A tale of two uncertainties
Finance Minister John Dalli speaks to DAVID LINDSAY
about the issues of uncertainty affecting the Maltese economy at present.
He also speaks about the Oppositions two month tax holiday proposal,
transparency at HSBC, the adjusting of tax ceilings and Maltas
future as a financial services centre in this
Finance Minister John Dalli sees the lack of certainty,
as Malta hangs in limbo over the EU membership question and international
turmoil caused by events in Iraq, as the primary factor affecting the
Maltese economy at the moment.
The issue of certainty or lack thereof - is two-pronged, with
one prong originating from outside the confines of Maltas shores,
while the other lies in the hands of the electorate on 12 March.
He explains, "The main issue affecting the economy is uncertainty,
which is affecting us on both the national and international level.
We all know what is happening around us on the international level,
which is creating levels of uncertainty both internally and on the international
market - the international market that buys our products and from which
our important tourism market is derived. This uncertainty has had and
will continue to have a negative effect on our economy, very much in
line with the toll it is taking on all other economies worldwide.
"This lack of certainty will also have a cascading effect, not
only through the first line reactions such as people being reluctant
to travel. But as tourism in general collapses and other economies suffer
negative economic effect, these economic effects will fuel further economic
negativity. Therefore we all hope that this negativity will be resolved
as soon as possible."
The other main issue affecting confidence levels is, however, home grown
and, of course, centres around the electorates indecision on Europe.
Dalli explains, "I believe the decision the Maltese people will
be taking on 12 April will be a decision of whether on 13 April we will
be certain of where we are. The Prime Minister will sign the European
treaty on 16 April and the Maltese people and those interested in Malta
- be they investors, visitors or others - will know what the playing
field is, where Malta is going and by which rules Malta will be playing.
This scenario leads to certainty.
"Alternatively there will be uncertainty. We will have a situation
in which we will have a Prime Minister who will be absent in Athens
on 16 April. This will give a totally negative impression. Our credibility
will suffer greatly and Malta would become a country with which one
is wary of dealing with.
"In this scenario we are promised that we would have four more
years of negotiations with the European Union, on what we dont
know, but this process of negotiations is a guaranteed four years of
uncertainty. That is what the economy could be ultimately facing."
If Dalli is certain of one thing in uncertain times, it is that Maltas
economy would not be able to cope with four more years of uncertainty
caused by a new set of negations with the EU.
He explains, "The country could not handle any further uncertainty
and I believe this is why the effect on Malta, as proven by all economists,
if the country were to go Labours way, would be a deflation of
growth as investments disappear.
"In this scenario I believe that productivity would decrease as
jobs would not be forthcoming. In an economy, as everyone knows, it
isnt simply a question of creating new jobs, but it is a question
of creating jobs to replace redundancies that arise from time to time.
Like all natural things, enterprises die - factories and services companies
close and workers become redundant. Now imagine a situation in which
we are not even generating the jobs to maintain existing job levels.
So what is needed is job generation - not just the creation of new employment
but also the replacement of lost jobs.
Dalli sees Opposition Leader Dr Alfred Sants two month tax holiday
proposal as, perhaps, equally dangerous and describes the clear electoral
ploy as a "farce".
"I honestly believe that this is not a give-away at all but is,
in fact, a postponement of tax," Dalli explains. "People will
not pay tax for the first two months but then they would have to pay
through the teeth for the one-off break over the coming months and years.
"The country cannot afford these gimmicks. I think people today
are mature and they see through these ploys, as shown by the publics
incredulous reaction to the proposal.
"The suggestion is dangerous. First of all these one-offs simply
dont work and reek so much of buying votes and an attempt to corrupt
the Maltese people
with their own money."
I suggest that some experts have said that if the tax holiday were to
be implemented, a good deal of this money would simply end up abroad.
"This would be normal because in Malta we have a great deal of
leakage," Dalli explains. "In fact, most 80 per cent of what
we consume here in Malta has a foreign content. Therefore, much of what
we consume does not go into local productive capacity but instead goes
to purchase goods imported from abroad. In this scenario you have quite
a heavy leakage of this money into foreign hands.
"Lets face it, there isnt really much you could do
with this gift anyway. No one is going to plan to buy a house even if
given the maximum of Lm200 for someone earning Lm10,000. What can you
do with this Lm200 one-off, let alone the others earning Lm4,500 a year,
who will be given Lm5.
"To package this as an economic measure suggests to me that some
people need to go to school on economics."
On the other hand Dalli, who on 12 April will stand for his second consecutive
term in office, suggests more permanent measures to boost spending and
economic growth, such as the raising of tax ceilings.
"What Im saying is that this [the raising of tax ceilings]
is what we have done in the last budget and in the one before it.
"If one wants to increase real spending and adjust the patterns
of our population, it is through permanent tax adjustments
temporary measures. The way to do this is by adjusting tax ceilings
and tax bands, as we have been doing.
"Instead of this one off, he [Dr Sant] could have simply said instead
of mentioning income tax, he would send a cheque of a certain amount
to every household in Malta. Why didnt he say that instead of
mentioning income tax this clearly has more to do with the marketing
and packaging side of things."
Reacting to Dr Sants threat, as it could be called, to investigate
transparency at HSBC, Dalli responds, "He [Dr Sant] can spend as
much money as he likes and he can check the transparency of everything
that has been done by this government and ministry.
"What hell find is that we have been transparent all through.
We have done what we needed to do in accordance with the law and, to
this end, he can do all the investigating he likes.
"He did this, of course, in 1996 when he was elected and he came
up blank after all the insinuations and allegations he was making to
try and smear the government and me personally. They did carry out investigations
and drew blanks on everything they investigated and the result would
have the same outcome this time around as well.
"Hes welcome to investigate all and sundry and if he wants
to call me to help him, I will be happy to oblige."
Speaking recently on a radio programme, the Minister had retaliated
against the accusations of lack of transparency at HSBC by citing misgivings
he had over the sale of Maltacom shares on the London Stock Exchange.
"I have always questioned the rationale of putting Maltacom shares
on the local and foreign market at the same time and of having shares
being sold at different prices in different countries. This creates
a leverage between them and opens the floodgates for arbitrage [the
purchase of securities on one market for immediate resale on another
market in order to profit from a price discrepancy] between the two
"In this situation, if I were so inclined, I could have made a
good deal of money by switching from one share to another - buying in
London, selling in Malta, buying again in London, selling in Malta and
so on and so forth.
"This arbitrage between the two shares prices was idiotic and people
need to ask why this was done.
"There was also the question of Maltacom shares being sold in bearer
form. These could have been bought by institutions, as claimed, but
I dont know who bought them and no one knows who bought them.
However, its not a question of who bought them, but of how they
were transferred, since once they were in bearer form they could have
been passed from hand to hand.
"The reality is that 20 per cent of Maltacom shares were sold on
the LSE and 80 per cent of those have found themselves back to Malta,
bought by Maltese."
Many across the Islands last week began receiving notifications that
penalties due for late Value Added Tax payments have been reduced by
90 per cent, payments that had in many cases amounted to several thousand
The measure, Dalli explains, which was announced in Novembers
budget, comes as a result of requests from the constituted bodies during
pre-budgetary discussions with the Malta Council for Economic and Social
Development and is now seeing the light of day some four and a half
Dalli comments, "The constituted bodies expressed the amount of
hardship and harassment these outstanding VAT penalties were causing
and how people were finding them a burden to pay. The situation was
also found to be clogging up the administrative system at the Department."
He adds that outstanding income tax penalties are also pegged for similar
treatment and that the first draft of the legal notice is in hand.
"We are reviewing income tax penalties in the same light and the
same letters will also go out to people who have longstanding penalties
as far as income tax is concerned, again, as a result of requests put
forward during MCESD discussions and as announced in the budget."
How does Dalli see Malta developing as a financial services centre if
Malta is to join the EU?
"What I can quote here is what I hear from practitioners themselves.
As you know we leave the marketing of our financial services centre
completely in the hands of our practitioners. Government does not take
a primary role in this respect and for good reason, since the financial
centre has to be marketed in a very quiet and professional way. However,
we give full support to practitioners, we finance a portion of their
marketing, and we work with them on the literature that goes out to
ensure that it is consistent.
"Im often invited to attend meetings organised by different
practitioners with clients both abroad and locally to promote the concept.
As such, we give a lot of weight, especially to practitioners, to this
potential role for Malta.
"What I hear from the practitioners is that financial services
will boom once Malta joins the EU and I can see why and explain why.
This is because they would then be in a better position to offer certain
products and services that are difficult to offer now because of the
passporting issues that local products currently face in
the EU. This means that with membership Maltese financial products could
be marketed in Europe, while today they cant be unless we were
to have the very difficult to achieve bilateral agreements with every
"Once we do join Europe, this passport will be avaliable
to all Maltese financial services practitioners, which will give us
a great deal of market spread and the security that comes with membership.
"The name Malta as a trademark or a name for a service
will gain value. Malta, as part of Europe, will be much more credible,
much more trustworthy and the political risk of operating in all sectors
will be zero.
"On the subject of political risk, I have to mention that Alfred
Sant is digging his own grave, even if he does get elected, with what
he said about HSBC, which was taken up by Reuters and distributed worldwide.
Not only will Malta lose credibility if he is elected because the country
would have would have abandoned the road to EU membership, but the political
risk generated by comments like that are so high that he would destroy
any vestige of investment that would have remained after his failure
to sign the European treaty."
Looking back on the last five years of his term as Finance Minister,
what does Dalli see as his main achievements?
"I believe that our main achievements were related to steadying
the boat of finances in Malta. Weve done that through new legislature
in the taxation sphere and in new efficiencies in taxation. Weve
managed to collect taxes mainly through increased tax efficiency, through
beurocratic efficiencies rather than new taxation.
"We have also managed to control expenditure. Weve maintained
certain expenditure without being too thrifty on things we needed to
do investment-wise and in also social sphere, especially in education.
Weve allocated higher budgets for education and health and security
police and army but I still believe we were very, very
careful as far as our operating expenditure is concerned and with diligence
weve managed to cap operating expenditure. In fact our operating
expenditure this year will be Lm500,000 less than it was in 1998. Youd
say its a small achievement but that is the area in which theres
some control over what can really be done. On the other hand, when you
talk about wages and social services there are a lot of heavy fixed
"We have had other achievements such as the sweeping reforms we
have re-enacted in financial services. These include the revision of
the structures of the financial sector, the autonomy given to the Central
Bank of Malta the creation of a single regulator in the MFSA. This has
revamped our financial sector and I believe this is working very well."
Only time will tell if Dallis vision for Malta as an EU member
will bear the fruit promised, or if Labours alternate route for
the country will lead to economic isolation and disaster. Sadly, the
electorate will have only one tangible option against which to gauge
the countrys progress after 12 April and the weight is on its
shoulders to make an educated choice.