Central Bank Governor doubts feasibility of City Gate SPV

The Central Bank Governor Josef Bonnici has expressed doubts on the feasibility of creating a Special Purpose Vehicle (SPV) to fund the €80 million City Gate project.

During the presentation of the bank's annual report held on Tuesday, Bonnici said "it would be much better to fund projects through a consolidated institution with a professional set-up such as a Development Bank".

He explained that this would enable the government to access super-national run funds. Bonnici added that he "does not wish to speak in detail about SPV's because it is still not clear how it will be structured".

Development banks are institutions, run by a group of countries, that provide financing for development projects through long-term loans at market rates, very-long-term loans below market rates, and grants such banks include both developed donor countries and developing borrower countries.

Bonnici said he has "suggested the setting up of a development bank to take over government assets to cover the expenditure of commercial nature". He added that a distinction should be made between government debt serviced by tax revenue and debt serviced by entities. Bonnici also insisted that government should only embark on "sustainable" projects.

Asked by economist and former Labour candidate Alfred Mifsud to comment on the Enemalta debt which was taken over by the government, Bonnici said "Enemalta should be economically viable to service its own debts".

On energy, the Central Bank governor said "subsidising energy is not a good policy". Bonnici also refused to attribute the inflation to the rising costs of water, electricity, gas and fuel. He instead said that the inflation is mainly based on the increase in the prices of imported commodities.

Bonnici warned that the government needs to be "vigilant" and control the general government debt which has reached 72% of the Gross Domestic Product (GDP). He urged the government to reduce the debt to below 60% of GDP.

Bonnici also called for "a concerted effort to live within our means". He stressed that the €4.6 billion debt needs to be reduced "to ensure a sustainable future".

The governor also put forward a controversial suggestion to have COLA (cost of living adjustment) increases incorporated in negotiations for collective agreements. Bonnici added that the mechanism should only "be mandated through a wage order for workers not covered by collective agreements."

This has already been suggested by the Central Bank governor in the Malta Council for Social and Economic Development. He explained that in order to achieve sustainable wages these need to be tied with productivity.

"Consideration should be given to measures which permit greater flexibility in the application of the COLA mechanism" 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," he said.

He also warned that upward pressure on unit labour costs was likely to lead to a loss of competitiveness and a drop in growth potential and consequently a higher unemployment rate, "especially among low skilled income earners."

Bonnici said the Central Bank last year made an operating profit of €52.5 million compared to the €57.6 million. He said this decrease is down to the 11 million one-off payment related to the demonetisation of Maltese lira coin and notes.