Editorial | Malta’s path to post-COVID recovery

COVID-19 has threatened Malta’s success in recording one of the highest real GDP growth rates in the EU and exposed its weakness in relying to a large extent on tourism and foreign labour to drive consumption and growth.

With tourist arrivals falling drastically and household consumption taking a dive, Malta’s GDP contracted significantly in the first half of 2020. The European Commission’s autumn forecast has painted a positive, albeit challenging picture of Malta’s growth prospects.

The government’s stimulus package thankfully should make up for the economic downturn inadvertently brought about the by the pandemic, with the wage supplements and vouchers proving crucial to many businesses. The voucher system helped to prop up the retail sector following months of inactivity while the wage supplemented went a long way to making sure layoffs were kept to a bare minimum.

Despite everything, a beneficiary of the household savings was residential property investment, with a record number of promises of sales being recorded in the months after the lockdown measures were lifted. Large-scale investment projects such as roads are expected to maintain government expenditure.

Two main factors will weigh heavily on the rate of Malta’s post-COVID recovery: how long coronavirus itself persists without a viable vaccine being introduced, and how the trade balance between Malta and the UK will be affected by Brexit.

A viable vaccine is bound to kickstart the tourism industry much sooner than a scenario devoid of a cure, while Brexit – whichever format is finally agreed upon – has a considerable negative impact on the trade balance between the UK and Malta.

With Malta’s economic outlook being closely tied to the economic performance of its main trading partners and their recovery, further uncertainty around the evolution of the pandemic could further impact Malta’s trade balance with the rest of the world, affecting its ability to bounce back from the crisis.

Before COVID-19 hit our shores, Malta boasted a sound labour market with the unemployment rate reaching a record low of 3.6% in 2019. And the measures introduced by the government helped ensure that employment was, for the most part, secured, and the unemployment rate is only expected to reach 5.1% in 2020, dropping to 4.1% in 2022.

And as the economic recovery unfolds next year, inflation is expected to pick up with a rise in the prices of services, reaching 1.3% in 2021 and 1.6% in 2022.

COVID-19 will also have a major negative impact on public finances in 2020, with the government balance plummeting into a deficit of some 9½% of GDP, after having recorded another small surplus in 2019.

As the drop in household consumption hits receipts from indirect taxes, lockdown measures will translate into corporate losses and therefore, falling income tax revenues. Lower revenues are also expected from Malta’s citizenship scheme for foreigners.

The expected (relatively) good performance of the labour market will prevent a large dent in personal income tax revenues and social contributions.

Government’s measures to mitigate the negative impacts of the COVID-19 pandemic – such as the wage supplement, voucher scheme, healthcare-related expenses and utility and rent subsidies for businesses – are expected to amount to some 5¾% of GDP.

In 2021, an improving economic environment is expected to support revenues and to contribute to a decline of the deficit to some 6¼% of GDP.

Several pandemic-related fiscal measures will still affect public finances, including a temporary reduction of real estate transaction taxes, extending the wage supplement scheme to March 2021, and a new round of the voucher scheme to come into effect in January.

And, assuming no changes in policies, the deficit is forecast to decline further in 2022 to just below 4% of GDP.

Naturally, the earlier a vaccine can help us return to normal, the better. But there are lessons to be learnt, and certainly enough, it is the need to be more innovative in the way we generate economic growth. That mission starts at home, by fostering a new entrepreneurial culture that kickstarts an export market of ideas, services, and innovative goods. Only then can we avoid the pitfalls of such cataclysmic game-changers.