Call for more flexibility

The Federation of Industry is calling on the government to allow more flexibility in the lira's pegging to the euro as a way to dampen the "shocks" Malta is being subjected to by the international economy.

A position paper, prepared by economist Edward Scicluna for the FOI, was launched yesterday during a press conference which was also addressed by FOI president Adrian Bajada and director general Wilfred Kennely.

The government pegged the lira to the euro as part of the process that will lead to the eventual adoption of the single European currency. The lira was pegged at a fixed rate as opposed to leaving a band within which it could oscillate allowing flexibility. Some economists, among them Prof. Scicluna himself, had immediately pointed out that the decision to have a fixed pegging may not have been wise.

In his report, adopted by the FOI, Prof. Scicluna is calling on the government to reconsider introducing a narrow band, which, he emphasised, could help the economy take the shocks coming from abroad by way of oil price hikes, for example.

Prof. Scicluna believes the Maltese economy is proving not to be resilient in the present circumstances. Data for the past five years reveal a roller-coaster pattern, Prof. Scicluna pointed out, saying that while there were positive results registered in certain periods, these were soon neutralised by negative phases often ushered in by something like rises in the price of oil or a negative period for tourism.

The situation would be understandable if the scenario was shared internationally but that is not the case. On the contrary, he added, other countries, even developed ones with high wages, are doing well.

The problem with the Maltese economy is that the country has a high cost of production without having a corresponding output rate. What the economy is managing to produce with the resources invested is simply not enough and certainly much less than the rates of other countries, like Ireland, that have higher wage costs but produce more, he emphasised.

In short, the country is losing its competitiveness.

The situation, among other things, was brought about by a wave of taxes, introduced to make good for a growing public expenditure which results from a number of inefficiencies in the economy, most notably in the public service. The taxes, Prof. Scicluna explained, raised the rate of inflation which, in turn, caused workers to ask for wage rises. The wages increased without a corresponding increase in output and all this led to Malta's products and services generally becoming costlier when compared with those of other countries.

The solutions provided in the government's pre-budget document, Prof. Scicluna added, are good but they have to be implemented. The introduction of a band which allows more flexibility in the lira's pegging to the euro is one in a series of recommendations the FOI is making.

Mr Bajada insisted on the need for a social pact to be discussed again. However, Prof. Scicluna emphasised, the first step in this direction would be for the government to give a clear picture of what is going on. "We are not happy with the diagnostic check of the economy in the government's document. I don't think it gives a clear picture of the economy."

Mr Bajada concurred.

The government's document falls short of describing the full extent of the problems facing the economy and unless this is done, the people can hardly be expected to back reforms, Prof. Scicluna added.

A social pact should be based on a clear understanding of where the country stands at the moment and were it plans to be once the reforms are in place. Workers should be given a clear picture if they are asked to make sacrifices, Prof. Scicluna insisted, after he was prompted by one of the journalists.

The government's efforts to curb the deficit now must be complemented with a reform in the public sector, in the pensions system and also the health and social services, he added. The government must not only manage to achieve the deficit targets but also bring the public debt down.

When asked whether he agreed with a reduction in taxes, Prof. Scicluna said this would have to be preceded or accompanied by a reform in the public sector.

As explained, taxes were introduced to make good for the bloating in public spending and this is partly due to inefficiencies in the public sector, he said. Any cut in taxes would have to follow the same pattern in reverse, which is to first reduce pubic expenditure and then reduce taxes or at least reduce them simultaneously, he concluded.