When the going gets tough, don't make it tougher

These are tough times, and worse are coming. In our case, the toughness lies on two fronts - the impact on the world real economy of the global financial crisis, and the impact on the local cost of living and economic activity of revised utility tariffs. Many of the aspects of these gargantuan problems are outside our control. What lies within our range is the careful capacity not to make very bad times and their effects, worse.

The financial crisis is not hitting Malta's banking sector. Our banks do not have a liquidity problem. Their ability to lend rests on their broad domestic deposit base, and some relatively small bond borrowing. Their loans and advances portfolio is practically totally local. There is no reason why our banks should be swamped by the global credit crunch. The value of assets they have in foreign equities and bonds will decline, no one is immune to that. So profits will be hit. But the profits accumulated over the years can serve as a dividend buffer, though banks should be conservative if they declare dividends.

Our MPs on both sides have acted responsibly in making this clear. Where they need to be extremely careful is in going unnecessarily further. They should avoid hypotheses and suppositions. The monetary authorities have followed the rest of the EU in extending the legal deposit guarantee up to €100,000 per depositor. In our case that was not at all a measure of the last resort. It was not even required, given the strong deposit base referred to. Yet it was right to do it for psychological reason.

That done, there is no need for talk of whether the government would nationalise the banks if required. It should not be required, not unless any run develops due to misconceptions and careless talk.

On an individual level, yes, of course, private investors who hold foreign assets now see the value of their investments drop. No investor's government can make good for risk inherent in investments. The Finance Minister was right to state so. He was wrong to go on to implicitly try to predict what asset prices will do. He said that the price of shares in HBOS, a UK financial institution which had dropped sharply, rose by 50 per cent when bail-out measures were announced. He did not say that, at exactly the same, the price of shares in the Royal Bank of Scotland, which had also recovered handsomely, lost their gain within a few hours. On subsequent trading days, there was further volatility.

Volatility is the name of this game. Don't talk of recovery where none can be guaranteed, not even in normal times, let alone when panic prowls. Given time the world will ride out this terrible financial storm, as it did in late 1920s and early 1930s. Meanwhile, there will be a harsh spillover of the hurt onto the real economy, which will contract. Let us realise that our exports of manufacturing and tourism will be hit and stick to trying to work out how to mitigate that.

Even as that is being digested, the government has unleashed plans to introduce a system of tariffs based on adjusted full recovery costs of water and energy supplies. That was inevitable and in fact the government should have followed that adjusted track, rather than introducing the surcharge in 2005.

Some of us had said so at the time. Now here we are, in the midst of a dangerous upheaval, fuelling it further by the government trying to make up for lost time. Lost time also means that tariffs were not properly adjusted when the government invested heavily in a new power station and reverse osmosis plants. It also means not doing much to drastically reduce Enemalta's production inefficiencies, due in part to the aged Marsa power station.

Now, following an accounting exercise, the government is trying to start remedying that. Proposed new charges, still subject to discussion, were worked out on a presumed return on capital employed. Though the capital equipment is probably largely, if not fully depreciated, that makes accounting sense since expensive replacement capital is required. But it does not make social and economic sense to shock the economy and civil society, certainly not to the implied extent.

New capital required to upgrade and broaden our energy supplies, such as through a high-voltage current connection to the euro grid via Sicily, should initially be seen as part of the public infrastructure, financed with the help of the EU and through bond issues. That will raise the public debt, certainly, but to an acceptable purpose. After such financing, the government will still have to charge Enemalta to acquire a return on capital invested. And a more efficient Enemalta will still have to pass that on to the consumer. That should be introduced gradually, not as a massive shock to consumers and employers alike, even if at the cost of some impact on the budget deficit, since higher taxation would be unwise in the current circumstances.

As for the cost of oil derivatives inherent in utilities, we need to pay for what we consume, as we do for fuel and food.

There is no economic choice to that. Social measures should shield the truly weakest in our society, and different measures to cushion the cost to employers somewhat might be politically worked out. Nevertheless the endgame is adjusted full recovery, or eventual higher taxation. It will hurt, but it will not triple hotels' operating costs, as hotelier representatives claimed.

There is a detailed discussion to make, situations to face and inevitable measures to take. We can make all that worse only to our peril.