The government’s arguments to rubbish the view that the rate of exchange of the Maltese lira ought to be brought down to a more competitive level as part of a re-structuring package and, before we take the point of no return decision to fuse our currency into the euro, are getting puerile and ridiculous.

The government is playing cheap politics with a very serious matter, which politicians should ideally not discuss in public lest they destabilise the financial structure on which we depend so much.

My position is clear and has been made repeatedly for the last four years. In normal circumstances a small open economy like ours should avoid resorting to nominal adjustments in the rate of exchange value. There is much to argue in favour of the virtues of rate of exchange stability. But, like all virtues, they could turn into vices if sustained regardless and obstinately when circumstances around us change from the normal to the abnormal. The latest example of this was Argentina, which tried insensibly to defend a currency board of the Argentinean peso with the US dollar before the whole financial structure collapsed in December 2001.

And circumstances are far from normal. We have had four consecutive years of little or no real growth while competitor countries, especially those from Eastern Europe who joined the EU, have experienced accelerated growth and a sharp inflow of foreign direct investment, which here was only noticeable by its absence.

We have had an excessive increase in our national debt, which has exceeded all limits of prudence in its relation to the GDP, and this at a time when one-off revenues from privatisation and dismantling of sinking funds held against national debt were simply lost in the fiscal wash.

But more than that we have statistical evidence, published by the Central Bank of Malta, that the real value of the Malta lira exchange rate has appreciated by 11 per cent since 1995 because we have sustained negative inflation differentials compared with the inflation experience by competitor countries.

So those who argue the virtue of stability in the rate of exchange should in reality be arguing for a nominal devaluation to regain such stability in the real value rather than argue against a nominal adjustment, which would sustain the instability in the real value that has been allowed to creep in.

I would very much have preferred if our economic policy was more effective in the control of inflation to ensure that our nominal rate of exchange remains aligned stably with the real value of our currency. But this has not happened and the monetary authorities and the government are at liberty to argue how to apportion the blame for this failure among themselves.

It really makes no difference to us whether this has happened because of lax monetary policy accommodating fiscal extravagance or because fiscal extravagance made, monetary policy ineffective in the control of inflation. What makes a difference to us is that the current rate of exchange is at a level which is at least 11 per cent (and growing) harder in real terms than it was in 1995 and that this is making our export and tourism product uncompetitive.

My position has always maintained that such measure should not be taken on its own as if it was a magic cure to all our problems but has to be part of a well devised package of measures meant to enhance flexibility in our economy, especially in the wage setting and labour allocation mechanisms, to ensure that the benefits of such a rate of exchange adjustments do not drain themselves away quickly in the inflation wash.

And on the eve of our embarking on a project to adopt the euro as our national currency, involving the loss of two very important economic tools (monetary policy and exchange rate policy), it is a matter of crucial importance that we have a good look at our current exchange rate level and ensure that it truly reflects our economic fundamentals lest we get locked into an unsustainable exchange regime over which we will have no future control, transferring all the strain of adjustment on the real economy, mostly on the employment sector.

By no means can these be considered normal circumstances.

And, while I faulted the Leader of the Opposition for making public his view in favour of a devaluation1, it is insensible and self defeating for the government to rule out of hand the use of such a policy in all circumstances.

The arguments brought against it are absolutely puerile and opportunistic. Like all medicine, devaluation is no piece of cake. But scaring the sick patient from taking the medicine or surgery he needs purely because the convalescence could be quite painful is no way to treat a malady.

If government thinks that just knocking off two public holidays and talking positively about restructuring will do the trick it is grossly mistaken. The pain of doing nothing and avoiding the medicine will be loss of jobs and continued economic stagnation, which could be much more painful than the adjustment pain of restructuring.

Arguments that a 10 per cent devaluation would increase the cost of living by 10 per cent would probably bring you the lowest failure mark in the GCE O level economics. Arguments that a 10 per cent devaluation would knock off 10 per cent in the real value of domestic deposits are wide off the mark.

Devaluation, if properly executed in conjunction with other measures, could project the economy on a new growth path, creating sustainable growth and attracting new investment leading to development and innovation. Devaluation could be a socially acceptable way to execute the restructuring as its spreads the burden of adjustment even on those who keep their jobs rather load it all on those who lose their job and have difficulty finding a new one, thus becoming a drain on public finances.

The best thing the government could do is just shut up on the matter and seek to reach consensus with the Opposition on a set of economic measures that are needed to get the economy out of the dire straits it is in. The Opposition has every interest to co-operate, because if it expects to be in government beyond 2008, it is far better to inherit a restructured economy rather than one that still awaits the administration of painful measures.

www.alfredmifsud.com

1 Devaluation policy should never be discussed by politicians in public as it could create destabilization through savers shifting their liquid deposits in Maltese lira into foreign currency causing a drain on the country’s official reserves. Furthermore the crawling peg mechanism for adopting a gradual devaluation as proposed by the Opposition is unsuitable and unrealistic for Malta’s circumstances where we need a one-off adjustment to reflect accumulation past inflation rather than frequent small adjustment for the accumulation of future inflation as is the concept with a crawling peg type of exchange rate adjustment.