05 October 2005

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Business Today

Commercial community calls for partial diesel subsidy

Michaela Muscat

In face of the ever increasing prices in fuel the investments minister has the possibility to implement an EU directive that allows for partial subsidies for ‘red diesel’ used by industry according to the Malta Chamber for SMEs (GRTU) director general Vince Farrugia.
Entrepreneurs and industry associations are justifiably alarmed at the increase in one of their fundamental input prices, with Federation of Industry director general Wilfred Kenely saying he is “very worried about the negative impact these hikes will have on the competitiveness of Maltese industry especially, when compared to countries which can tap into their natural resources.”
An increase in the international price of oil has spurred on government to hike up the prices of fuel, with unleaded petrol and lead replacement petrol shooting up by 3c9 to 44c5 a litre and 47c5 a litre respectively. The price of diesel has also increased, by 3c to 41c8 a litre.
Farrugia insists Malta should implement the EU directive on ‘red diesel’ before its transition period runs out next year. Farrugia says the directive will make life easier for firms by imposing a ceiling price on ‘red diesel’. When diesel is used for fixed equipment, or for manufacturing, fishing and agriculture machinery, the directive allows for a partial exemption from the full price.
He also says duty free fuel was forsaken for enterprise in favour of yachts, the reasoning being that it would enhance business at yacht marinas. But GRTU believes it is time that enterprise is given more consideration in these hard times.
Austin Gatt’s ministry seems to be dragging its feet as it is still reportedly studying the situation and has been so far non-committal on the issue, although the transition period officially ends next year.
“Government should not postpone this decision any further and diligent study of the effect of oil prices on the local economy should be continuous,” Farrugia says.
To aggravate the situation further, excise tax on fuel might have to increase in the future. Excise in Malta is low by EU standards, however “it amounts to a good chunk of the fuel price paid by firms, and I find it very worrying that it might have to increase in the future so as to be levelled out with the rest of the EU tax rates.”
The representatives of industry are conscious of the pressure government is having to face from foreign oil markets. But they are insisting that industry cannot keep operating in this manner. So both FOI and GRTU are vehemently pushing for a decrease in fuel excise tax. The two associations say that whilst understanding the government’s position of not being able to subsidise fuel anymore, industry will not be able to cope with spiralling costs, the only remaining option being a decrease in excise tax for commercial uses, as well as implementing the red diesel directive.
The fuel price hikes announced yesterday will also add pressure on the operating costs of hotels and restaurants. Joe Sammut, the chief executive officer of the Malta Hotels and Restaurants Association (MHRA) says that “the increase in light heating oil comes at a very bad time for the industry as this time of the year when this type of fuel is used substantially. This will have a direct impact on costs. Other increases will affect hotels’ own transport expenses and will eventually translate in higher prices from suppliers of materials and services as these go about to recoup the increase generated in their own operations. On a general note, tourists who rent cars will also have to pay higher fuel costs for their cars.”
The MHRA is conscious of the pressure on prices coming from the international oil market. However, at a time when the industry is going through difficult times and facing tough competition from neighbouring destinations, the association registers its dissatisfaction at these steep rises which will add to the increasing burdens they are already carrying.
Considering the low level of GDP growth of 1.2 per cent, it is probable the inflation is cost-push/supply-side, due to the increasing price of oil.
To make matters worse, Farrugia says “the profits being made by a few categories of industry or business are being eroded by the increase in costs.”
Both the increase in the cost of living and unemployment represent a bad omen for Maltese business, leading to a decrease in disposable income. And as budget time is looming, without benchmarks being met or economic indicators showing a better performance, neither firms nor consumers are expecting any respite from the government.
With financial analysts predicting a continuing increase in oil prices it is probable that Malta, having no natural resources like oil or gas to rely on, will again be badly hit by these changes.
The global political scenario of the past few months, like the death of the Saudi King Fahd and the environmental disaster that was hurricane Katrina, have not helped ease oil prices. The increase in oil has highlighted the fragility of micro-economies like Malta’s and the danger of not investing enough in the research of cheaper oil refineries and finding alternative sources of cheaper and cleaner energy.


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