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“The loss of competitiveness is…due to the stubbornness of…John Dalli in refusing to countenance a devaluation of our ridiculously high value lira.” Such was the introductory sentence of a recent contribution by a frequent writer in one of our English dailies, entitled “The case for devaluation.”
As an economics-educated business consultant, trained in analytically weighing pros and cons before arriving at any conclusion in practically all aspects of my work, and especially on opinions regarding macroeconomic issues, I do not believe that, on balance, there is a clear case to be made for devaluing our currency as a means towards re-energising our stagnant economy. Even less so at this delicate stage when negotiations are under way for a much-desired social pact which necessarily entails government commitments on a number of do’s and don’ts.
Maintaining the current international exchange rate computation method for our lira, particularly vis-à-vis the euro, is bound to be one of them. Indeed, it would even make more sense to effect gradual further bouts of alignment, leading to eventual pegging by the end of the threshold period (3, 4, or 5 years, no more) inside the Exchange Rate Mechanism, eurozone’s waiting room, during which time any fluctuations of our lira would need to be constrained inside a band no wider than 15 percent from the euro at any time.
Perhaps it would be around that time, not now, that any move for a devaluation could be openly discussed in the light of circumstances then. The last chance, as it were, for us to be able to manipulate our currency’s exchange value.
Nevertheless, I do respect those who, with sufficient learning on the subject, are able to argue a sensible case for devaluation now, not then. One of these happens to be an ex-politico and chairman of Malta’s largest bank whose writings are always worth listening to, though not necessarily concurred with.
What is irritating is someone who needs to be frequently reminded of Alexander Pope’s immortal verse from his ‘Essay on Criticism,’ viz. “A little learning is a dangerous thing; drink deep or taste not the Pierian spring.” Note how Pope mentions ‘learning,’ not knowledge as most people seem to think. Any knowledge, however little, enhances the person. Learning, unless total, can be dangerous: that is why apprenticeships are usually longer than most consider necessary.
“ When a British tourist finds that he will be losing 40 percent of the value of his sterling due to the ridiculous rate of exchange…” argues the advocate for a devaluation, blaming it all on John Dalli’s intransigence. I counter-add “When an American tourist finds he will be losing 65 percent of the value of his dollar..” And so on. Got the gist ?
“Taxation, which is passed on to the consumer and the importer of locally manufactured goods ( sic ), naturally results in further loss of competitiveness…” How? What the heck is this man talking about?
Let’s have some more words of wisdom: “Devaluation would be tantamount to a breach of promise to a foreign creditor, with all the consequences that it implies.” Is there any foreign creditor who is owed a single lira? In my long working life I have never encountered any importer buying on credit denominated in Maltese liri. If anything, a devaluation would be a breach to the local debtor and, currently more so, to those who last year repatriated their overseas savings in compliance with the government’s amnesty on foreign holdings.
Finally, “devaluation will be the most equitable instrument to spread the burden, required to regain some long lost edge on our competitors.” Equitable? By increasing the price of even our imported basic necessities, thus hurting the lower-income earners harder than the affluent?
Let’s be serious. The writer, admittedly, did conclude by beseeching the government “to invite the opinion of prominent economists and act on their advice.” Incidentally, no economist, prominent or pedestrian, has commented on his piece. I wonder why. But I am now. So there.
Just for the record. John Dalli was the only Maltese finance minister ever to deliberately devalue our currency just over a decade ago. Prior to the birth of the euro, of course. I remember remarking to a foreign correspondent interviewing me at Malta Shipbuilding that it was a courageous decision, if not foolproof wise. With four of our main trading partners devaluing their currencies, the Minister virtually had no choice but to fall in line with them in the best interest of our exporters.
In effect it was not really a substantial devaluation but enough to cause ripples of discontent in its wake. Years later some economists began to doubt whether John Dalli was correct in his judgment to devalue immediately or whether he could have bided his time for a while. One thing for sure was right about what he did: scotching speculation on our currency by the importing barons - a very important factor to heed.
There is no stubbornness in refusing to devalue. In our economic scenario any beneficial effects will be of a very short duration, even for the very same exporters it is mainly intended to assist. Devaluation is a finance minister’s easy way out of a predicament. Experience has taught us that, in matters of economics, the easy way is never the best, not even a good one for that matter. In the words of veteran Czech statesman Vaclav Havel, “The challenge of politicians is not to follow the mood of the public with elections in mind, but to think in the long-term.”
Patchy solutions are not to be recommended to the current finance minister, who also happens to be the premier. I don’t think he needs to be reminded of the sober valedictory advice he received from his predecessor and mentor, viz. that the time for short-term measures is over.
It would be wiser to impose a wage-freeze, even reduce salaries in the public sector and introduce other unpleasant measures than to devalue. More honest, and, certainly, more effective.
PS for Minister Gatt - If expenses do not justify retaining Radju Bronja, at least let the station continue with BBC Radio 3 and Maestro. They cost nothing to transmit.
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