FISIM

The Malta Independent on Sunday
19th March, 2006


In a desperate attempt to clutch at any straw to prove that its unpopular prescriptions being applied to stabilise the economy are starting to deliver the expected results, a lot of hoopla was generated when the National Statistics Office published the data for the National Account ` GDP for the whole of 2005. 

  Contrary to previous expectations the NSO reported that the economy grew by 2.5% in real terms during 2005.` As late as last Budget presentation on 31st October 2005 the government had announced real growth of 1.7% for the first 9 months of 2005 and projected a real increase of only 1.1% for 2006.

So if it results that the average for the year was pushed up from 1.7% for 9 months to 2.5% for the whole year then it means that real growth in the last quarter of 2005 must have been to the order of 4.9%.` If it were so we should celebrate as this rate is nearer to our potential and to the sort of growth we require to match the performance of competitors in Eastern Europe who were in the same pack of EU accession countries in 2004.

In such a case the projections for real growth in 2006 seem pretty cautious and could be revised upwards to a more realistic level.

But the message from the real world we live in does not corroborate such economic impetus and therefore this makes you search beneath the surface to try to bridge the gap between the real world and the statistical output.` This is where FISIM comes in.

FISIM is the acronym for Financial Intermediation Services Indirectly Measured. An explanatory note on page 21 of the NSO release provides boring reading for technical experts let alone for the man in the street.` I personally have not understood much of what it says and need to delve further into it and get more clarifications to understand the principles if not the detailed mechanics of what is explained therein.

But the essence of such note is that certain economic activity previously captured statistically as intermediate consumption is now being re-allocated to final consumption and net exports. The explanation proceeds to say that `as a consequence (of the change in methodology) all data in this news release is not comparable to data published previously and supersedes all National Accounts news releases so far`.

What this is saying is that there has been a technical change in methodology which is capturing data which previously escaped GDP measurements and therefore the sudden surge in GDP growth is more likely to be attributable to such change of methodology rather than to actual real growth in the last quarter.

Apparently this gap between the real world and the statistical output has been perceived by more authoritative sources including the Governor of the Central Bank.` He has once more shown his concern at the excessive growth in consumption credit which is facilitating unsustainable over-consumption culture which temporarily but unsustainably gives a boost of economic activity.

Indeed this gives rise to whether we have proper orientation in our monetary policy. Our monetary policy is totally linked to sustaining the exchange rate peg i.e. the fixed exchange parity between the Maltese Lira and the Euro. This is founded on the dogma-like belief professed by the Central Bank of Malta, a dogma which I do not entirely share, that through the intermediate objective of fixed parity with the Euro, monetary policy will automatically deliver the ultimate objective of maintaining domestic price stability.

I find it quite questionable that our monetary policy seems disinterested in addressing the asset price inflation which is nonetheless eroding the real value of money. Other Central Banks, particularly the Bank of England and the Federal Reserve of the US, do include asset price inflation in the conduct of their monetary policy. After all the need to safeguard the value of money should not be exclusively restricted to prices of recurrently acquired products.` It should also apply to the one- off acquisitions of investment type, including real estate and financial market products.

It is in this context that one can understand the subtleties contained in recent press communications of the Governor of the Central Bank that local interest rates will probably have to rise pretty soon given that EUR interest rates have been edged up twice in the space of four months and the signals are that there are more EUR interest rate hikes are` in the pipeline.

The Governor must not only be `concerned that the evaporation of the premium between the Maltese Lira and EUR rates could challenge the sustainability of the exchange rate peg, but also because the over-consumption generated by the lax monetary policy is leading to unsavoury increases in asset prices and uncomfortable deficits in the balance of payments.

Given the delicate stage which we are entering into for the execution of monetary policy in the context of rising Euro interest rates, politicians would do well not dwell on illusions of economic growth and face reality whilst allowing the Central Bank good space of true independence in the execution of monetary policy.` FISIM adjustments produce no real growth, only statistical ones.