As 2020 dawns, the Maltese economy faces significant downside risks.
The biggest challenge is the long tail end of the political crisis that has rocked confidence in Malta’s reputation as a respectable jurisdiction for foreign direct investment. A new prime minister has to conduct a deep soul searching exercise on the sustainability of the economic plan that has boosted growth in the last few years but was built on high-risk activities that are unlikely to last forever.
The harm done to Malta’s reputation as a result of political abuse of power and the state capture by a small cabal of prominent businesspeople will only become evident in the coming months as the flow of investment in the country begins to be measured. Encouraging more of the same economic activities is hardly going to restore investors’ trust in Malta. Action is needed to reduce economic risk on various fronts.
The selling of passports is arguably the biggest obstacle to winning over trust from EU institutions and international investors. Malta must no longer be considered as one of the weakest links in EU security because of the possibility of non-desirable persons gaining free movement in the Union utilising a bought Maltese passport.
The government would do well to stop the rhetoric: that the due diligence exercise conducted by the management of the passports scheme is robust.
Even if it were as robust as claimed, the perception internationally is that our passport scheme is putting at risk other EU countries. In international politics, perceptions are as harmful as reality.
Another aspect of concern is the growing dependence of various economic sectors on imported labour, which is causing more harm than good. The highly skilled foreign workers are causing severe pressures on the housing market thereby accentuating social problems. They are also hiding the decades-long weaknesses in our educational system that is simply not producing the right kind of skilled workers that our economy needs.
On the other hand, low-skilled imported workers are often exploited on the pretext that Maltese workers do not want to take up undesirable jobs. Rather than improve wages and upgrading the skills of low-paid workers, we are increasingly relying on imported labour, workers who are being exploited. Many do not want the island to imitate the Singapore or Dubai economic model as it has been doing in the last few years.
A further strain is the international regulation on anti-money laundering that is bound to tighten. Banks are already facing a situation where there is a growing gap between the government’s economic strategy of promoting i-gaming, cryptocurrencies and other risky activities and regulators’ insistence on de-risking their business model.
Malta’s reliance on cheap labour, low taxation and high-risk appetite will continue to pose a dilemma to the government, as this economic model is not sustainable. Any changes will undoubtedly cause some shocks but these could be managed if changes are made in an orderly way over a reasonable period.
Making changes when one’s back is against the wall is a recipe for failure.
Underpinning the country’s governance with constitutional and other reforms that ensure rectitude by all actors in the public sector is undoubtedly the top priority for 2020. This objective should be followed by a thorough revision of the economic blueprint to reduce the inherent risks that could endanger the country’s future.