Chamber concerned that business profits are ‘being eaten’
Semira Abbas Shalan
The next Cost-of-Living-Adjustment (COLA) will amount to a minimum of €13 per week, but government must also find a way to increase wages without increasing the cost on businesses, CEO of the Malta Chamber of Small and Medium Enterprises (SMEs) Abigail Agius Mamo said.
As things stand now, rising prices due to inflation means that the COLA that would have to be awarded next year would amount to a minimum of €13 per week. The COLA adjustment will be announced in the budget for 2024, due in October or November.
Agius Mamo told The Malta Business Weekly that sticking to just the COLA mechanism to increase wages creates a vicious circle for businesses, who have to make up for increased prices, as well as increased wages.
The COLA is awarded annually to compensate for inflation over the previous year and is worked out on a fixed formula based on the cost of a basket of products and the minimum wage. This is paid by employers as part of their workers’ salary, and a projected €13 a week increase for next year has employers worried.
The last COLA increase was substantial, with an increase €9.90 per week.
Agius Mamo said that expanding the tax bands could be an option, as the last COLA increase moved some individuals receiving a minimum wage, where they would not be paying tax on income, to a new tax bracket, where they would need to start paying tax.
“Our costs are increasing, so as a result we are being compensated for these costs through COLA, which increases our income. However, we are then moving in income levels, and are consequently being taxed more,” Agius Mamo explained.
She said that an adjustment for income to have the affordability aspect addressed is being done, but by being taxed more, income and purchasing power is reduced.
“There are ways of looking at a strategy, to stop this ‘firefighting’ and start planning a bit better. We need to address the level of productivity in a healthy manner, we need to start having employees that produce more value, work smarter not harder,” Agius Mamo said.
“Those will be the employees that are more difficult to replace, that will be paid more for their jobs and will be stronger when it comes to inflation re-increases,” she continued.
Agius Mamo was asked about certain businesses who could be taking advantage of the inflation situation and raise prices just to make profit.
She said that while she could not reassure 100% that there isn’t anyone abusing, or taking advantage of the situation, putting it down to just abuse would not help with coming up with solutions.
Agius Mamo said that realistically, businesses in Malta were not comfortable increasing their prices, and with the number of businesses as well as the competition between them, it is not realistic that many of them are taking advantage.
She said that we need to classify and understand the different circumstances, as otherwise, solutions would not be found.
“We have to analyse why they have increased prices, and the very minority said that they have not increased their prices,” she said.
Agius Mamo said that Malta is a country which is heavily dependent on imports, and most of the inflation is being imported.
“Even though we have a control on energy prices in Malta, we import the majority of the products, and outside of Malta there is high inflation, so the products coming to Malta come at an increased price,” she said.
She said that in terms of inflation across Europe and beyond, Malta is one of the countries which is performing best, having a capping on energy, but it is not only Malta, but Europe and the world who is experiencing this.
There are more things at play, as goods in Malta take longer to come, making it a more expensive process and adds on to the cost, she said.
Agius Mamo described the situation in the labour market, and due to the little resources we have, businesses are ending up paying more to be able to retain their workers.
“This goes beyond the COLA, it is wage inflation, also adding on to the pricing of the goods. We need to find a way to be less import dependent and have a strategy plan to see which the basic products Malta are, and which needs to be produced locally, so that we are not exposed to fluctuations from abroad,” Agius Mamo explained, mentioning the pandemic, where certain countries made an export ban to retain basic products for themselves.
“Malta ended up having to fight for everything, we need to start strengthening our basic needs, producing locally,” she said.
The government has been told to prepare an exit strategy for energy subsidies, and Agius Mamo was asked what the impact on SMEs would be should subsidies stop.
“The impact would be substantial, in Malta we already have a level of inflation, and it will be much more significant if the help with energy had to stop,” Agius Mamo said.
She said that when the Chamber asks members about challenges they experience, they always tell say that among a list of serious challenges, nothing compares to having to be burdened with the increase in energy prices.
“That is something that they know will be very difficult, we need to keep in mind how particular Malta is, it cannot compete on any fronts, Malta does not have many energy options. Something like this would have a very big impact on Malta,” Agius Mamo said, adding that the Chamber hopes that prices will stabilize before doing away with the incentive.
She was asked how consumers can be expected to purchase from local businesses, when a foreign product from somewhere such as Sicily, is significantly cheaper.
“A recent study done showed that the difference between prices locally and Sicily was not so substantial,” Agius Mamo said.
She continued that while there are many difficulties in Malta to be able to compete, it does manage to be competitive.
She said that one must keep in mind that minimum wage is lower in Italy and Sicily, and Sicily has a high unemployment rate.
“People cost much less, so producing anything in Sicily costs much less, compared to the locals,” Agius Mamo said.
Agius Mamo said she believes that where Malta’s products are a little bit more expensive due to the circumstances, they make up with other benefits.
“Purchasing a product from Malta has a next day delivery, if you have a problem, you can go find someone to change it, replace it, get a refund. That convenience is very good,” she said.
She said that furniture coming from abroad, for instance, evades a lot of taxes, and that is why they do not manage to compete so effectively.
A survey conducted by the Chamber found that 60% of SMEs reported an increase in turnover, resulting in higher income reported. At the same time, almost 40% found that they increased their profit.
She was asked if some of it could be due to certain businesses taking advantage of the inflation crisis, to which she said that businesses were selling more, but making less profit.
“It is a concern for the Chamber that their profits are being eaten, and they do not have the same level of profits they used to have before,” Agius Mamo said.
Something the Chamber asked businesses in a recent SME barometer survey was which were their biggest concerns, and what did they think government should act on.
Agius Mamo said that businesses mention inflation, which affects businesses as well as customers and clients.
“Business looking to invest will know how much prices are going up, and each investment they made that would have been projected two years ago, is costing more now,” Agius Mamo said.
She added that businesses think of clients, and whether they would continue being able to afford their product, as importation prices continue rising.
Agius Mamo said that there are some local companies that are striking a deal with Sicilian and Italian companies to be part of the same quota and benefit from their prices.
She said that when it came down to increasing prices, businesses were asked what they did and how they decided to increase prices.
“They told us it took them a while for them to decide to increase prices, they initially tried keeping prices at the same level, absorbing the increases. When they increased prices, they increased more specific products, not all of them. There is homework which goes into it, they do not decide it on a whim,” Agius Mamo said.
She added that there is still a lot of consumption, and they need to attain, and maintain customers’ loyalty.
If the consumer knows that someone has increased prices which seem unjustified, they will change service provider or compare other markets, Agius Mamo said.
“We find ourselves at a time where we need to shop around more, compare prices, and find cheaper options. The power the customer has is important, and they must use it, as whoever is taking advantage of the situation is thinking in a short-term strategy not a long term one,” Agius Mamo said, adding that it is not a smart strategy, that there are many players involved, and that clients will remember.