Roll Back the Sleaze

The Malta Independent on Sunday 

 

Quoting from Bloomberg last Friday: `Oil in New York has declined 26 percent from a record of $55.67 on Oct. 25.2004.Crude oil for January delivery fell $1.48, or 3.5 percent, to $41.05 a barrel at 1:09 p.m. on the New York Mercantile Exchange.

The Prime Minister in his budget speech on 24th November 2004 stated `This year the international price of crude oil exceeded US$50 (per barrel)` thereby implying that the 17% surcharge` on utility bill is the direct result of such an increase in the price of crude oil.

If this were truly so the Prime Minister could announce the withdrawal of the surcharge as the price of crude oil has dropped by 18% from the US$ 50 mentioned in the budget speech and by more if compared to the more than US$50` benchmark. Since budget day the US$ has depreciated by 1.26% against the Maltese Lira so in Lm terms the price of crude oil has dropped by 19%.

But reality is that notwithstanding the impressions given in the budget speech, the surcharge has nothing much to do with the price of crude oil and much much more to do with the fact that the adjustment made to honour easy electoral promises to roll back the increased utility rates that brought down a Labour government in 1998, is proving unsustainable. Equally the measure of withdrawal of all subsidies relating to kerosene which was depicted so unsocial by the PN opposition when proposed by Labour government of 1998 and immediately rolled back upon re-election, is now no longer unsocial and needs to be re-instated exactly as Labour had proposed in 1998.

Rather than promises of roll-back, for political self-interest, of tough measures taken by Labour governments in order to avoid waste and maintain competitiveness, we now have to roll-back our sleaze.

The very first thing a new PN government did when elected in 1987 was the restoration of` six public holidays that Labour had abolished when it had legislated the four weeks minimum leave entitlement in the conditions of employment act. Furthermore plans were announced to increase the annual vacation leave by 5 days, one each year over a period of five years. Eventually one was taken away when `sette gugno` was elevated to the national day status and an extra public holiday was instituted. So now we have 24 days leave ( those working five day week) and 13 public holidays, a minimum of 37 work ` free days apart from weekends.

17 years later we are now being told that we can`t afford so much holidays and we have to start rolling them back. I agree, but it is fair to remind that political opportunism has cost us dearly in terms of global competitiveness and that it was irresponsible to give such easy promises purely to gain access to power through the abuse of those voters who misguidedly believe that governments have the power to overcome the rules of economics and behave like Santa the whole year round. Again we have to roll-back our sleaze.

Now I agree that measures like the ones announced in the Budget, for public holidays that fall on weekends not be replaced by additional vacation leave as the law presently stipulates, is much less than the minimum required to truly make a difference to our competitiveness. On the other hand I appreciate that the Unions cannot be expected to subscribe voluntarily to such measure.

However, given the grim economic situation of which the Unions are aware more than most, I would expect the Unions to condone or tolerate the measure, under protest and against their wishes, as a token gesture by the workers to re-establish national competitiveness.

This gives rise to an interesting point of reflection. The social democratic system of which we are so proud has an inherent defect.` Every time that the economy passes through a bad patch, either because of external forces or because of bad internal management , the workers have to carry a disproportionate share of the load that has to be carried to get the economy back in shape again. It is not fair, but that`s how it is, inevitably.

Attempting to shift the burden of adjustment on the entrepreneurial class, the investment providers and risk-takers, proves counter-productive as they would withhold the investment needed to kick-start the economy. Quite often rather than forced to carry an additional burden they have to be caressed with tax breaks and incentives to stimulate their participation through their increased investments.

Shifting the burden of adjustment on the not economically active, the pensioners, the sick and the unemployed is socially irresponsible, unacceptable in a social democracy and conducive to serious loss of social cohesiveness without which investment will hold back.

So all that`s left in the middle is the whole body of workers, the economically active, who will have to roll back their past gains in order to restore the country`s international competitiveness. This could come in many forms. It could come in the form of a wage freeze where workers are expected to become more productive without expecting wage increases. It could come in the form of increased hours of work without additional pay. The proposal for non replacement of public holidays that come on weekends fall in this category. This very same week the French government rolled back the 35 hour week introduced by the former socialist government and re-established the longer week between 40 -48 hours as agreed at company level without any automatic pay increases for the additional working hours. In Germany, unions at Siemens and Volkswagen had to make similar concessions to dissuade these corporations from moving their plant to lower cost locations.

It could come in the form of devaluation of the currency which reduces the real value of the wages or it could come through acceptance of additional work, more flexibility and wider responsibility without additional compensation.

In whatever form or shape it comes, the workers, unjustly but inevitably, have to carry the brunt of the adjustment.

So the next time workers are offered by loose talking politicians a free lunch in the form utility bills below their real cost, additional holidays without loss of pay or similar Santa Claus bonanza, it would be very appropriate for the workers to remind themselves that free lunches don`t exist and that ultimately they will have to pay the price of adjustment through the loss of their job or rollback in their standard of living.

When they have to choose between sleaze and serious talk, workers could opt for sleaze only at their own expense.

Stop the Lira Circus

The Malta Independent 

The external value of the currency is the flavour of the month on the political circus. Each Sunday morning the Prime Minister includes in his ritualistic sermon in some PN club somewhere, strong assertions that the mere idea of devaluation is economic blasphemy and that his government will not even give a second thought to the matter, sure as it is that our economy is on the mend under its own steam, aided by the measures taken in the 2005 budget.  
  

It matters not in the least to our Prime Minister that surveys show that the large majority of the population is not at all convinced that the budget makes any significant contribution to addressing our economic ills.

Just as predictably, the leader of the opposition blesses our Sunday new bulletins and Monday morning papers with explanations about the difference between devaluation and depreciation and asserts that the latter will have no adverse impact on the cost of living.

This would be comic if it weren’t tragic. I strongly advise both the Prime Minister and the leader of the opposition to stop this charade and find some other flavour of the month on which they can speak with better authority. Then if both of them truly have the strong views they express on the rate of exchange issue, they should meet quietly face to face with their economic experts and argue the case away from the headlines.

Otherwise, public discussion of this very sensitive and important issue will unavoidably lead to a hardening of the respective positions, making it difficult for parties to adjust their position following an objective review of the situation aided by some qualified, expert and independent advice from international sources.

The last source for such advice should be the Central Bank of Malta. It is unfortunate that this is so but reality is what it is and the Central Bank has a vested interest to defend, which precludes it from giving objective advice on the matter.

Chart 5.4 on page 43 of the September 2004 CBM Quarterly Review explains why. The Central Bank is charged with ensuring that our domestic inflation remains low and does not exceed that of competing countries. Because the Central Bank has failed to do so over a considerable number of years, during which interest rates were kept low to accommodate excessive government borrowing, our inflation has quite consistently exceeded that of our competitors. Consequently the real value of the Maltese lira rate of exchange was as at last July 11 per cent higher than it was in its 1995 base.

With hefty price increases in the pipeline for utility bills and public transport, among others, it is logical to assume that the inflation negative differential will continue to widen and the over-valuation in the real rate of exchange will continue to harden.

When the Governor of the Central Bank occasionally makes the point that their primary tool for the control of inflation is the defence of the fixed rate of exchange peg against the chosen basket of currency, he is missing the point that the objective ought to be the stability of the real not just the nominal rate of exchange.

If the Central Bank tolerates higher domestic inflation it is economically hazardous to try to address the excessive inflation through a fixed nominal rate of exchange which tends to get progressively more out of line, with its true underlying value threatening, as it is doing, the international competitiveness of Malta Inc.

For me, the issue of the need to address the over-valuation in the real rate of exchange of our currency is not the flavour of the month. I have been arguing in favour of serious discussion on the matter since early in 2001 when the real over-valuation shot from six per cent to 12 per cent in the space of a few months.

On 2 March 2001, in this same column, I commented as follows in a contribution titled Prognosis without prescription, following a business breakfast addressed by the Governor of the Central Bank:

“During last week public breakfast talk Governor Bonello made up for half his former omission. The correct half was a frank and emphatic identification of the problem of living beyond our means with resulting chronic deficits in the public budget and the country’s balance of payment. Governor Bonello, welcome to the rank of Geremiah and Cassandra!

The missing 50 per cent was in the prescription for the identified malady. If the country is living beyond its means then it can only address the problem if it cuts back its life style to within its means.

One of the most effective ways of doing this is by using the devaluation tool. No other economic tool is more powerful and effective provided devaluation is accepted for what it is, a reduction in the country’s standard of living versus the rest of the world.

Rather than reject outright the devaluation tool the Governor should have underlined that this would only be really effective and lasting if it forms part of a national economic re-structuring package which wins the support of the unions. This would avoid wage claims which would turn devaluation into an inflationary spiral requiring further devaluation. Rejecting devaluation outright is indicative of absence of real determination to tackle the problem until a crisis forces us to the unavoidable.”

Nearly four years after I wrote this and several similar contributions since then, it is certainly not too early to open serious consideration of using the rate of exchange policy to address the chronic faults which have developed in our economy. Hopefully, it is not too late either.

Oily Contempt

The Malta Independent 

 

Utility rates are very politically sensitive. Labour government came to an untimely abrupt end in 1998 partly because it did not manage well the utility rates increases announced in that year`s budget.

Public opinion was not shaped up in advance for the unavoidability of increasing utility prices, given the precarious state of public finances and the losses then being incurred by Enemalta. The present government when faced with the hard reality that lowered utility rates that brought it back into power in 1998 are no longer sustainable, did not fail to learn the lesson on the need to shape up public opinion for the expected increases.

We have had a good two months run-up to the budget being constantly reminded that the price of oil was reaching record levels and that this makes utility rates upward revision absolutely unavoidable. Then in presenting the budget the Prime Minister told us that Enemalta was absorbing more than half the increased cost of Lm16 million and the announced utility raised revisions will only cover 48% of the increased procurement cost of imported energy. (How Enemalta can afford to carry this subsidy when it is virtually bankrupt remains to be seen.)

This is all well and good except that the facts have been misrepresented and we have clearly been treated with contempt. Are we stupid idiots expected to swallow whatever propaganda government decides to throw at us to justify the hard measures which are being taken for very different reasons than those stated. 

Let me start with the price of oil. The oft quoted price of crude oil is irrelevant to our case. Enemalta does not import crude oil. Enemalta imports refined products. The correlation between the prices of crude oil and the prices of refined products is tenuous. For example between August 2003 and November 2004 the cost of crude oil increased in US dollar terms by 48%. On the contrary the cost of Fuel Oil, one of the main refined products imported by Enemalta to generate electricity, went down by 15% in case of the High Sulphur version and by 4% in case of the low sulphur version.

Dollar depreciation in the meantime means that every Lm1, one gets 17% more US dollars now than one used to get in August 2003. So in Maltese lira terms the Fuel OiI that Enemalta burns to generate electricity is cheaper than it was in August 2003. It is also cheaper though by a lesser margin than the price levels for such fuel oil in Lm terms as at January 2004.

So why on earth are we being fed false information forcing to us accept utility rate increases on the basis of increased acquisition cost of crude oil which we do not import, when in fact the finished refined products we do import are cheaper than they were last year`

The truth, for those who want to know the truth, is that because of EU regulations we are being obliged to burn low sulphur fuel oil which is far less environmentally offensive than high sulphur fuel oil. The problem is that low sulphur fuel oil is about 40% more expensive (approx. US dollars 50 more per metric ton), and this on its own runs up an increased import bill of some Lm7 million more.

Of course I agree we should welcome the use of more environmentally friendly fuel; but we should call a spade a spade and say it costs more and not hide behind the irrelevance of increase in crude oil prices.

Government`s contempt doubles up when one realises that whilst the consumers are being loaded with the expense burden of this environmental measure, the government is lining up its pockets by netting Lm3 million more in 2005 in excise duties on imported petroleum, probably due to he application of excise duty on kerosene or the expected shift of use from kerosene to diesel.

So while we all have to pay surcharges on our utility bills, higher prices on kerosene which saw its subsidy abolished (this was socially atrocious when Labour did it in 1998 only to be reversed by the PN government for political convenience; now it has become socially responsible), and industry is having to pay 50% more for Light Heating Oil apart from additional cost in the utility tariff, government on the other hand is loading on an additional excise tax of Lm3 million. Rather than soften the blow it is actually accentuating it.

Seeing all this misrepresentation, what value can the consumer give to the assurance that the surcharge on utility bill will be removed once oil prices return to normality Prices of imported refined oil products used for electricity generation are already quite normal in Lm terms and the major cost difference is due to the use of more environmentally friendly low sulphur oil. So how, may I ask, can we hope for the abolishment of the utilities surcharges` Certainly we cannot go back to use high sulphur fuel oil!

And if the government truly believes in accountability why not publish the benchmarks costs of the imported products (with specifications of such costs i.e. whether they are spot prices, monthly averages or quarterly averages) and of the applicable US dollar rate vs the Maltese Lira. Only through publication of such information can we hold government accountable to the promise to reduce or remove the surcharges when procurement costs in Lm terms recede.

The Minister responsible for Enemalta was reported as saying that the corporation has no expertise in using hedging techniques for energy imports and other financial derivatives.` If this is so than I regret that for all the expensive new recruitments at senior level Enemalta has lost rather than gained expertise in these sectors. I well remember the period when in 1998 as chairman of Mid-Med Bank I was being consulted on the hedging offers Enemalta was considering, we had concluded deals which eventually rewarded Enemalta not just with certainty of costs but with substantial savings both on the price of imported refined oils as well on its foreign exchange transactions and balance sheet exposures. There certainly seemed to be no lack of such expertise within Enemalta`s ranks at that time.

I appreciate these could be quite complex matters and the Minister can pontificate with impunity when there is no one to correct his misstatements; but that does not mean that we, as citizens and consumers who are being forced to carry the burden of his decisions, are not being treated with utter contempt.