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Matthew Vella
Households and investors took the brunt of the island’s beyond-its-means lifestyle when interest rates were increased by the Central Bank in a bid to halt a serious decline in its external reserves.
More money has flowed out of the country since its accession into the EU following the liberalisation of trade and capital movements, since January 2004 reaching a cumulative total of Lm80 million over a year.
The decline prompted the Central Bank to increase interest rates by 25 basis points, now up to 3.25 per cent, in a bid to curb the outflow of money into foreign currency assets and the increase in bank lending.
Both Bank of Valletta and HSBC Malta announced their central rates would be going up by a quarter of one per cent, whilst BOV’s interest rate on credit cards increased by 0.5 per cent.
APS Bank decided to leave its interest rates on home loans and on facilities to certain economic sectors unchanged, adjusting upwards the rate applicable to all other advances. The Catholic Church’s bank said it will be reconsidering its lending interest rate regime by July 2005, or earlier, if there are further interventions by the Central Bank.
Households will have to face the prospect of higher mortgage payments as well as reconsider their consumption patterns. Economist Karmenu Farrugia imparted a cynical pat on the back to the banking sector:
“Now we have Maltese banks which are already earning millions from the Maltese people with their charges, and they will gain far more in an economy that is becoming worse,” Farrugia said.
Both Central Bank Governor Michael Bonello and former finance minister Lino Spiteri pointed out how increased bank lending and investment in foreign currency assets had forced the Bank to curb the demand for credit.
Spiteri wrote in the press how economic observers “could not but note the persistent encouragement by the banks and other financial institutions to invest in foreign currency assets, and their constantly advertised eagerness to lend to fuel consumption.”
Malta remains heavily dependent on imports and is constantly facing a widening trade gap as its value of exports decreases, not least due to falling international prices and a crisis in competitiveness.
“When we spend more we are actually helping to create jobs abroad. If the interest rate decision helps to slow spending on conspicuous consumption, which had been aided by the availability of relatively cheap credit, this would help the economy and cool down the property market,” Bonello told sister newspaper The Malta Financial and Business Times last Tuesday.
Lino Spiteri rightfully pointed his finger at successive governments for failing to address the imbalance between savings and spending: “The irony is that it has been the government itself which, since 1987, has exalted consumption as its favourite indicator to demonstrate – or so it thought – how well the country was doing.”
But Bonello’s warnings about the “rabid” increase in lending were apparently not heeded by the banks. Lino Spiteri ruefully commented that the Governor was unable to intervene “other than to have a quiet word with the banks and other financial institutions to try out what, in old parlance, was called ‘moral suasion’.”
Economist Karmenu Farrugia says that the choice will undoubtedly affect Maltese businessmen, but the priority for the Central Bank is to safeguard Maltese savings.
“The Central Bank has tried to stem this outflow by taking on savers, and not punish industrialists. But what would be worse? Taking on businessmen or scaring off the Maltese into investing in foreign currencies?”
Farrugia said the uncertainty surrounding Malta’s entry into ERM II, the two-year waiting room for the Maltese lira until it formally joins the eurozone, has led many to throw their money into euros, sterling or dollars.
He remarks that addressing the trade gap between imports and exports could have been a choice between either devaluing the lira or increasing interest rates but he attacks Opposition leader Alfred Sant for bouncing off devaluation in Parliament.
“Sant was wrong to speak of devaluation because it means that is what he would do if he was in government. You don’t speak like that when you are in Opposition. The increase in interest rates is a sacrifice for the Maltese economy, but it is an assurance that there is no intention for devaluation. Devaluation will only solve an immediate problem which will then resurface as a greater problem after three months.”
But that still leaves many industrialists unhappy with the move, especially those in the export sector, who are facing a decrease in the value of their export receipts due to falling international prices and challenges from low-cost labour economies.
Andy Gatesy, chairman of Toly Products, is unequivocal about the need to devalue the lira, although the move is squarely ruled out by the Central Bank. Although Malta’s flirtation with devaluation in 1992 taught a valuable lesson to the Central Bank that devaluation will not work, entrepreneurs like Gatesy are still looking for a badly-needed shot in the arm.
matthew@newsworksltd.com
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