You Can Be Too Rich

30^th June 2006

The Malta Independent - Friday Wisdom

The old dictum that one cannot be too rich was proved wrong this week when the world second richest man donated 85% of his estimated $44 billion fortune to the world’s richest man.

Warren Buffet has long indicated that he meant to leave most of his accumulated wealth for philanthropic purposes. In his twilight years, widower for the last two years and winding down his business appointments though very much in control of his core business of Berkshire Hateway, Buffet is regarded as solid gold in making value laden investment which deliver beyond the allure of temporary fads. People are prepared to half a million dollars for the privilege of sharing his wisdom over lunch, an auction for philanthropic purposes which Buffett launches annually over E-bay.

To his natural heirs he left part of the estate which should satisfy all their needs for a hundred lifetimes. In giving away most of his fortune he is following the steps of Andrew Carnegie and John D Rockfeller whose endowments have funded some of the greatest discoveries that have served humanity beyond description.

A century ago John D Rockfeller was the world’s richest man. His fortune from Standard Oil was endowed to the Rockfeller Foundation. While Alexander Fleming discovered antibiotics in 1928 it was only in 1938 when the Rockfeller Foundation funded the Oxford scientists Florey and Chaim to develop its commercial potential that Fleming’s discovery started to deliver the benefit we still enjoy today as it is still the basis of the modern pharmaceutical industry.

What is remarkable about Warren Buffet’s decision is that he did not form his own foundation to immortalise his name among the greatest philanthropists of all times. Instead he gives it to Bill and Melinda Gates, founder and largest shareholder of Microsoft, to add it to the $35 billion funds already held in the foundation that carries their name.

While these figures seem huge when considering they are being funded by a single private source, in macro-economic context the figures are a mere drop in the ocean. But such philanthropic funding fills a very important gap in development finance.

Certain very worthwhile projects with high risk of failure but with great potential for round breaking discoveries cannot find commercial funding, given the corporate world’s obsession with top and bottom line performance measurements from quarter to quarter.

Governments on the other hand have a rather poor record for financing such developmental research and a lot of the funding gets wasted in bureaucratic controls which are necessary for accountability purposes but are a barrier to seeing the funds applied as meant by founders of such philanthropic vehicles.

This gap is then filled by the Trustees of such philanthropic foundations. Because philanthropy accepts that projects fail they support innovation of economic significance that governments would not finance for fear of political liability in case of failure.

Bill Gates, having promoted software innovation which in one way or another has changed our lives these last twenty years, is now winding down his executive role in Microsoft to dedicate most of his time and experience in managing the application of funds of the Gates Foundation to deliver the maximum benefit for the under-privileged in the hope that in hundred years time he will be remembered more for his foundation rather than for the business that made his fortune.

Let me try to put this problem in a local context. If a liberal market oriented society like the USA has found it socially necessary to maintain inheritance taxes and on top of it the super rich to avoid paying such inheritance taxes simply donate their excess fortune to philanthropic foundations during their lifetime, is it not strange that a social democracy like ours has found it socially acceptable to repeal inheritance taxes except for transfer duty on inherited immovables? We further found it justified to reduce the tax impact on profits made from resale of inherited real estate. Is this fair when we tax earned income at 35% beyond the easily reached margin whilst we continue to give favourable tax treatment to unearned income and assets, at the expense of high taxes over earned income?

I can hear all those who are already arguing that inheritance taxes are a form of double tax as the donor would have already paid tax on the earnings leading to the estate being willed over to his or her heirs. While even such claims are dubious given that capital accumulation is in many instances tax free, I am not persuaded that it is fair for our society to continue to build excessive reliance for taxes collection on earnings and spending whilst exempting from taxation asset transfers through inheritance or donations.

Especially those who are tasked to protect those earning their way in life through work rather than capital, ought to make it their battlecry to review taxation to reduce taxation on earned income and shift the fiscal burden on those who acquire their wealth without working for it.

A Tribute to Entrepreneurship

25^th June 2006

The Malta Independent on Sunday

A tribute is due to Winston Zahra Jr. for not mincing his words about the poor performance of the Minister for Tourism and the Head of MTA who keep acting as if all is well and in order when in fact our bread and butter industry is slipping from bad to worse.

Those who earn their spurs in the private sector know that there is space no between success or failure. You either deliver or you don’t. Those in charge of our tourism are not delivering even on their own set targets, quite apart from the fact that such targets are probably irrelevant.

Frankly I think tourism is too important for it to be left in the hands of politicians and their politically appointed acolytes. They seem to have no idea of what it takes to truly turn round this basic industry where we have natural advantages to compete. Even the signals being given by the market, clear as they may be, seem to be escaping them as they continue to play the tourist numbers game which is irrelevant at worst and tangemtial at best for the true cure of the tourism malady.

This is an industry where our best entrepreneurs have invested their huge millions to make it work. They have put their money where they mouth is and unlike Ministers and civil servants lack of success would burn holes in their pockets. They just cannot afford and to fail and consequently work their guts out to ensure that they remain at the refreshing end of the industry rather than at the discount end which the number game played by politicians for their short term ambitions anchor us in mediocrity.

The fact that five star hotels are showing growth when all the rest are struggling shows that only those that invest to keep their product fresh can win in a game which is being played by many other countries offering formidable competition.

The Zahras have invested in several outfits the latest being the Golden Sands. Tribute is also due to the Decesares who invested to give us Inter-Continental and the Pisanis of Corinthia who gave us their own brand which they are building at international level through selective investments in emerging economies.

But probably the biggest tribute is due to George Fenech and his family owner of Tumas Group and Charles Polidano of Caqnu fame. These are the people who seem to attract the most ire from those who are prepared to accept anything but success.

When George Fenech was seeking administrative approval for Portomaso project, including the Hilton Hotel and the Business Tower and the Convention Centre, he was made to look like the biggest villain in town. The offensive screams of protest in that MEPA public hearing still ring in my ears. For developing land he in any event owned till 2114 he was made to look like a speculator using public property for personal gain. Who remembers the hunger strikes organised outside Castille or the personal obstruction of pseudo environmentalists chaining themselves to earth-moving equipment on site? I am sure they had no idea what they were protesting about.

Today that Portomaso is a completed reality, providing a sample of what we could be if we can raise the whole island to comparable standards whilst preserving the historical treasures we are abundantly endowed with, no one seems to doubt the wisdom and the vision of those who inspired this investment.

Investing in five star hotel project is no piece of cake. It is not for those seeking the quick buck like the many who convert old buildings into concrete boxes for quick resale. The payback is long and arduous and depends on continuous investment and efficient organisation in all its dimensions, from marketing to operations.

Caqnu Polidano has invested beyond comparison to have a large contracting organisation capable of handling mega projects. He also poured money into his own investment projects including the newest St Julians Meriden and other diverse interest from cinema to wine-making. All this is not for the faint-hearted or for those who expect quick return for their money.

Whilst foreign investors were offered for free priceless land in order to construct hotel projects, which in many cases they failed to do and cashed in a quick profit by selling out to Maltese investors as in the case of the land over which the Zahra’s built the Julians Radisson, Polidano and Fenech were made to pay top prices to acquire public land for hotels they built in Gozo and Marfa.

Clearly entrepreneurs don’t invest for the love of their neighbour. They do it for profit, plain and simple. Unless they can see good profit at the end of the line they would not do it and if they do it they would not be around for long as in business the alternative to success is failure.

Being a nation of traders rather than producers, with a strong inbuilt trait for a quick buck and fast turnaround, such investors who can eye quality and invest for the long term are a rare species who deserve all our encouragement and appreciation. Branding Caqnu Polidano as baron is confusing true entrepreneurs who succeed in spite of the obstructions, with those who create bureaucracy to slow down our true entrepreneurs and force them to beg for what should be easily accessible.

If society ought to demand something from tourist entrepreneurs it is for them to search and appoint a CEO for our Toursim Authoirty who can truly engineer a turnaround over the medium term. No quick fixes, no numbers game, but plain and simple restructuring starting from product development, going to product packaging, to brand building, to effective marketing and finishing up with sales to clients who can perceive full value in our offerings and will pay a price that will permit us to make a profit to be reinvested to keep our tourist product fresh and bubbly.

It would have to be a CEO who cares nothing about his Minister’s demand to produce instant success and understands that brands can only be built on products packed with value and quality. Trying to build brands before achieving the necessary quality standard can only lead to the simple truism that effective marketing kills a bad product faster than bad advertising. Before we aim for the numbers we have to aim for all round leap of quality in our tourist products outside the walls of our top hotels.

The numbers then will take care of themselves and the brand will be built through effective marketing strategy but more importantly through the daily delivery of our promise which will lead to satisfied clients and word of mouth recommendations which will build the soft aura surrounding hard branding.

Those Holidays Again

23^rd June 2006

The Malta Independent - Friday Wisdom

Half measures lead to convoluted results. And this is exactly what is happening with the public holidays issue that has been brought to the surface by the ILO ruling.

May be some background would not be out of place for those who suffer from short memories.

In the ‘bad’ old Mintoff days when government had the guts to take unpleasant decisions in order to protect competitiveness a Labour administration had knocked off a handful of public holidays in compensation for legislating a four week vacation leave for all.

It was a bold decision which displeased the Church authorities as many of the abolished public holidays had religious motives and displeased workers in the public sector who had gained privileges for extended leave entitlement, sometimes exceeding six weeks. It was pretty neutral for private sector employees who gained in annual vacation leave what they lost in public holiday entitlements.

The productive sector obviously welcomed this bold move in that it rebalanced the excess privileges of public sector employees in comparison to their brethren in the private sector and eliminated wasteful mid-week stoppages that cause severe disruption to efficient production.

The system had set in and the political price for such unpleasant but necessary step had been paid. Serious politicians should never, in the national interest, play for the political gallery in promising reversal of hard earned concessions that provide instant political acclamation at the expense of long term prejudice to competitiveness.

But this is exactly what a new PN administration did in 1987. It re-instated most of the public holidays that were ‘taken away’ and to compromise further our competitiveness added an additional week of vacation holidays in graduated steps over a five-year period.

The serious shock to our competitiveness came out as time unfolded in the longer term as the economic growth slowed down and whatever growth remained was mainly consumption driven (extra holidays lead to more consumption) rather then the more sustainable production driven.

The Gonzi administration, partly because a new man at the helm permits himself the luxury to revise old habits and partly under the external discipline of EU membership, acknowledged that we were taking too many holidays to remain competitive with the rest of the EU, indeed the rest of the world.

But not having the same determination of the ‘old’ Mintoff habits of calling a spade a spade, rather than doing the obvious and simple thing of scratching off a few public holidays, nibbled at the problem by declaring that for public holidays that fall on a weekend no extra day leave in lieu will be granted. The law of averages dictates that this would add 4 working days to a normal year.

This roundabout way of doing things meant that the government was nullifying by legislation specific collective agreements signed between Unions and Employers providing for such extra days of leave. It this interference of annulling by legislation what was agreed at industry level through free collective bargaining that was condemned by the ILO. The right of government to decide on the number of public holidays has not in any way been disputed.

The second half of the legislature is never a time for government to take bold moves. If the issue was tackled as it should have been tackled two years ago by now the matter would be dead and buried. But because half measures were adopted the issue keeps coming back for reconsideration at a time when government’s room for manoeuvring is getting more limited by the day.

The need for the MCESD to be re-invented in underlined by its inability to broker a consensus over such rather small matter. Is it possible that we cannot understand that we do not afford the luxury of celebrating each year five national holidays. Can’t we come to an agreement to celebrate one national holiday each year by rotation (thus avoiding the political rigidities of choosing the national day) and celebrate the other four on the nearest weekend. After all nationhood is an evolving process and no one day symbolises the whole process.

Evaluating Membership

16^th June 2006

The Malta Independent - Friday Wisdom

Our political leaders crossed swords this week debating whether two years down the road EU membership has been a positive experience. Not surprising you might add, as our political leaders tend to disagree on most issues, even trivial ones, and therefore cannot be expected to make a fair evaluation of EU membership from a common vantage point.

To objective observers the evaluation cannot produce a black or white answer. There is no doubt government had over-promised in depicting EU membership as a panacea for our ills, as instant as our morning coffee. Over-promising naturally leads to under-delivery. Judged on this basis there is no doubt that many feel disappointed with their first hand experience of EU membership. It has not been as fruitful as they were made to expect.

Consequently in absolute terms it is perhaps easy to write off EU membership as a disappointment. We did not get the inflow of foreign direct investment experienced by other new EU members where for example Slovakia is being branded as the new Detroit for auto manufacturing. Job creation is as slow as it was before membership, inflation is somewhat higher and the oppression of high oil prices has eroded our standard of living. Though in reality oil price oppression has nothing to do with our being in or out of the EU, it is quite unavoidable that in their assessment of post-membership experience people fail to distinguish between variables directly related to membership and others that have nothing to do with it. Everything tends to get packaged.

It would be unfair to make such rash assessments. EU membership has never been for the short-term. While government has no doubt exaggerated the instance of accruing benefits, this is not the same as saying that for the long term the benefits being enjoyed by others who seem to have been better prepared, should not accrue to us as well.

Really it depends on us and on none other. The truth is that we approached membership with an uncompetitive economy, with a chronic fiscal deficit and institutionalised rigidities which were depriving our economy from the flexibility it needs to grasp opportunities and make the most of the new realities of membership.

For sober analysts whose judgement is based on the long term rather than quick fix short term solutions EU membership can be considered as a positive experience if for nothing else, for the fact that it is forcing on us the discipline to address issues which have long been neglected.

Finally we seem really coming to terms with reducing the fiscal deficit to sustainable levels from the over-blown level it has been since 1996. We lost eight years looking and turning the problem upside down without addressing it at its source i.e. by cutting expenditure rather than raising taxes.

The discipline of EU membership and the consequent obligation to shape up for the Euro, has forced us start doing what needs to be done.

We are finally freeing the economy from monopolistic rigidities in our transport sector. We have started with the lubricating rigid port systems that do not sit well with the competitive pressures of globalisation, and I hope we can extend this to other inland transport segments including passenger transport.

Without the discipline of EU membership I doubt if our politicians would have had the will to take such measures which whilst pleasing to central bankers, economists, rating agencies and armchair critics, are not at all popular with the electorate. They are even less palatable it they have to be executed simultaneously with oppressive measures reflecting the wealth transfer we are being constrained to suffer through the astronomic energy prices.

For me whilst the jury on our experience of EU membership is still out when judged in absolute terms, which is well understandable as this is a long term project which should be judged by long term results which depend on us, on our good sense, wisdom, prudence and determination. In relative terms, benchmarked to where we would have been today without EU membership, I have no doubt that membership has been a positive experience.

Now this is hard to prove as it is just impossible to state with precision where we would have been today if we had opted for non-membership. It is impossible to prove that had we opted for Dr Sant’s Partnership the EU would have went out of their way to negotiate a specific deal to suit our circumstances or would have put us on the back burner, whilst they focus their attention on integrating new members and preparing candidates, including Turkey for membership.

From someone who had argued the superiority of Partnership over Membership in quite emphatic terms this might look like flip-flopping. It is not. I have consistently argued that Partnership’s theoretical superiority could only be translated into practical advantages if we had the self - discipline attributes of the Swiss and leadership qualities in the best of Mintoff terms. Events since 2003 have more than convinced me that we fail on both counts. We have no Swiss type self -discipline (would we vote in a referendum for working a 44 rather than 40 hour week?) and we certainly have no strong political leadership in the degree needed to make Partnership work.

We need external discipline to save us from ourselves and this is the best we are getting from EU membership. For all I know this lack of discipline trait in our genes and our dissatisfaction with the EU’s external discipline could work to Dr. Sant’s favour come next elections. I do not however understand what room for manoeuvrability there is for whoever is elected but to press ahead with the much needed re-structuring, painfdul as it may be, to render our economy flexible and competitive to make the most of EU membership.

There Must be a Better Way

11^th June 2006

The Malta Independent on Sunday

The proposed extension of development boundaries is a high stakes issue. It is a process whereby real estate is turned instantly from bronze into gold. With the stroke of a pen land values could increase a hundred fold or even more.

The higher the stakes, the higher the need for the process to be controlled, transparent and subjected to checks and balances. This is necessary in order to render the final decision beyond suspicion of serving private rather than collective interests.

There must therefore be a better way of going about the process of changing the development boundaries. The one being adopted at present has thrown up all sorts of accusations, whether real or imaginary I don’t know, that this or that is being favoured; that this or that bought land, now included in the extension process, for peanuts just a few months before and suddenly striking gold by seeing it turned into priceless development land.

How can we adopt strict controls on matters of much lesser importance and then allow a process involving large millions to be run without sufficient checks and balances? Take a personal example. Being an economic commentator who frequently expresses opinions about the on-goings in local financial markets and the companies whose shares and bonds are traded thereon, I refuse to hold, as a matter of principle, local quoted investments lest I give the impression that my comments and opinions are motivated by personal gains prospects.

The law imposes severe penalties on any person, journalists included, who try to influence public opinion for personal gain from trading on the Exchange. Directors and senior executives of companies whose shares are quoted on the Exchange are strictly controlled and have to report all their trading activities in such shares. Indeed they are blocked from conducting any trading in certain periods when they can have inside information that is not yet available in the public domain.

If we take such correct and extreme measures on issues that could involve at most, hundreds of thousands of liri, how can we allow a process involving large millions to be dominated entirely by the political class with scant visibility and poor accountability?

Let me fantasise what in my dictionary would amount to something resembling a fair process for such a project. I do not wish to enter into the merits of whether it is or is not necessary to extend the development boundaries. I take it as a given that government feels that it is in the national interest to make some extensions to the development boundaries and I am only concerning myself with proposing a better way for managing such a process to reduce or eliminate claims of favouritism and clientelism.

It should all start with the adoption of a policy that will guide the criteria to be used for extending the development boundaries. At such policy formulation stage, which should be conducted with official public consultation through white papers and so on, no particular areas are to be identified as being considered for boundary revision.

Once the policy formation process is exhausted and a firm policy is decided upon, the public is to be invited to submit requests for boundary revision within the terms of such policy. The process has to be widely advertised with several months given for submissions that have to be accompanied by an architect’s report and certificate explaining why the requested inclusion within the revised boundaries falls in line with the published policy.

For this purpose, architects are to undergo a period of explanation and familiarisation with the word and spirit of the policy and they should be made aware that a dim view would be taken of the professionalism of architects who endorse applications that are evidently outside the terms of the policy.

The applications are to be examined by a wide panel that includes representatives from MEPA, environmental bodies, local councils, and is to be chaired by a retired judge or by a President Emeritus. The work of such panel is to be supervised by the Office of the Auditor General who is to report on the integrity of the process to Parliament.

The recommendations of such panel are then to be submitted for parliamentary approval so the final say would vest in our parliamentary representatives. However, Parliament would not be permitted to change the proposals of the panel but only to either approve it or send it back with comments for reconsideration.

Having built a solid structure for the process to render it more collegial and less subject to domination by any special interest group, there must still be at least two conditions attached to any property which gets through the process to be included in the revised boundaries.

These conditions would include the following, apart of course from the need to go through the normal process for securing a specific development permit:

The land can only be developed by an owner who has had title to the property for at least five years. This is to avoid get rich quick schemes by people who seem to have more inside knowledge than the rest of us about where it is likely to strike success in extending development boundaries. It reduces if not eliminates speculation and tempers the common temptation of politicians to use such development boundary revision to pump up the economy for electoral success purposes. We cannot allow development planning to become a shoddy tool of convenience for political popularity purposes.

A tax is to be imposed on beneficiaries of development boundary revision as a measure of collective sharing of the value added created by the process.

There must be a better way of doing things. I am sure others can improve and refine my above suggestions with the scope of rendering development planning above suspicion, respectful of environmental standards and serving collective needs and priorities.

Lost Governance

9^th June 2006

The Malta Independent - Friday Wisdom

If you are feeling confused about the conditions included in the sale of the government’s majority equity stake in Maltacom, do not despair. You are in good company.

Although the process of this privatisation has been fair and transparent, I am not convinced that, from a price point of view, we should not have done better. The argument that the price of Lm1.55 per share is at a slight premium to international valuation of similar companies, based on profitability criteria, indicates that no premium was included in the price to take account of the substantial assets that are not essential to the company’s profitability.

The most obvious candidate here is Maltacom’s substantial liquidity, including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded?

Following criticism that valuable real estate, not essential for the company’s core business, should not have been included in the privatisation package, given that the price tendered was based on profitability criteria and not asset values, revelations were made in parliament this week that sounded like an after-thought to parry such criticism.

The minister responsible for Maltacom’s privatisation explained that the said property was, in fact, not included in the privatisation package, as the government had reached agreement with Maltacom to acquire such real estate and in compensation would be granting Maltacom full title to property used for its core business that is currently rented or used on some concession title from government.

This to me sounds like a “tbazwira” (bungling) bigger than those that government spokesmen like to attribute to the Opposition Leader. These are serious matters and cannot be treated with the off-handedness of an after-thought.

Maltacom’s privatisation was a long drawn out process, as it have should been for the sake of transparency and governance. There was all the time in the world for such matters to be fully planned, approved and executed before the actual privatisation.

Government was not the sole owner of Maltacom. Minority shareholders have every right to be informed of what exactly has been agreed and to satisfy themselves that their interests as co-owners of Maltacom have been effectively safeguarded.

As an outgoing shareholder, the government has a clear conflict of interest in negotiating such a property exchange and it is therefore important for the sake of acceptable standards of governance that such a property exchange deal be conducted under the gaze of the general public and the private shareholders.

I would even dare suggest that, given that such a property exchange is not in the ordinary course of business of the company, there was an obligation to seek approval for the matter from shareholders at a general meeting. At such a meeting, small shareholders would not only have full access to information but would have the opportunity to comment and express an opinion on the transaction.

Has the proposed property exchange deal short-changed the minority shareholders who could have been rewarded better and more fairly if the property was disposed of in the open market? The minority shareholders have a right to ask these questions and the board of directors has a duty to give full and clear answers.

What amazes me is that when the minister concerned gave this skimpy information in parliament, the Opposition only found fault with the deal on the question of parliamentary technicalities.

They took the minister to task for not seeking prior parliamentary approval for this property exchange, given that parliamentary rules demand that concession of property rights – as proposed in the property exchange deal with Maltacom – are subject to parliamentary approval.

It is true that the minister sounded brash and arrogant when arguing that parliamentary approval could be considered as mere rubber-stamping, given that the government commands a five-seat majority in parliament. He could easily have said the same truism in a more technically correct manner by stating that the deal was subject to parliamentary approval and that parliament would be given every chance to debate and decide the matter. All the other assumptions could have been left unsaid, rather than voiced as arrogant assertions. Nothing would have changed the fact that approval of such a resolution by parliament would sail through with or without the Opposition’s endorsement.

But the core of the criticism should have been why was this being presented at this late stage, rather than being addressed in advance during the process leading to the privatisation. As representatives of the people, parliament should be interested in ensuring that such deals are conducted with the highest standards of corporate governance and that the government, as outgoing shareholder, and the board of Maltacom, do not expose themselves to claims of unfair trading which protects the interests of the outgoing majority shareholder at the expense of the minority shareholders, who are staying on as co-owners of the company with the new incoming majority shareholder.

When such things happen it is unavoidable that one questions whether our regulators and corporate executives pay only lip service to the need of high corporate governance standards. Public corporations and the government have to lead by example, as they are responsible for protecting the interests of the public in general and the small minority shareholders in particular.

Having the Cake and

2^nd June 2006

The Malta Independent - Friday Wisdom

…eating it, is what best typifies the attitude of critics to the quarter point increase in interest rates announced by the Central Bank whilst at the same time singing glory to the project for accession into the Euro at the earliest possible date.

One cannot enjoy consistently spending more then one earns and at the same time expects to find money in the bank. One cannot enjoy the spirit of Rome, the eternal city, and expects that all Romans should speak back in English. One just does not go with the other.

So those who support accession into the Euro in January 2008 cannot pretend that the Central Bank in its execution of monetary policy in the pre-accession phase has any choice but to shadow the monetary policy adopted by the European Central Bank (ECB)

When we joined the ERM II in May 2005 the official interest rate of the ECB was 2% whereas Malta’s official interest rate (technically referred to as the central intervention rate) was 3.25% giving a differential in Malta’s favour of 1.25%.

This differential has to narrow down gradually until accession date to permit seamless fusion. Following two quarter point rises in interest rates the ECB rate is now 2.5% and by all accounts it will be raised at least to 2.75% next week at the forthcoming ECB council meeting. Some are even hypothesising the possibility of a half point increase to bring the ECB rate to 3%.

Consequently the increase in Malta interest rate from 3.25% to 3.5% means that the margin has narrowed since ERM accession from 1.25% to at least 0.75%. possibly 0.50%. Given that we are still 19 months away from the projected accession date it is quite logical for the Central Bank to slow down the speed of narrowing the margin differential by raising local interest rates. Indeed we have raised interest rates by one-quarter point for the three or four quarter points raised by the ECB.

One could bring all sorts of arguments against raising domestic interest rates due to internal factors; arguments that on their own are valid and relevant. But if we are to be realistic and believe in the overriding need to join in the single currency in January 2008 we cannot escape that even in this preparatory phase, our monetary policy cannot be attuned to domestic economic issues. Once we join the Euro, monetary policy will be fully transferred to the ECB who will implement their policy on a Euro-land perspective and not on the issues of any single member country especially if it happens to be the smallest one.

In this regard at least the Opposition is consistent in arguing that we should postpone entry to the Euro until we achieve a real growth rate of 4%.

Realistically this is only hypothetically possible within reasonable time frames if our international competitiveness is given a boost from the exchange rate policy, meaning some sort of devaluation which falls in line with proposals for economic regeneration proposed some time back by the Leader of the Opposition.

Such a policy would however prejudice our achieving the all important criterion of keeping our inflation within 1.5% of the average of the best three countries of the EU which explains why it would be unrealistic to think of any such devaluation now and still expect to make to Euro accession come January 2008.

Where such policy falls on its face however is in the instability that such a prospect would create. This would on its own force the Central Bank to raise interest rate far more aggressively in order to stem the outflow of capital and this would work again the smooth fusion into the Euro causing the differential between the respective rates to widen rather than narrow down gradually.

There is plenty to be critical of the Central Bank but not in its implementation of monetary policy during the ERM II phase. One could question whether the Central Bank is sensitive enough to the chronic deficit in our Balance of Payments which increased from 9.6% of the GDP in 2004 to 13.1% in 2005. No country can live with this sort of deficits for an extended time and the pressure on the erosion of reserves seems to be coming more from this source rather than from capital transfers which remain comfortably in black.

One could question whether a Central Bank, which has been relieved of its regulation and exchange control duties, still needs to employ 306 full time and 16 part-time staff. What sense does it make to employ six additional clerks in 2005? Is it possible that the Central Bank, that preaches with moral authority the need for economic restructuring to increase efficiency, which is essential to underpin monetary and economic stability and growth, could not re-structuring itself to lead by example rather than simply keep adding on to its headcount no matter have much responsibility is taken off its plate?

The Central Bank as well cannot have the cake and eat it.