31 May 2006

The Web
Business Today

Stifling the economy

There may be different ways of interpreting the Central Bank’s decision to raise interest rates last week but on the balance this leader believes that the decision was mistaken since it will only add to the woes of the business sector and householders.
It may help to stop capital outflows from the country but there is little to suggest that higher interest rates will curb inflation. People will not consume less and save more as a result of the Central Bank’s decision; they will only feel a harder squeeze on their already stretched pockets. It is not as if we have a vibrant economy running the risk of overheating.
Inflation is not being caused by higher consumption because people are earning more and are in an upbeat mood. Most of the inflation is imported through the higher prices we have to pay for our fuel and energy needs, apart from government-induced inflation in the form of a higher tax burden that has been eating away at purchasing power for the past three years.
To marginally curb inflation government could have possibly taken a more pro-active approach by identifying a number of core consumer goods and reaching a two-year agreement with large supermarkets and importers on set prices, similar to what the Berlusconi government in Italy tried to achieve. On the other hand, the medicines issue needs to be tackled urgently and in a way that embraces importers rather than puts them on a warpath.
But only addressing inflation will not work miracles. Competitiveness is the key issue at stake.
Raising interest rates by 0.25 basis points, the second similar hike in just over a year will simply increase expenses for businesses and households alike.
It will add to the cash-flow crisis many small and medium enterprises are grappling with and could possibly instigate a more cautionary approach towards accessing loan finance for investment purposes.
Even government will not be spared the stick. Public expenditure is also expected to increase as a result with government having to fork out more money to pay interest on its debt.
In this scenario the words of Prof. Edward Scicluna last week during the BOV Business Today breakfast seminar ring loud and clear. Unless economic growth is higher than the interest rate government is paying on its loans, public debt will simply continue to spiral up even in a hypothetical scenario where the country has a zero deficit.
Another interest rate hike has only made matters worse.
This country needs real and sustained economic growth that exceeds three per cent. The leader of the opposition is right in harping about the need to have constant growth rates of between three and four per cent. The difficulty is how to achieve those figures. And neither Sant nor Gonzi seem to have the answer.
The political class shies away from addressing the issue of competitiveness because it means hacking away at bureaucracy in the public service, rationalisation of the different authorities, conducting reforms in key sectors of the economy, which inevitably will fluster different interest groups.
Once upon a time the MCESD had commissioned a report on competitiveness. It was exhaustive and could have possibly provided the basis for a three-year packet of measures to kick start the economy and a longer-term framework for a flexible economic model.
That document is gathering dust, somewhere at the MCESD’s Floriana office. Other documents pertaining to different social partners abound. Unfortunately they remain useless tools never to be implemented.
Industry needs to regain competitiveness to be able to go for higher value exports, which are our only lifeline to a higher standard of living.
A three-year wage policy prior to joining the Euro would have helped in no small way to enable businesses regain their competitive edge. It could have been the spurt required to start achieving higher growth rates which would then enable government to reduce the tax burden on businesses and households alike.
Another crucial aspect in the whole equation is government’s expenditure. Unless this is controlled and trimmed, even a 2.5 per cent GDP growth would not be enough to get us out of the rut.
The interest rate hike, even if motivated by reasons which may seem to be correct, has only compounded an already tricky situation. However, it may also serve as a warning that unless a concerted effort is done to shake the system to the core, this country risks experiencing a very long-drawn sluggish performance that can only get complicated if we join the Euro at the wrong exchange rate.

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Editor: Kurt Sansone
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