13 July 2005

The Web

A question of trust

When a leading economist representing no particular interest group gives a negative overview of the economy and the way it is being managed by Government, the duty of politicians is to listen attentively and digest the statements made.
The interview with Prof. Edward Scicluna in this newspaper last week caused shockwaves among economic operators, not because what he said was new, but because it was spelt out clearly by someone who does not represent any particular organisation.
Prof. Scicluna, a former chairman of the MCESD, is a widely respected economist whose services are sought even by foreign agencies requiring independent advice on the state of Malta’s economy.
Any administration with a small dose of common sense would have stopped to listen and evaluate the economist’s strong criticism of joining ERM II with a fixed peg, his analysis pointing towards a long-drawn recession, the explanation he gave for rising inflation and the criticism of Government’s drive to tackle the deficit at all costs ignoring the impact this is having on the economy at large.
But what does the Prime Minister do instead? He rubbishes the economist’s point of view, saying that the economy is picking up.
On Saturday Lawrence Gonzi committed a big mistake when he argued that Prof. Scicluna was wrong on all counts. This does not mean the PM had to embrace all the arguments made by Prof. Scicluna but a strong dose of humility would not have done the PM any harm.
And here lies the problem with this Government. No single person seems to be responsible for economic affairs. We have a minister for competitiveness, who was kept on the sidelines when the social pact was being discussed in the MCESD. We have another minister, who single-handedly seems to be setting Government’s privatisation policy. Yet another minister is responsible for employment and industrial relations.
Then there is the Prime Minister who is also minister of finance.
In all this hotch potch of overlapping responsibilities Government’s sole drive seems to be deficit reduction at all costs. Gonzi may quote large tracts from the budget to show that Government is giving its fair share of attention to the economy but in reality all efforts are focussed on reducing the deficit.
The writing has been on the wall for quite some time. The very same push to bring down the deficit is having a lasting negative impact on economic growth, which has contracted in the first quarter of this year.
In turn, hot money flows in the form of loose credit from the banks to finance personal consumption are cranking up inflation at a time when the productive sectors are faltering.
At this rate, inflation will be fuelling demands for higher wage rises, which will in turn render our export base more expensive and therefore less competitive. This will further stifle economic growth, which has been languishing around the one per cent mark, way below the high flying economies in Eastern Europe.
To make matters worse the currency is now pegged at a fixed rate with the Euro, making it impossible to cushion international shocks to the economy.
In such a scenario it is hard to draw a positive outlook of the economy in the months to come. The Prime Minister may try to play around with figures to downplay the darkness but his charm in delivering statistics is fast disappearing. His optimism is not shared by the operators on the ground and much less by salaried employees who are seeing their standard of living slide with every passing month.
Government lacks a sound economic policy and increasingly Gonzi is being seen as civil service driven. The ‘experts’ around him are nothing more than inflexible civil servants with no inkling as to what the big picture is all about.
The latest move to try and extend the powers of the VAT Commissioner by granting him the right to issue a privileged hypothec on property owned by VAT defaulters is an example of how the civil service is pushing things through the system without politicians smelling the coffee.
Business operators and the self employed are fast losing trust in the ability of the current administration to turn the tide. Urgent, direct action is required if the country is to be saved from falling into an abyss.

The Malta Financial & Business Times is published weekly on Wednesdays.
Website is updated weekly on Thursdays at 15.00CET
Copyright © Newsworks Ltd., Malta
Editor: Kurt Sansone
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
Tel: (356) 2138 2741 | Fax: (356) 2138 5075 | E-mail