03 November 2004

Search all issues

powered by FreeFind


Send Your Feedback!





Former finance minister favours currency depreciation

By Kurt Sansone

As the government ponders its options on when best to join the exchange rate mechanism (ERM II) prior to adopting the single currency, in the opinion of one economist the Central bank should consider a gradual depreciation of the Lira irrespective of the decision when to adopt the Euro.
Speaking to The Malta Financial and Business Times, Former Finance Minister Lino Spiteri said he was against devaluation because its impact would be neutralised by the wage rise government would have to give because of the movement in the retail price index. “For devaluation to work there has to be willingness on the part of people in production who are paid wages, the labouring classes, to accept the effects of devaluation. But people expect an upward adjustment in their wages and we have a law still in force that adjusts wages according to the retail price index that will neutralise the impact of any devaluation. If there is gradual depreciation it still will have an impact on the retail price index but it would come in small punches rather than one big impact,” Spiteri told this newspaper.

“It is clear that the monetary authorities don’t have devaluation in mind. The question is whether they have depreciation in mind. Are they considering administered depreciation, whereby the Lira is gradually adjusted downwards? There are no signs they (the Central Bank) are considering this. Should they consider it? I think they should,” Spiteri remarked
The economist also cautioned against rushing to adopt the single currency. “We should not adopt the euro speedily. We should take our time. Secondly, we are not in a position to do it. Not being part of the euro allows us some flexibility regarding exchange rate adjustment. As for the convergence criteria they are still too tough for us to meet and it’s going to take us years to converge as required.”
Spiteri also played down the argument that Malta will lose out to eastern European countries in terms of competitiveness if it does not adopt the euro at the earliest stage possible.
“I don’t think the new entrants who become part of the Eurozone will gain any competitive advantage relative to us. If the euro is adopted as our currency it would facilitate the life of or importers and exporters, not so much as to exchange rate fluctuations but in terms of transaction costs. But in terms of competitiveness it is not the euro, which is a determinant factor. Once we join the Eurozone our competitiveness is locked in and will be moving along with that of the whole block. At the moment the euro accounts for 70 per cent of the currency basket but we still have some degree of flexibility. By adopting the euro flexibility will be lost. The gain would be that we will become part of a more stable currency zone. But I do not think the euro will have any impact on competitiveness,” Spiteri said.
Government is expected to decide on when to join ERM II – the compulsory two year period prior to adopting the Euro, during which the Lira would be pegged to the single currency – by year’s end and could possibly announce measures to this affect in the forthcoming budget.

[email protected]



Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
Tel: (356) 21382741-3, 21382745-6 | Fax: (356) 21385075 | E-mail