|
Kurt Sansone talks to veteran economist and one of the founders of the Malta Development Corporation KARM FARRUGIA about his suggestion to introduce a new tax on super profits
The profits made by the commercial banks have been hailed by government exponents as a sign of an economy performing well but for veteran economist Karm Farrugia the positive results presented by the banks are nothing more than “super profits” derived from an oligopoly that sees the banks operating in a privileged sector.
Farrugia has no qualms about banks making profits but insists that in a small market where the barriers of entry for increased competition are extremely high, it is only just that super profits are taxed at a higher rate of income tax.
“You can never tell whether the extra profits made by an oligopolist are made through increased efficiency or because of the privileged status. Government can do nothing about the situation but the least it can do is identify those pockets of the economy where competition is restricted because of market size and the nature of the business, and raise the level of income tax on their super profits depending on the state of the oligopoly,” Farrugia says.
Apart from the banking sector, Farrugia also identifies the insurance sector, mobile telephony, port operations and the international airport as economic sectors where competition is not “free and full”.
Farrugia says that in these sectors competition is restricted because the small size of the market posits veritable problems for new competitors to enter given the high capital costs and in some instances the restricted licences issued by the authorities.
“Real competition allows freedom of movement in and out of the sector but in the case of oligopolies new players can’t make it because there are limitations. An oligopoly tax will hurt nobody except the super profits of the institutions in question. It is not a disincentive to investment because it is not a tax that will hit the exporter and there is no social impact on the general public,” Farrugia says.
He explains that the new tax would be set at every budget depending on the state of the particular market. If an oligopoly is no more because new players have entered the market then government can review the tax downwards, Farrugia says.
The economist believes that an oligopoly tax would hurt nobody except the super profits of those companies it applies to. It would be a tax levied on profits generated solely from the domestic market and hence would not have an impact on exporters and foreign direct investment, Farrugia says.
Farrugia laughs off the notion that super profits generated by the banks are the sign of an economy performing well. “How can we say that the banks’ profits are in the interest of the Maltese citizen, because they are not? Nearly two thirds of banking profits by way of dividends go abroad. How well the economy is performing should not be argued in terms of banking profits,” he says.
While huge bank profits go a long way to boost the country’s gross domestic product (GDP), they have no bearing on gross national income (GNI) which is the measurement used to assess personal income. He insists, GDP does not reflect GNI.
Farrugia says it was a mistake to privatise Mid Med Bank to HSBC since most of the profits made by the bank now go abroad to the foreign shareholder. He argues that HSBC should have been enticed to come to Malta and compete with Mid Med Bank, Bank of Valletta and the other commercial banks.
“I agreed with de-nationalisation of Mid Med Bank because nothing in the hands of government works efficiently but I did not agree with its sale to a foreigner. In the banking sector we had been well advanced to know what to do ourselves. We did not need to sell the bank to HSBC. This gave them the chance to exploit our market. The bank could have easily been privatised by taking recourse to the domestic market,” Farrugia says.
And he has no qualms about the part privatisation of Bank of Valletta. He argues that it should not be sold to a foreigner. Government should retain its shareholding, leave the bank to work in a purely commercial way and benefit from the yearly dividend, Farrugia says. But if government’s intent is to sell off its shareholding, Farrugia believes it should be sold to Maltese shareholders.
The banks come in for some more criticism when it comes to the recent interest rate hike by the Central Bank.
The economist believes the Central Bank was correct in raising interest rates since it had to protect its reserves and try to curb creeping inflation. But he objects to the commercial banks’ decision to also raise their interest rates on loan accounts.
“Let the Central Bank increase the central intervention rate but the commercial banks should have said we are making so much oligopolistic profits that we won’t pass this new increase on to the borrower,” Farrugia says.
Read the full interview with Karm Farrugia in next Wednesday’s Business Today.
|
