Malta must live within its means – CBM Governor

There has to be a concerted effort for Malta to live within its means to continue to move general government debt downwards from the 72 per cent of GDP registered last year, Central Bank Governor Josef Bonnici urged yesterday.

GDP growth expected to reach two per cent next year

Prof. Bonnici essentially reiterated the call made by his pre-decessor Michael C. Bonello in recent years when presenting the Central Bank’s annual report for 2011 after it was tabled in Parliament on Monday.

Projections point to slower GDP growth this year to reach 1.6 per cent, a deceleration from last year’s 2.1 per cent and an expectation that the momentum will pick up to hit two per cent next year, in line with the government’s expectations. This is still lower than 2010’s 2.3 per cent and is due to repercussions stemming from the impact of an expected contraction in the euro area economy before it recovers next year.

This year, government debt is expected to reach 69.4 per cent of GDP, still higher than the 60 per cent threshold mandated by the Maastricht criteria.

Prof. Bonnici urged authorities to monitor the situation closely to avoid upward movements that would make the economic situation perceptibly more difficult to adjust.

Malta’s economy and financial system have continued to be buoyed by a diversification of largely new activity, particularly services, the sound banking system, and the capability to source borrowing internally.

Further structural reforms were required to enable the economy to grasp the opportunities arising from a recovery and an improvement of the islands’ external environment.

Prof. Bonnici stressed the importance of wage increases being supported by productivity gains and urged stakeholders to consider measures that would allow greater flexibility in the application of the Cost Of Living Adjustment (COLA) mechanism, essentially echoing business leaders’ sentiments.

In the wake of the recent proposal to raise the minimum wage, Prof. Bonnici said sustainable wages must be linked to the value of the work carried out and to a person’s productivity. The debate on wage increases must involve a careful assessment of the wider impact on the eco-nomy, he emphasised.

He warned that upward pressure on unit labour costs is likely to lead to a loss in competitiveness and a fall in growth potential, and therefore higher unemployment, especially among low-skilled workers.

The key to higher living standards lay in the provision of further skill-enhancing programmes, and sustained and better targeted investment at all levels of education, Prof. Bonnici stressed.

Reforms could include measures to improve competition in domestically-oriented sectors of the eco-nomy or efforts to achieve gains in efficiency levels.

Prof. Bonnici urged the banks to continue to strengthen their capital buffers to mitigate risks associated with non-performing loans, the concentration of property-related lending as well as the use of property as loan collateral.

He also encouraged the banking sector to adopt more prudent policies where dividends and loan-loss provisioning were concerned.

Prof. Bonnici stressed that Malta’s economy continued to be exposed to external developments. The sovereign debt crisis had prompted structural reforms in some competitor countries and competition was bound to increase. Similar efforts for reform had to be made locally to safeguard the continued resilience of the local economy.

Last year the Central Bank registered an operating profit of €52.5 million, down from the €57.6 million registered in 2010.