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business
Central Bank reports on last year's
developments
-
economy grows by 4 per cent last year
- unemployment at three year low
- government's 2004 deficit objective within reach
- devaluation/ flexible exchange rates ruled out
The Central Bank of Malta, reviewing last year's domestic economic
developments, estimates that the economy grew by some four per cent
last year.
Export-oriented manufacturing firms, particularly those in the electronics
sub-sector, contributed strongly to Malta's Gross Domestic Product,
a sum that measures a nation's economical output, growth.
Luckily, this growth compensated for the modest performance in the
tourist industry and in the locally-oriented manufacturing and services
sectors.
After having remained subdued over the previous four years, investment
grew strongly in 2000. The rate of job creation also accelerated,
particularly in the directly productive sectors.
As a result, unemployment fell to 4.5 per cent, its lowest level
in three years. Retail price inflation stood at 2.4 per cent, but
underlying inflation continued to decline however, at around one
per cent, and remained somewhat higher than imported inflation.
Balance of payments
The current account deficit widened significantly over 2000. The
development was largely attributable to a number of exogenous factors,
including the hike in international oil prices, a substantial rise
in imports of capital goods, and a surge in investment income outflows
as foreign firms located in Malta recorded a large increase in profits.
Meanwhile, the surplus on the capital and financial account shrunk,
in spite of these earnings having been reinvested in Malta. The
main contributing factors were higher portfolio investment outflows
and a lower level of inward direct investment compared to 1999,
when inflows were boosted by the sale of Mid-Med Bank to the HSBC
Group.
The Maltese Lira
Regarding the Maltese Lira, the currency generally appreciated against
the euro and weakened against the US dollar through most of the
year, reflecting the persistent depreciation of the euro against
the US currency. Against sterling, meanwhile, the Maltese lira was
relatively stable.
Fiscal developments
Turning to fiscal developments, an improvement in public finances
was noted during 2000 – one that was greater than anticipated,
with the fiscal deficit being provisionally estimated at Lm95 million,
or six per cent of GDP. Furthermore, projections for 2001 show that
fiscal consolidation should continue, and that the government's
objective of bringing the deficit down to three to four per cent
of GDP by 2004 is within reach.
With regard to monetary and financial developments, the annual growth
rate of broad money was halved to around four per cent during 2000.
This partly reflected a slower expansion in domestic credit and
in the net foreign assets of the banking system. However, the slowdown
in the growth of deposits also reflected the growing popularity
of collective investment schemes and foreign portfolio investment,
as well as a greater recourse to the capital market by the private
sector to raise long-term finance.
Concerns regarding the balance of payments invariably lead to questions
about the exchange rate, which is a key issue for the Central Bank
as the main operational objective of its monetary policy is to maintain
the exchange rate peg in order to achieve its ultimate goal of price
stability.
Devaluation, flexible exchange rates ruled out
In this regard, the Governor of the Central Bank has ruled out both
the adoption of a flexible exchange rate regime, because the associated
fluctuations and uncertainty would be detrimental to a small and
open economy such as Malta's.
Meanwhile, a devaluation was likewise ruled out, because this presupposes
that sufficient slack exists in the economy to meet an eventual
increase in export demand, and that costs - particularly wages -
would not rise in response to higher inflation. Experience has shown
that in a local context the competitive advantage gained by a devaluation
tends to be short lived. It would, moreover, undermine the country's
reputation for exchange rate stability with existing and potential
investors.
A more lasting solution to the balance of payments imbalance does
not lie exclusively in macroeconomic adjustment, but also in microeconomic
reforms aimed at maximising efficiency in the use of resources.
For this to happen, it is essential that a more investment-friendly
business climate be fostered and that prices be allowed to fully
reflect the production costs of goods and services, and that the
resources employed be rewarded accordingly.
Improving efficiency
In this regard the bank identifies a number of areas susceptible
to the achievement of efficiency gains. These include: the labour
market, where wages should reflect productivity more closely and
a culture of safeguarding jobs through efficient work practices
should be promoted; the educational system, which should increasingly
provide the skills most in demand in a modern economy; the public
sector, where the excessive absorption of human resources imposes
a tax burden on other sectors; the financial markets, where uncertainty
about Malta's commitment to EU membership is adversely affecting
inflows of foreign direct investment; the real estate market, where
rent controls have contributed to artificially inflate prices; the
provision of public goods and services by the State free of charge;
subsidies to public enterprises; the welfare system, where the pay-as-you-go
pension scheme disconnects the payment of contributions from the
receipt of benefits; and monopolistic practices in the markets for
goods and services.
The bank stresses that with the economy's competitiveness increasingly
under threat, the restructuring process currently underway needs
to be extended across a broader front.
For this purpose it calls for a common effort by all interested
parties to devise ways: to relate the provision of welfare payments
and free medical, social and tertiary education services more closely
to needs; to create a smaller, but more professional and accountable
public service; and to introduce greater competition into monopoly
situations, particularly in key economic sectors.
The economy's short term prospects
Turning to the short-term prospects for the Maltese economy, the
Central Bank forecasts suggest that the growth rate should rise
to a figure between four and 4.5 per cent in 2001, while inflation
should moderate to 1.5 to two per cent.
Growth in domestic demand should be contained, as the fiscal deficit
is to be reined in further. On the other hand, the deficit in the
external account is expected to persist, although it should narrow
as the exceptional factors observed in 2000 are unlikely to be repeated,
while the export sector should record an improved performance.
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