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The Central Bank of Malta published its Annual Report for 2005 and presented it to the government during the end of March
This publication is awaited in anticipation as it gives all the necessary information on the financial and economic developments experienced in 2005, as well as the bank policies, operations and activities. Moreover, there is also an economic and financial policy calendar for 2005 and last but not least the audited financial statements for the year ended 31 December, 2005.
This week Business Today highlighted two issues when commenting on the financial results. The first was that in 2005, the Central Bank had a registered a reduction in profit of Lm10,796,000 against Lm14,901,001 in 2004. This decrease of Lm4.2million came about mainly from less income from disposal of available for sale of assets but mainly a net loss from foreign exchange activity. In 2004, foreign exchange activity registered a profit of Lm717,000 against a loss of Lm2.3 million loss.
So to comprehend this, one has to refer to the explanatory note which the Bank gives.
To the entry of the Maltese Lira into the exchange Rate Mechanism II colloquially known as ERM II, the Bank entered into foreign exchange transaction for the forward purchase of Euro and simultaneously forward sale of sterling or US dollars for the purpose of hedging against foreign exchange movements. It must be underlined that the basket of currencies determining the Maltese Lira was composed of Euro, sterling and dollar, now it is a 100% pegged to the Euro.
The Bank states clearly that this transaction came at a cost of Lm3 million for premium paid on the interest rate differential to these transactions.
The Bank continues to state that these costs were offset by additional interest earned on holdings in currencies sold forward in accordance with its hedging policy and such additional income is given under the heading Interest and Similar Income of the published Profit and Loss Account. Now this revenue item is less this year than the previous year so overall it still remains that there was a price to pay for joining ERM II
Now in the economic and financial policy calendar for 2005, it is stated that 29 April, 2005 marked the day when the Maltese lira obtained approval to join ERM II, the decision was taken by the Prime Minister on the recommendation of the Central Bank.
This week’s reportage also highlighted a flaw in the Audit Committee’s composition of the Central Bank as it is not totally composed of non-Executive Directors. The Deputy Governor who is a Director, official and bank employee is a member of the Audit Committee. Best practice Corporate Governance suggests that the composition of an audit committee should be solely made up of independent non-executive directors only. The Deputy Governor as the second most high ranking official of the entity is glaringly out of place as a member of the Audit Committee.
This week saw the Euro introduction was on the agenda of the local media. Two issues were raised. One is the early date from when the dual pricing is to be shown for consumers to get accustomed to Euro pricing. SMEs and the business community consider it an extra cost.
Euros will start to be accepted early, the Banks will still charge a commission fee over translation expenses.
One has to see how this debate develops, but the lack of a strong consumer lobby group or voice is conspicuous by its absence.
The other controversy resulted from a question which the Leader of Opposition expects an answer to, on whether there is a directive issued by the EU which penalises those countries who have more money in circulation per capita than an allowable amount. Calculations carried out show that this ‘penalty clause’ will be equivalent to the CBM profits and if this is whipped out, government is left with less dividend income from entities he controls.
The reaction from the Government and CBM was weak. The explanations of the CBM were in highly technical jargon.
The European central bank has come to the rescue of the Malta Central Bank and explained that there is a transitional period for our system to absorb and adjust accordingly.
The consumer and trader looks forward for the adoption of the Euro. However seeing that the monetary authorities incurred a Lm3 million cost on joining ERM 2 makes you wonder if the decisions one still needs to take are truly affordable!
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