond 2008 it is far better to inherit a restructured economy rather than one that still awaits the administration of painful measures.
No comments:
Post a Comment