IMF report - are we ready for the challenge? | PKF Malta

Two weeks ago saw the publication of a concluding Statement on the economy by IMF. This lauded government for last year’s performance which reveals real GDP growth was another high in 2018. The sustained economic growth resulted in ever present acute labour shortages which were filled by strong inflows of foreigners.  

GDP growth is averaging 6.5 percent in 2018, slightly lower than the previous year, and a modest 5 percent expected in 2019.  All this is driven by buoyant domestic demand. This bonanza has given birth to a feel-good factor which is commendable. Similar good performance has also blessed other EU countries such as Poland and Czech Republic, both countries faced labour shortages which were temporarily filled by imported labour.  

The IMF report on Malta goes to mention a number of steps to help ensure a sustained future growth. Among the number of recommendations, one finds the standard advice urging government to improve support to start-ups. These are finding access to credit being hindered by red tape and the perennial demand by banks for tangible collateral. Equally important, in the opinion of the IMF experts, is the need to improve the quality of labour force to be able to attract more international companies which are be tempted to relocate to Malta.

An ideal way to improve the quality of the local talent is by setting up an innovation hub of international repute. Attracting foreign talent and having superlative education system churning out more PhD’s graduating in science and ICT, can be the right building blocks to populate a vibrant industrial ecosystem.

Nonchalantly, we heard this promised many times in budget speeches and a feeling of Déjà vu sets in. Not surprisingly, critics lament, that the government is more than delighted to attract mega manufacturing projects lured by State agencies which for the right applicant it guarantees bank loans and build custom -made factories - all rented out at low rates. This is not to forget public protest when it reads that in a move to assist upmarket tourism, the government has on a number of occasions granted prime sites on generous terms to mega developers erecting high-rise luxury units.  

The independent press is criticising government, when in such cases, public land worth millions is granted at fire-sale prices. This is not a level playing field where SME’s are concerned - the latter are struggling to keep pace with competition and find it impossible to secure extra funds needed to innovate their products. Perhaps due to their small size, albeit they make up 85% of local industry, facts show that they face perennial problems to innovate.

Really and truly, although the bureaucracy speaks of business concessions, facts show they are not the government darlings. Regardless of this incongruency, it is an undisputed point that such accelerated GDP growth has fuelled an unprecedented exuberance - voters are enjoying the ride. Indirectly even SME’s which operate for the domestic market cannot complain given that sales are improving.

There is no denying that consumers have more spending power.  Equally resonant are developers - these are in a race, to splash their egos building concrete and glass units in the Eldorado area in Paceville. Every week, we read about PA approving another high-rise tower. For an island, which for many years has not witnessed such unprecedented growth in high rise buildings, it comes as an incredulity to inhabitants to see all this sudden affluence.

As can be expected, all this building frenzy came under heavy attack from environmentalists, Caritas and Church authorities lamenting that confidence in Dubai-ification can only be a symptom of wanton greed. In other countries, it led to the ruination of traditional core values and way of life.  

Sceptics retort that we are living in a time warp painting a fairy tale picture about a fleeting feel-good factor but deep down - foundations are weak. The millions that are pouring in to sustain this gentrification drive has encouraged real estate agents to train a bigger sales force to cater for the influx of foreign buyers. Prices for quality seafront apartments have never increased so spectacularly as has been the case in the past five years.

Party apologists think that the home-grown aversion towards land speculation can be a temporary phenomenon saying that prices will resist pressure to drop drastically - since land is scarce. The latter feign any comparison to what happened in other EU countries with property bubbles that swept over Ireland, Spain and Portugal. When burst, they inflicted dire consequences for banks, leaving in its wake, unpaid suppliers and high unemployment.  

Naturally, when a property boom led to a bust - politicians rushed cap in hand to IMF.

To mitigate against this potential calamity happening in Malta, the IMF report notes that while local banks are adequately capitalised yet it calls for more prudence in bank lending and a programmed reduction in non-performing loans. Again, it recommends an extra effort by government to support start-ups and create a culture that small can also be beautiful. Needless to say, it is advisable to increase links between academia and the private sector, which at present, can be pictured as two trains running in parallel.  

It is a dichotomy that Malta is spending big on education yet it still faces a high proportion of early school leavers. This is criticised in the 2018 edition of the European Commission’s Education and Training Monitor. Another topic in the IMF report which merits our attention is the need for more social housing.  There is a waiting list of 3,500 families seeking decent habitation.  

This human malady, is partly caused by the onset of gentrification (mentioned earlier) forces house prices to escalate. It is no surprise, that low-income workers cannot afford the rents on offer. For vulnerable households, the IMF recommends more rent subsidies granted by the State to deserving families and the acceleration of investment in affordable accommodation by Housing Authority.  

But not everything is gloom and doom and one must congratulate government for creating financial stability, jobs for all and a general feel-good factor. The attraction of more tourists which in turn has contributed to the recovery of AirMalta are positive factors that have helped generate a healthy multiplier effect.

Rating agencies praise the government for success in navigating the ship of the state in choppy waters amid the uncertainty of a faltering Eurozone, immigration challenges and the deleterious effect in case of no-deal Brexit.

In conclusion, the administration is rapidly approaching its mid-term blues and to add to the excitement, the prime minister declared he shall pass on the baton and will not seek re-election. Rumours are doing the rounds that he may exit the political scene before the end of this year.  

Perhaps now is a good time for him to reflect on his legacy to the nation. The irony of the mid-term blues may corelate with his yearning for early deliverance.