Opposition says it does not see ERM as a political issue

Opposition finance spokesman Charles Mangion said yesterday the opposition did not view the decision on Malta's membership of the Exchange Rate Mechanism as being a political issue, but that did not mean it would not voice its disagreement with the government.

He was speaking in Parliament during the debate on a bill to amend the Central Bank of Malta Act. Its main purpose is to prevent the sale of medals and tokens similar to euro coins and to implement other amendments to strengthen the independence of the bank.

The bill will give legal recognition to the bank's Audit Committee. It also provides that the bank may own shares and participate in international and national organisations and international monetary agreements necessary to fulfil its international obligations.

The bill was piloted by Parliamentary Secretary Tonio Fenech gave an overview of the operations of the bank. He explained how the bank had prepared detailed studies ahead of the decision for Malta to join the Exchange Rate Mechanism (ERM II) with the central parity rate of the lira to the euro fixed at the value it was at the close of business on the day before joining ERM.

Mr Fenech said the decision on how the central parity rate was achieved and Malta's commitment to retain it throughout the ERM period was the best. Malta, he said, had had a fixed exchange regime for some 30 years and it was not considered right to have a floating mechanism for the interim period until Malta adopted the euro. Such a move would have created uncertainty where none had existed for three decades. Malta would also have risked currency speculation.

Mr Fenech also defended the decision for Malta to join ERM now, saying that Malta needed to enjoy the benefits of adopting the euro as soon as possible. Those benefits would include lower inflation, greater economic stability, removal of exchange rate costs and price transparency.

Had Malta delayed joining ERM, it would have fallen behind competitor countries, such as Cyprus. It would also have effectively given up control over the date when it would actually adopt the euro, since it would have been lumped with the other countries that have still to join ERM, countries which were seen as having "fallen behind" and still had much to do to achieve the Maastricht criteria for euro adoption. That would not have been a good signal to credit rating agencies and investors.

Charles Mangion (MLP) also spoke on the operations of the Central Bank, saying the independence of the bank depended not just on legislation but also on the personality of the Governor not to allow influence on how the bank operated.

Dr Mangion welcomed the provisions in the bill on the audit committee , which would be responsible for matters relating to the system of risk management and internal control and the financial reporting process.

Now that Malta had joined ERM, the Central Bank was transferring its monetary policy tool to the European Central Bank. To date it had been the Governor, acting on advice by the Monetary Policy Council, who could set monetary policy.

Interjecting, Mr Fenech said the Central Bank would retain responsibility for monetary policy, including setting the central intervention rate, until Malta adopted the euro.

Continuing, Dr Mangion observed that interest rates would eventually have to be aligned to those set by the European Central Bank. But the Central Bank recently raised local rates to make investment here more attractive.

Speaking on the euro adoption process, Dr Mangion asked the government how it intended to administer the changeover and how much it was expected to cost.

When he referred to Malta's membership of ERM, Dr Mangion said the Opposition did not view this issue as being political. That the Opposition expressed an opinion did not mean it was being politically partisan or that it was against Malta being part of the EU. The opposition was guided only by the national interest. In joining ERM and preparing to adopt the euro, the country needed to be guided by its particular economic conditions and requirements as a small island state. The Opposition would not shirk from expressing its disagreement with the government when it felt justified to do so.

In the case of ERM, the question was not whether Malta should adopt the euro, because it had no choice once it was in the EU. The Opposition disagreed with the timing of ERM membership from last May 1 because much spadework remained to be done for Malta to achieve the Maastricht criteria such as the deficit, the national debt, inflation and interest rate convergence. Malta's interest rates were still well above those in the eurozone.

Inflation, at best, was 2.1 per cent in the eurozone whereas in Malta it was between 2.7 and 3.0 per cent.

That was mostly because of government measures such as the higher rate of VAT, the introduction of eco-tax, the surcharge on power and water consumption, higher fuel prices and other costs such as higher fees and the higher departure tax.

Malta was very far from bringing down its debt to the required 60 per cent of GDP from the current 72 per cent - and the latter figure did not include letters of comfort issued by the government for borrowing by state entities.

Debt had to be brought down through economic growth, yet the economy had been in negative growth up to two years ago and it was still stagnant. Significant progress in debt reduction could only be achieved with economic growth of at least five per cent in nominal terms.

The government had argued that it had needed to decide on ERM because of currency speculation fuelled by rumours of a devaluation. This was not true.

What had happened was that the Central Bank was worried by how the balance of payments was deteriorating and how the deficit of the current account had exploded at the end of 2004, eating away at Malta's foreign reserves. The situation had persisted at least up to April.

It was the state of the economy which had eroded the reserves, not the political situation as was implied by government spokesmen.

Manufacturing industry was seeing the value of its sales falling, and tourism was not doing well. It was claimed that joining ERM would make Malta more attractive for investment, yet the highest rate of investment inflows was being enjoyed by the accession countries which had stayed out of ERM.

Dr Mangion said the government was only meeting its deficit reduction targets through privatisation proceeds and other extraordinary measures. For example, at the end of last year the Central Bank, on the premise of wanting to be independent, bought its rented premises from the government for Lm4 million. And several payments due by the government had been postponed to 2005.

Unfortunately, economic prospects did not look bright because of long-standing problems which the government had not tackled, such as competitiveness and an education system which, per capita, absorbed as much funds as in major countries but did not produce as many skilled workers. The manufacturing sector was still fragile, with half of Malta's exports accounted for by one firm. It was these realities which Malta needed to tackle first and which showed that joining ERM now was premature.

Replying, Mr Fenech said the Central Bank had always enjoyed independence under different administrations.

He reiterated that the Central Bank would retain its monetary policy tool while Malta was in ERM, but would transfer it to the European Central Bank when Malta adopted the euro. When that happened Malta would have a say in monetary policy for the eurozone.

He agreed that the real issue which would make Malta more competitive was not euro adoption but greater productivity. It was for that reason that the government had launched structural reforms before the decision was taken for Malta to join ERM. But there was no doubt that having a stable exchange rate and eventually adopting the euro would also help the economy.

The euro would not be legal tender for transactions in Malta until the euro was formally adopted.

Mr Fenech said he was pleased that the opposition was saying that euro adoption was not a political issue. The Opposition disagreed with the timing of ERM membership, fearing that the Maastricht convergence criteria would not be attained in good time.

It was true that inflation was higher in Malta than the eurozone average, but there had been extraordinary factors, including VAT increase, and now that those were past the local rate was expected to fall.

Furthermore, with regard to the debt-to-GDP ratio, what Malta needed to show before adopting the euro was that there was a consistent debt reduction trend so that it would eventually dip below 60 per cent of GDP. It was worth pointing out that even some countries which had already adopted the euro had a higher debt-to-GDP ratio such as Greece at 110 per cent of GDP, Italy at 105 per cent, Belgium at 96 per cent and Germany at 66 per cent.

Mr Fenech said the government's figures were based on accrual accounting and, contrary to what Dr Mangion said, took in all liabilities. In that context, the current national debt was 75 per cent of GDP.

The parliamentary secretary said there was no doubt that before Malta announced the ERM decision there had been speculation over what would happen, with uncertainty over whether the lira would be devalued.

This speculation had been reflected in the reserves, as confirmed also by the Central Bank when it announced its decision to raise interest rates. It would have been irresponsible for the government to delay Malta's ERM membership in such circumstances, when the EU itself had confirmed that the economy was on track and ready for this membership.

Dr Mangion had spoken about other accession countries receiving a higher rate of foreign investment than Malta, without pointing out how wages there were far lower than Malta.

Turning to deficit reduction, Mr Fenech said that while Dr Mangion had cast doubts over how the targets were achieved, the books were examined in detail by the EU and given the green light.

The so-called privatisation proceeds from the sale of the Lotto Department had been properly assigned as recurrent revenue last year because the department had not actually been sold. What had been sold was the right to hold lotteries.

If the Lm4m revenue from the sale of the Central Bank's offices should not have been included, as Dr Mangion argued, then, by the same yardstick, the government's spending of Lm9 million on Dar Malta should also not have been included. Furthermore, it was the Central Bank which had sought to buy its offices. That had not been a government initiative.

It was not true that payments due last year had been postponed to this year and not shown in the accounts. Spending by the government this January had shown a spike because there were five Mondays, Mr Fenech said.

The bill was then given a second reading.