Inflation not easily curtailed – Leo Brincat

While the Central bank of Malta maintains that overall inflation is expected to ease over the course of the year, the current level of inflation is undoubtedly worrying.

In fact, figures released recently by the National Statistics office show that year-on-year inflation had climbed in March of this year by over 88 per cent, having stood at 1.92 in March 2001 while nearly doubling itself by reaching 3.62 per cent in March of this year.

However, the leap is by no means a sudden one, in fact it has been rising steadily in what could be interpreted as a consistently growing problem.

In fact, while inflation in Malta’s main competitors eased over the course of last year, the domestic inflation rate had climbed persistently upwards.

Shadow Finance Minister Leo Brincat sees the problem as a complicated one. Speaking to The Malta Financial and Business Times yesterday he explained, "We feel that it will be difficult for this government to curtail the inflation problem since it is mainly domestically created. Latest provisional European Central Bank figures show that although higher than ECB targets, inflation in the Eurozone is being contained. In fact, April figures are expected to show a decline. This runs counter to trends prevalent locally.

"Government-induced costs are not helping matters either. Neither are the increasing red tape and bureaucracy, which are both bound to rise if we were to join the European Union.

"We cannot forget that all this is happening at a time when the economy is experiencing negative growth and when key economic sectors such as tourism and electronics are underperforming. The same can be said for other areas such as wholesale/retail and other key areas of the services sector, not to mention the Malta Stock Exchange.

"The worst thing is not only that the situation is running badly out of hand but that nobody in government seems to have either any remedy or will power to keep the situation in check."

While commenting that the inflation rate scenario as a whole had deteriorated last year, climbing more than one per cent since October, he explains, "Although the Minister for Economic Services tried to laugh off my allegation that we are experiencing stagflation, I modestly feel that time is proving me right, particularly given the stagnant situation we have right now as well as the failure of lower interest rates to kick start the economy. As things stand every body is worse off."

Mr Brincat cites several trends to back up the ‘stagflation’ hypothesis such as the fact that industry is becoming increasingly uncompetitive as prices tend to rise faster than productivity, that wages are being steadily eroded and declining purchasing power.

He adds that earnings on savings are declining in real terms and that the food component in the retail price index increase is at its highest.

Meanwhile, he also cites the fact that consumer spending has only been increasing marginally, at a pace that hardly fails to take account of the rise in prices.

He adds, "We are reaping the negative effects of an over-taxed economy where the proportion between tax raising and deficit curtailment is growing more and more out of sync.

"I believe that the erosion of our competitive edge is detracting foreign investment from locating in Malta. This is having more direct bearing on the economy than the EU issue or the VAT removal/retention issue could have.

However, the Central Bank of Malta in its annual report predicts that inflationary pressures are expected to subside over the course of this year with the projected rise in unemployment dampening domestic wage pressures, and consequently price inflation, particularly in the non-tradable goods and services.

The Bank cites higher food prices as being mainly responsible for the rise in inflation, while the collapse of a large chain of discount stores eventually led to a restructuring within the retail sector, which subsequently contributed to a rise in prices.

However, the Bank maintains that inflation should decline as the effect of last year’s shock to food prices begins to dissipate.

Moreover, according to the Bank, protectionist measures had impeded the importation of agricultural products from entering the domestic market during a period of scarcity caused by unfavourable weather, further adding to price pressures.

In the domestic market, last year consumption growth decelerated as disposable income expanded at a slower pace than in 2000, reflecting lower employment growth. The unemployment rate had risen marginally due to a contraction in employment in hotels and catering establishments and redundancies in the distributive trades. The latter followed the closure of two large discount stores, a development that contributed to the sharp rise in food prices witnessed in the course of the year and in the absence of unforeseen shocks, the Bank expects that overall inflation should ease over the year.

The inflation performance over last year, the Central Bank explains, testifies to imperfections in the local market, as inflation rose from 2.4 per cent in 2000 to three per cent at a time when the average rate in Malta’s main trading partners was under two per cent.

International developments, such as a predicted stability in interest rates, could potentially benefit Malta’s economic growth this year, aided by further investment expenditure on capital projects.

Economic growth had decelerated sharply in 2001, as the deterioration in global economic conditions took its toll on the Maltese economy. The electronics sector, which in previous years had been a major source of real GDP growth, was faced by a sharp decline in export demand and consequently experienced a significant drop in profits. After an initial burst in activity during the first half of the year, other export-oriented manufacturers were similarly affected during the third quarter. The September 11 terrorist attacks on the United States further aggravated the situation for exporters.

Meanwhile, the tourism industry was already coping with a decline in arrivals from Germany following a cut in the capacity allocated to Malta by a leading tour operator. The events of September 11, however, induced an aversion to air travel, especially among conference organisers, and this resulted in a marked decline in tourism activity in the following months.