Malta must quickly reduce its national debt levels to ensure financial sustainability, the Central Bank governor warned yesterday.
The first years of the euro were poorly managed from a fiscal point of view
Josef Bonnici, a former Minister for Economic Affairs, noted that while Malta’s deficit was gradually being cut, debt projections had been revised upwards.
Debt is expected to exceed 70 per cent of GDP in 2012 and 2013. Deficit levels stand at 2.7 per cent, with the government projecting further drops over the next two years.
Prof. Bonnici called for continued vigilance in setting fiscal policy, saying low debt levels would give the government greater flexibility in an economic slowdown.
He called for more public awareness on the importance of raising productivity and competitiveness and reiterated calls for cost-of-living-adjustment increases to be incorporated into collective agreement negotiations rather than superimposed on wage increases.
Prof. Bonnici argued that the first years of the euro had been poorly managed from a fiscal point of view.
“With the benefit of hindsight, it is clear that the first seven years of the euro would have been an ideal time for governments to engage in fiscal consolidation. Instead, imbalances and vulnerabilities were further aggravated,” he said.
Financial think-tank set up
He acknowledged the difficulty of introducing structural reforms aimed at correcting fiscal imbalances, as rapid corrections often led to economic slowdown.
However, Prof. Bonnici argued that the benefits of such measures eventually manifested themselves over the longer term and suggested EU funds could help alleviate any short-term economic difficulties.
Prof. Bonnici added that compliance with official EU criteria was no guarantee of fiscal health. Ireland, he pointed out, was fully compliant with the EU’s Maastricht criteria when its economy began to crumble.
He described some of the EU-wide measures introduced to better protect against future fiscal crises.
In Malta’s case, a standing committee was set to be replaced by a joint committee on financial stability. As well as monitor and assess stability risks, it would also advise the Central Bank and the Malta Financial Services Authority.
Prof. Bonnici was speaking during Finance Malta’s fifth annual general conference, where Finance Minister Tonio Fenech announced the establishment of a financial services-related think-tank.
This would be tasked with generating new ideas to strengthen Malta’s financial services sector.
The minister provided a general overview of Malta’s economic situation, saying it had weathered much of the financial crisis fairly well but had to remain vigilant.
He praised the financial services sector for its rapid growth, saying there were more than 500 Malta-based financial funds with a total net asset value of more than €8.5 billion.