Maltese households and businesses fared relatively well in 2022. The country’s economic performance was among the best in the EU thanks to generous subsidies to curb inflation and increasing reliance on public and private consumption.
The experts’ forecasts for 2023 are moderately optimistic. So, what will 2023 look like and what risks still lurk beneath the surface of normality?
The recent reports from the International Monetary Fund and rating agencies confirm that the minister of finance’s economic projections for 2023 are realistic and achievable. Still, they identify some uncomfortable realities that need to be addressed as they pose a risk to long-term economic sustainability.
The unprecedented economic turmoil of the last three years has been addressed with massive fiscal and monetary initiatives to save European economies from falling into deep recessions. Interest rates have been kept at record low levels. The European Central Bank undertook to buy the debt of countries struggling with their weak public finances. Businesses were given massive support to prevent them from discharging workers. Households were provided with well-padded subsidy cushions to mitigate the pain of high inflation.
These tactics, of course, cannot be kept in place forever. Neither can a country continue to rely excessively on economic growth built on increasing public and private consumption.
The IMF and OECD forecasts for countries in the European Union remain rather depressing. In 2023, many member states will likely experience a mild recession, stagnant growth and continuing high inflation. It will be naïve to expect that Malta’s open economy will not be affected by these negative global trends.
The IMF’s advice for the government to start being more selective in its support for families and households through subsidies for energy prices must not be ignored. The present policy encourages waste and creates an illusion that Malta is a special case. We are not immune to external headwinds that are affecting all other European countries.
Even if the Ukraine war were to end soon, the global geo-political upheaval is unlikely to disappear. Interest rates will likely continue rising in 2023 and beyond, even if at a slower pace than in 2022. Oil prices continue to fluctuate but they are unlikely to return to the pre-COVID levels, when the old normality supported with low inflation was very different to today’s uncertain economic environment.
"The tourism industry has a tired business model based on attracting as many low-spending tourists to the islands as possible"
Malta’s structural economic challenges remain real and must be addressed before they become more acute. We need to redefine the critical success factors that will make us attractive in the eyes of potential foreign investors. Changes in international taxation regimes, the challenge by the EU to Malta’s practice of selling passports, an ageing population, a still unclear labour market strategy and overreliance on property development could dent the prospects of continuing healthy economic performance.
The tourism industry in particular has a tired business model based on attracting as many low-spending tourists to the islands as possible.
Little is revealed about the actual value added that the sector contributes to the economy after deducting infrastructural costs and subsidies.
As the familiar saying goes, the top line of the tourism industry accounts is vanity; the bottom line is sanity.
Malta’s solid fiscal starting point at the beginning of the pandemic has helped the government to cushion the worst effects of the last three years of economic disruption.
Now is the time to tackle the structural weaknesses that undermine long-term economic prosperity.