Central Bank of Malta THIRTY-EIGHTH ANNUAL REPORT AND STATEMENT OF ACCOUNTS 2005 © Central Bank of Malta, 2006 Address Pjazza Kastilja Valletta CMR 01 Malta Telephone (+356) 2550 0000 Fax (+356) 2550 2500 Website http://www.centralbankmalta.com E-mail [email protected] Printed by Print It Printing Services Corradino, Malta All rights reserved. Reproduction is permitted provided that the source is acknowledged. The cut-off date for information published in this Report is 28 February 2006, except where otherwise indicated. The source for data in Tables and Charts is the Central Bank of Malta, unless otherwise indicated. ISSN 0577-0653 (print) ISSN 1811-1262 (online) Our Mission To maintain price stability and to ensure a sound financial system, thereby contributing to sustainable economic development. We seek to achieve this mission by: • Pursuing appropriate interest and exchange rate policies • Maintaining the value of the external reserves • Safeguarding the integrity of the financial sector • Promoting and supporting the development of financial markets and efficient payment and settlement systems • Issuing notes and coins to meet the demands of the public • Conducting economic analyses and publishing economic and financial statistics • Advising the Government on economic and financial matters To achieve the above objectives, the Bank is committed to providing effective support functions through a sound financial control system and appropriate information systems, and through the development of competent and qualified staff. BOARD OF DIRECTORS* Michael C. Bonello Governor David A. Pullicino Deputy Governor Joseph V. Gatt Director Philomena Meli Director Charles J. Falzon Director Executive Management Committee* Monetary Policy Advisory Council* Investments Policy Committee* Michael C. Bonello Michael C. Bonello Michael C. Bonello Governor & Chairman Governor & Chairman Governor & Chairman David A. Pullicino David A. Pullicino David A. Pullicino Deputy Governor Deputy Governor Deputy Governor Alfred Demarco Joseph V. Gatt Godfrey Huber Director Director Director Economics and External Relations Finance and Banking Division Division Philomena Meli Director René G. Saliba Godfrey Huber Director Director Charles J. Falzon Financial Markets Division Finance and Banking Division Director Raymond Filletti René G. Saliba Alfred Demarco Senior Manager Director Director Financial Control Department Financial Markets Division Economics and External Relations Division Saviour Briffa Herbert Zammit LaFerla Senior Manager Director René G. Saliba Reserve Management Department Financial Stability Division Director Financial Markets Division Stephen Attard John Agius Manager Director Herbert Zammit LaFerla Middle Office Resource Management Division Director Financial Stability Division Mario Bugeja Manager Audit Committee* Investments and Reserves Office Joseph V. Gatt Chairman David A. Pullicino Member Charles J. Falzon Member *As at 30 March 2006 THE BOARD OF DIRECTORS (Left to right) Standing: Philomena Meli (Director), Joseph V. Gatt (Director), Charles J. Falzon (Director), Seated: David A. Pullicino (Deputy Governor), Michael C. Bonello (Governor & Chairman), Bernadette Muscat (Secretary) Philomena Meli was appointed as Director Joseph V. Gatt was appointed as Director of Charles J. Falzon was appointed as Director of the Central Bank of Malta for a period of the Central Bank of Malta for a period of five of the Central Bank of Malta for a period of five years with effect from 21 January 2003. years with effect from 1 January 2003. He is five years with effect from 7 February 2004. She is an economist and is presently an an economist and a retired banker. He is an economist and management adviser on trade policy matters in the consultant and is currently a Senior Lecturer Economic Policy Division at the Ministry in the Faculty of Economics, Management of Finance. and Accountancy at the University of Malta. Organisation Chart* Governor Michael C. Bonello Economic Analysis Office Research Office Economic Research Department Director Statistics Office Deputy Governor Economics & External David A. Pullicino Relations Division External Transactions Data Alfred Demarco Office Library & External Library Relations Department External Relations Office Retail Banking Office Banking & Issues Director Department Payment Systems Office Finance & Banking Division Currency Issue Office Godfrey Huber Financial Control Department Finance Office Monetary Operations Office Domestic Markets Money & Capital Markets Department Office Director Financial Markets Government Debt Analysis Division Office René G. Saliba Investments & Reserves Office Reserve Management FX Market Analysis Office Department Middle Office Financial Stability Director Financial Stability Office Department Financial Stability Division Herbert Zammit LaFerla Internal Audit & Risk Assessment Office Risk Assessment Department Internal Audit Office Human Resources Office Resources Department Administration Office Director Security Resource Management Division IT Services Office Legal Office John Agius Information Systems Software Development Office Department Records Management Services Office *As at 30 March 2006 LETTER OF TRANSMITTAL CENTRAL BANK OF MALTA VALLETTA 30th March 2006 Dear Prime Minister, In accordance with Article 23(1) of the Central Bank of Malta Act (Cap. 204), I have the honour to transmit a copy of the annual accounts of the Bank, certified by the auditors, for the financial year ended 31st December 2005, a statement of the Bank’s investments and a report on the Bank’s operations during that year. Yours sincerely, Michael C. Bonello Governor Central Bank of Malta, Annual Report 2005 Contents GOVERNOR'S STATEMENT 11 I FINANCIAL AND ECONOMIC DEVELOPMENTS 17 1 The International Environment 18 The world economy Interest rates Exchange rates Commodities 2Monetary and Financial Developments 22 The monetary base Monetary aggregates Counterparts of monetary growth The money market The capital market 3 Output, Prices and Employment 29 Gross domestic product Domestic demand External demand Nominal sectoral developments Manufacturing Prices & wages Short-term outlook 4The Balance of Payments and the Maltese Lira 43 The balance of payments The current account The capital and financial account The Maltese lira and indicators of external competitiveness 5Government Finance 48 General government Consolidated Fund performance in 2005 Government debt and financing operations 6Financial Stability Analysis 52 Regulatory and structural developments Financial sector The non-financial sector Market infrastructure Risk outlook Central Bank of Malta, Annual Report 2005 II BANK POLICIES, OPERATIONS AND ACTIVITIES 57 1 The Conduct of Monetary Policy 58 External reserves management Open market operations Standing facilities Reserve requirements Money and capital markets Box 1: Preparing for the Euro Changeover 2 Financial Stability 63 3 Banking and Currency Operations 64 Banker to the public sector Banker to the banking system Payment and securities settlement systems Currency operations Commemorative coins Anti-counterfeit measures 4 Internal Management 68 Administration Economic analysis and research Statistics Administration of External Transactions Act Legal issues Human resources Premises Information technology Internal audit Risk assessment Information and public relations Library Cultural and educational activities 5 Relations with International Institutions 75 European System of Central Banks European Commission International Monetary Fund World Bank Group European Bank for Reconstruction and Development Other ECONOMIC & FINANCIAL POLICY CALENDAR 2005 78 III FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 A-1 Directors' report Statement of Directors' responsibilities in respect of the financial statements Report of the auditors Profit and loss account Balance sheet Statement of changes in equity Cash flow statement Notes to the financial statements ABBREVIATIONS BIS Bank for International Settlements COICOP Classification of Individual Consumption by Purpose EBRD European Bank for Reconstruction and Development ECB European Central Bank ecu european currency unit EMU Economic and Monetary Union ERM II exchange rate mechanism II ESA 95 European System of Accounts 1995 ESCB European System of Central Banks ETC Employment and Training Corporation EU European Union FI fungibility issue GDP gross domestic product HICP Harmonised Index of Consumer Prices IBRD International Bank for Reconstruction and Development IMF International Monetary Fund MIGA Multilateral Investment Guarantee Agency MFI Monetary Financial Institution MFSA Malta Financial Services Authority MSE Malta Stock Exchange NACE Rev. 1 Statistical classification of economic activities in the European Community NECC National Euro Changeover Committee NPISH Non-Profit Institutions Serving Households NSO National Statistics Office OECD Organisation for Economic Co-Operation and Development OMFI Other Monetary Financial Institution OPEC Organisation of Petroleum Exporting Countries RPI Retail Prices Index UNDP United Nations Development Programme WTO World Trade Organisation Central Bank of Malta, Annual Report 2005 Governor’s Statement The past year witnessed an important milestone in Malta’s monetary history with the entry of the Maltese lira into the EU’s Exchange Rate Mechanism (ERM II) on 2 May. Preceded by measures to liberalize the economy and to harmonise financial standards and practices with those