The government should not lose sight of its target to bring down the deficit, Central Bank of Malta Governor Edward Scicluna said on Wednesday.
According to the Central Bank’s projections, Malta’s deficit is expected to decline to 6.2 per cent of gross domestic product by the end of this year and continue narrowing to 3.3 per cent in 2024.
Speaking at the launch of the bank’s annual report for 2021, the former finance minister said that, like other countries in the EU, Malta should work towards gradually reducing the deficit.
“All countries resorted to a deficit to be able to help in the pandemic. The government should start reducing deficits gradually without waiting for the reintroduction of rules on excessive deficits,” he said. “The government should not lose sight of the target on bringing down the deficit.”
EU rules on excessive deficits are currently suspended due to the need for higher government spending to support pandemic-ravaged economies.
A debate is now taking place on when to reintroduce them.
Under the so-called excessive deficit procedure, an EU member state is subject to action by the European Commission if it exceeds ceilings imposed by the Stability and Growth Pact. Until 2020, when the pandemic struck, those ceilings were a budget deficit of three per cent of GDP and public debt not exceeding 60 per cent of GDP.
In its annual report, the bank said it expected the country’s GDP to grow by six per cent this year as it continues to recover from the pandemic shock.
GDP is expected to grow by 5.3 per cent in 2023 and 3.8 per cent in 2024. Last year, GDP rose by 9.4 per cent, marginally surpassing that of 2019.
The bank estimates the fiscal balance will show a deficit of 9.3 per cent of GDP in 2021 while the general government debt is estimated to have reached 57.7 per cent of GDP.
The government balance is expected to narrow to 3.3 per cent of GDP by 2024 as COVID-related support measures are phased out. Government debt is set to reach 60.9 per cent of GDP by that year.
The bank said the current deficit reflected the extension of COVID-related economic support amid renewed containment measures in response to new variants of the virus and an aggressive vaccination campaign.
According to projections, risks to its fiscal projections mainly affect the rest of this year when certain outlays could be deficit-increasing.
These risks relate to the likelihood of additional COVID-related support, the impact of Air Malta’s restructuring on the likelihood of state aid to the airline as well as support needed to cushion the impact of rising commodity prices following the conflict in Ukraine.
Scicluna said inflationary pressures are expected to remain elevated in 2022 but should begin to dissipate in 2023, as supply bottlenecks are expected to gradually fade.
He explained that inflation decreased marginally from 0.8 per cent in 2020 to 0.7 per cent in 2021, rising to 2.6 per cent in December as international price pressures began to transmit locally.
Scicluna said that, notwithstanding the increase in inflation in the second half of the year, inflation in Malta remained well below that in the euro area, which ended December at five per cent. This was partly due to the cushioning of domestic energy prices.
Inflation based on the Retail Price Index rose from 0.6 per cent in 2020 to 1.5 per cent in 2021.
According to the bank’s annual report, growth in 2021 was driven by domestic demand although net exports also supported the recovery.
Employment continued to benefit from the ongoing normalisation of economic activity in the context of a tight labour market and from COVID-related support measures, in particular the wage supplement scheme.
The bank said that, according to the Labour Force Survey, employment expanded at an average annual rate of two per cent during the first three quarters of 2021, following growth of 3.5 per cent during the corresponding period of 2020.
The pace of job expansion improved as the year progressed with the number of job holders in the third quarter around five per cent higher than that recorded before the pandemic.
The unemployment rate averaged 3.7 per cent between January and September 2021, down from 4.3 per cent in the same period of 2020, well below its average since at least 2003 and the average rate in the euro area.