Growth and fiscal prudence: the post-COVID formula

The European Commission Spring forecast for Malta’s economy notes that despite the increase in commodity prices and the war in Ukraine, our economy is set to continue expanding, by 4.2% in 2022 and by 4.0% in 2023. The strong demand and growth in exports of services, contributed by strong recovery in tourism are the main factors for this forecast.

The commission attributed fiscal support as the reason why Malta was able to cushion the impact of the pandemic on the labour market. Employment was estimated to have grown by 1.6% in 2021. The wage support measures have had a positive impact on the labour market as jobs were protected and new ones created. Malta’s unemployment rate is low. Employment is now expected to continue to increase.

Ratings agency Moody’s too predicted the Maltese economy to grow by 4.2% of GDP in 2022, attributing domestic consumption and investment as important drivers of growth. It confirmed Malta’s A2 negative rating; Moody’s had changed Malta’s outlook from stable to negative in August last year.

The Moody’s report follows another report by rating agency Fitch. Fitch Ratings has affirmed Malta’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a stable outlook.

Inflation, though one of the lowest in the euro area, and below the 7.5% for the euro area, Estonia (19.1%) and Lithuania (16.6%), has increased. The Maltese government has decided to absorb additional costs for basic commodities and energy. Inflation is expected to stabilise around 2% between 2023 and 2025.

There has also been an increase in government debt. At the end of March 2022, Central Government debt stood at €8,466.3 million. According to a Central Bank of Malta report last month, the government balance is expected to remain in deficit for the forthcoming years, narrowing to 3.3% of GDP by 2024. COVID-19-related support measures contributed to a higher deficit – however they protected thousands of jobs and surely no one can be against this sort of expenditure. Government assistance was imperative. These measures are now expected to be phased out by 2024.

The global events of the past two years have shown the fragility of the world’s economies. But the challenges brought these events can be addressed through a coherent plan for recovery and growth. On the upside, the pandemic provided an opportunity for local businesses to focus on higher productivity and innovation – eCommerce has experienced significant growth.

In the coming months and years, it is crucial for Malta to achieve both fiscal prudence and sustain economic growth.

Diversifying into new economic sectors is of the essence – and this depends largely on our education system. Long-run growth will depend on the creation of new jobs.

A government consultation document launched in 2021 identifies five main economic pillars for the coming ten years: Sustainable economic growth to improve the quality of life; High quality infrastructure and investment; Education and employment; Environment; High standards of accountability, governance, and the rule of law. To improve the level reached by our country’s economy we must make a greater effort to make the next leap. Maximising human capital value through training and education is imperative. Despite an anomalous two years, the economy continued to grow at appreciable rates and is expected to continue growing. We must do all we can to hasten the journey.