During the last 30 years, the Maltese lira has been based on a basket of currencies and the composition of this basket is revised periodically by the monetary authorities acting through the Central Bank of Malta.

Currency in Malta is a fascinating subject and interested readers may wish to read From Scudo to Sterling by Joseph C. Sammut and visit the Central Bank in Castille Place where there is a permanent numismatic exhibition. Just prior to the adoption of the basket, the Maltese pound, as it was called, was at par with sterling.

The composition of the basket generally reflects Malta's foreign trade patterns but account is also taken of the stability of the lira. Often, one basket is changed into another without significantly changing the value of the lira versus the other currencies. The value of the lira does not change but merely starts following the new pattern set by the new basket. The value of the lira can also be adjusted without changing the basic composition of the basket, as happened in November 1992, when the lira was adjusted to 10 per cent below its value the previous day for Malta to retain its competitiveness in the international markets.

In the old days, in the basket, one used to find a motley collection of currencies, mostly European, but in 1989 the European Currency Unit (ECU) was introduced into the basket and, later on in January 1999, the euro, thus simplifying its structure.

The basket system served Malta well since it provided stability, and therefore credibility, to the exchange rate and also, indirectly, it provided price stability, which to an extent facilitated monetary policy.

The most recent revision was announced by the Central Bank on August 23, 2002. It primarily consisted of increasing the weight of the euro in the basket in view of the euro's increasing popularity as a trade currency and its expanding role as an international reserve currency. In view of Malta joining the EU, this increased weight makes even more sense.

Weights are given in percentage terms. As a result of the review in August last year, for example, the weights were: euro 70 per cent, pound sterling 20 per cent, and US dollar 10 per cent. Basically, the revision consisted of keeping the sterling much as it was (in the December 1998 revision it was given a weight of 21.6 per cent) and transferring weight from the dollar (1998: 21.6 per cent) to the euro (1998: 56.8 per cent).

The problem with these weights is that you cannot use them directly each time you want to calculate the exchange rate in order to find out, say, how many dollars you will get for each lira. The weights have to be converted into so-called "currency portions". When one adds the dollar value of each currency portion on a given day, one will get the exchange rate of the dollar versus the lira. As an example, I show how the exchange rate for August 23, 2002 was worked out above.

Essentially, this is how the exchange of the lira is worked out. Note how the currency portions will remain the same until the next revision (which will now probably be when we adopt the euro) while what I called the "USD value" (the currency portion multiplied by the exchange rate) changes every moment as the value of the dollar changes versus sterling and the euro. Therefore, the weights of 70-20-10 are only so when, and if, it happens for the three exchange rates to be interlocked at the same figure. Otherwise, the weights will vary around these portions.