The IMF’s timely advice to Malta

Only a day after the International Monetary Fund warned Malta not to take its economic resilience for granted, the European Commission gave the island a clean bill of health on the government’s finances. However, the Labour Party does not appear convinced about the actual health of the economy, as given by the government, with its two financial spokesmen arguing, for example, that many figures mask long-term sustainability issues.

The finance minister loses no time in reacting to remarks that the Labour Party makes from time to time, and in a number of cases, he has good reason to do so, for the PL has a glaring tendency to miss the big picture in its earnestness to put the government in a bad light, particularly at present when the political situation is uncertain.

The European Commission, which must certainly be aware of this, is not influenced by the political nuances of party talk. After reviewing the government’s financial position, it has come to the conclusion that no further steps are required insofar as the excessive deficit procedure is concerned. The Commission had given Malta up to last year to bring the deficit down to below the three per cent threshold required under EU rules. The Commission now feels the government has taken effective action towards a timely and sustainable correction of the excessive deficit.

So, that hurdle may be over for now, but there is no guarantee that things will run as smoothly as originally forecast. There is certainly no shortage of advice in reports about the island’s economic situation, but very often Malta only follows those recommendations that are less politically damaging. There are some long-term sustainability issues, for instance, that have become too hot to handle for the two main parties, which is a shame considering the impact these are expected to have on Malta’s future finances and the burden they will impose on future generations.

Free health care to all, stipends and welfare are key issues that cry out for sensible reform, but neither of the two parties will dare touch them for fear of losing votes. On the contrary, they defend them with all their might acting as if they feel sure they have a secret formula to ensure a kind of long-term economic growth that will see each administration through with flying colours. The stark truth, however, is that they have no such magic formula.

The IMF’s main advice to Malta is not to take its economic resilience for granted. Like the EU Commission, it expects the deficit to continue to fall following the measures taken in the budget for this year, and, also, the subsequent cut in expenditure, estimated at about €40 million, demanded by Brussels. However, it is also aware that the composition of the adjustment remains what it has so clearly described as “suboptimal”.

It particularly calls for bold policy actions to reduce contingent liabilities arising from public corporations. The restructuring of Air Malta has been taken well in hand but what about that which is also so badly needed at Enemalta? It is a hot potato, one that could help bring about a reduction in utility rates if it is combined with other timely measures.

In view of the turbulent political situation in which the government has found itself, it remains to be seen how successful the government will be in exercising the kind of fiscal discipline which both the EU Commission and the IMF are demanding. Hopefully, however, Malta will not get derailed in its economic programme by political uncertainty.