The breather the Prime Minister promised companies that fall behind in their tax payments has been welcomed by the business community.

"It is a shot in the right direction," Paul Abela, president of the Chamber for Small and Medium Enterprises, said.

He argued that companies would be able to give salaries priority, something that was hard to do because not paying VAT on time could lead to hefty fines and even imprisonment.

"Businesses are already suffering from a cash flow problem because they sell on credit and have to pay the government VAT even before they get paid themselves," he said.

His comments come after Lawrence Gonzi said on Thursday the government had decided to give breathing space to companies that genuinely fell behind in their national insurance and VAT payments because of cash flow problems. He said this move would safeguard jobs.

But the Malta Chamber of Commerce, Enterprise and Industry went one step further, saying VAT refunds should be speeded up in order to avoid increasing companies' cash flow problems.

The promised move was still welcomed though. The Chamber said this was a positive line of action that would contribute towards easing the situation for businesses facing acute cash flow problems. However, such breathing space must be defined in terms of specific time-frames for payment programmes.

Joe Farrugia, from the Malta Employers' Association, said relaxing credit requirements would help businesses face the prevailing international climate. Many employers were concerned that a delay in refunds following an investigation into fraud at the VAT department would affect their liquidity. "Such a delay could have devastating effects on companies," he said, adding that having a liquidity problem at a time of recession was not a good idea.

The delays in repayments come after large-scale fraud was discovered at the department. It is still being investigated but the department has been instructed to sift through all VAT refunds to make sure they are clean before any money is paid up.

But beyond the VAT crisis, Mr Farrugia said that like other countries, Malta was affected by the global international crisis and measures such as the one Dr Gonzi had announced could help the island avoid the worst of the recession.

"So far we are holding up and have not been as badly affected as other economies. There is a good chance that if we manage to make it through the coming six months, we will not face the full brunt of the recession," he said.

Although he cautioned against being over optimistic, Mr Farrugia said international projections seem to point toward a very slow recovery.

The president of the Malta Hotels and Restaurants Association, Kevin DeCesare also welcomed the announcement. "It is positive to know that the Prime Minister is realising the problems the industry is facing," he said.

Mr DeCesare said hotels, like many other businesses, were facing cash flow problems and there was fear of redundancies, especially after room rates dipped, including in the five-star category, because of a drop in tourists. However, it was hoped that the summer months would be good.