07 AUGUST 2002

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Economic growth expected to continue

In its latest Business Perceptions Survey, the Central Bank of Malta has found that Malta’s business players expect the country’s economic growth to continue recovering over the rest of the year – thanks mainly to a bolstering of export activity from Malta’s manufacturing sector.

To this end, Malta’s manufacturing firms are projecting higher export orders with potential increases additions firms’ workforces. However, the success of the sector depends very much on the continued amelioration of foreign demand. This, the bank explains, is expected to help domestically oriented firms through the multiplier effect and in fact firms in the services are also expecting heightened activity levels over this year’s second half. On the downside, the problems being faced by the tourism sector, crucial to the economy as a whole, are expected to dampen overall economic activity during the year.

Meanwhile, demand from the domestic market is likely to remain weak although the survey results suggest that conditions have stabilised, and some sectors, particularly financial services, are showing signs of an incipient recovery, which suggests that pressures on the labour market should recede in the second half of the year.

Over the first quarter of 2002, the CBM notes, the Maltese economy had showed some signs of recovery from the sharp downturn that had characterised the second half of 2001, particularly after September 11.

As such, the Gross Domestic Product had increased by 1.4 per cent in real terms, after a decline of 2.2 per cent over the previous quarter.

The CBM cites domestic demand as the main driving force behind the stronger performance as private consumption expenditure recovered sharply. Some improvement was also recorded in external demand, with the contraction in the activity of the two major export-oriented sectors - manufacturing and tourism - moderating.

Inflationary pressures had eased during the quarter, as the acceleration in food prices that had persisted for most of 2001 subsided. The twelve-month moving average rate inflation rate, however, continued to rise, buoyed by the rise in the Retail Price Index (RPI) recorded during the second half of 2001. Meanwhile labour market activity remained subdued, leading to a four per cent rise in the number of persons on the unemployment register.

On government finance, the CBM observes that during the March quarter fiscal operations resulted in a deficit of just under Lm32 million, slightly higher than the shortfall registered in the corresponding quarter of 2001. Revenue growth, especially the intake from direct taxes, slowed down, and was outstripped by the expansion registered in expenditure. The resulting deficit was financed mainly through the issue of short-term debt instruments. Thus, gross Government debt rose by Lm33 million, or 3.3 per cent, during the quarter.

Analysing developments in the balance of payments and the exchange rate movements of the Maltese lira, the CBM remarks that the improvement in the balance of payments observed during 2001 continued into the first quarter of 2002. The current account deficit shrank further, mainly due to a narrowing of the merchandise trade gap. The latter development, in turn, reflected a sharp drop in imports, driven by lower outlays on industrial supplies, capital goods and fuel, which offset a decline in exports. The decline in imports also led to lower freight costs and thus contributed to an increase in the net surplus on services. Meanwhile, a marked rise in the surplus on the capital and financial account mainly reflected portfolio inflows on the part of international banks, and, to a lesser extent, the repatriation of foreign investments by Maltese residents.

Reflecting these movements in the current and capital and financial accounts, the official reserves (net of revaluation adjustments) rose by Lm25.4 million.

Regarding exchange rate movements the CBM explains that over the quarter reviewed the Maltese lira lost 1.2 per cent of its value against the US dollar, but appreciated against the euro and the pound sterling. At the same time, the strengthening of the yen against the dollar caused the Maltese lira to weaken slightly against the Japanese currency.

On the CBM’s monetary policy stance, the Bank explains that over the first quarter of 2002, the Bank had further eased its monetary policy, lowering both the central intervention rate and the discount rate by 25 basis points to four per cent on January 31. Official interest rates were then left unchanged for the remainder of the first quarter and throughout the second.

The Bank’s decisions were based on its analysis of economic and financial developments in Malta and abroad and were consonant with its monetary policy strategy, which is based on pegging the Maltese lira to a basket of currencies. Since the premium on Maltese lira short-term interest rates remained relatively wide, the Bank’s net foreign assets rose significantly during the second half of 2001 and into most of the first quarter this year. This supported the decision to cut official interest rates in January. Thereafter the Bank adopted a more cautious monetary policy stance, as the increase in official reserves was partly reversed in subsequent months, although they stabilised in May.

Copyright © Network Publications Malta.
Editor: Saviour Balzan
The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07, Malta
Tel: (356) 21382741-3, 21382745-6 | Fax: (356) 21385075 | e-mail: editorial@networkpublications.com.mt