The export dilemma

Data on the exports and imports that has been published recently by the National Statistics Office present an interesting dilemma. This data refers to the unit value indices of imports and exports for a number of years.

It presents a dilemma because for the last five years we have noticed exports of goods and services in nominal terms fluctuate, with a peak having been reached in 2002 and with 2004 having registered the lowest level of exports during this period; while exports in real terms (that is after accounting for inflation) did fluctuate, did reach a peak in 2002 but in 2004 an increase over 2001 and 2003 was registered.

We do not have volume indices for our exports (admittedly, they may be very difficult to compute). In any case, the concept of a volume index in relation to the export of services is not applicable.

As such, it is difficult to state with complete accuracy whether firms operating in Malta are exporting more in volume terms (be it in units of production, be it in the amount of activity related to services rendered) but less in monetary terms. However, the indication that one obtains is that this is what is very likely to be happening. The data on the unit value of exports continues to give substance to this likelihood.

A unit value index seeks to measure price movements, in this case export prices. However, it is limited in that products classified under the same category may be very dissimilar to each other. Nevertheless, in spite of this limitation, it is still a useful indicator.

The unit value index of exports fell by 25 per cent between 2000 and 2004. In 2004 it was five per cent lower than it was in 1995. It has fallen every year since 2000, while between 2003 and 2004 it fell by something like seven per cent.

What this means is that, on average, export prices fell by 25 per cent over the last five years, they are five per cent lower than they were 10 years ago and in the last year they fell by seven per cent.

The following is an attempt at determining the increase in volume terms in the exports of goods between 2003 and 2004. Exports of goods in 2003 were Lm928.3 million while in 2004 they stood at Lm909.2 million. The unit value index of exports was 81.95 in 2003 and 75.96 in 2004 (with 2000 being base of 100).

If one divides the monetary value of the exports with the unit value index (which is an indication of a price), the answer that one obtains could be interpreted as an indication of volume. On this basis, the estimated increase in exports of goods in volume terms could be around the 5.8 per cent mark.

The dilemma that is referred to in the title of this contribution has three facets. The first relates to the drop in export prices and the increased pressure on productivity that this poses. The second relates to the impact on the balance of payments, while the third facet relates to the terms of trade.

The drop in export prices was not across the board. However, where a decrease was not registered, prices did not rise but remained fairly static.

One needs to stress that, in the meantime, labour costs have continued to rise as have other costs of production. Therefore, any increase in the profitability of exporting firms can only have been achieved through increased productivity of the workforce or through price reductions of some of the materials and services purchased.

This evidences once more the increased competition the Maltese exporting sector is facing and its resilience in the face of very adverse market conditions.

The impact on the balance of payments of the country of this development is seen to be negative, especially since the unit value index of imports has not dropped to the same degree as the unit value of exports. The drop between 2000 and 2004 was of just over 11 per cent (that is just over half the export price index) and between 2003 and 2004 it was relatively static. Between 1995 and 2004 the unit value index of imports rose by just under 15 per cent compared to a drop of five per cent in the unit value index of imports.

With exports being priced less and imports being priced more, the impact on the balance of payments is likely to be negative with a consequential negative impact on the country's foreign reserves.

The third facet of the export dilemma is related to the terms of trade - the country's export prices relative to its import prices. It is expressed as an index and is calculated by dividing the unit value index of exports by the unit value index of imports.

In Malta we are experiencing a deterioration in the terms of trade, which means that we need to export more to purchase the same amount of imports. Between 2003 and 2004, Malta's terms of trade deteriorated by 7.5 per cent. In 2004 they were at their lowest level for the period 1995-2004.

The issue is a complex one because it is not simply a case of increasing exports or reducing imports. On the one hand, we have a confirmation that the exporting sector operating in Malta is registering a positive performance. On the other hand, the international economic situation prevents us from reaping maximum benefit from such a positive performance - hence the dilemma!