Keeping the balance

As a result of Malta's membership of a number of international organisations, such as the European Union (and eventually the eurozone), the International Monetary Fund and the World Bank, and as a player on the international financial and business market, the Maltese economy and, in particular, the way it is administered is continuously in the spotlight. Politicians, economists and policy analysts, from these organisations and credit rating agencies from around the globe, reflect on our decision-making in order to come up with recommendations to us and to the rest of the international financial community on the sustainability of our economy and on the level of security afforded to investors putting their money into our shores.

Our decisions are continuously scrutinised in terms of their potential impact on the island's competitiveness, ability to attract investment and, thus, create further growth and more and better jobs.

Two high-level and politically-independent reports have given a very important thumbs up for the way our economy is being managed over the last years. The reports have been drawn up by the International Monetary Fund (IMF) and the World Bank.

The IMF is an international organisation that, in following the macroeconomic policies of the nations within its ranks, is in a position to oversee the global financial system, giving ample attention to policies adopted by member states that impact exchange rates and balance of payments, while offering financial and technical assistance to its members.

The World Bank is an internationally-supported bank seeking the twin objectives of eliminating poverty and implementing sustainable development.

The IMF published an important review of the state of affairs of the Maltese economy. Although there are various elements to the report, it is safe to react that it is indeed a very positive certificate awarded to the management of the Maltese economy that confirms that our policies, as described last year in the European Commission's decision with regard to the adoption of the euro by Malta, are credible and sustainable.

It is indeed the decision to adopt the euro to which the report reserves the best commendation. Despite the opposition's calls that euro adoption came too early, the IMF describes the introduction of the euro as a crucial landmark for Malta's growth-oriented reform agenda.

The common European currency has brought a wave of fresh air for the local business community as it makes commerce easier and cheaper, especially considering Malta's dependence on imports and exports. For foreign investment, it is now more enticing to invest in Malta, as the euro means less costs and a sounder economic environment, considering that the Growth and Stability Pact obliges eurozone member states to keep the countries' finances well in check.

The IMF notes that euro adoption, together with liberalisation and export diversification, were a major factor that contributed to a three-year expansion of foreign direct investment and, consequently, a major reason behind the record low unemployment levels.

The report does appreciate that Malta's economic growth was achieved despite the high international prices of oil, commodities and food that are keeping inflation relatively high through most of 2008, although predicting that it will ease in 2009. In order to sustain Malta's finances, the IMF describes the decision to phase out subsidies on bread and review other subsidies as "reassuring".

It also recommends to urgently revise the subsidy on electricity rates but the government has always believed that it is responsible to absorb, as much as possible, the impact of the price of oil in order to reduce the burden on our families and businesses. However, with the price of oil increasing day after day, there is a limit to our absorption capabilities, and therefore, although at this stage a revision in the surcharge is inevitable, it is also our duty to invest further in cleaner energy and support measures that lead to energy efficiency. Therefore, the report, although commending Malta's successes, provides a word of caution. The economy still faces substantial challenges and we must just sit there happily on the basis of the progress so far achieved.

Clearly, removing subsidies benefits no government politically. But, indeed, where this has taken place, such as in the bread market, the decision has been taken responsibly, first by studying the potential impact of such a policy move and, secondly, by identifying appropriate measures to compensate families that have to face the toughest challenges to absorb the price changes that result in the immediate term. However, with the necessity to sustain sound public finances and to ensure high quality health, education and infrastructure we have to choose between paying more taxes in order to be able to retain the subsidies or else do away with subsidies but, through less taxation, we would be able to have a better purchasing power with more cash in hand.

The World Bank's study, carried out by an independent commission composed of economists and politicians, goes a step further and describes Malta's achievement as an "economic miracle", highlighting the feat that Malta was the only Mediterranean country that had a growth rate of seven per cent or more over the last 25 years. The World Bank points out that Malta's success in providing for a stable economy and attract high levels of investment resulted from the Administration's measures intended to favour a sustained economic growth.

While welcoming these positive certificates, we must ensure that the suggestions for improvement are evaluated while our commitment is to keep listening to the needs of the citizens and, for this reason, I am inviting all readers to share their recommendations for the next budget by e-mailing the budget team on budget2009@gov.mt.

Mr Fenech is Minister of Finance, the Economy and Investment.