|
Matthew Vella
Economists speaking to MaltaToday have taken umbrage at the way depreciation and devaluation of the Maltese Lira have turned into yet another political contest between Prime Minister Lawrence Gonzi and Opposition Leader Alfred Sant.
Sant’s proposal to have the Maltese Lira gradually depreciated over two years was pounced upon eagerly by the Nationalists, who are now calling it devaluation, which unlike a gradual depreciation, is a single shot at reducing the value of the currency.
Much to the chagrin of certain economists, many have argued that the issue should not become a political battlefield, although many are divided over whether the value of the Maltese Lira should be depreciated in order to render the Maltese economy more competitive.
“It is sickening to find a sensitive economic subject being so politicised, trivialised, and over-dramatised. It would be pathetic if we were to turn Labourites into pro-devaluationists and Nationalists as contras,” economist Edward Scicluna said.
Depreciation is being proposed as a way to make Malta more competitive by making the Lira cheaper and exports and tourism more attractive. According to Gonzi however, depreciation will increase the price of imports to the extent of a yearly average of Lm767 increase in the cost of living for the Maltese family.
With the issue being trashed out along political Party lines, many have argued that the matter should not be left on the political battlefield: “One is not expected to discuss such subjects openly with the governor of the Central Bank or the Minister of Finance, since it is inherently obvious that they will be publicly against any form of currency depreciation,” Scicluna says.
He finds agreement with General Retailers and Traders Union director-general Vince Farrugia: “Understandably, Gonzi does not want to appear lukewarm on the issue for fear of seeing an outflow of funds, but certainly there should not have been a definitive ‘no’ to such an economic tool.”
Talks between the social partners at the Malta Council for Economic and Social Development (MCESD), held in rushed conditions just weeks prior to Budget Day, saw Government ruling out proposals relating to the depreciation of the Lira, or tax reform, according to Farrugia, who believes depreciation will be a must for Malta to join the Euro.
“The big boost Ireland got after joining the Euro was because for years ahead of entry into the Economic Monetary Union (EMU) it was slowly depreciating the Punt, to finally join at a highly competitive rate, with competitive export prices, and with more value for the European tourist.
“In the case of Malta, our Lira is overvalued by around 12 per cent. I say we will have to start considering depreciation the closer we get to join the EMU, because the worst thing to do would be to join at a high exchange rate. We have to adjust our rate whilst we’re out of it.”
Farrugia also lambasted the political butchering of depreciation at the hands of both Sant and Gonzi: “We cannot kick-start the economy just on a wages policy that can only create social conflict. Government is shying away from lowering income tax for business and the middle-class and shifting taxation onto land hoarding instead. On the other hand, one cannot understand how Labour has suddenly latched on to this issue in this manner – depreciation should be carried out stealthily and cleverly by the Central Bank, without the need for politicians to discuss it.”
Economist Gordon Cordina is of the opinion that devaluation can only work if production costs, namely imports of raw material and labour, don’t rise following any devaluation. “In terms of labour you can freeze wages to make devaluation really effective, but do we want to again become a cheap production base, or do we want to become more productive? At the end of the day if you want to be wealthier you have to work harder.”
The Maltese Lira was devalued back in 1992 under Nationalist stewardship, a response to the realignment of sterling and of some competitor Mediterranean currencies following the crisis in the European Monetary System. The gain in competitiveness did not last long. From 1.6 per cent in 1992, inflation in Malta increased to around four per cent in 1993 and stayed there through 1995.
Parliamentary Secretary in the Ministry of Finance Tonio Fenech has dubbed the measure ‘crazy’, saying devaluation carried zero effect in the past: “We had a competitive advantage for a few days which was lost soon after when prices started going up again. All that happened was that we made pensioners poorer,” he told The Times.
Former Nationalist Finance Minister John Dalli today is also aware of the instability devaluation can create: “It does great damage to the economy, it freezes investment and it can tempt people to shift their money outside Malta.”
He however criticised the debate that started raging over depreciation: “We’re not going anywhere and we’re doing great damage to the country. This is a policy which depends on the Central Bank, which we imbued with the autonomy to conduct such a policy. A Cabinet committee interrogates the governor every six months on the policy taken.”
Former Labour Finance Minister Lino Spiteri is also convinced that devaluation is not on, for various reasons:
“Dr Sant came up with a measure that might be termed bold – depreciate the exchange rate slowly so as to regain competitiveness, other things remaining equal. But he framed that prescription in an unrealistic supposition – that such depreciation would not have inflationary consequences,” Spiteri recently wrote in The Sunday Times. Spiteri believes that in the case of a net importing country like Malta, depreciation would be inflationary because import prices would in fact rise.
For two years, Malta will have to have its currency pegged to the Euro in the Exchange Rate Mechanism II, the Euro’s waiting-room for Member States joining the EMU. The Maltese Lira is currently pegged to a basket of currencies, 70 per cent of which is based on the Euro, with the rest shared between sterling and the dollar. The dollar remains significant in Malta due to the fact that ST Microelectronics, a major exporter, exports in dollars. Fuel is also purchased in dollars.
matthew@newsworksltd.com
|
