Governor's FAQS and website warnings

The Governor of the Central Bank seemed untypically facile on Saturday, reacting to those who question the Bank's current silence over the government pushing the euro process while leaving the public in the dark on the analysis taking place. He said in an interview with The Times that he had expressed the Bank's views through speeches and interviews which can be accessed on the Bank's website.

His replies to the unspecified interviewer at times resembled a Frequently-Asked-Questions exercise. As would be expected, the facts were presented well, if too technically to serve as an updated briefing to a wide public. The Governor reiterated well-known details, without really enlightening the public to ensure it is not taken euroing in the dark.

He said that the two Cabinet meetings held recently assessed Malta's state of readiness (as regards a high degree of convergence with the rest of the EU). No one had suggested the Cabinet had met to shoot the wind aimlessly. Point is - what did it conclude?

The Governor was at pains to emphasise that decisions on the exchange rate cannot be taken, or announced, unilaterally by the Bank. Implication of any similar suggestion by commentators who know such onions reasonably well was unwarranted. What this columnist and others variously questioned was timing and parity. In this regard the Bank's head confirmed that the timing of joining the ERM II mechanism could be close to April and that would include setting the central parity at about the current E/Lm level.

That approach to the central parity rate, the Governor revealed, is based on a Bank study on the equilibrium rate. He said the methodologies and results of the study had been shared with local and foreign experts. They "generally" share the Bank's conclusion that there is no "unequivocal indication of a significant misalignment in the exchange rate".

Translated that means that some local or foreign experts disagreed with or were equivocal about the Bank's conclusions. Who were the local experts consulted? Why do not the authorities also share their views and consult with society at large? Whereas the Governor speaks cautiously - as befits his office - he seems to want unequivocal proof that the current exchange rate is not necessarily the right one to set as the central parity in the ERM II. That contrasts with the Bank's satisfaction though not all the experts unequivocally share the Bank's view, but only "generally" do so.

While E/Lm daily rate is allowed to fluctuate in the ERM II mechanism by +/- 15 per cent, the Governor says one should expect it to remain close to the central parity. That indicates he sees it as likely Malta will eventually join the eurozone at around the present E/Lm rate. Has the Bank advised the government, unequivocally, that is the correct rate? The Governor stressed that central parity would not be set by Malta alone. That, too, is known to those who are reasonably familiar with such affairs.

Concern, such as that expressed by this columnist last week, relates to the position which the Maltese authorities will adopt in the search for consensus. The authorities still have to convince that the current E/Lm rate is broadly correct to lead towards adopting the euro, which will be done before the next election, leaving the new government no latitude in the context of the state of the economy it will inherit. That is not necessarily good news for confidence.

The Governor attempted to explain away this columnist's observation that the Central Bank has lost substantial reserves in the year to January. He offered scant comfort by saying that, whereas the Bank lost Lm82 million in foreign assets, the commercial banks gained Lm66 million.

The latter's gain is theirs alone to deploy and profit from. It does not compensate for the decline in external reserves. Considering growing downward pressure on export prices and total value - which can lead to volumes dropping as well - the Bank's head seemed too sanguine in saying that (despite shrinking by Lm82 million for various reasons) "the Bank's reserves remained at a comfortable level of Lm856 million at the end of January".

Such bullishness is not consonant with the warnings repeated by the Governor on various aspects and attitudes of Malta's economy and society. They too were given in speeches which can be accessed on the Bank's website by anyone who might have forgotten them. Context is relevant at all times.