Josef Bonnici said lending rates need to be stimulated if the economic forecasts are to be reached. Photo: Chris Sant Fournier

Central Bank Governor Josef Bonnici yesterday warned that the lending rates in Malta have gone into negative balance and if they were not stimulated, the economic forecasts would not be reached.

Addressing the House Economic and Financial Committee, Prof Bonnici said reserves had been strengthened by over €40 million over the past two years. The macro economic situation had shown a marked decline in economic stress and was back to 2006 levels. Normality in terms of financial stress was fast approaching and this was also reflected in interest rates.

Prof. Bonnici said the fluctuations in inflation in Malta were generally in trend with the EU average. Growth appeared to be higher than the EU average and had been so for the past five years or so. Unemployment was near the EU average.

Turning to structural issues, he said the tourism and manufacturing industries were showing downward trends while gaming, communications, professional sectors and financial services were on the increase. This indicated that the economy might be changing direction. He warned that the indicators were clear that salaries needed to retain a direct relationship to productivity.

Salaries need to retain a direct relationship to productivity

Examining the profitability of Malta’s economy, Prof Bonnici said that 2012 data showed it was the second highest in Europe after Ireland. This was further strengthened by a positive national current account. This, however, might indicate weak domestic consumption.

He said that the debt ratio was at 72 per cent which, albeit slightly high, was not worrying.

With regard to lending rates, compared to the rest of Europe, Malta did not seem to follow the ECB trends. The countries that did not follow the ECB trends in this sector were those financially stressed and one should ask why this was so.

Lending rates were declining in Malta and this needed to be examined and addressed.

Replying to Finance Minister Edward Scicluna’s remarks that this might actually be a positive thing, Prof. Bonnici said it was worrying that not only was the construction sector shrinking, but manufacturing and retail as well.

He reiterated the need to assess the lending growth rate to be able to fuel the economy. He said the banks were right to protect their interests but if they were not encouraged to fuel the economy, then the effect would be negative. If lending growth rate was not stimulated, the economic forecasts would not be reached.

Minister Scicluna asked if this was a lack in demand for lending services or a lack of supply by the banks, both situations requiring different solutions.

Opposition Finance spokesman Tonio Fenech said credit growth appeared to be very weak and asked if the EU forecasts for Malta could be attained. He said these forecasts were not export-driven but domestically-driven. This, coupled with weak retail and weak credit growth, indicated uncertainty in attaining the set targets.

Prof Bonnici said domestic consumption had been underperforming for some time. He said that cost of borrowing for investment might be leading to this decline. However, the banking sector was strong, performing better than the EU average.

Forecasts showed the euro area was exiting the recession but Malta seemed stuck and might need to re-assess its economic strategies. In defining the economic potential, using the labour force survey, this was showing a decline while that of the Central Bank was more optimistic since it is drawing upon a wider spectrum of workers.

Mr Fenech agreed with the analysis of the Central Bank rather than that of the EU. However, government must be careful not to fan xenophobia since this would affect the projections of the CBM.

Minister Scicluna said that the remarks referred to by the PN member had been meant to warn job seekers not to go for non-existent jobs. He said that Maltese job seekers should be trained first.

Prof Bonnici said in the past Malta had provided all sorts of services but it must be on the lookout for other value added sectors since the competitive edge might be lost.

Productivity might be increased if the skills mismatch was reduced. He said that participation rate in the workforce needed to be retained and strengthened as this would benefit Malta’s economy.