Convergence programme update slashes growth forecasts

An updated Convergence Programme presented to the EU in December includes a downward revision of medium-term growth prospects, with GDP growth projections for next year slashed to 1.2 per cent from a 2.2 per cent forecast given in another report in November 2004.

The updated programme was tabled in Parliament yesterday by the Prime Minister in reply to a Parliamentary question by Evarist Bartolo (MLP). It is expected to be considered by the European Commission this month.

Growth prospects for 2006 were revised downwards by 0.7 percentage points, with foreign demand remaining the main contributor for the decline.

During this year and in 2007 both imports and exports of goods and services are expected to recover. However growth forecasts have been revised downwards owing to lower than expected foreign demand as a result of lower GDP growth forecasts in Malta's main trading partners. Although a moderate recovery is expected in the international semiconductor market, the growth rates are considerably lower than projected in November 2004.

Whereas private consumption expenditure was projected to grow by 1.0 pr cent in 2005 and 1.4 per cent this year, these projections have been revised to negative growth of 0.9 per cent and 0.2 per cent respectively, particularly because of the impact of energy costs. A recovery in private consumption is expected next year.

Growth projections for gross fixed capital formation for 2005 and 2006 were revised upwards to reflect revised capital expenditure projections by the government, notably on the new hospital. Investment expenditure was expected to increase by 11.3 per cent in 2005 from 7.7 per cent projected in November 2004. Forecasts for 2006 have been revised from a negative 1.6 per cent to a positive growth of 3.3 per cent this year.

When discussing the revisions for 2007, the report says a recovery in private consumption is expected although growth forecasts at 0.6 per cent are still 1.0 percentage point lower than projected in 2004. A marginal growth in government final consumption expenditure is expected in 2007. On the other hand, investment expenditure has been revised downwards by 4.2 percentage points to a negative growth of 3.8 per cent, reflecting the completion of the new hospital.

While lower growth is projected in exports of goods and services in 2007, the growth of imports of goods and services has been revised downwards by a larger magnitude.

Inflation is projected at 3.1 per cent this year and 2.5 per cent next year. Unemployment is expected to decline.

The 2006-2007 deficit-to-GDP ratio has been revised upwards due to lower GDP projections while absolute deficit levels were also revised upwards, mostly owing to the measures taken to counteract rising energy costs. Nonetheless, the government remains committed to achieving a deficit below three per cent of GDP in 2006.

On privatisation, the programme says the privatisation of the Kordin Grain Terminal, Maltapost, Tug Malta, Malta Dairy Products and three hotels forming part of Air Malta is ongoing. The production and distribution of gas and the Enemalta oil facilities "are also in the process of being divested to a strategic partner."

The privatisation of yacht marinas is also being considered.

Revenue from privatisation is set at Lm136 million this year.