Editorial

This year's report by the International Monetary Fund's staff mission and the related Public Information Notice (PIN) could not have been better timed. They came just a week before the budget speech, this Monday, and, coincidentally, followed calls made in Parliament and elsewhere for the government to "change priorities" in view of what is seen as being a stagnant economy and a fast growing oil import bill. The IMF holds a different view.

The PIN published with the report acknowledges that Malta's economic growth languished in 2004 for a fourth consecutive year. However, it highlights the positive developments, such as the fact that parastatal reform gathered steam and that the fiscal balance improved substantially, ensuring that the fiscal outturn was on target with the deficit reduction programme back on track as promised in the government's Convergence Programme 2004-2007. As a result, Malta was able to join the Exchange Rate Mechanism (ERM II) in early May with a commitment to maintaining a fixed lira/euro peg.

Only a few days before the IMF report was released, the opposition spokesman on finance, Charles Mangion, insisted that the government needed to get its priorities right, with top priority being given to boosting the economy rather than achieving the deficit reduction targets. Indeed, he said, such targets should be postponed if necessary.

Such a statement implies that economic growth and deficit reduction are separate and distinct from each other. Hardly. The persistence of a high deficit has resulted in a huge accumulation of government debt, now standing at about 75 per cent of GDP. Debt servicing costs are as high as what is spent on health or education and are severely restricting the government's ability to direct its expenditure to productive activities which would certainly boost the economy. And the burden of debt servicing will continue to get heavier for as long as the deficit remains. Deficit reduction, therefore, is actually the key to propel the economy forward.

It is an argument which does not apply just to government spending. Just days ago, a senior editor of the Economist Intelligence Unit, Dan O'Brien, insisted at a public talk that potential investors in Malta are concerned that the country's growing public debt could force changes to the taxation structure in the future.

Uncertainty discourages investment and Malta therefore needs to stick to the commitments it made in the Convergence Programme and when it joined ERM II. Which leads one to ask the Federation of Industry to better explain why it advocates the introduction of flexibility in the exchange rate within the 15 per cent band permitted by ERM II, which could create a new element of uncertainty for investors and exporters.

Quite clearly, the country still faces a difficult task ahead in order to achieve the Maastricht criteria for euro adoption and to be in a better position to attain a faster pace of economic growth. Tough reform decisions are becoming more urgent with every passing day. The hand on the rudder, therefore, must be kept steady despite the fresh challenges posed by the oil price hike.

The warning contained in the IMF executive board's assessment of the staff report is reported clearly in the PIN. It says that "although short-term growth prospects are moderate, directors stressed that continued consolidation of Malta's public finances remains a key priority in light of the sharp increase in public debt which, if not addressed, would threaten macroeconomic stability and weaken the credibility of the exchange rate". They could not have stressed that point enough.