Our economy, scarred

Electoral campaign and pledges aside, Malta’s economy is still in post-pandemic recovery mode. A few weeks ago, new tax refunds were announced, and benefits such as the COLA are being dished out by government. But other challenges are ahead, such as rising energy prices. We spoke to economists Frans Camilleri and Stephanie Fabri for their take. 

How would the recently announced tax refunds help in the post-pandemic recovery process? How do you envisage the Maltese economy post-COVID, and which new niche markets should Malta should tap into?

This could be seen as a continuation of other short-term measures. Short-term because such measures boost the economy but only for a limited period of time. It is essential to always balance public spending through measures that not only boost the current economy, but also the economy of the future. 

What else is currently helping — and what else would help — Malta’s post-pandemic recovery process?

COVID-19 left various scars on the economy, both at a global and national level. With supply-chain shortages, increasing interest and inflation, society, governments, and the business community are still battling against uncertainties. 

Government has implemented a number of short- and long-term measures:

The short-term:  here Government through various measures assisted firms with their liquidity issues, and to retain employment. These are of course positive measures, still, the challenges mentioned above need to be addressed. The economy is based on perception and the business community needs further guidance and further reassurance that Government intends to continue addressing the present financial and economic challenges. 

The long-term: in line with the EU we have to continue excelling in areas such as green investment, enhancing governance quality, and investments in innovation and digitalization. To this end, further clarification is needed with regards to how are we going to get there. This reshaping of our economic ecosystem involves considerable long-term investment that needs commitment from all decision-makers. 

We have to continue excelling in areas such as green investment, enhancing governance quality, and investments in innovation and digitalisation.

In line with this, for the long-term a clear direction of where we want to take the economy of Gozo is important. Together with this, while investment in the infrastructure of education is welcome, it is important that we continue strengthening the human resource in general and address pertinent issues such as those related to early-school leaving and upskilling of the workforce. In line with this, we need to find additional ways to boost R&D in our country if we want to be seen as a knowledge-based advanced economy. 

Having said this, it is important to note that it is not only businesses that are experiencing financial difficulties and increasing uncertainties. Government is also facing such a turbulent time, the fiscal situation is expected to deteriorate for a while, which puts Government in a more difficult position when it comes to designing and implementing measures.

Other countries, like Italy and the UK, are now feeling the brunt of the pandemic. Across the globe, energy prices have increased drastically and rapidly. How and why did the Maltese government achieve this stability in prices?

Inflation occurs when prices increase as a result of higher spending. Higher demand does not lead to higher production and therefore prices go up. This diminishes the purchasing power of consumers. The current inflation that we are experiencing is a result of higher energy prices primarily, and higher food prices amongst other price increases. There are also serious issues with the supply chain due to port congestions, limited human capital in the transport services, shortages in raw materials and factory closures. These are all issues that are clogging the economic ecosystem. 

In order to address inflationary issues, monetary policy would be of assistance through rising interest rates which in turn limit spending in the economy. This however depends on the European Central Bank and not on the Maltese Government. The Maltese government can continue using fiscal policy tools to for example address the pressures that are coming from energy prices, assisting society and business, especially the vulnerable with their energy bills. Another method could be price controls but these could lead to recession and unemployment. 

Overall, there is no magic wand to control inflation. It is not an easy issue to address. One has to study the day-to-day movements of the international economy and act accordingly.

People argue that the current COLA is not helping much with alleviating the increase in prices of everyday goods. Including the recently announced tax refund, the current COLA and other benefits, how much money did the Maltese government leave in people’s pockets?

COLA of this year is based on past increases, Therefore the COLA received this year does not address the excessive inflation we are experiencing now. COLA has to be seen in line with other social measures that are in place. In order to enhance the quality of life in society at large, COLA is definitely not the solution. The solution, unfortunately, involves measures that are mainly effective in the medium to long term, focusing on heavy investment in education.

How would the recently announced tax refunds help in the post-pandemic recovery process?

As you know, the final household consumption expenditure in 2020 took a huge nosedive because of COVID. One has to remember that, during the height of the pandemic, Maltese households went into a saving mode as they postponed most unessential consumption. The banks became awash with huge deposits of several million euros which they couldn’t lend and on which they had to pay negative interest to the Central Bank.

Since it is domestic demand which drives the economy, the Government’s priority for the post-COVID phase was to restore consumption to its previous levels. In the first nine months of 2021, we witnessed some recovery in household consumption, which accounted for 41.6% of GDP.  But this was still not enough to take it back to the 2020 level of 42.6%, let alone to that of 43.9% in 2019.

Now that the pandemic has receded and we are back to a full-employment economy, stimulating further consumption expenditure makes sense, especially if it stimulates domestic demand. So, the tax refunds will surely help stimulate consumer expenditure. Since they are not a regular payment, their effect will be that of a windfall gain which, from experience both in Malta and abroad, consumers will tend to spend.

 What else is currently helping — and what else would help — Malta’s post-pandemic recovery process?

One fact that is helping the recovery process is, ironically, Malta’s concentration on services. This worked against us at the beginning of the pandemic as tourism collapsed. But now that most countries have relaxed or removed their restrictions entirely, tourism should start recovering quite quickly. Moreover, many service industries such as financial services and gaming, either retained their economic pace or even benefited from the pandemic. Now, one can expect them to resume their growth path.

The tax refunds will surely help stimulate consumer expenditure.

Of course, Malta’s economic growth is interlinked closely with that of its trading partners in the EU. This means that, if other EU economies grow, Malta would stand to gain. I say “if” because the recovery might stutter due to the recent crop of challenges, such as supply chain problems, the disappearance of thousands of workers, and now rising prices.

What gives us an advantage is that we don’t have an unemployment problem, participation in the labour force remains strong, our inflation rate is at a significantly lower level than that in the EU, and we still have one of the lowest debt-to-GDP ratios in the EU in spite of the high government COVID-related expenditure. We should build on these strengths.

Other countries, like Italy and the UK, are now feeling the brunt of the pandemic. Across the globe, energy prices have increased drastically and rapidly? How and why did the Maltese government achieve this stability in prices?

 The Government’s energy policy has been highly successful in containing the rise in energy prices, and not just during the pandemic. Whatever the Opposition says, this is a fact. If one looks at what happened before the pandemic, one already sees that the reduction in electricity prices soon after the election of the PL in 2013 had a positive effect. 

Between 2013-2017, energy prices in electricity prices in Malta declined at a rate of 5.26% per annum, but those in the EU fell by a mere 0.34% – that’s a 4.9p.p. gap in favour of Malta. And the new gas-powered station helped us preserve much of that gap. While electricity prices between 2017-2021 rose at a rate of 3.2% per annum in the EU, in Malta there was a decline of 0.05% per annum – that’s a 3.2p.p. gap in favour of Malta.

So, it’s not just that we have had the stable prices that business was pleading for before 2013, but we actually pushed down prices.

People argue that the current COLA is not helping much with alleviating the increase in prices of everyday goods. Including the recently announced tax refund, the current COLA and other benefits, how much money did the Maltese government leave in people’s pockets?

It is not that the current COLA is a problem.  It has always been like that.  This is because it is a well-known fact that the COLA mechanism often diverges from the real rate of inflation due to the fact that the expenditure patterns of household change over time but are only captured by the mechanism with a lag when the weightings of different types of expenditure are revised, and this can only happen when there has been a new household budgetary survey.

In fact, whereas various PN governments used to award wage increases strictly related to what the COLA showed, the PL governments have repeatedly topped the COLA with additional compensation. These have been generous enough even to ensure that vulnerable households, that is those earning less than 60% of the median income, were able to cope with the higher inflation that such households tend to experience. This has been established beyond doubt by a Central Bank of Malta study.

As to the current situation, apart from the increasing cost in energy prices, the cost of everyday goods is also increasing. So far, the rise in our inflation has been one of the lowest in the EU, being some 1.4% compared to 4.4% in the EU, not to mention 7.3% in the USA. Does the COLA mechanism necessarily reflect this accurately? Maybe not, but the Government awarded an increase of €92 per annum in Budget 2022; increased the tax refund to between €60-€140, depending on the income of the households concerned; started giving an in-work benefit of €150 per annum to some 40,000 workers whose basic wage does not exceed €20,000; and reduced the income tax rate on overtime of some 23,000 workers. The recent measure of cash cheques worth €100 (rising to €200 for pensioners and people on social benefits) is a further alleviation of the cost of living.

At this stage, it is quite generous, when one considers that the Government had also started subsidising energy and transportation costs, to ensure that manufacturers and businesses in Malta can cope with the international spike in such costs.

How do you envisage the Maltese economy post-COVID, and which new niche markets should Malta should tap into?

All independent projections show that the Maltese economy will resume a growth path better than that of the EU in general. The European Commission itself expects real GDP to grow by 6.0% this year – that’s two percentage points higher than the rest of the EU. As I said before, we cannot but use some words of caution, because the robustness of the recovery is being threatened by continuing economic and inflationary problems.

The recovery will depend to a great extent on the return of travel and tourism to pre-COVID levels, as early an exit as possible from the FATF grey list, and the timely expenditure of the EU’s recovery and NextGen funds. 

In terms of niches, some of these have already been spelled out in the Government’s post-COVID recovery strategy. This will be driven by green investment, projects involving AI, stronger research and innovation, and digitalisation. No Government sets up industries nowadays. What it does is to create the business environment and infrastructure (both physical and soft) to let entrepreneurial activity flower.

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