Recovery is a plant of slow growth

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An interesting report issued by the Malta Employers Association (MEA) calls for a sober approach by government in its quest to prepare the economy for a swift recovery post-COVID. Naturally, observers have different points of view, how best to accelerate the recovery based on available resources. It comes as no surprise that government borrowed a cool €2bn for funding that had to be incurred so as to help employers retain their workers.  During the three-and-a-half months of the lockdown, there has been a number of mini budgets announced by government following pressure by the constituted bodies. 

The latter saw their members forced to close hotels, restaurants, shops, gyms and so on without any alternative source of income. The closure of all the ports and airport sounded the death knell for the hospitality and other connected businesses such as travel agents, importers of foodstuff, taxi drivers, transport in general and others such as language schools. The direct hit taken by language schools may be a fatal one since it is debatable whether, once the vaccine is available, foreign students will risk returning. Quoting from the MEA report, one observes that we all wish to wake up one fine morning to a resilient and diversified economy, where a certain equilibrium is reached. 

Party apologists recall how Malta (pre-COVID) was the envy of EU‘s best economic performers. As usually, we had a successful mix of established sectors which amply compensated for unforeseen slowdown or outright cessation of activity in others. Since the first week in March, there has been mounting pressure on government by the social partners to dig deeper in its reserves to fund lame ducks (closed due to the lockdown orders). This strategy has borne fruit once Malta Enterprise started paying wage supplements for retained full-time workers, who were suddenly made idle. The aid was well received (albeit some operators complaining that they were excluded from Annex A). This scheme will be extended till the end of this month.   

Horror stories, especially from the hospitality quarters, foretold that if the airport is not opened this week then Armageddon will follow with 90,000 soulless workers waiting for dole assistance. Luckily, so far, the country was spared this poisoned chalice. It is encouraging to read that research carried out in April by MEA revealed how just 9% of companies surveyed resorted to redundancies as a measure to counter the impact of the crisis. Officially, 4,000 are currently registering for work and one notices that this figure is low since many foreign employees, third country nationals in particular, did not have their contracts renewed, with 20,000 being repatriated and therefore not showing up on the unemployment register.  Naturally, unless the next mini budget comes out with serious proposals for reviving the hospitality, retail, wholesale and a number of manufacturing firms, which saw their sales orders cancelled, the dole queue will skyrocket by the end of the year.

On a positive note, one must praise the tenacity of local employers who have shown that they are less likely to shed labour when things turn sour. By comparison, in other countries (for example, the USA unemployment has reached a critical figure of 25%), unemployment has increased at a much faster rate than Malta, in spite of government schemes and incentives that are similar to those that have been implemented locally. Like other countries in the Med. such as Spain, Italy, Cyprus, Greece and Turkey, we have suffered a fall in domestic and foreign income growth due to the sudden collapse of the travel sector. Demand in Malta was exceptionally good in 2019 due to the inward tourism, having around three million airborne tourists and 900,000 cruise liner visitors. Due to this drop in arrivals, commerce has precipitated a contraction of the accommodation sector by 18%.  By contrast, the construction sector, having continued working through the lockdown period, has actually accelerated its pace and expanded by 14%.

There are a number of measures that government is encouraged to heed in the next recovery budget. Ideally, we need back the third country nationals (TNC) that left in droves, as workers. Perhaps, a wise move by Identity Malta (now back to basics) can expedite extension of work permits of TCNs who are still in employment when they expire. This is the key for picking up the momentum which we enjoyed pre-COVID. MEA also suggests a reduction in corporate tax (at 35% it is the highest in Europe) and inculcate a smart way to incentivise businesses by introducing a number of extraordinary tax incentives for those companies which make investment post-COVID in the coming 12 months, with enhanced incentives channelled towards green economic activities, agriculture and innovation. 

The secret ingredient in the recovery pot is the reduction of VAT. This boosts consumption.  Knowing for a fact that there is a considerable amount of evasion, international studies have shown that this will drop when taxes are discounted. Seriously combatting evasion will amply make up for loss of revenue due to lower taxes. For many years, the Chamber for SMEs has pleaded (unsuccessfully) for a lower rate of corporate tax for family businesses and others falling under the definition of SME. The good news is that Germany shall be reducing its VAT rates from 19% to 16% and on hospitality from 7% to 5%. Can Malta follow suit and reduce VAT from 18% to 15% in general and 5% for hospitality. With oil and gas prices hovering in US$30s, it is opportune for government to drop its tax on household and commercial utility bills. This will increase disposable income. At the moment, retail outlets in Valletta, which opened last week, complain that it is not worth opening as sales dropped to 30% of 2019 volume.

In the restaurant and food services sector, one anticipates that as more workers are fending on lower income (or are out of a job) the habit of dining out (la dolce vita) is the last thing on their mind. There are other factors that contribute for such parsimony. Pouring over recent statistics one notes how local prices of food have risen at more than double the average rate of the EU over the last decade. This creeping inflation was a silent one with a gentle rise of 2.9% in Malta. It has not ruffled many feathers − yet it is more than twice the EU’s 1.4% increase. Official facts reveal how food prices went up by 3.74% in the beginning of the year compared to August last year. Sadly, even the cost of dining at home is edging up. Eurostat figures showed that in 2018, the average price of food in Malta was 12% higher than the EU average.

To put this in perspective, one prays that the resumption of normality is accelerated by government − truly acknowledging that the private sector has just suffered a catastrophe. It needs to be nurtured when climbing its slippery path to recovery − as it is only when it succeeds, that it will start laying the golden eggs.

gmm@pkfmalta.com

The writer is a partner in PKF Malta, an audit and business advisory firm.