Welfare system reassessment "needed"

The governor of the Central Bank of Malta, Michael C. Bonello, underlined the need for a reassessment of the welfare system, with a view to moving away from universal schemes to focus on fulfilling genuine needs and to reward work.

In a statement accompanying the Central Bank annual report for 2002, Mr Bonello said sustainable long-term growth depended on the country's ability to attract high-value added export-oriented operations which necessitated further investment in human capital and a suitable balance between wage levels, productivity and taxation.

Mr Bonello said that the operation of the labour market was a critical determinant of national competitiveness.

"In this context, the objective should be a suitable balance between wage levels, productivity and taxation.

"It is essential that wages do not move out of line with productivity, particularly in the public sector, and that taxation levels do not serve as an excessive disincentive to work and investment."

Mr Bonello added that the government could contribute by further improving the efficiency and transparency of the public administration and by facilitating the redeployment of some of its own human resources to sectors of the economy where they can be used more productively.

"At the same time, every effort should be made to preserve the social fabric," he said as he called for a reassessment of the welfare system.

In its report, the CBM forecasts real GDP growth of between 3.1 and 3.7 per cent during 2003, with investment and, to a lesser extent, exports driving economic expansion. Inflation is expected to ease further.

The projected pick-up in economic growth was subject to considerable downside risks, however, stemming from the international geopolitical situation, the CBM said.

Net profits during 2002 fell to Lm19.8 million from Lm26 million in the previous year, as the sharp drop in foreign interest rates outweighed the positive income effect of the strong increase in the bank's external reserves.

In his statement, Mr Bonello explained that a monetary policy that was effective in delivering price stability was the bank's single most important contribution to sustainable growth.

Mr Bonello observed that the fixed exchange rate regime has been an efficient tool for this purpose, with domestic inflation remaining within a reasonable range of the basket-weighted foreign inflation rate.

Mr Bonello also referred to the need to maintain a premium on interest rates in Malta, given the fixed exchange rate system, liberalised external capital flows and the additional risk associated with investing in a small and open economy.

He said that from the monetary policy point of view, the surest way to overcome the cost of a higher risk premium would be to adhere to a larger currency area. He also stressed the importance of a stable financial sector for macroeconomic resilience and an efficient allocation of resources.

Analysing output, prices and employment in Malta, the report comments that economic activity began to recover, driven by stronger domestic demand during the first half of the year and a rebound in exports, particularly of electronic components, during the second half.

On the other hand, the tourism sector experienced a further decline in activity, although most of the drop was concentrated in the first six months of the year, when the industry was still suffering from the negative effects of the events of September 11, 2001.

Reviewing the country's balance of payments, the report says that the current account deficit is estimated to have widened slightly in 2002.

This mainly reflected a lower surplus on the services account, whereas the merchandise trade gap narrowed for the second consecutive year.

Meanwhile, net inflows on the capital and financial account continued to be recorded, leading to an expansion in the official reserves.

In its analysis of public finances, the report observed that the fiscal deficit for 2002 has been provisionally estimated at Lm78.5 million, down by Lm6.8 million from the previous year's level.

Thus, the fiscal deficit/GDP ratio is estimated to have declined from 5.2 per cent in the preceding year to 4.6 per cent. The shortfall was mainly financed through short-term borrowing and privatisation proceeds, and the year-end ratio of gross government debt to GDP rose by 0.8 percentage points to 62.8 per cent.

The annual report is available on the website of the Central Bank of Malta.

www.centralbankmalta.com