26 October 2005

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Business Today

The ‘50 million dollar’ question

The ‘50 million dollar’ question facing government is how to make up for the oil price hike and keep on track with its deficit target without drying up the well of economic initiative in the country.
Interviewed on the eve of the announcement of a 55 per cent surcharge and a few days before the budget, Parliamentary Secretary Tonio Fenech talked to Business Today about the hard choices facing government.

In the pre-budget document, the oil price hike was hardly given the same importance it is being given today. How come the oil controversy has only surfaced a few weeks before the budget?
The document was based on our experience during the first six months of the year. At that stage the price of oil had not reached the alarming levels it has reached now. There were even indications that the price of oil could decrease. Of course in outlining a vision till 2010 we did not deceive ourselves by imagining that we would not face any hurdles. Even the avian flu was not envisaged till some time ago and this will also have a financial impact as money will be spent on medicines, protective clothing and security. But it is important that these unforeseen factors do not derail us from our overall aims of the pre-budget plan.

But couldn’t the government have planned ahead for this eventuality?
We are not prophets. Our only indications came from the international markets. Throughout the end of last year and the first months of this year, all indications were that the price of oil would stabilise or decrease. Last year’s decision to introduce a 17 per cent surcharge was based on trends pointing towards a possible decrease. Otherwise we would have had to introduce a 34 per cent surcharge. At that stage we did not want to burden the consumer any further. But after Hurricane Katrina, the price of oil shot up. Katrina exposed a major problem: although demand is rising with the growth of emerging giants India and China not enough refined oil is being produced. Even the USA with its crude oil reserves did not have enough refined oil. I acknowledge that it would have been much better had Enemalta accumulated some profits in the past to be prepared for the storm. Yet this would have meant higher fuel prices. Rightly or wrongly, we have always adopted a non-profit policy for Enemalta. In the past politicians would have been scandalised if they heard Enemalta had registered a profit.

But were you not part of the same government that did not prepare for the storm?
I was part of this conscious decision not to register profits at Enemalta.

But who is to blame for inefficiencies in Enemalta. Surely one cannot blame the consumer for this?
Enemalta should definitely increase its efficiency. Definitely due to a lack of investment, the Marsa power plant suffers from a chronic lack of efficiency. One cannot blame Enenalta employees for this. Definitely Enemalta still has a number of surplus workers. But we are not making the consumer pay for these inefficiencies. When we introduced the surcharge, we made it clear that the consumer was not paying to make up for these inefficiencies but merely to make up for the increase in fuel costs. The message to Enemalta to start restructuring itself was therefore clear. In fact a number of reforms were enacted. These included better working practices and a clampdown on abuses and waste. Yet eliminating inefficiencies would not eliminate the main problem, that of recuperating the Lm50 million losses due to the oil price hike.

In order to kick start the economy, there has to be an incentive for people to consume and invest. If the cost of the oil price hike is transferred onto the consumer, isn’t there the risk that the economy will stagnate? Are we drying up the well, from which we have to drink to survive?
Economists on a theoretical level are saying that the impact of the oil price hike on the economy would be negligible because all countries in the world are being affected equally. Nobody will fare better than others. I disagree because effectively we will be simply transferring Lm50 million to Saudi Arabia instead of pumping them into the economy. But we cannot be deceived by the idea that the oil price hike will not have an impact. We have to be sensitive in order to mitigate any negative impact on the economy. How can we collect these fifty million without harming the economy? This is the million-dollar question or rather the 50 million dollar question. We must surely avoid double inflation for example by introducing a levy on diesel to finance the fuel bill. Diesel is such an important component of other economic activities that we cannot penalise it further.

GRTU Director General Vince Farrugia criticised the government for its hostility towards any idea of a hedging agreement. Do you exclude hedging?
Absolutely not. We never excluded the idea of hedging. What we dispute is the opposition’s contention that the hedging agreement reached between 1996 and 1998 could have remained valid till today. This is impossible. All hedging agreements have a timeframe. The price hedged by the MLP government was 23 dollars a barrel. When the PN government decided not to ratify this agreement, the price of oil was 12 dollars a barrel. It did not make sense at the time to buy oil at a higher price. Hedging always involves a gamble on both parts. Experts say that at the moment the market is highly speculative. Those willing to hedge quote very high prices in order to avoid losing money. It only makes sense to reconsider hedging when the price gets stable again. In such a circumstance it would make sense to diversify by hedging part of our oil and fuel bill. But one cannot risk such a decision at this moment.

How do you react to Farrugia’s criticism that you are a good accountant but a lousy economist?
I thank him for certifying my credentials as an accountant. As regards my economic insights I am surrounded by economists who give their constant advice. I know he meant this in good spirit. Our intention is clearly not that of ruining the economy.

What can we expect of the budget?
When we issued the pre-budget document we identified several aims. The budget must set the right environment for the expansion of a number of sectors like tourism, industry and manufacturing. This expansion can take place through increasing the role of the private sector.

But can we speak of an economic turnaround?
When we had two quarters registering negative growth, some said that we had entered a recession. Using the same argument with two quarters of positive growth, we are experiencing a turnaround. We cannot apply different standards. We have to be consistent.

Are you saying that there are positive indications in the third quarter of the year?
I cannot reveal GDP statistics for the third quarter as these are not yet certified by NSO but the indications are that the economy fared better in the third quarter than in the second quarter. Indications also show that prospects for the fourth quarter are positive.

How can we speak of an economic turnaround when exports went down sharply and statistics released by Eurostat show a 52 per cent fall in industrial orders, which is far higher than that experienced in other EU countries?
60 per cent of our imports and exports depend on the performance of ST Microelectronics. Although ST is producing more components, the fall in international prices, has resulted in a fall in a decrease in the value of exports and imports. GDP statistics are a better indication than export and import statistics. The very fact that we have exceeded our projections for VAT collection for this year is a sign that people are consuming more and that the economy is recovering. Even as regards income tax, figures exceed projections.

The government boasts of a decrease in the number of people registering for work with the ETC. Yet in the last five years, the number of people whose sole revenue comes from part time work has also increased from 14,000 to 21,000. Does this mean that the economy is not creating opportunities for full time work?
For the past year the unemployment rate decreased by 1,000 not due to more employment in the public sector but through an increase of jobs in the productive sectors. Most of these found full time and not part time jobs.

What about the 12 per cent figure mentioned in the Labour Force Survey?
This survey is conducted among people aged between 14 and 65. People registered by ETC are aged between 16 and 61. A survey always has a margin of error, which must be taken into consideration. Unlike the Labour force survey, the ETC register is a head count. One should also refer to positive investment statistics. Eurostat has recently published the amount of investment attracted by each EU country. Malta attracted 400 million Euros. Per capita Malta was on the higher end of the table, at the fifth place. Eurostat has also shown that Malta has one of the lowest taxation burdens.

Is the government being more Catholic than the pope in its goal to reduce the deficit to 1.4 per cent by the end of 2007 when Malta is only required to keep its deficit under 3 per cent and when other countries like Germany and France do not seem to give much importance to keeping their deficit within these limits?
I think nobody would dispute the benefits of having sustainable finances. Nobody disputes that we need to ensure that future generations are not burdened by debt. This is the aim of the Maastricht criteria. The government is aware of the particular circumstances facing the country but we cannot afford to substantially derail our commitments. Prospective investors give paramount importance to the financial credibility of the country in which they would be willing to invest in. Of course the 1.4 mark is not an obligatory one because the EU only demands that we do not go beyond the three per cent mark but we cannot afford to change the overall direction.

Do you agree with Austin Gatt that the Malta Council for Social and Economic Development is a talking shop?
I have a more direct experience of the MCESD than Austin Gatt. I experienced it for six whole months when an attempt was made to reach a social pact. But the aim of the MCESD is not that of taking decisions together. It is a forum for consultation and open discussion where the government could share ideas with the social partners. A national agreement is not required before any decision is taken.

But do you agree with Gatt or not?
The MCESD has a great value. Although we failed in reaching an agreement on a social pact, trade unions showed great responsibility in discussions on the collective agreement for the public sector workers.

Tonio Fenech was interviewed by Saviour Balzan on Smash TV programme Int x’Tahseb?

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