Editorial

Finance Minister Tonio Fenech has good reason to be pleased about the latest reports on Malta by the International Monetary Fund and the World Bank. However, there is much in the IMF report that would need to be mulled over and, in some parts, acted upon without undue loss of time if the economy is to remain on the right track.

Other than the usual warnings about the need to raise productivity and efficiency, the IMF underlined one very important risk - "complacency over reforms against a backdrop of an increasingly competitive global environment". It felt it was essential that EMU entry does not give rise to complacency and a loss in reform momentum as, otherwise, the island would risk falling back into a protracted period of economic stagnation. The observation would need to be kept in mind for, even though the first quarter this year has seen further growth in gross domestic product, progress in some lines of the reform programme has slowed down.

In the case of the shipyards, for example, the reforms did not produce the expected results. With little or no prospect now for the yard to meet the set target of moving into financial viability by the end of the year, the Finance Minister said that "the government was studying all possibilities". What, exactly, are these possibilities? Privatising parts of the enterprise? But what about the other parts that may be deemed to be impossible to turn into profit-making concerns? Since time is pressing, it is about time the government lays its cards on the table.

As to the economy generally, the IMF is forecasting a drop in growth of between two and two-and-half per cent in 2008-09. This is more or less in line with the forecasts already made by both the Central Bank and the European Union, which gave the forecast figure at 2.6 per cent, compared to a growth rate of 3.8 per cent last year.

However, the government still thinks the economy can grow by three per cent and, indeed, in the first quarter this year, gross domestic product rose by 3.5 per cent in real terms. It remains to be seen if the economy can now sustain this rhythm in the face of the new international price pressures.

With the prices of crude oil and commodities shooting up, the government will, no doubt, come under increasing pressure from the unions to raise compensation for the rise in the cost of living. In anticipation of the food price hike, the government had allocated an extra amount in the allowance granted in the budget to make up for the rise in the cost of living but many are doubting if this covers the actual rise in the cost of commodities since then.

The IMF is against the mandatory cost of living wage adjustment as, it feels, it hinders productivity-based wage increases and contributes to inflation (now standing at over four per cent). However, the government does not agree with the IMF's view as, it argues, COLA, as the mechanism is known, kept wage increase claims by unions at bay.

While the government's argument on this is debatable, more so when considering that, according to the Central Bank, unit labour costs last year rose dramatically, there are other points in the IMF report that are not and would require urgent attention.