michael c bonello : the maltese lira interview with mr michael c bonello, governor of the central bank of malta, by the malta business weekly, 9 december 2004. * * * i must first of all point out that decisions regarding the external value of the maltese lira can only be taken by the minister of finance on the recommendation of the central bank of malta and with the consent of the prime minister. decisions on such a complex, technical issue can have far - reaching economic and social implications and are understandably not taken lightly. they must, for that same reason, be made on the basis of facts not supposition. having said that, i must make it equally clear that at this point in time the bank cannot responsibly make a recommendation in this sense for the simple reason that it has no conclusive evidence that such a change is warranted, still less that it would deliver the expected benefits. nor is the bank aware that anybody else has made a credible case for changing the value of the currency. the conclusions of the bank ’ s study on the equilibrium exchange rate have been shared with several local and foreign experts, including the imf mission that was in malta last may. subject to the caveat that the equilibrium exchange rate of a currency cannot be estimated very precisely, there is common agreement that the exchange rate of the maltese lira does not appear to be significantly misaligned and that the reasons for the economy ’ s slow growth lie elsewhere and should be addressed directly. indeed, i cannot detect an economic rationale for the sudden attention being given to the exchange rate. the exporting community, the sector most directly concerned, has not to my knowledge made a formal proposal through the foi. it is also significant that a change in the exchange rate did not feature among the 55 mcesd recommendations for the restoration of competitiveness. devaluation to improve competitiveness does not work. unless it is accompanied by a cut in real wages, it serves only to raise inflation. this is borne out by the experience of several countries, including malta ’ s after 1992. as for the concept of a “ gradual depreciation ”, which has not been clearly defined, the nearest instrument known to economic theory is a crawling peg. since this involves a change in the exchange rate regime, it requires an announcement that the currency will be depreciated at given intervals dictated by movements in some anchor, such as the retail price index. this method creates uncertainty and

seen to what extent they will manage to break free from this pattern in the current good times ; some need to fight high inflation, pressures on their currencies or to correct their external imbalances. nevertheless, the common denominator of all our economies is having to deal with institutional weaknesses and the need to undertake reforms that should make them stronger. a common challenge our emerging economies are facing is the need to speed up convergence towards the development level of mature economies. in order to achieve this, the responsible policymaker should be concerned with steady progress and not with delivering bouts of accelerated growth, which may turn out to be reversible. this brings us to the need to address bottlenecks to potential growth – even though in central and eastern europe, for instance, growth is now much stronger than in the euro area, most countries have still work to do in order to ensure that potential growth matches the catching - up needs. at least in the non - euro eu members in eastern europe, bottlenecks to sustainable growth usually stem from structural impediments to labour supply ( high emigration, low participation rate, decline in working age population, skill mismatch ), inefficiencies in public administration, quality of institutions, in general, and in some cases, inadequate infrastructure. 1 / 3 bis central bankers'speeches while inflation has reemerged in central, eastern and south - eastern european countries, in most cases it remains tepid ( broadly, around 2 percent ). nevertheless, it has spiked in such cases as romania and turkey, where it currently stands at 5 percent and 11 percent respectively. part of this reemergence is related to the global cycle, as it comes from international commodity prices, with idiosyncratic supply - side factors and domestic demand pressures accounting for the rest of the explanation. these latter two sources are particularly relevant in romania, where changes in indirect taxation and regulated utility prices have played a significant role in the recent inflationary spell, adding to the underlying inflationary pressures stemming from the opening of the positive output gap ( to which contributed a persistently expansionary fiscal policy ), increases in wage costs, and, last but not least, an upward adjustment in inflation expectations. as a matter of fact, significant acceleration in wage growth is a common feature of the non - euro eu member group. nevertheless, in most cases this has not led to a deterioration in the current account positions, which remained in surplus. unfortunately, romania appears