One very pertinent question related to the economy of the country is how relevant are the balance of payments indicators today, especially after the adoption of the euro as our national currency.
Students of economics tell you that the balance of payments is a record of all the transactions that the country has with the rest of the world. It includes the exports and imports of both goods (visible trade) and services (invisible trade), as well as income earned abroad by Maltese nationals and transferred to Malta and income earned by expatriates in Malta and transferred back to their home country. The net result of all these transactions is referred to as the current account.
In addition, the balance of payments also records investment flows in and out of the country, including both direct investment and portfolio investment. When our currency was still the Malta lira, the balance of payments had a particular significance.
Since the Malta lira was not a currency traded in the international currency markets, we needed to make sure that we had enough foreign exchange reserves to cover any shortfall in our international earnings. This is why we had very strict controls on international transactions, namely the import of goods and services and Maltese investment outflows.
The younger persons among us are unaware that there was a time that, when we used to travel, the amount of currency that we could take abroad was limited to Lm250 (around €580). There were also restrictions on the amount of money that we could invest abroad. With the liberalisation of the economy in the late 1980’s a number of these restrictions started being removed.
With the EU membership, the free flow of capital, goods and people and any remaining restrictions were done away with. Still the balance of payments was an issue.
We needed to maintain a positive balance in our international transactions to keep the economy moving forward. We needed to have adequate coverage for our imports. With the adoption of the euro this issue is no longer relevant to us.
Although we do need to make our contribution to support the value of the euro, the fact that the euro is an international currency and that our economy is only a very small fraction of the eurozone, we no longer have the strong pressure to safeguard our foreign exchange reserves as we used to have in the past.
This does not mean that the balance of payments indicators have become totally irrelevant. There are two factors that used to contribute to the importance of the balance of payments and still do. The first factor is that it continues to reflect our ability to export goods and services. Our economy has always thrived and will continue to thrive on its ability to export. The phrase “export-led growth” is still very relevant today.
The local economy on its own is too small to generate significant economic growth. What has changed over the years is our ability to increase the export of services, apart from the export of goods.
The second factor is that it continues to reflect our ability to attract foreign investment. In order to achieve the desired level of export-led growth, we cannot rely exclusively on our own financial resources. We need foreign direct investment.
This was recognised 50 years ago and is still recognised today. Therefore, taking both factors into account, the balance of payments indicators used to be and are in themselves good indicators of our economic performance.
The National Statistics Office this week published provisional data on the balance of payments for the second quarter of this year and cumulatively for the first six months of this year.
The data for this year shows a very healthy situation with regard to our ability to export goods and services. This shows a positive balance of €142.8 million. The value of our exports of goods and services represents 75 per cent of our gross domestic product for this period. The relative figure for the first six months of last year was 70 per cent; strongly indicating that our economic growth has been export led.
The capital and financial account tends to be rather volatile, reflecting our highly active financial services sector and the presence in Malta of a number of international financial institutions. The statistic that is most interesting is the one related to direct investment. There was a positive movement of €270 million compared to last year. The capital account showed an improvement of €24 million in the first six months of this year compared to the same period last year.
The answer to the question I started off with is that yes, the balance of payments indicators are still relevant today. And the data for the first six months demonstrate once again the progress that has been registered in the economy.