15 August 2001


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IMF, S&P in mutual agreement – Malta outlook positive

Last week The Malta Financial and Business Times brought its readers the details of the International Monetary Fund's latest report on the Maltese economy. Following is the second and final part of the series, in which we look at the Chamber of Commerce's cautionary statement on such positive reports and the findings recently released by international rating agency Standard & Poor's.

The Chamber's reaction
The Malta Chamber of Commerce on Monday warned participants in the Maltese economy to not become complacent, given the positive findings issued by the International Monetary Fund and the Standard & Poor's credit rating agency.

The Chamber makes reference to the fact that the IMF commented favourably on a number of economic indicators. These include inflation, unemployment and GDP growth. However, the Chamber explains that it cannot stress enough that such comments should not be blown out of proportion by the government or any section of the media, as such a development would be very dangerous for the country if it were to become complacent about its future economic needs and performance.

According to recent surveys it has carried out with its members, the Chamber holds to its belief that the local economic situation is not quite as buoyant as figures alone depict it to be.

With reference to the S&P report in particular, the Chamber expressed its gratification that the New York-based credit rating agency has confirmed Malta's ratings giving the country a "stable" outlook. Stability, the Chamber explains, is a fundamental pre-requisite for the attraction of investment and future economic development and that Malta cannot afford drops in credit ratings issued by international independent agencies such as Moody’s or Standard and Poor’s.

The Chamber observed that the IMF has been reported to state that Malta’s deficit reduction needs to be more ambitious. The Chamber considers the deficit problem as a critical one for the country and, over the last few years it made several representations to this effect mainly through the formal budget proposals it sends to the Minister of Finance on an annual basis, as well as through its active participation on MCED – now MCESD.

The Chamber comments that it has always maintained that the deficit should be tackled through a responsible curtailment in government expenditure where it is believed that there is still significant scope for savings in taxpayers’ funds, especially through the control of wastage and abuse. This comment was replicated by the IMF, "Fiscal deficit reduction would best be achieved through expenditure reform rather than through further increases in tax burden."

The Chamber is adamantly against tackling the problem through increased taxation, contending that a widening of the tax base or the alteration of taxation parameters which cannot be accounted for beforehand by investors may only serve to introduce fiscal uncertainty.

According to the Chamber, "Government’s recent measures to step up efficiency in tax collection have been noticeable. This is positive in itself as the Chamber argues that all taxes should be paid, although it cannot be denied that this has contributed towards a tight cash-flow situation within the remainder of the economy. Moreover, this must be complemented with other measures aimed at eradicating the rampant tax evasion that continues to exist in many sectors of the local economy."

The Chamber also makes reference to a common message from both reports – that economic reforms must continue and Malta must strive to enhance its competitiveness. The Chamber explains that it has also felt this need for some time and to this effect, it has decided to hold a national conference on 5 October with the theme of "National Competitiveness – The Way to Prosperity". The aim of the conference, which is to be addressed by local and international speakers, is to discuss Malta’s requirements in terms of National Competitiveness in the light of the globalisation process and the country’s EU membership aspirations.

Standard & Poor's
In its report, Standards & Poor's comments that, reflecting gradual improvements in the government's fiscal position, progress with structural reforms, and strong, albeit weakened external position, it affirmed its single-'A' foreign currency and double-'A'-minus local currency long-term ratings on Malta. At the same time, Standard & Poor's affirmed its 'A-1' foreign currency and 'A-1'-plus local currency short-term ratings on Malta. The agency also gave Malta a stable outlook.

According to S&P, "The general government deficit is forecast to narrow to 5.3 per cent of GDP in 2001, from a peak of 13 per cent in 1998, reflecting renewed efforts to broaden the tax base and contain public sector employment growth. Further efforts to enforce existing taxation provisions, coupled with continued expenditure restraint, are expected to enable the government to exceed its budget target of a deficit equivalent to four per cent of GDP in 2004.
Sustained reductions in the fiscal deficit, coupled with a resumption of the government's privatisation program, are forecast to limit further increases in the general government debt burden. The debt burden is forecast to increase by six percentage points in 2001, to 66 per cent, reflecting the addition to the government's balance sheet of the debt of Freeport Corp. PLC, following the privatisation of Malta Freeport Terminals Ltd.

Outlook: stable
Preparations for EU accession, including the gradual implementation of structural reforms, a stabilising general government debt burden, and continued fiscal restraint, underpin the stable outlook.

The government's gradualist approach to fiscal consolidation, however, provides little budgetary flexibility in the event of weaker-than-expected growth, and over the medium term, additional budget measures, including structural reductions in expenditure, will be central to maintaining fiscal consolidation and averting downward rating pressure.

The government's reaction
The government also reacted to the findings of the two major monetary bodies with enthusiasm, given the very two positive reports in as many weeks.

The government explains, "In their statement, Standard and Poor’s commented on the positive indicators that are noticeable in the Maltese economy, especially the improvements registered in the budget balance.

"This positive assessment follows the very positive report issued by IMF last week. All this shows that government’s efforts to bring the deficit to sustainable levels, after its hike to nearly 12% of GDP after 20 months of labour government, is giving Malta credibility on the international front.

"The IMF Report welcomes the positive outcome of Malta’s post-1998 economic strategy and endorses the Government’s current macroeconomic policy stance, while calling for more ambitious reforms to defend competitiveness, particularly in the context of a possible slowdown in Malta’s export markets caused by the slowdown being experienced in global markets and in developed economies.

"The Report notes that Malta’s macroeconomic performance improved in 1999 and 2000, when real GDP growth was robust, driven by strong fixed investment and exports. Economic growth has been accompanied by rising employment and lower registered unemployment, and by a decline in inflation. These trends mainly reflected strengthened fiscal and structural policies. These included a significant reduction of the fiscal deficit, a reinforcement of the tax system – including the successful reintroduction of VAT, a bold privatisation programme, better financial regulation as well as the removal of controls on trade, interest rates and capital flows. The IMF Executive Board’s assessment, which is contained in a Public Information Notice (PIN) that has been released by the IMF on Friday 3 August 2001, notes that 'these achievements leave Malta well placed to pursue its application to join the European Union.''

The government, meanwhile, does make reference to the fact that the report does stress that the policy framework needs to remain firm, particularly in 2001 if external market conditions weaken. It also noted the sharp deterioration in the current account last year, which resulted in a deficit equivalent to 14.5% of GDP, while acknowledging that this deterioration mainly reflected temporary factors, but the underlying external deficit remains high and may be affected by the weaker external environment.

Given this, the government reports that the Executive Board in its assessment supports the intent of the Maltese Authorities to achieve further fiscal consolidation in order to secure a sustainable current account balance over the medium term.

The Report also mentions the importance of addressing the fiscal deficit from the expenditure side to which the government explains that a number of measures are identified to rationalise public spending, namely the curbing of subsidies to public enterprises, pensions reform, stricter control over the government wage bill and an impetus to the privatisation process while the medium-term fiscal programme should aim to lower the overall tax burden relative to GDP.

Regarding the Maltese lira, the Report notes that the present fixed exchange rate regime has served Malta well. The durability of the peg, the openness of the economy, the strength of the financial system and the flexibility of private sector labour markets all indicate that the pegged regime remains appropriate. Further action is, however, necessary to support the peg, in particular efforts to ensure continued appropriate flexibility of nominal and real wages.
In the context of an open capital account the Report stresses the importance of a more flexible monetary policy to ensure an appropriate level of external reserves as foreign interest rates rise and fall.

Here the Report remarks that the proposed amendments to the Central Bank of Malta Act – the adoption of a clear mandate to maintain price stability, the prohibition of direct lending to the Government, and steps to strengthen the Bank’s independence, should serve to boost market confidence in the Bank’s monetary policy. The effectiveness of this policy would be further enhanced by the maintenance of a robust financial system.

Finally, commenting on statistical issues, the Report says that Malta subscribes to the IMF’s General Data Dissemination Standard (GDDS) and its statistics are generally of good quality. Surveillance, however, would be enhanced by shortening the lags with which some of the key data are produced.

The government has wholly welcomed the IMF’s endorsement of its economic policies and strategic direction. It explains, "It [the IMF report] is also broadly in agreement with the IMF’s recommendations in so far as they are designed to strengthen Malta’s competitiveness.

When implementing economic reform the social impact should be kept well in view. This is why, over the years, government has adopted a gradualist policy, the IMF recommendations, can be implemented more successfully if the government receives the full support and co-operation of all the social partners."



The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt