Michael Bonello, Governor of the Central Bank has called for a collective effort by the social partners for Malta to achieve greater competitiveness.

Writing in the Central Bank's annual report, published yesterday, Mr Bonello said the persistence of sluggish growth in the economy could not be explained exclusively in terms of a cyclical downturn, as the world economy posted strong growth last year, though the recovery in the EU remained modest.

"While the global economic environment is clearly becoming more difficult, there is, however, evidence that the delay in implementing effective competitiveness- enhancing reforms is also an important factor in Malta's case. This, together with the fact that the relationship between productivity and costs has tended to deteriorate compared to that in competitor countries, partly explains why Malta does not appear to be capitalising on the new opportunities (of EU membership) to the same extent as most of the other new EU member states."

Mr Bonello said an important cause, and also an effect, of the slow pace of economic growth was the relatively low level of investment activity. Whereas the proportion of GDP allocated to private investment in Malta averaged 16 per cent over the five years to 2003, the figure for the new member states with a comparable level of development was closer to 20 per cent. At the same time, however, consumption in Malta was around five percentage points higher than in those countries at 82 per cent of GDP.

"Apart from putting further downward pressure on the national saving ratio, this sustained level of consumption at a time of weak growth is tending to accentuate the imbalance in the external accounts. The deficit in the balance of goods and services averaged over five per cent of GDP during the past five years and widened to around seven per cent last year, as the demand for imports was sustained while exports showed virtually no growth."

Mr Bonello said trends in monetary aggregates during the year mirrored these developments, the increase in bank credit was directed almost exclusively to personal, and particularly the housing sector, rather than the corporate sector, a phenomenon which had generated undesirable upward pressure on property prices; and the fall in the Central Bank's external reserves towards the end of the year reflected developments in the balance of payments position.

Another factor underlying the economy's poor growth was the relatively large fiscal deficit. In this context Mr Bonello welcomed the reduction of the deficit last year and the adoption by the government of the convergence programme to reduce the deficit to 1.4 per cent of GDP by 2007.

He expressed his regret that the social partners had not managed to agree on a social pact late last year.

"The inability of the social partners to reach agreement suggests that there is as yet insufficient understanding of global economic realities and of the threat they represent for Malta's small economy and, more specifically, for employment levels.

"That threat will not go away. In facing up to this challenge, moreover, it must be recognised that in today's highly competitive environment, there are no painless options that will, at once, produce more rapid growth, enhanced welfare benefits and higher living standards.

"If it is to succeed, the quest for greater competitiveness should, therefore be pursued as a collective effort and perceived as being in the mutual interest of all the social partners. It must be premised on an acceptance of the need to raise output levels without increasing costs and to invest a larger proportion of available resources."

In its report, the Central Bank says that after having contracted in 2003, the economy grew by 1.5 per cent last year. The economy is expected to grow at a faster pace this year but still perform below its potential.

The measure on public holidays announced in the budget, was expected to boost GDP growth by 0.4 percentage points, contributing to an overall growth rate in the range of 1.7 to 2.3 per cent. The external sector was expected to be the main source of growth, with export volumes expected to pick up, with the increase in import volumes slowing down. A significant increase in fixed capital formation, especially by the public sector, was also expected to stimulate economic activity.

The Central Bank last year made a net operating profit of Lm14.9 million, compared to Lm18.2 million in 2003.

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