Divergent views on rising inflation

Rising inflation in Malta - which the Central Bank has linked to "rigidities in the setting of prices of goods and services in the domestic market" - is being caused by exorbitant administrative costs, excessive bureaucracy and increased taxes being incurred by Maltese businesses, according to Vince Farrugia, director general of the Malta Chamber of Small and Medium Enterprise - GRTU.

Central Bank Governor Michael Bonello has said the latest rise in inflation contrasted with the economy's failure to expand in the first quarter of 2005. The Central Bank said restraining prices was important since inflation could otherwise feed into the domestic cost structures and this would further erode Malta's international competitiveness.

"Under normal circumstances, a high inflation would show there is higher demand for resources than the amount of resources actually available in the country. It implies that the economy is going at full speed and that the GDP is growing at a phenomenal rate," Mr Farrugia said.

Under current circumstances, however, Malta's inflation was rising even if the economy was shrinking and not growing.

Asked what he thought were the factors that made the prices of local goods and services increase, Mr Farrugia said business profits were being eroded by excessive compliance costs that had been imposed on businesses, the across-the-board increase in VAT and its introduction on goods and services which had been VAT-free and the full impact of the "unplanned" eco tax.

"The sum total of expensive regulations and compliance costs have increased at a time when local businesses were supposed to have benefited from the removal of levies following accession to the European Union," Mr Farrugia said.

He said one could take as an example the hotel profits recently released by the Malta Hotels and Restaurants Association, which showed that "the entire sector suffered even if it lowered prices" in this case.

Mr Farrugia said another factor which was increasing costs was the Tax Compliance Unit's clampdown on businessmen to pay tax arrears. "Even though ensuring that everyone pays taxes is positive, this measure is creating a big burden on business and is therefore being felt in the economy." The same went for the government corporations - such as Enemalta and the Water Services Corporation - which were suddenly becoming stricter on pocketing bills from clients.

Another factor which increased inflation was the direct or indirect impact of fuel costs, that the government had little or no control over because these were determined by internationally set prices.

However, Mr Farrugia said, there were many areas the government could tackle to get the economy going and decrease inflation.

"Malta lacks a food policy. The government subsidises farmers so that the industry survives and breaks even. But there is no policy regulating the prices of fresh produce reaching the consumer," Mr Farrugia said, defining the Ta' Qali vegetable market as the country's "price fixing institution par excellence".

"The government lacks a macro-economic policy," Mr Farrugia said, adding this was the fundamental reason why the economic policy of the country was "full of contradictions".

The economic problems are becoming even more complicated because increased costs are leading to the shedding of jobs, he said.

The Parliamentary Secretary within the Finance Ministry, Tonio Fenech, said that Malta's inflation was still well below historical levels even if it had increased over the past months.

According to the government, Malta's inflation was not out of line with the trends at European level: "Our May HICP inflation stood at 2.5 per cent as compared to 2.2 per cent for the EU25 and euro-zone respectively. Other EU member states are registering higher inflation rates than us.

"Nonetheless, as already explained by the Prime Minister, the government is concerned at the level of price increases in the economy and is monitoring very closely and actively the evolving situation."

Rising inflation in a situation of slow economic growth points towards a lack of flexibility in price adjustments, Mr Fenech said.

"Apart from the impact of fiscal measures, such inflexibility seems to be resulting from a number of structural rigidities in our markets for consumer goods and service."

Asked to comment on the GRTU director general's claim that fiscal measures introduced last year had increased prices, Mr Fenech said this was the case, but said fiscal measures alone did not fully account for the inflationary pressures in the country.

According to Mr Fenech, there were structural rigidities in the product and services markets that could be contributing to inflationary pressures.

"When looking at this area, it is believed that we need to take a much wider perspective in order to understand properly what is going on and take corrective action," he said.

Reacting to Mr Farrugia's claim that the government lacked a holistic economic policy, Mr Fenech said that a government that has opened up, restructured and integrated this economy within the EU cannot be said to lack a holistic economic policy.

"We are now working for European Monetary Union membership. You cannot be accepted in ERMII and be on the road to EMU membership if you do not have an economic vision for the country."

Notwithstanding, there were a number of hurdles the government wanted to overcome to improve the general well-being of the population.

"Removing the market inflexibilities that I mentioned earlier is certainly one example. Improving our national productivity levels in order to improve our international competitiveness is another," Mr Fenech said.