04 January 2006

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Business Today

A country’s litmus test

On paper, 2006 holds no major surprises or events that could galvanise the country, apart from the brief one-month interlude when football lovers will be glued to their TV sets watching the world cup, unless pay-TV rights will not make it mission impossible for viewers.
But 2006 has the potential of being a make or break year on a number of counts. The signs of an economy revving up are still not there and with the European Commission autumn review forecasting a growth of 0.7 per cent, 2006 is unlikely to be the year of the turnaround. Even so, much can be done to sow the seeds of change.
The European Commission economic forecast for Malta projects a growth figure that is much less than government’s own forecast of 2.1 per cent, which it had presented to the EU in its convergence programme in 2004.
Sluggish growth is expected to persist in 2006 unless the value of exports picks up dramatically. Malta’s over-dependence on ST for exports will continue to drag down the overall performance unless a wider diversification of the manufacturing base occurs. It looks unlikely that diversification will happen in a big way in 2006.
Growth figures will remain dismal and keep the country back from making the quality leap promised by the current administration. In general people will continue living with a lower standard of living.
Pharmaceuticals picked up nicely in 2005 and can be considered to be the single largest ray of hope for manufacturing but alone they will not be enough to prep up the other faltering sectors. Already, pharmaceutical companies are facing problems related to limited adequately trained human resources. A concerted effort is required in 2006 by ETC and MCAST to offer basic training courses in science subjects required as a basic skill by prospective pharmaceutical employees.
Otherwise, manufacturing will continue to face serious setbacks in 2006. Expect more lay offs in the less competitive sectors such as textiles and shoes. And with no visible efforts in the offing to ease government-induced costs on industry, the prospects will continue to remain bleak.
In services the game-play will be different. If the authorities act diligently, financial services and online betting will continue to be growth areas. Malta has to firmly keep its eyes on competing jurisdictions. Online gambling must not be shackled by moral constraints and the gaming authorities must have a forward-looking strategy to assess future trends and adapt accordingly.

Not oil’s well
But it will be oil that will continue to cause headaches in 2006. Higher oil and fuel prices will have an impact on our import bill and this will only aggravate the trade imbalance at a time when exports are down.
Oil will also have an impact on inflation. The cost of living is increasingly becoming a serious concern for many middle income families, who will be expected to shoulder a hefty utility surcharge. Spending power is down as evidenced during the Christmas period where restaurants, hotels and retail outlets experienced lower than normal sales.
In 2006 lower consumer spending could be expected to have a negative impact on economic growth.
Apart from ensuring that Enemalta buys its fuel oil at advantageous prices and improves its efficiency the other solution would be to slow down the importation of oil by controlling demand. But that can only be achieved if consumers across the board are educated into utilising electricity and water in a cost-effective and efficient way.
In 2006 government has to embark on an educational campaign to teach households simple conservation techniques and if need be the campaign could kick off with each and every household being supplied with one free energy saving bulb. Extravagance has to be replaced with prudence.
Curbing fuel demand for travel could also be achieved by radically overhauling the public transport system. Despite the rhetoric in the beginning of 2005 about restructuring public transport, nothing ever materialised. Government has to find the political will to effect the reform in 2006.

Tax and welfare reform
With the deficit tightly under control, government has to abandon its expansionary income trend by taxing consumers and businesses. In the budget government lost the opportunity to ease the tax burden on businesses as a first sign of relief. 4page 4
3page 3 By June, government should have its report over tax reform ready but business leaders would be more interested in the timing of when any tax relief will kick in. With 2006 being out of the question for tax relief, the commercial community can only hope for tax cuts in 2007, with a second wave of tax relief in 2008 for individuals.
But it is a reduction in public spending that business leaders would like to see being tackled in a more concerted way in 2006.
Welfare reform is unlikely to happen because of an electoral backlash but 2006 could very well be the year when the country takes stock of the vast array of welfare benefits and their beneficiaries.
Far too many individuals are certified boarded out, which literally makes us a country of sick people. In 2006 government has to reform the system by tightening the requisites for benefiting from the sickness pension. Beneficiaries have to be certified every year as being unable to work, against a nominal payment. Anyone caught working while benefiting from the pension would have to refund any money within a stipulated time period
Another facet of welfare reform could be the Children’s Allowance. The current system is built around the notion of a mother that stays home to take care of her children. In a changing scenario where more women for social and economic reasons are entering the productive labour market, the concept of giving hand outs to women to stay at home is alien to society’s contemporary needs.
The Children’s Allowance can be transformed into a baby fund with government investing a sum of money for each and every child that is born. The investment, administered jointly by government and the private sector would be redeemable by the child upon reaching maturity. Such a concept would give each and every child born in Malta a life chance to further his or her studies without the worry of not having suitable personal finances to sustain a decent education.

Pensions bomb
It is unlikely that the welfare system will be radically overhauled in 2006 but in at least one area reform has to be undertaken urgently. With the first batch of post-war baby boomers reaching pensionable age this year, 2006 will exert further pressure on public finances.
The situation will only get worse over the next 20 years as more people reach pensionable age at a time when the work force is not being replenished owing to falling birth rates. But the ‘worst’ can be avoided if pension reform is instituted in the first part of 2006.
There is no doubt that the retirement age needs to go up to 65 and the unrealistic capping of pensions needs to reflect modern-day exigencies. The notion of voluntary private pensions also needs to be nurtured with government providing fiscal incentives to individuals who take up private pensions.
The workings of a comprehensive reform are available in the report prepared by the Pensions Reform Commission and the various reactions given by the constituted bodies, unions and interest groups. In 2006 Government has to take the bull by the horns and propose its own blueprint for implementation by June.
Skin deep relations
On the European front government will have to spruce up its administrative capacity to be on the ball with the Brussels bureaucracy. But as part of the EU family Malta will also be part of the wider European debate on how deep should the EU go.
In 2005, Europe woke up to the reality that its current set up is increasingly unsuitable to enable the member states to forge deeper relations. The rejection of the European Constitution was a wake up call for the Brussels bureaucrats but it was also a sign of the deep divisions which make it increasingly difficult for European states to have a deeper relationship.
Europe will find it easier to grow wider, eventually roping in states like Bulgaria, Romania, Croatia, Turkey and possibly Ukraine and Serbia. Further enlargement will give the Union a boost but forging deeper ties will remain problematic.
If the EU is to function as a potent economic bloc that goes beyond the simple notion of a free trade area, key changes need to be implemented.
Controversial as it may sound, the European Union has to adopt a single official working language. In contrast to its competitors, Japan, the US, China and India, the European Union is handicapped by the administrative requirements to translate every document into 20 official languages.
Translation and interpretation cost money and time. It is one of the areas identified by former Commission president Romano Prodi as requiring a radical overhaul if the EU is to be a competitive force on the global stage. Will it be done? It is highly unlikely, member states will relinquish their national pride for the greater good.
And this is possibly Europe’s biggest problem. It is the same problem that hinders a more streamlined taxation system across the continent which is the logical next step after the introduction of the single currency.
It is improbable that any changes will also be forthcoming in this sphere as member states remain jealous of their fiscal independence.
The bloc will remain hindered by the competition between its constituted members and 2006 is less likely to produce a meaningful working relationship between European leaders as most are saddled by serious domestic economic problems.

Back in Malta, politics will dominate the first quarter of the year as elections are held in one third of localities, primarily PN strongholds. It is unlikely the PN will pull off another of its ‘intelligent’ strategies by retiring candidates from certain localities like it did last year.
The March elections will provide a litmus test of the PN’s strength in some of its key strongholds like Sliema and Birkirkara. The result will most probably confirm government’s loss of support and with the Green Party still unclear on how many candidates it will field, the Labour Party will be the likely beneficiary.
Tempting as it may be the political parties have to avoid starting their respective general election campaigns in 2006. Potentially the election is still almost three years away. Government still needs to push ahead with key reforms in pensions, health and public transport. It has a country to run and needs to do it efficiently, much more than it has until now. This year will be a make or break for the administration’s target to achieve a turnaround by election year in 2008.
The Opposition on the other hand needs to dig deeper to come up with meaningful radical solutions to today’s problems and tomorrow’s aspirations. It still lacks a long term vision that inspires people to greater heights and 2006 should be utilised as a foundation-laying year for eventual policy announcements in 2007.
As for the Greens, their rent reform campaign seems to have fizzled out into nullity. Rent reform is required and their efforts are commendable but as a political party the Greens need to feel the public’s pulse more. In 2006 apart from dedicating energy to rent reform they need to speak the language of the streets, address people’s concerns and aspirations.
Campaigning by the parties can be staved off for 2007 when it becomes crucial for them to have a clear vision of where they want to head and possibly even start announcing parts of their respective electoral manifestos.
For the time being the country can do without political campaigning that raises the level of rhetoric but does little to solve the country’s pressing problems.




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Editor: Kurt Sansone
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