The report of the mission of the International Monetary Fund on Malta published last week confirmed yet again that the performance of our economy is a positive one. In fact, we need to remember that our economy has not had a severe recession with high unemployment for the last 35 years.
We have had our blips, at times even going into what is referred to as a technical recession or times when employment growth was minimal. However, these were very short-lived, and over the long term we have had a very stable economic performance.
Even when the world’s leading economies were passing through the most severe recession around 10 years ago, we still managed to protect our employment through appropriate measures. By any measure we have done well. One might ask whether there were any issues raised by the IMF mission that need to be tackled. A pertinent question would be about how well placed we are to face future challenges to our economy. This explains the title of this week’s contribution.
The IMF did raise three issues which are seen as a threat to our economy, namely our anti-money laundering framework, pressures on the infrastructure, and reliance on corporate taxation. They also stated that our economy is “gradually reaching cruising speed” and is now increasingly reliant on domestic demand.
These last two comments were not highlighted as a threat. But I would like to refer to them as I do see them as a threat. The increased reliance on domestic demand is an issue that makes alarm bells ring for a number of reasons. Domestic demand may fuel inflation and therefore lead to an increase in salaries to unsustainable levels.
The overall inflation figure is still below the two per cent threshold. That is mainly due to the prices of imports. On the other hand the inflation in property prices and the prices for local services is much higher than that. That does not bode well for the future.
However, we also need to build for the future – that is unescapable
Moreover the increase in domestic demand is mainly due to the increase in the number of foreigners living in Malta. I doubt whether we can sustain increasing the numbers further and therefore we may be reaching a plateau. The increase in the number of foreigners here is due to the presence of certain economic activities in Malta. As such this makes our economy very vulnerable.
Admittedly we should always expect our economy to be vulnerable to certain events because of its small size and openness. So we need to take a strategic decision as to whether to continue to be reliant on domestic demand or revert back to the policy of export-led growth. Both have their downside risks and their upsides, and possibly one would argue for a balance between the two. To generate export-led growth requires hard work but it has proven itself to be very beneficial to our economy.
The other comment that gives rise for concern was about the economy gradually reaching cruising speed. Apart from its connotation related to sailing, when we speak of someone cruising, we are normally referring to someone who is going about their way effortlessly. As such with a little bit more effort, one would deliver better results.
To my mind, similarly, when an economy is cruising, it seems to be enjoying the benefits of past efforts but not doing much to create new activity, to diversify, to generate new sources of wealth. This is something that Malta can ill afford. The reliance on corporate taxation mentioned by the IMF does indicate that there could be risks if businesses currently operating in Malta are offered something more advantageous than our current tax regime.
What happens then? It may prove to be difficult to suddenly get out of the comfort zone which our economy would have got into. I have always argued that we should use the current positive momentum of our economy to develop future economic activities. The current positive economic performance has provided us with the resources to do so.
As a country we are perfectly entitled to be proud of our economic performance. Today, we are reaping the benefits of past efforts. However, we also need to build for the future – that is unescapable.