The House Economic and Financial Committee had a very important meeting earlier this week. The importance lay in the fact that the meeting was addressed by the governor of the Central Bank, Josef Bonnici, with interjections by Minister of Finance Edward Scicluna and his parliamentary shadow Tonio Fenech.
The role of the Central Bank has been on the face of it diminished in recent years. In the first instance supervision of the banking sector was transferred to the Malta Financial Services Authority. Despite fears to the contrary the authority made a good fist of it, working closely with the Central Bank.
In the second instance, with Malta joining the European Union 10 years ago, the Central Bank became part of the European Central Bank (ECB), losing many of its functions in establishing monetary policy. That is now set by the ECB, which is responsible among other things for setting the basic interest rates which serve as a guide for the banking system across the members of the eurozone.
The term “guide” has to be emphasised because it does not bind banks to harmonise with their peers. The build-up of interest rates includes a measure of risk, which varies across a country’s corporate sector, let alone among countries. That is the main reason given by the two main domestic banks for keeping lending and borrowing rates higher than among most of the rest of the eurozone.
Despite the diminished local role of the Central Bank of Malta the governor, together with the chairman of the Malta Financial Services Authority retains a key role in overseeing the financial sector and the rest of the economy. The bank continues to publish regular quarterly reviews with deep analysis of the domestic economy and global activities, as well as an analytical annual report in terms of its legal obligations, though this is no longer debated in Parliament as in the earlier days of the bank.
The bank also has a large staff collecting data and preparing reports for Eurostat, the financial arm of the European Union, as well as to supervise what is going on in Malta in terms of our obligations towards the EU and the eurozone. The bank staff also keeps the governor informed of the nitty-gritty of the Maltese economy and financial sector, in the context of developments abroad.
I do not know whether the governor has regular meetings with the Prime Minister as well as the Finance Minister, as was regular occurrence in the days when I ran the bank, and later too, in very different and less complicated circumstances. If not, it is the political masters that are losing out.
I do not know whether the governor has regular meetings with the Prime Minister as well as the Finance Minister... if not it is the political masters that are losing out
In his report to the House Committee on Monday, governor Bonnici indicated why. Among other things that struck me was his reiteration on the areas of growth of the Maltese economy, all of them in the modern services sector. This goes a long way to explain why we have had unemployment stuck under 8,000 individuals for several years, with the number on the increase for the past 30 months.
There is an obvious mismatch between those truly seeking employment and the needs of the economy. This is also confirmed by the fact that last year half of approximately 5,000 new jobs created in the economy went to expatriates. No breakdown of these jobs was given but I should think that the extreme ends of the requirements – low skills and technical skills – were taken up by expats.
This poses a challenge which statements by the government show awareness of. More focused education programmes are required, and are now being offered, to contribute to a better trained workforce. The emphasis on this factor can never be strong enough.
The governor also gave a new insight which is worrying. It was common knowledge that manufacturing was in overall decline, though there is positive replacement growth within it. It is a surprise, however, to learn that tourism too needs keen looking into. That industry has grown to near saturation level. What it requires is a continued improved mix of arrivals who can spread capacity take up over the whole year, with higher expenditure per tourist entertained. The governor may have reports of other areas that need looking into.
The tourism authorities cannot rest on their laurels. It might seem odd to say this but in many ways the industry may need to start restructuring again, both in terms of the quality and value for money it offers, as well as in terms of promotion and marketing.
The governor also touched on the level of lending. This is not rising but shrinking, as is happening elsewhere in Europe. If that goes on, growth projections will be threatened. The governor did not say whether the cause lay with lower demand for loans and overdrafts, or because the banks were being more tight-fisted as they seek to strengthen their capital base. Further public analysis would offer better understanding.
The incursions of the governor in the public arena are few and far between. It would be beneficial to the running of the economy if there were more of them.
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