The Central Bank is advocating three main measures for banks to strengthen financial stability, Governor Josef Bonnici told the House Public Accounts Committee.

Committee chairman Charles Mangion (PL) welcomed Prof. Bonnici on his first presentation to the committee, on Malta’s monetary policy, since his appointment as governor.

Prof. Bonnici said the three measures were further diversification to reduce concentration risk in collateral and lending; greater emphasis on reducing maturity mismatch, resulting from a significant proportion of deposits with a short maturity; and higher provisions for non-performing loans, especially related to the construction sector.

At the start of his presentation he said recent and current international financial events made a long-term forecast for 2011-12 difficult. Inflation had generally increased in 2011, but it was expected to flatten out in 2012.

In spite of the well-known dips in 2009, figures for the first half of 2011 showed that percentage-wise, productivity and compensation to employees had risen at the same rate as those in the rest of the EU. Since accession in 2004 unit labour costs had also risen at about the same rates as the EU throughout the whole economy, without much distinction between the public and private sectors.

Dr Mangion immediately pointed out that what Prof.Bonnici was saying ran counter to the message that productivity was falling while labour costs kept rising.

Prof. Bonnici said Malta’s fiscal debt was approaching 70 per cent of GDP. The immediate target should be to aim for 60 per cent, even though the figure in the EU area was 85 per cent.

Dr Mangion asked why the government should undertake to guarantee the debts of a corporation like Enemalta, which had a revenue stream of its own. Prof. Bonnici replied that in such cases a company or corporation would be borrowing on the international markets with the backing of the government’s credit rating.