The annual report of the Central Bank for 2008 presents a balanced account of how the Maltese economy has fared in the last year and also a sobering assessment of what the challenges ahead are. In it, the Governor uses clinical statements to identify where we have performed well and warns about work that still remains to be done if we are to see the Maltese economy grow in future.
Last year's economic review indicates both successes and failures. Malta still managed to end the year with GDP growth of 1.6 per cent when many countries in the eurozone area were already deep in recession. As the CBM report states, this may be attributed both to the prudent way with which the financial system is managed in Malta but also to the fact that it takes some time before international economic events affect us.
The record on inflation management is more worrying. Despite falling oil and food prices in international markets, we ended 2008 with an inflation of five per cent, well above the 1.6 per cent registered in the eurozone area. The CBM Governor attributes this failure partly to worrying "market imperfections". The removal of these imperfections should become a top priority for the managers of the economy.
The forecasts for this, and next year, seem to be less gloomy than one would expect. The CBM report forecasts a 0.5 - 1.1 per cent economic growth in 2009. This is based on what the report defines as "increasing economic demand" since it acknowledges that foreign demand for Maltese goods and services will remain weak.
Forecasting GDP growth is as difficult as trying to hit a moving distant target. But one can understand the doubts that some may have on whether these forecasts are realistic. The "relatively high budget deficit and debt levels" leave very little room for the government to manoeuvre by easing fiscal pressure and increase local demand.
The Governor suggests that if there is any further extra public expenditure to be made, this should go to public productive expenditure. He remarks that "consumption cannot be a reliable engine of growth" for the economy. What the country needs is more foreign direct investment with the transfer of technology and the opening of markets that it brings with it.
Economic statistics for the last quarter of 2008 and the first two months of 2009 indicate that the property market, manufacturing industry and tourism are all suffering, partly as a result of the global recession. The prospects for 2009 are not very encouraging. The focused measures being taken by the government to ease the pressure on some of these sectors will help but the challenges ahead leave little room for complacency.
The Governor makes a bold statement that the time has come for deeper reforms in expenditure on social services and education. He also points out that the labour market needs a shake-up to make the economy more competitive.
The CBM's annual report has always been an important instrument that stimulates public debate on the urgent needs of the economy. Whether one agrees with the economic assessment in it or not, it has the great merit of being written in clear language, which may sound technical to some but which is devoid of political rhetoric.
The report confirms that now is the time to turn the global economic crisis into an opportunity to energise the economy through further reforms. Taking action while remaining optimistic would be the ideal way forward.