Galloping economy – a cornucopia of rich harvest

The editorial of The Sunday Times of Malta praised Finance Minister Edward Scicluna and Prime Minister Joseph Muscat for success in navigating the ship out of choppy economic waters amid the recent uncertainty of a faltering eurozone, the effect of Brexit and the fallout from a devaluing sterling. The editor attributes the earning of high accolades due to the fact that in his opinion the government to a large extent has maintained the same economic direction as the Nationalist government before it, with the exception that its move to reduce utility tariffs has increased consumers’ purchasing power and boosted business competitiveness.

This comment seems a trifle rich since the Nationalist credo over its 25 years’ reign embraced a different policy of tax and spend with an over-riding overture of a borrowing instinct – under the merry slogan of “money is no problem”.  The national debt at its highest peak exceeded the Maastricht criteria and the European Commission was about to invoke an Excessive Deficit Mechanism at the end of 2012. It is fallacious to attribute the secret of our economic miracle in three short years exclusively to an increase in tourist arrivals or the low price of oil.

This is because other European economies registered lacklustre performances but equally benefitted from the low price of oil, yet none reached an impressive 6.5% real growth in GDP. In a patronizing note, the editor concludes that the economy is fragile and can be compared to the spurious success of an Olympic athlete who won gold yet he or she must never rest on their laurels.

Thus he harps on that only diversification can be the elixir which guarantees continued success, and so far there has been little or no effort in this direction – apart from the IIP scheme (the latter boycotted by the Opposition leader). 

Therefore in his opinion, the economic success is only paper thin as pitfalls can be found in every corner.  Sadly, he opines that the government has not concentrated enough on encouraging and identifying new and sustainable forms of economic stimulus.

Stop the current building boom which on paper shows solid enthusiasm by local investors to splurge in excess of two billion euros to develop 25 high-rise towers – all catering for upper class tourists and super rich foreign residents. This building frenzy came under heavy attack from environmentalists and Church authorities lamenting that confidence in Dubai-ification can only be wanton greed which will end up being the ruination of our traditional core values and way of life.

Another fly in the ointment is the recurring case of poor governance, particularly resulting from the Panama Papers and the foregone conclusion that a recent resignation of a FIAU director (he joined a law firm consulting in AML sector) was linked to alleged internal investigations over the Mossack Fonseca links to an ex-minister and a top government official.

Are we fighting windmills by painting a fairy tale picture that the economy is strong but its foundations are weak?  Finally, the editor agonizes about a number of politically affiliated persons elected to top government agencies – a practice that is heavily criticized by the Opposition which in its glorious past has never fallen prey to this temptation.

At this juncture, can we assess if really and truly our economy is firing on all cylinders or on the contrary its latent fragility is simply an exercise in spin and mirrors to paper the cracks. Our growth potential has been highlighted by the recent favourable upgrade by Standard and Poors agency to a stable outlook BBB+/A-2.  The Fitch credit agency also upgraded our ranking based on government policy to gradually reduce the debt ratio to below the 60 per cent of GDP and aim for a budget surplus.

Party apologists blow their trumpets and rub their hands with glee, saying that the economy continued to expand robustly in 2016, with real gross domestic product (GDP) reaching 6.3% in 2015, reflecting superlative results gained by both the tourist industry and the gaming sector.  Naturally the proof of the pudding is employment statistics and these point to a healthy and steady improvement reaching historically low levels.

The unemployment rate has been coming down from 5.8 per cent in 2014 to 5.4 per cent in 2015.   Moreover, Eurostat, showed that Malta compared to EU members had recorded the lowest total unemployment rate at 4.0 per cent, mirroring the lowest youth unemployment rate at 6.9 per cent.  The full-time gainfully occupied population reaches 173,474 at the end of December 2015, yet our overall labour participation rate must improve further.

It is encouraging to read that the government is aiming for a deficit target of 0.7 per cent of GDP in 2016 which will decline to 0.6 per cent of GDP in 2017 and further down to 0.2 per cent of GDP by 2018. So where is our Achilles heel?

We cannot be perfect on all counts and quoting the pre-election document this openly states that our main weaknesses converge in two – namely difficulties of SMEs in getting credit and resolving insolvency. In the case of getting credit, Malta’s score is low given the lack of institutional set ups and duopoly in banking, together with a lack of a credit bureau and a credit registry.

In terms of insolvency resolution our weaknesses lie in inefficiencies related to the time, cost and recovery rates of insolvencies. The pre-budget document proposes that new legislation is introduced next year in order to speed up proceedings with respect to resolution of insolvency, through

the new concept of Second Chance. This seeks to introduce voluntary mediation procedures in insolvency if at least 60 per cent of the company’s creditors are in agreement.

More skeletons in the cupboard can be state-owned enterprises which pose fiscal risks, as exemplified by financial support to loss-making Air Malta and the accumulated debt outstanding at the Freeport and Gozo Channel. In my opinion, the most important challenge facing the country is not lack of diversification or perceived low corporate governance but the need for higher social cohesion through better education and the elimination of skills gaps. Studies have shown that education (all free, and the government pays stipends) is good but needs to be further pruned to ensure better dispersion of knowledge and skills. It is beyond doubt that lower skilled persons find it more difficult to access the labour market as demonstrated by the employment rate for persons with a low level of educational attainment, which at 52 per cent is considerably lower than the overall average in Malta of 63.9 per cent.

Concurrently, we need to encourage more female participation in the labour market and continue to offer strong labour demand conditions. The pre-budget document comments about how low skills are associated with relatively lower employment rates and in turn this is manifesting itself in poverty outcomes in light of the persistence of poverty and social exclusion in low skilled households. In conclusion, while we praise the Lord for showering on us a cornucopia of delights that are the fruits of our rich harvest, may we pray that the 2017 budget will take effective measures to distribute more benefits to those persons who for some reason or another have fallen or are about to slide into the poverty trap.