policy makers would have to orchestrate this sustainable outcome at a national level through direct incentives or disincentives to the sectors of strategic concern. if the government lacked tools such as tax policy to influence financing behaviour, it would continue to have to rely on direct, though less efficient intervention to influence external financing patterns. this is the positon in which the bahamas still finds itself, and will likely have to focus if we are to further optimise external financing inflows to locally owned businesses over the medium - term. as to stability, the bahamas must still be able to accommodate the volume and speed of capital flows, without losing control of the exchange rate or the solvency of financial institutions. funds that move through capital markets or sit in liquid bank deposits are examples of flows that can relocate swiftly. again, from a regulatory point of view, the risk of bank insolvencies can be suppressed, by requiring that banks do not rely on short - term foreign currency deposits inflows to finance long - term lending. reserve requirements can also be placed on banks to reduce such tendencies and to provide some insurance against sudden outflows. that said, there could also be vulnerability to sudden outflows if, en masse, residents are allowed to shift out very liquid funds they hold in local currency. faced with such developments, the exchange rate could be allowed to depreciate — that is, the price of foreign exchange could be allowed to increase. such an outcome would not be desirable for the bahamas. 6 therefore, we should be striving for an outcome, where other than for diversification residents are indifferent between holding deposits in local or foreign currency. this would be an outcome where portfolio decisions are not materially driven by speculative movements to outrace expected depreciations in the exchange rate. among other factors, given high import reliance, a fluctuating exchange rate would affect prices but little else, as it would not confer any competitive advantages to the economy. instead in tourism, for example, depreciation would be offset by higher local currency costs on imported inputs, and in negotiated wages which would also respond to exchange rate generated increases in the cost of consumed goods. 6 | page speculations about whether the currency would maintain its value would depend on whether it is believed that the government was doing a credible enough job of keeping its finances in order ; whether it is believed that public sector debt dynamics would be kept within a comfortable zone, or whether misali

the euro should enhance the economy ’ s potential to grow faster. the elimination of exchange rate risk and currency conversion costs should result in increased trade, while the lower interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. combined with the fiscal discipline associated with monetary union, this is expected to translate into higher credit ratings and better investment prospects. from a central banker ’ s viewpoint, moreover, a key benefit of euro area membership will be the elimination of the costs inherent in managing a small, vulnerable currency like the maltese lira and their replacement by the greater security and credibility afforded by a strong international currency. euro adoption necessary but not sufficient viewed from this perspective, therefore, the euro is but one element in a continuum of changes necessary to enhance the international competitiveness of the maltese economy. the benefits of the single currency will not suffice, especially in the presence of downside risks to global growth such as higher oil prices, a potentially disorderly unwinding of current account imbalances and the rise of protectionism. although the ongoing preoccupation with the level of the external reserves will cease once we join the euro area, moreover, any imbalance between what we buy and sell abroad will continue to cause the depletion of assets or the accumulation of liabilities, and be reflected in the country ’ s international investment position. any loss of competitiveness, therefore, will still result in slower growth. raising productivity a key challenge in setting out to overcome this challenge, a primary objective should be the correction of existing macroeconomic imbalances. output growth must, therefore, match spending growth more closely, and a key element in bridging that gap is increased productivity. put differently, since we are price takers in the markets that matter, notably those for electronics and tourism, we must have a cost structure that does not discourage investment. domestic inputs, particularly labour, must be competitively priced. and since the cost of labour in malta is relatively high, we must increase the value of output per employee. once again, the only way forward is through productivity growth. in this regard, there is much room for improvement. the level of productivity has remained roughly unchanged since 2001, while it is projected to increase at an annual rate of only 1 % to 2 % in 2007 and 2008. for a country that is highly dependent on exports, this is not good enough when many of our competitors are achieving faster productivity growth. faced with