The medical emergency of the COVID pandemic is arguably over. The economic consequences are also beginning to show signs of amelioration. Still, the road to economic recovery is likely to be long and winding as uncertainties persist.
Central Bank governor Edward Scicluna has revealed some encouraging economic indicators which confirm that, in 2021, the country’s GDP was marginally better than that achieved in 2019 before the onset of COVID.
Growth in 2022 and 2023 is also expected to be encouraging. So far, there is no indication of a recession setting in due to the threats created by the Ukraine war.
These short-term indicators need to be analysed with a hefty dose of prudence. The economy’s resilience of the last two years has been achieved thanks to massive fiscal support that boosted domestic consumption and protected thousands of vulnerable workers in the labour market.
The props that helped to keep the economy stable now need to be slowly dismantled. No country can shield its economy for long from global geopolitical challenges and unaddressed local structural weaknesses.
Scicluna advised the government to gradually reduce the fiscal deficit without waiting for the reintroduction of EU rules on excessive deficits.
Even so, the government’s room for manoeuvre remains very limited, even in the short term.
The potential costs of dealing with the long-term, health-related risks of COVID are still an important factor in the mix of economic uncertainties.
Meanwhile, businesses will undoubtedly clamour for continued support to preserve employment levels and the future of Air Malta – with the support it may need from taxpayers – continues to be challenging.
But the most daunting short-term challenge will be defining a strategy to deal with the risks of spiralling inflation that is affecting all European countries.
The economic projections for Malta of the Central Bank and those of the IMF and the European Commission remain subject to several caveats made necessary by the exceedingly complex and uncertain situation that dominates the Union. Malta’s open economy means that no amount of fiscal support from the government can be sustained over the long term if the economic climate in Europe remains unstable for too long.
Scicluna focused on the short-term issues that are likely to affect the country’s economic performance over the next two or three years.
He diplomatically avoided addressing the tools that the government needs to use to strengthen the country’s fiscal framework.
The notion of selectively increasing taxation in areas that will not have too much impact on jobs remains taboo. Yet, it may be unrealistic to expect that by itself, economic growth will be strong enough to reduce the deficit and address the growing debt. If inflation continues to rise, consumer expenditure is likely to be hit. The engine that produced economic growth in the last two years will then begin to stutter.
Perhaps even more importantly, the medium- and long-term socio-economic challenges the country faces are arguably not being given the importance they deserve, at least in the public domain. The threat that corporate taxation will be harmonised on a global level needs to be addressed more openly and with more determination. The labour market weaknesses and how they need to be tackled similarly attract little public debate at the political level.
The road to recovery is still shrouded in thick fog. Put simply, to start making out the way ahead, Malta needs to reinvent the competitive advantages that make it attractive to foreign investors.