Government insists on need of cost-of-living adjustment

The government does not agree with the International Monetary Fund's criticism of the cost of living adjustment (COLA), with Finance Minister Tonio Fenech saying the yardstick kept wage increase claims by unions at bay.

However, the authorities share the IMF's belief that wage increases should be productivity-based.

"We cannot just increase taxes but we also need to increase productivity or we would be just adding a burden to the economy," Mr Fenech told a press conference yesterday.

In its report following a visit to Malta by its officials late last month, the IMF commented that the government-decided COLA was unusual among advanced economies and advised the government to eventually remove it as it hinders productivity-based wage increases and contributes to entrench inflation.

It also recommended the full privatisation of Bank of Valletta and the restructuring or privatisation of Air Malta, Enemalta, the shipyards and other public enterprises.

Mr Fenech insisted that the government had no intention of privatising the national airline, something that had already been ruled out by Prime Minister Lawrence Gonzi before March's general election. However, "some form of participation" was not being excluded once the airline became viable.

The authorities are also treading carefully when it comes to Bank of Valletta, with Mr Fenech saying that, while the government was open to any expressions of interest, the current international circumstances could have an impact on the price.

"We understand the need for the bank to find a strategic partner but one needs to ensure that this is done in the best interest of the country."

The government was looking at all possibilities when it came to the shipyards but it was still too early to comment, he said.

While commending the authorities for the successful adoption of the euro - describing it as "a crucial landmark" in the growth-oriented reform agenda - and the increase in foreign direct investment and export diversification, the IMF said growth would decelerate to between two and 2.5 per cent in 2008 and 2009. Yet, the government is still holding strong to its three per cent growth predictions, with Mr Fenech saying that figures for the first quarter were encouraging and indicating that this target could be reached.

Referring to the IMF's recommendation to urgently revise the subsidy on electricity rates, Mr Fenech said the government always believed it has a responsibility to absorb the impact of oil prices to cushion the economy from big problems. However, these were temporary measures and the economy has to adjust if the price of oil remains high.

"The country needs to make a choice: Do we want to pay more taxes to retain the subsidies or do we remove the subsidies and also the need for certain taxes?"

The IMF recommended market-based measures to rationalise demand and increase the efficiency of supply of public services, particularly in the health sector. It also commented that the level of non-performing loans in domestically-controlled banks was still high, making up 7.6 per cent of total loans at the end of last year.