Sixty per cent of the stock of foreign direct investment in Malta takes the form of capital inflows in the financial sector, according to the government’s Pre-Budget 2011 document.
This suggests that a significant share of capital investment did not finance the purchase of new machinery or other equipment. The report points out that a significant share of foreign direct investment pertains to banking institutions which do not operate in the local market.
“In this context, it is important to assess the nature of foreign direct investment flows in Malta, and specifically, whether such flows relate to balance sheet transactions of a financial nature, or inflows which are more directly related to productive investment in the domestic economy,” the document says.
However, at 102.1 per cent of GDP in 2008, the stock of foreign direct investment in the Maltese economy is by far the highest when compared to that in Malta’s major EU competitors and some 40 percentage points higher than the EU-27 average.
The report highlights that investment by the private sector in Malta averaged some 15.3 per cent of GDP during the 2000 – 2009 period, the lowest when compared to the country’s main EU competitors. This level is low even when compared to the EU average of 17.7 per cent, suggesting that a higher level of investment is needed for the Maltese economy to grow at the pace of EU countries.
“Specifically, the level of investment as a per cent of GDP would have to increase by around four percentage points to reach the level of investment by the main EU competitors.
“The negative implications of the economy’s productive capacity are exacerbated by the fact that around 20 per cent of investment is directed at housing construction. The improvement in productive investment can either be domestic-led or foreign-led or both,” it says.
Varying between 11 to 16 per cent of GDP, the level of domestic savings (typically used as an indicator of the level of domestic investment) has been relatively low when compared to that of the EU-27. However, it is close to the average of the level of Malta’s main competitor countries.
The level of investment in research and development has also been low compared to the EU-27 average. When compared to its major European competitors, Malta fares only better than Cyprus, possibly reflecting the fact that both countries have significantly large services sectors.
The pre-Budget document contains a strong emphasis on upgrading Malta’s education and health sectors. It says Malta is one of the last Bologna Process countries which does not have a quality assurance agency, and this needs to be remedied, not only for the improvement of quality within higher education institutions, but also for the eventual accreditation and licensing of higher education institutions and their qualifications.
“This will serve to legitimise the private higher education sector in Malta and will enable accredited and licensed providers to offer home-grown degrees which will be duly recognised in Malta and abroad.”
The document says that the Education Ministry is currently drafting a law on further and higher education in order to differentiate this sector from lower levels of education, and to realise the full potential of upper secondary education, tertiary education, lifelong learning programmes and all areas of education that are non-compulsory.
Individuals and companies will also be provided incentives to enter into an effective partnership whereby educational institutions, enterprises, the community and the labour market, both in the public and the private sector interact and participate through well-developed programmes. Additional investment will be targeted at adult learning courses which focus on key competencies.
The document says single parents should be encouraged to combine work with family life and that their social security entitlements are to be reviewed and carefully analysed. “This analysis should also keep in view the Maltese socio-economic realities,” it says.
Expenditure on social protection as a percentage of GDP is 19 per cent in Malta, the report highlights.
In the budget for 2010 €4 million was allocated to address the problem of hospital waiting lists. An extensive three-year programme has been put in place with the agreement of all the clinical staff and unions. “For the first time in many years, a downward trend in waiting lists across a few specialities has started to be observed. This will continue in 2011.”
The Pre-Budget report emphasises that the Maltese economy increasingly depends on its ability to diversify its economy towards high value-added industries that can generate a higher rate of return than other industries, and points out that the culture and creative industries offer great opportunities in this respect.
“However, this requires a shift to quality in order to obtain the highest possible value-added from the CCIs, which contribute to around four per cent of GDP with an annual growth of almost three per cent between 2001 and 2007. Around 4,000 enterprises operate in these sectors with four per cent of the labour force, equivalent to 7,000 individuals,” it says. The pillars of the CCIs are the heritage, arts, media and creative business services sectors. A working group appointed by the Ministry of Finance is working on developing a strategy for the creative economy.
The government intends to provide the necessary framework for the green economy to realise its potential not only in terms of employment, but also in terms of generating more economic activity and reaping the necessary environmental benefits.
Over the next five years the government will focus mainly on the continued development of the energy and renewable energy sectors; the reform of the transport sector, the promotion of more energy-efficient buildings; the increased participation of the private sector in waste management; the improved management and conservation of water resources; the provision of training and qualifications for the skills that are and will be required by the creation of new green jobs; the exclusive support for tourism development that can prove to be sustainable and environmentally friendly; and continued support for small-scale sustainable agriculture.
The document proposes three priority areas for Gozo, which offer great potential to create employment opportunities, namely the agro-cultural sector, tourism and the knowledge-based industry.
The report says that the government believes its medium-term fiscal consolidation strategy should be largely expenditure based, rather than on tax measures.
Fiscal projections show that in 2011 and 2012 the tax revenue ratio-to-GDP will follow a gradually declining trend. The deficit will be 3.9 per cent in 2010 and the government is targeting a 2.9 per cent figure in 2011 and 2.8 per cent in 2012.
The report says the decline of one percentage point of GDP in the deficit to GDP ratio in 2011 will largely reflect the phasing out of stimulus measures, the impact of the economic recovery and consolidation of the expenditure side.
Pension expenditure as a per cent of nominal GDP in Malta is projected to increase from 7.2 per cent in 2007 to 9.3 per cent in 2020. Healthcare expenditure as a per cent of GDP is projected to record an increase of 0.9 percentage points while long-term care as a per cent of GDP is projected to record an increase of 0.2 percentage points during the period 2007-2020.
“When one considers a scenario whereby a five per cent annual nominal growth rate in GDP is assumed, coupled with an implicit interest that increases from around five per cent to around 6.5 per cent, the debt ratio is estimated to increase from 70.2 per cent in 2010 to 72.9 per cent in 2020 if the government’s revenue-expenditure pattern remains unchanged.
“Furthermore, if the annual nominal GDP growth rate is assumed at a lower rate such as four per cent, the debt ratio would increase to around78.6 per cent by 2020. This accentuates the need to address the fiscal imbalance as soon as possible if the requirement of achieving a declining debt ratio is to be achieved,” the document says.
It is also estimated that if a gradual decline in the debt-to-GDP ratio to the 60 per cent level required by the Maastricht criteria by 2020 is to be achieved, an immediate reduction in the deficit ratio of around 1.7 percentage points is necessary.