High interest rates and subsidised energy prices

As a general rule, banks usually lend for longer terms than they borrow, so part of this year’s extra profit comes from the difference between long-term and short-term interest rates (i.e. the slope of the yield curve). If the yield curve is normal, all else remaining equal, a higher slope that the world is now facing means a larger margin for dealers and higher profits for the banking system.

Does this mean that debt-stricken countries like Greece and Italy, it is acceptable to impose a super profits tax on banks to calm down forces that are pushing the economy into a deficit. The Eurozone countries, by and large are facing a lack lustre performance and governments are pressed with increasing demands from voters to help them face cost of living hikes. Back home, there are a number of demands on the exchequer starting with a common plea for an untaxed Cola weekly increase.

This has not been granted. It is understandable, that the government wishes to claw back in taxes part of the Cola refund. Other worries include the soaring rate of foodstuff prices. Regrettably, the budget did not provide a solution to calm traffic congestion which is leading to more road accidents-some fatal. Millions of euros in new roads were expensed by Hon Ian Borg, the ex-roads minister but sadly no solution to the traffic congestion is in sight. In fact, parts of the Marsa junction are still without proper signage and the promised 40 mins savings to drivers using a controversial Central road in Attard has not materialised.

It is commendable that our affluence has resulted in over 430,000 licensed vehicles (of which only16,000 are EV or PHEV) and as yet, forgotten is the promised final solution to congestion by constructing an underground metro with a price tag of euro 6 billion. This was announced amid much razzmatazz in two lavish inaugurations before the 2022 elections.

Moving on it is not all doom and gloom. Ebullient announcements from Castille remind us of the excellent rankings showered by IMF forecasts, DBRS, Fitch all of which placed Malta as “the fastest growing EU economy, with the lowest unemployment rate”. Quoting the prime minister’s words, he said that despite weakening international conditions, the IMF has revised up its GDP forecast for Malta to 3.8% and sees us as the fastest growing EU economy this year and the next, with the lowest unemployment rate in both years.

This may harken Malta Enterprise to the notion that we should miss no opportunity to attract investors for Renewables, REITS an Thank God, it is the end of a cruel pandemic era and by recurring to the services of tempting companies, we recruited an army of TNC’s as a means to solve the acute shortage of low-skill workers. Has the formula of importing low-wages migrants (mostly living on minimum wage) help reduce labour costs and calm inflation?

Not really, although core inflation is found to have mellowed toners etc). Local demand factors are encouraging yet export growth is expected to plateau from the high growth rates registered in recent years, in line with the projected moderation in global demand, while imports are expected to rise, drivent growth.

The services sector composed of financial services, gaming, tourism and aviation continues to underpin Malta’s current account surplus. In the past, our debt level may have hindered us from trying harder to innovate (ie R&D is only 0.7% of GDP when a 3% is normal). Yet, party apologists rejoice how during the moniker L’Aqwa Zmien” the economy showed a buoyancy delivering a surplus.

Now, perhaps partly due to the Russian war and post pandemic stress, our much-vaulted annual surpluses morphed into deficits. National debt is sailing close to the 60% mark of GDP yet Clyde Caruana, the finance minister consoles us that unemployment rate is low and due to improved demand, we are experiencing worker shortages so this extra costing higher welfare/payments are pushing us to upper debt limits. Party apologists exclaim this is a fair price to pay as most of it can be attributed to helping the economy and the strata of population which need assistance.

Notice, how the Central Bank headed by an ex-finance minister came out with good tidings in its business dialogue. The rabbit came out of the hat. One hopes, that the prognosis is doable since exports need more vim to reach the pre Covid highs. Firms report improved supply chain conditions. However, they were unable to give an assurance if the trend persists due to the high level of global uncertainty. Malta Employers association expressed concerns about labour shortages and skill mismatches which can lead to claims for increased wages without corresponding augment in productivity. Indeed, many firms expect wages this year and next to rise by two to five per cent.

The Economist Intelligence Unit forecasts that the global economy will suffer next year partly due to rising energy prices and two major wars in Ukraine and Israel.

To conclude, history has proven two important things: first, that in spite of all its imperfections, the free market is still the market structure that generates most wealth, second that glitches in state-controlled economies need to be controlled via effective regulation of ESG rules with public policies that promote and sustain the common good.

A dirigisme attitude where most regulators are run by politically appointed incumbents has always been a malady of our governments since Independence. Ideally, let us revert to meritocracy and drop cronyism to achieve positive aspects that garnered the heady words of the 2024 budget speech.