“Up to just a few weeks ago, we were discussing how the global economic recovery from Covid-19 is likely to unfold. However, the Ukraine-Russia war has transformed and amplified the nature and extent of this recovery, bringing a new form of economic uncertainty”. Interviewed by Dayna Camilleri Clarke, leading economist Dr Stephanie Fabri discusses this still-unfolding event whose economic impact cannot yet be determined.
How will Malta handle the latest scenarios we are facing? Dr Fabri is quick to reply, “Malta’s economic recovery from Covid-19 will undoubtedly be affected by this new turn in events. Our smallness, openness to trade, and limited resources expose us to external shocks. Yet, one has to mention that despite our challenges, we have managed to rebound from every economic and financial crisis we have faced. In times of crisis, we are resilient and agile. We are indeed capable of weathering major unforeseen disruptions”.
Dr Fabri continued, “The Ukraine-Russia war has tested the global economies once again, and Malta’s economy is no exception. The already existing supply chain shortages as a result of Covid are now coupled with significant increases in the price of grains, energy, and commodities. These are expected to persist throughout the months to come”.
“The recovery had indeed started to gather momentum from the pandemic, with Malta expected to have the fastest economic growth rate in 2022 among EU members, yet, we need to keep in mind that the economy is still exposed to increasing threats due to the present economic and political instability. Tourism numbers and growth rates in most sectors were picking up, yet economic activity is still below pre-pandemic levels in most cases. The present war situation will, of course, make it even more challenging to achieve those results”.
“The question of how hard we will be hit ultimately depends on how long the situation within Russia and Ukraine persists”, explained Dr Fabri. “Given that there is no sign of a cessation, the economic situation is extremely fluid; this makes it very challenging to predict what will happen next.”
“We know that Russia and Ukraine are major exporters of energy, metals and agriculture products. The EU is particularly dependent on these. Whilst global supply chains have been under stress before the war started, the present Ukraine-Russia situation amplified this problem. Certain industries are more exposed than others to these increases in prices; however, since the bulk of these products is commodities, it is likely to lead to a multiplied and intensified increase in prices throughout various sectors and industries. Case in point, the price of wheat has increased considerably with a resulting increase in the cost of food. Same with natural gas. Russia is the leading supplier of gas in Europe, and some analysts are predicting a 30% increase in energy bills over the coming months. All of this needs to be seen within the context of a still fragile recovery whereby no longer have particular leeway to intervene in the economy given that they have invested heavily to support an ailing economy during Covid”.
“The situation overall is already having an impact on consumer and business perceptions, which affects the level of investment and consumer demand. Of course, everything depends on how long this war will take and how deep the scars will be on the economic and financial situations. However, as the French prime minister recently outlined, we need to prepare for a prolonged crisis”.
In the face of all of this, what can we do to maintain a strong economic activity at a national level as much as possible? Dr Fabri replied “first and foremost, we need to ensure that the adequate measures are there to limit as much as possible the implications of all of this on Maltese companies, employees, investment, and consumer purchasing power. In addition, companies depending on exports will also be impacted with the downturn of export markets, while expected increases in food prices will also impact consumers. Government intervention through extension of state-guarantee loans, direct subventions to support purchasing power as it is already doing and other financial measures will play a key role in limiting impacts”.
Dr Fabri continued, “despite the current context, we must still prepare ourselves for better days. Our efforts to prioritise investment in greening and digitalising our economy must persist. We need a plan to drive these economic transitions to create new investment and employment opportunities”.
“In the meantime, to enhance our competitiveness and productivity, we also need to ensure that our economic model is characterised by flexibility and agility. That is, our economic ecosystem is designed in a way that can respond quickly to volatile economic situations and consumer demands. This strongly depends on the innovation ecosystem that we are going to develop”.
According to the European Innovation Scoreboard (2021), Malta is classified as a moderate innovator though important gaps remain. Significant gaps remain in areas such as R&D expenditures in both the public and business sectors and access to venture capital and private equity support, which needs to be addressed.
Dr Fabri stresses that education is another factor pivotal to our success through turbulent times. “Malta has one of the lowest school-aged leaving rates in Europe. We have one of the lowest investments in Europe in research and development. There are structural issues in our educational system, and we need to take a closer look at what is going on and understand the reasons as to why this is happening. Enhancing the skills of our workforce and of the next generation remains integral to our shared future success within the islands.
“I see huge potential in sectors with low productivity levels, especially compared to other sectors, such as the agricultural sector. At times like this, this potential highlights just how important they are. However, more emphasis needs to be on attracting younger generations to these sectors” How can that be done? Dr Fabri quickly replies, “If we take agriculture as an example, one way is to integrate science and innovation within farming. The ideas are there; the question is, how can we secure the right ecosystem to make it happen.”
What’s next after we emerge from this scenario? Dr Fabri continued, “in line with some examples mentioned through this interview, once the economic recovery kicks in and aid is scaled back, an important element is that the government rebuilds its fiscal buffer, which allowed it to invest in temporary, targeted support to companies in distress. Fiscal sustainability is vital, and the government needs to strive to achieve a stable reduction in both its deficit and debt levels over the medium term to ensure it retains the capacity to intervene in the economy.”
Dr Fabri remains optimistic about the future, “despite the challenges; there are several opportunities in which Malta can thrive. One hopes that post-election, the country can come together to start tapping into such opportunities, she concluded.