15 March 2006

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Business Today

Government satisfied with growth, economists wary

James Debono

Parliamentary Secretary Tonio Fenech yesterday alluded to a reform in the tax bands, saying that current rates of economic growth as well as the reduction of the deficit will enable government to be more flexible in its fiscal policy.
Talking to Business Today after the conclusion of the Ecofin meeting in Brussels, the parliamentary secretary also expressed his satisfaction that the European Commission has certified that Malta, unlike Portugal and Germany, has kept its deficit well on track to achieve the three per cent mark required by the Maastricht criteria.
Fenech was doubly satisfied since government’s aim to reduce the deficit was achieved without sacrificing on economic growth.
He reiterated government’s claim that the 2.5 per cent growth in Gross Domestic Product was a clear indication of an economic turnaround.
But the parliamentary secretary’s optimism is not shared by economist Professor Edward Scicluna. The former MCESD chairman is far from convinced with the figures.
“The announced GDP figures challenge if not defy the universal laws of macro-economics,” Scicluna told Business Today.
The same scepticism on an economic turnaround was expressed by MLP Deputy Leader Charles Mangion and AD spokesperson for finances Edward Fenech. Parliamentary secretary Tonio Fenech expressed satisfaction that the Maltese economy registered a 2.5 per cent growth in GDP despite government’s drive to push down the deficit.
“It was not a surprise that initially our drive to consolidate the country’s finances had a negative impact on economic growth. Yet the country’s economy has responded in a more positive way than we expected and has grown beyond our expectations,” Fenech told Business Today.
The decline in exports in 2005 has fuelled scepticism about government’s claim of an economic turnaround.
Fenech rebutted the criticism by pointing out that the manufacturing sector grew by one per cent. He also noted that the negative trend in exports during the first six months of 2005 was redressed to the extent that in January this year exports have increased. Fenech attributed the negative trend to an unfavourable international market effecting ST Microelectronics during the first half of 2005.
According to Fenech Malta is fairing better than countries like Portugal who have to resort to austerity measures without any sign of economic growth.
But Prof. Edward Scicluna said that GDP figures for 2005 published by the National Office of Statistics last week are “challenging if not defying the universal laws of macro-economics.”
Scicluna contended that one cannot have the combined major sectors of a small open economy, manufacturing and tourism, falling by three and a half per cent in real terms in any one year, and the economy growing by two and a half per cent during the same period.
“There is a lot of explaining to do about this puzzle,” Scicluna told Business Today.
Scicluna attributes the discrepancy between growth figures and the decline in the productive sectors by pointing out that Italian and European Union-government capital expenditure programmes may be keeping the economy buoyant.
Disputing government’s claims of an economic turnaround, Scicluna said figures for the traditional productive sectors are not yet showing a comeback.
“I am as eager as any other Maltese to see a sustainable turnaround in our economy. We can only see this when there is a convincing turnaround in our main economic sectors,” insisted Scicluna.
Scepticism was also expressed by Labour deputy leader Charles Mangion who insisted it was too early to speak of an economic turnaround.
Mangion said that one can only speak of a turnaround when the productive sectors of the economy, tourism and manufacturing grow at a satisfactory rate and when the trade gap between exports and imports is closed.
While the banking and property sectors have experienced substantial growth, the same cannot be said of tourism and manufacturing, Mangion said.
He also pointed out that figures for gross capital formation indicate that most of the investment is generated by government.
“Throughout 2005 there has been an increase in unsold merchandise and stocks, which are not a healthy economic indicator even if they contribute to an increase in GDP,” Mangion told Business Today.
The NSO statistics show an increase in inventories from a negative 49,225 million in 2004 to a positive 26,484 million in 2005. Higher inventories may be an indication of the countries inability to sell what it produces.
This issue was first raised by Green Party spokesperson Edward Fenech last year who had called on government to explain the increase in inventories.
Fenech is still waiting for an answer. “If one were to exclude the change in inventories from both the 2004 and 2005 economic growth statistics, then in real terms the economy did not grow by 2.5 per cent but contracted by 2.2 per cent,” Fenech said.
Fenech called on government to explain what he considered to be “extraordinary movements in inventories.”
While noting that the GDP statistics are positive, Fenech concurred with the Labour deputy leader that it is far too early to talk of an economic turnaround.
Fenech said that statistics show that during the 2000-2005 period GDP per capita actually decreased in real terms by 3.2 per cent.
“This means that in actual fact on a per capita basis we are poorer in 2005 than we were in 2000.”
Fenech said that what lifted the overall growth rate to 2.5 per cent is the extraordinary increase in gross fixed capital formation by 32 per cent.
“Whilst this is positive, we do not have enough details in which sectors this increase occurred.”
Fenech also expressed his concern on the decline in exports in real terms, after removing the inflation effect.
The decline in exports is indicative of the severe drop in national competitiveness, the Green Party spokesperson told Business Today.
While lauding the SmartCity project, Fenech insisted that it was still many years ahead before the dividends are reaped.
“Action for the short and medium term is forthcoming and urgent.”
Fenech, however, had one positive word for government. “Expenditure between 2004 and 2005 was practically fixed, which means that it is under control,” he said.
Another dissenting opinion is that of economist Karmenu Farrugia. Talking to Business Today, Farrugia said that it was regrettable that the positive GDP growth figures were not reflected in the gross national income (GNI). “That is all that really matters for Maltese citizens and their standard of living,” Farrugia said.
Malta’s GNI is Lm57 million less than the corresponding GDP.
“This means that at least this amount of the national cake was absorbed by non-Maltese citizens.”
Farrugia noted that as far back as economic statistics have been compiled, Malta’s GNI was always well in excess of GDP.
According to Farrugia the situation changed “following the take-over of our financial services sector by the outsiders, mainly in their majority holding of bank shares.”
The economist said that excessive profits in the banking sector have swelled its GDP's share without a parallel movement in GNI.
For this reason Farrugia argued it would be folly if the government persisted in selling what remains of government's possession in Bank of Valletta to outsiders.


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