What on earth am I doing here?
My host, sitting on my right, is so absorbed in conversation with his colleague across the dining table that he seems to be totally oblivious of my presence, let alone my grumble. Suddenly this is transformed into curiosity as I hear his entreaty “ our lobby is simply losing ground in its confrontation with economists. There is not much time left to win the government over.”
In between puffs of havana and sips of cognac, the other replies, “ aren’t you ever satisfied? Between the two of us, we control nigh 90% of the domestic market. For 8 years we have been allowed total freedom to exploit both our saving and our business clients by borrowing cheap, lending high and, even better, introducing new charges unheard-of before. At times, ridiculous and only possible because of our hold over the business community, like the annual ad valorem facilities renewal fee. The public accepts supinely everything we impose: we might even consider an entry fee for merely visiting our branches. They have nobody to defend them in such a strategic sector of the economy where competition hardly functions. By ensuring an impeccable conduct in our daily operations, we have managed to blind even our regulator from investigating our charges and their consequential atrocious profits ramping up by over 25% consistently year after year. Indeed, the regulator even inspired the Prime Minister, some two years ago, to publicly declare that our profits were the best proof of the economy’s overall prosperous performance.”
“ True, true. Not to forget the bonanza of the repatriated millions seeking new exciting investment outlets which we readily provided in the form of innovative financial services packages to the Maltese market which can be passported more widely. At quite a profit, of course, which enabled us to donate bits here and there to charity, the arts and so on. Our problem is that shareholders have come now to expect suchlike hefty profit ramps and dividends to continue at the same rhytm ‘ad infinitum’. In fact they have already factored them in when trading in our shares. Worse in mine than in yours, judging by the yawning P/E ratio gap.”
I forgot to mention that these two gentlemen are bankers assembled, together with several others from the financial services sector and academia, to discuss how best to pressure the government into negotiating a lower conversion rate for our lira at the point of entry into the eurozone.
The sumptuous dinner, during which I am expected to express a solidarity view that the fixed rate of 1 euro = Lm 0.4293 is too high for our economy to perform competitively after entry, is now followed by a general discussion as to what level the rate ought to be pushed down.
“ Let’s round it down to 1 euro = Lm 0.50” someone yells from the far end of the gathering, clearly in tipple, “ so easy for everybody to convert. Simply multiplying by two. No cheating by businessmen becomes possible.” A young economist sitting near him quickly took out his calculator and whispered “ that will be the equivalent of a 14.1% devaluation”.
“The government will never accept that! Preposterous. Reduce it to 1 euro = Lm 0.45 and let’s see”. The economist’s face suddenly brightened up, “4.6%. That should be acceptable to the government, but not to the Opposition”.
“ Not enough” a chorus cries. A man, hitherto in complete silence even during the dinner, stands up. Obviously, he carries some authority in banking circles, “ Just let me remind you that a lot of jam will soon be scraped off our breakfast toast when our currency changes to the euro. We have been banking ( laughter at the pun ) on the third tier of the pensions reform scheme for our salvation. But, as is always the case, government reforms take far too long to carry out. Besides, we might well have a change in administration early next year and a further delay is almost a certainty. Equally distressing is the interest the fringe banks are showing in the domestic market which will surely intensify the competition. Good-bye, then, to our past profits to which we have all been accustomed. The only thing left for us is a devaluation on eurozone entry, since this will enhance our balance sheets by reducing heavily the euro equivalent of our debts to depositors whilst maintaining intact the values of our reserves, all now in foreign currencies. A windfall profit such as this is hardly expected to be repeated when in euroland. Thank heavens for official reluctance to windfall taxes, which even British premier Margaret Thatcher imposed. We are also lucky to have an Opposition whose leadership intermittently betrays a receptive mood to a devaluation considered as a booster to economic expansion and tourism revival. So let us agree on the oft-bandied 10%”.
“1 euro= Lm 0.4769” mutters the young economist.
“Another complicated fraction” again yells the now-tipsy first proposer. There seems, however, to be a consensus among the gathering at a 10% devaluation. The representative of the Banking Assocation breathes a sigh of relief as he rises to leave.
Suddenly, my host appears to have heard my introductory plea “ what on earth am I doing here ? ” He takes the floor, turns round to me and asks “ what do you think?”
Not quite sure what sort of a reply he expects from me, but I have a feeling that he is going to experience a shock. “ Two years ago the exchange rate was fixed at 1 euro= Lm 0.4293 . The authorities were free to bring it down by up to 15% if that served the economy better. But they did not. During this period the economy has even managed to move , after nigh 3 years, to a real growth path. Which is good. But not good enough, in that the increased generated wealth has not been equitably distributed throughout the social strata in the country. You must all have read last week about the EU’s survey lamenting that our national minimum wage has not even kept pace with inflation, let alone improve in real terms, despite the overall real growth. Admittedly there exist one or two economists who genuinely believe that our lira is overvalued and could be hampering further growth. To my way of thinking, they fail to evaluate correctly the medium-to-long term inflationary consequences of our currency devaluation. Unwittingly and inadvertently, they are recreating an uncertainty which was supposed to have disappeared last year when I myself broached it to the NECC chairman during a Today seminar. He emphatically stated that he could then visualise no uncertainty since the government was committed to the chosen exchange rate which, as the economy showed, must have been the correct one. ”
“Indeed, I would go as far as to knock off 0.0093 from 0.4293 and negotiate an entry rate of € 1 = Lm 0.42, this being the equivalent of a 2.2% revaluation, enough to mitigate the inevitable € conversion rounding up hikes, plus a little bonus to those who have steadfastly and loyally followed the government’s advice to refrain from early € conversion”.
The ensuing boos must have woken me up. Funny, these dreams.