The Central Bank has revised Malta's economic growth projection for this year to 1.6%. That is above a projection of 1.2% made by the IMF last week but below the projections made by the government in the Budget speech (2.3%). Growth is expected to pick up to 2.0% next year. 2011 growth was of 2.1%.
Bank Governor Josef Bonnici told a press conference when presenting the bank's annual report today that the economic outlook was subdued because of the weakness of key foreign markets.
The latest ECB projections suggest that the euro area economy is expected to contract slightly this year.
[attach id=193957 size="medium"]Prof Josef Bonnici[/attach]
Prof Bonnici repeated calls made by his predecessor Michael C Bonello for wage increases in Malta to be supported by productivity gains.
"Consideration should be given to measures which permit greater flexibility in the application of the COLA (cost of living adjustment) mechanism," Prof Bonnici said.
"The sustainability of wage increases must be fully recognised in the debate surrounding the recent proposal to raise the minimum wage. Wages provide compensation for work carried out. To be sustainable, they must be linked to the value of the work that is carried out, and hence to the productivity of the person involved. This aspect of the debate needs to be fully taken into account through the careful assessment of the wider impact of the economy."
The Governor also suggested that COLA increases should be incorporated in negotiations for collective agreements in the case of unionised workers.
He warned that upward pressure on unit labour costs was likely to lead to a loss of competitiveness and a fall in growth potential and consequently higher unemployment, especially among low skilled income earners.
Prof Bonnici said the key to higher living standards was in the provision of further skill-enhancing programmes and sustained and better targeted investment at all levels of education.
Other measures could include measures to improve competition in the domestically-oriented sectors of the economy.
In his press conference Prof Bonnici welcomed the government's measures to curtail spending growth and called for an 'all round effort' to reduce the debt to below 60% in order to have 'room for manoeuvre'. Malta, he said, should not live beyond its means. The debt was 72% at the end of last year.
He urged the banks to continue to strengthen their capital buffers in order to mitigate risks associated with non-performing loans, the concentration of property-related lending, as well as the use of property as collateral. He also called on the banking sector to adopt more prudent policies regarding dividends and loan-loss provisioning.
The Central Bank last year made an operating profit of €52.5 million last year, slightly below that of the previous year (which was affected by an extraordinary item).