Swotting and sweating it out

We have an abundance of vision statements, strategy documents, and action plans, which we need to implement.

The recent country report by the International Monetary Fund (IMF) provided an unbiased assessment of Malta’s economic performance in 2023 and complements that carried out by the European Commission.  The Fund’s executive Board endorsed a report by its team which said that Malta has demonstrated a resilience to external shocks and a strong post-pandemic recovery.  This was achieved through strong fiscal support, a persistent inflow of migrants, a strong recovery in tourism, and robust consumer demand.

Somebody might say “we knew that”.  Fair enough, though if one listens to some Opposition spokespersons you might think that the economy is about to collapse.  Happily for us, those famous red bulbs which were supposed to start flashing in 2013 have remained solid green for over a decade now (except, of course, for the Covid pandemic).

Photo: Belga

The traffic light indicator for the next couple of years remains green.  The IMF expects continued solid growth over the medium term, albeit below pre-pandemic levels.  Its own projections mirror those of the Maltese government and the European Commission   ̶   with a 5.1% growth in real GDP this year, unemployment remaining at a historic low of 2.5%, and inflation half of that in 2023 at 2.9%.  That’s brilliant.  Compare it to the EU’s projected 1.3% growth in GDP, an unemployment rate of 6.0%, and inflation of 3.5%.

Where it gets more interesting, from my point of view, is when the IMF talks about certain aspects of the economy and policy-making.  This is no different from the opinion it offered in 2022, in that it talks of “risks to the outlook (being) tilted to the downside”.  This does not mean that the risks will definitely occur, but my view is that they will.  How large they will be depends on our ability to attenuate them and how long it will take to do so.

Risk № 1

Because Malta’s economy is operating above potential   ̶   resulting in tight labour markets, elevated inflationary pressures, and sizeable fiscal deficits   ̶   there is a sore need for reinforced fiscal consolidation.  While rejecting austerity was the right response to the Covid pandemic, the effort now should be on disinflationary efforts and rebuilding fiscal buffers to bolster fiscal sustainability.  I know this is what the Government is planning to do, but possibly the pace is not fast enough.

Risk № 2

Huge energy subsidies continue to place a substantial burden on the budget.  In doing so, they limit the fiscal margin available to support productivity-enhancing reforms, and dampen the incentive for energy savings and efficiency.  Both the IMF and the Commission had already recommended that such subsidies be phased out while increasing targeted support for vulnerable households.  Frankly, I believe that the last Budget should have included an element of that, if only to ensure that the phasing out will not be a sudden shock.

Risk № 3

There is a substantial potential to improve Government revenues by modernising revenue administration, rationalising recurrent spending, enhancing public investment efficiency, and strengthening oversight of public enterprises.  The European Commission has estimated the VAT gap in Malta at around €287 million   ̶   that’s equivalent to a 4.8% addition to the Government’s total revenue per year.  On top of that, the Central Bank of Malta has estimated the Black Economy at around 23% of GDP.  The potential income tax revenue being lost is at least a further €136 million, equivalent to another 2.8% of total Government revenue.

Risk № 4

While the EU has adopted a 15% minimum tax rate for companies forming part of a group with an annual turnover of at least €750 million, Malta has declared that it will not apply it yet.  The IMF is still insisting on its introduction.  While the Government was right to use the derogation option allowed under the EU directive, we all know that this cannot be postponed indefinitely.  So, it  would seem prudent to develop a roadmap for the phased implementation of the corporate income tax reform.  By the way, the Fund also recommended that the roadmap include personal income tax reform to make the adjustment more efficient and less distortionary   ̶   this is something I have often written about.

Risk № 5

 It was satisfying to read that the IMF has recognised the resilience of Malta’s financial system, which has often been noted by our Central Bank.  However, the Fund drew attention to the need for continued monitoring of possible vulnerable areas, especially in the real estate market.  While frequent claims that a so-called property bubble is about to burst are unnecessarily alarmist, this does not exclude keeping an eye on how inflation and macro-financial conditions affect vulnerable and leveraged borrowers.  This is especially important since it is well known that a substantial chunk of property is the fruit of corruption, financial crime, and money laundering.  There can therefore be no flagging in the fight against them.  As to corruption, I mention it but without a shred of hope that there will be any progress.

Risk № 6

Recently, I wrote about the crying need for structural reforms in the economy in an efforts to boost productivity, given increasing capacity constraints as well as our striking gap from better peers in the EU.  The action needed here ranges from substantially more research and innovation through addressing skill gaps, accelerating decarbonisation and climate resilience, and boosting investment in renewables to strengthening education outcomes.  The Recovery and Resilience Plan aims to deliver investments in digitalization and green transition; its implementation is crucial.

Opportunities and structural reforms

As to structural reforms, I know that this is a pet subject of the business organisations, but it is also a fact that every time any government has had the temerity to lift a finger in that direction, vested interests have managed to kill the effort or water it down to meaninglessness.  By the way, the unions have also been complicit.

The structural risks to which the IMF has referred should neither be overstated nor underrated.  In strategy development, we often refer to SWOT   ̶   Strengths, Weaknesses, Opportunities, and Threats. I have written a bit about the strengths, threats and weaknesses.  But what about the opportunities?  I can only mention a few.

Industry 4.0. 

The new technological revolution in the works will alter the way we live and work in scale, scope and complexity.  AI and other tehcnologies will augment human capabilities and current production levels to drive increased levels of automation and machine-to-machine interactions.  Malta can obtain its fair share of this through new niches (pharmaceuticals, medical devices and electronic manufacturing sectors, and IT).

Remote working and learning  

The rapid adoption of remote working practices provide an opportunity to expand Malta’s service-based economy across the globe. This could also have positive implications for land use, since less land would be required to satisfy employment demand. There could also be a benefits from less air pollution from commuting traffic and enhanced employee well-being from an increase in personal time for non-work related activities.

Ecosystems and clusters   

Some of the current strong clusters of activity – igaming, manufacturing, logistics, and financial services   ̶   can be exploited further through ecosystems for value-added expansion.  To complement them, there are opportunities for the creation of new economy activities in adjacent areas such as videogame development, 3D printing (manufacturing), e-sports (tourism), green finance and green energy exchanges (financial services), and other green activities   ̶    such as renewable energy (with concomitant green jobs), as well as digital logistics (logistics), and international arbitration.

Reaching our goals

We have an abundance of vision statements, strategy documents, and action plans.  They are regularly reviewed and discussed, sometimes interminably, in stakeholder consultations and conferences.  Going to all the seminars would set you back by a couple of hundred hours and several hundred euros, if not add to your waistline by the time you consume all the food offered.  But, joking apart, the million euro question is to what extent we will successfully implement the building blocks of these plans.

We have swotted out the elements of a success plan for the next decade.  Now we need to sweat in order to reach our goals.    

Main photo: Abdulmomen Bsruki

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