Editorial

It is not so long ago that Michael Bonello, Governor of the Central Bank, incurred the wrath of the Labour leadership after he had addressed a dinner gathering of the Institute of Financial Services. The reason for the anger was the Governor's unequivocal assertion after a closely argued position that "the case for (EU) membership remains a compelling one". By so stating, he had disqualified himself from serving under a Labour government; so, at least, intoned the shadow finance minister Leo Brincat.

Mr Bonello made the considerable point that "... by pooling resources with those available in neighbouring countries, Luxembourg (which has a per capita income three times that of Malta) has managed to address resource limitations and other problems that it could not deal with in an effective way on its own". Through Malta's membership of the European Union, it, too, will be able to address its well-known resources limitations "and other problems" it cannot deal with alone.

Mr Bonello never argued that membership was a panacea for all our ills. Membership will not bring down the fiscal deficit, nor will it get the ratio of debt to GDP to disappear in our favour. For that to happen, it will take lots of hard work.

In his statement which precedes the Central Bank's annual report for 2002, Mr Bonello is guardedly optimistic. The year 2001 had been a bad year when GDP declined by 0.8 per cent. Latest estimates are suggesting that real GDP grew by about three per cent in 2002. The recovery was partly export-led and, in part, due to a restructuring programme which appeared to be bearing results.

This year, on the other hand, will have to cope with sluggish international growth over the next two years and any bombshells that may hit the world economy as a consequence of geopolitical tensions such as are being provided by the Iraq war, North Korea and the uncertainty of a Middle East breakthrough.

Mr Bonello entertains no doubt that in the longer-term, Malta's small but open economy "can only be ensured by a dynamic and innovative export sector, backed by continuous investment in physical and human capital". Here, in short, is the Governor's pre-eminent advice to the government. Living standards will only come about if we board the globalised, competitive world and pay our ticket in the form of exports, investments and human resources upgrading.

The Central Bank has a vital role to play, naturally: to create a monetary policy that will ensure price stability. It is the latter that "allows the market mechanism to allocate resources efficiently and constitutes an essential premise for investment decisions".

Malta's lira pegged to the euro, the US dollar and the pound sterling has kept inflation down to an average of 2.4 per cent during the past five years. Last February, that rate stood at a remarkable 1.58 per cent.

The deficit for last year has been provisionally estimated at Lm78.5 million, down by Lm6.8 million from the previous year's level and only marginally above the original projection. The ratio of the deficit to GDP fell to 4.6 per cent from 5.2 per cent in 2001.

So, to price stability must be added a stable financial sector that will, hopefully, bring the fiscal deficit down to the projected Lm56.6 million by 2005, or a healthy 2.8 per cent of GDP.