In his traditional address on the state of the economy, delivered at the Institute of Financial Services’ annual dinner, Central Bank governor Mario Vella gave a balanced view of the more positive aspects of the country’s economic performance as well as the less favourable issues that need to be addressed.
The impressive GDP growth of the last few years is acknowledged by local and international observers. Malta has one of the highest growth rates and one of the lowest unemployment rates in the eurozone. Labour participation has also improved and public finances are well within limits established by the EU for eurozone member states. Both the Central Bank of Malta and the European Commission forecast continued fast growth through 2020, although there may be a deceleration.
Still, such unprecedented growth brings with it some significant challenges that need to be addressed. The worst downside risk is the global political instability that may affect Malta’s open economy. Possible trade wars, even if conducted by major countries like the US and China, could ultimately have a negative impact on Malta whose economic success ultimately depends on exporting its goods and services on a global level.
Brexit and the rise of populist parties in Italy, France, Spain and Germany may hinder progress in the reforms the EU needs to fight off the unimpressive economic performance and high unemployment afflicting some countries. International financial markets developments are unlikely to be encouraging in the short term.
Malta cannot isolate itself from the harmful effects of these geopolitical challenges. While domestic demand is forecast to remain strong and a booster for economic growth, a downturn in international economic sentiment may dampen this demand. However, the investment in infrastructure projects should keep the local economy buoyant for a few more years as road improvement projects and building of residential dwellings are accelerated.
Dr Vella sounds a note of caution about the negative implications the recent economic growth is having on various sectors of the local community. He argues: “The rapid economic expansion and population growth have put pressure on the country’s physical infrastructure, in particular as regards road transport and health and educational facilities.” The problem of escalating rents is also underscored.
The risk of infrastructure projects overshooting budgeted costs is highlighted by the Central Bank governor in the context of competition for resources from a booming construction sector and more stringent procedures linked to the utilisation of EU funds. He expressed “significant reservations” on some methodological aspects underlying international surveys that monitor the business environment.
Dr Vella does, however, mention that Malta has a reputation issue because of international institutions’ concerns about money laundering even if he failed to mention the equally important issue of perceived corruption.
Somewhat surprisingly, the governor’s speech makes little direct reference to the issue of the ever-increasing number of tourists that according to industry operators is leading to diminishing economic and societal returns. Similarly, the overdependence on e-gaming does not seem to be a concern to the Central Bank.
In his speech, Dr Vella threw some light on the unfinished business of hardwiring sustainability in the country’s economic strategy. Economic policymakers will do well to ensure that future economic growth pays better long-lasting dividends to a broader base of society.
This is a Times of Malta print editorial