Challenges for 2023 and beyond

Last Updated on Thursday, 15 December, 2022 at 12:35 pm by Andre Camilleri

Silvan Mifsud

The recent IMF “Mission Concluding Statement” issued on the 12th December, gives a very good overview of the excellent economic performance Malta has had and the challenges that face us in the coming years.

On one hand, as IMF themselves state, Malta has had a strong economic recovery after the pandemic with an economic growth of 11% percent in 2021 and a likely further economic growth of around  6% in 2022. This was possible thanks to the huge “cushions” that government has used both during the pandemic and now with regards the increased costs of energy and fuels.

As from next year Malta’s economic growth is expected to slow down to around 3%, although remaining amongst the highest in Europe. As the IMF mention, the reason for this is that Malta’s economy will be obviously affected by the lower growth in other European economies. As the IMF put it “This growth forecast is based on the assumption of lower consumer purchasing power dampening domestic demand, and weakening external demand from European partners overall, even though tourism and gaming sector exports will continue to support growth. Uncertainty is significant, with risks to the outlook tilted to the downside. Externally, downside risks include a deeper-than-expected recession in Europe and a possible de-anchoring of inflation expectations (which would raise Malta’s import prices and result in tighter monetary policy than anticipated). Domestically, the key risk includes higher wage pressure (leading to higher and persistent inflation) and the realization of ML/TF risks. On the upside, lower-than-expected commodity prices would lead to stronger growth than forecast.”

Beyond the above immediate effect, I am personally more concerned on two very valuable points which the IMF outline.

The first point is with regards the energy subsidy. Such subsidy in 2023 will cost us around 3.5% of Malta’s GDP and will likely contribute towards more than half of the deficit projected for 2023. While one surely understands the rationale behind such a subsidy, which is that of protecting our economy to allow it to continue to grow, one also has to plan in the eventuality that global energy prices remain well above pre-war levels for a prolonged period. IMF question whether government’s strategy to continue the fixed price policy could place a strain on fiscal policy, whilst suppressing the price will not help incentivise energy conservation and investment in energy-efficient products and green energy. The IMF go as far as to suggest that government should “prepare an exit strategy from the current fixed price policy on energy ahead of winter 2023/24”  whilst protecting vulnerable groups. They also put forward a number of suggestions:

  • They suggest that fuel prices at the pump should reflect market prices.
  • Finding ways of passing some of the market prices of energy to household consumers, possibly in a progressive tariff structure whereby those that consume less are aided the most and those with higher consumption levels are charged market prices, whilst business consumers are charged closer to market rates, with support given to those businesses that are energy intensive and doing every effort to increase energy efficiency.

Now, I am not saying that we should follow blindly what the IMF are saying, but on the other hand, we need to have a mature and serious discussion on the way forward in the likely eventuality that energy prices are going to remain elevated for a considerable amount of years going forward. After all, whilst protecting our economy is important, so is fiscal sustainability.

Which brings me to the other important point raised by the IMF – fiscal sustainability. On this point the IMF said “The authorities plan to reduce the overall deficit to below 3 percent of GDP by 2025. Public debt is, however, projected to hover just below 60 percent of GDP and could be put on an upward trajectory if growth underperforms.” In a nutshell, keeping public debt within 60% of GDP is dependent on achieving the economic growth forecasted by government. To achieve such a growth, as admitted by government itself, Malta has to adopt a new economic model which is not dependent on foreign workers and most of all delivers more value added per person in the economy. If such forecasted economic growth is not achieved than “additional measures to mobilise (government) revenues and enhance spending efficiency will be required.”

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