A tale of two uncertainties

Finance Minister John Dalli speaks to DAVID LINDSAY about the issues of uncertainty affecting the Maltese economy at present. He also speaks about the Opposition’s two month tax holiday proposal, transparency at HSBC, the adjusting of tax ceilings and Malta’s future as a financial services centre in this
wide-ranging interview

Finance Minister John Dalli sees the lack of certainty, as Malta hangs in limbo over the EU membership question and international turmoil caused by events in Iraq, as the primary factor affecting the Maltese economy at the moment.
The issue of certainty – or lack thereof - is two-pronged, with one prong originating from outside the confines of Malta’s shores, while the other lies in the hands of the electorate on 12 March.
He explains, "The main issue affecting the economy is uncertainty, which is affecting us on both the national and international level. We all know what is happening around us on the international level, which is creating levels of uncertainty both internally and on the international market - the international market that buys our products and from which our important tourism market is derived. This uncertainty has had and will continue to have a negative effect on our economy, very much in line with the toll it is taking on all other economies worldwide.
"This lack of certainty will also have a cascading effect, not only through the first line reactions such as people being reluctant to travel. But as tourism in general collapses and other economies suffer negative economic effect, these economic effects will fuel further economic negativity. Therefore we all hope that this negativity will be resolved as soon as possible."
The other main issue affecting confidence levels is, however, home grown and, of course, centres around the electorate’s indecision on Europe.
Dalli explains, "I believe the decision the Maltese people will be taking on 12 April will be a decision of whether on 13 April we will be certain of where we are. The Prime Minister will sign the European treaty on 16 April and the Maltese people and those interested in Malta - be they investors, visitors or others - will know what the playing field is, where Malta is going and by which rules Malta will be playing. This scenario leads to certainty.
"Alternatively there will be uncertainty. We will have a situation in which we will have a Prime Minister who will be absent in Athens on 16 April. This will give a totally negative impression. Our credibility will suffer greatly and Malta would become a country with which one is wary of dealing with.
"In this scenario we are promised that we would have four more years of negotiations with the European Union, on what we don’t know, but this process of negotiations is a guaranteed four years of uncertainty. That is what the economy could be ultimately facing."
If Dalli is certain of one thing in uncertain times, it is that Malta’s economy would not be able to cope with four more years of uncertainty caused by a new set of negations with the EU.
He explains, "The country could not handle any further uncertainty and I believe this is why the effect on Malta, as proven by all economists, if the country were to go Labour’s way, would be a deflation of growth as investments disappear.
"In this scenario I believe that productivity would decrease as jobs would not be forthcoming. In an economy, as everyone knows, it isn’t simply a question of creating new jobs, but it is a question of creating jobs to replace redundancies that arise from time to time. Like all natural things, enterprises die - factories and services companies close and workers become redundant. Now imagine a situation in which we are not even generating the jobs to maintain existing job levels. So what is needed is job generation - not just the creation of new employment but also the replacement of lost jobs.
Dalli sees Opposition Leader Dr Alfred Sant’s two month tax holiday proposal as, perhaps, equally dangerous and describes the clear electoral ploy as a "farce".
"I honestly believe that this is not a give-away at all but is, in fact, a postponement of tax," Dalli explains. "People will not pay tax for the first two months but then they would have to pay through the teeth for the one-off break over the coming months and years.
"The country cannot afford these gimmicks. I think people today are mature and they see through these ploys, as shown by the public’s incredulous reaction to the proposal.
"The suggestion is dangerous. First of all these one-offs simply don’t work and reek so much of buying votes and an attempt to corrupt the Maltese people…with their own money."
I suggest that some experts have said that if the tax holiday were to be implemented, a good deal of this money would simply end up abroad.
"This would be normal because in Malta we have a great deal of leakage," Dalli explains. "In fact, most 80 per cent of what we consume here in Malta has a foreign content. Therefore, much of what we consume does not go into local productive capacity but instead goes to purchase goods imported from abroad. In this scenario you have quite a heavy leakage of this money into foreign hands.
"Let’s face it, there isn’t really much you could do with this gift anyway. No one is going to plan to buy a house even if given the maximum of Lm200 for someone earning Lm10,000. What can you do with this Lm200 one-off, let alone the others earning Lm4,500 a year, who will be given Lm5.
"To package this as an economic measure suggests to me that some people need to go to school on economics."
On the other hand Dalli, who on 12 April will stand for his second consecutive term in office, suggests more permanent measures to boost spending and economic growth, such as the raising of tax ceilings.
"What I’m saying is that this [the raising of tax ceilings] is what we have done in the last budget and in the one before it.
"If one wants to increase real spending and adjust the patterns of our population, it is through permanent tax adjustments…not temporary measures. The way to do this is by adjusting tax ceilings and tax bands, as we have been doing.
"Instead of this one off, he [Dr Sant] could have simply said instead of mentioning income tax, he would send a cheque of a certain amount to every household in Malta. Why didn’t he say that instead of mentioning income tax – this clearly has more to do with the marketing and packaging side of things."
Reacting to Dr Sant’s threat, as it could be called, to investigate transparency at HSBC, Dalli responds, "He [Dr Sant] can spend as much money as he likes and he can check the transparency of everything that has been done by this government and ministry.
"What he’ll find is that we have been transparent all through. We have done what we needed to do in accordance with the law and, to this end, he can do all the investigating he likes.
"He did this, of course, in 1996 when he was elected and he came up blank after all the insinuations and allegations he was making to try and smear the government and me personally. They did carry out investigations and drew blanks on everything they investigated and the result would have the same outcome this time around as well.
"He’s welcome to investigate all and sundry and if he wants to call me to help him, I will be happy to oblige."
Speaking recently on a radio programme, the Minister had retaliated against the accusations of lack of transparency at HSBC by citing misgivings he had over the sale of Maltacom shares on the London Stock Exchange.
"I have always questioned the rationale of putting Maltacom shares on the local and foreign market at the same time and of having shares being sold at different prices in different countries. This creates a leverage between them and opens the floodgates for arbitrage [the purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy] between the two positions.
"In this situation, if I were so inclined, I could have made a good deal of money by switching from one share to another - buying in London, selling in Malta, buying again in London, selling in Malta and so on and so forth.
"This arbitrage between the two shares prices was idiotic and people need to ask why this was done.
"There was also the question of Maltacom shares being sold in bearer form. These could have been bought by institutions, as claimed, but I don’t know who bought them and no one knows who bought them. However, it’s not a question of who bought them, but of how they were transferred, since once they were in bearer form they could have been passed from hand to hand.
"The reality is that 20 per cent of Maltacom shares were sold on the LSE and 80 per cent of those have found themselves back to Malta, bought by Maltese."
Many across the Islands last week began receiving notifications that penalties due for late Value Added Tax payments have been reduced by 90 per cent, payments that had in many cases amounted to several thousand pounds.
The measure, Dalli explains, which was announced in November’s budget, comes as a result of requests from the constituted bodies during pre-budgetary discussions with the Malta Council for Economic and Social Development and is now seeing the light of day some four and a half months later.
Dalli comments, "The constituted bodies expressed the amount of hardship and harassment these outstanding VAT penalties were causing and how people were finding them a burden to pay. The situation was also found to be clogging up the administrative system at the Department."
He adds that outstanding income tax penalties are also pegged for similar treatment and that the first draft of the legal notice is in hand.
"We are reviewing income tax penalties in the same light and the same letters will also go out to people who have longstanding penalties as far as income tax is concerned, again, as a result of requests put forward during MCESD discussions and as announced in the budget."
How does Dalli see Malta developing as a financial services centre if Malta is to join the EU?
"What I can quote here is what I hear from practitioners themselves. As you know we leave the marketing of our financial services centre completely in the hands of our practitioners. Government does not take a primary role in this respect and for good reason, since the financial centre has to be marketed in a very quiet and professional way. However, we give full support to practitioners, we finance a portion of their marketing, and we work with them on the literature that goes out to ensure that it is consistent.
"I’m often invited to attend meetings organised by different practitioners with clients both abroad and locally to promote the concept. As such, we give a lot of weight, especially to practitioners, to this potential role for Malta.
"What I hear from the practitioners is that financial services will boom once Malta joins the EU and I can see why and explain why. This is because they would then be in a better position to offer certain products and services that are difficult to offer now because of the ‘passporting’ issues that local products currently face in the EU. This means that with membership Maltese financial products could be marketed in Europe, while today they can’t be unless we were to have the very difficult to achieve bilateral agreements with every single country.
"Once we do join Europe, this ‘passport’ will be avaliable to all Maltese financial services practitioners, which will give us a great deal of market spread and the security that comes with membership.
"The name ‘Malta’ as a trademark or a name for a service will gain value. Malta, as part of Europe, will be much more credible, much more trustworthy and the political risk of operating in all sectors will be zero.
"On the subject of political risk, I have to mention that Alfred Sant is digging his own grave, even if he does get elected, with what he said about HSBC, which was taken up by Reuters and distributed worldwide. Not only will Malta lose credibility if he is elected because the country would have would have abandoned the road to EU membership, but the political risk generated by comments like that are so high that he would destroy any vestige of investment that would have remained after his failure to sign the European treaty."
Looking back on the last five years of his term as Finance Minister, what does Dalli see as his main achievements?
"I believe that our main achievements were related to steadying the boat of finances in Malta. We’ve done that through new legislature in the taxation sphere and in new efficiencies in taxation. We’ve managed to collect taxes mainly through increased tax efficiency, through beurocratic efficiencies rather than new taxation.
"We have also managed to control expenditure. We’ve maintained certain expenditure without being too thrifty on things we needed to do – investment-wise and in also social sphere, especially in education. We’ve allocated higher budgets for education and health and security – police and army – but I still believe we were very, very careful as far as our operating expenditure is concerned and with diligence we’ve managed to cap operating expenditure. In fact our operating expenditure this year will be Lm500,000 less than it was in 1998. You’d say it’s a small achievement but that is the area in which there’s some control over what can really be done. On the other hand, when you talk about wages and social services there are a lot of heavy fixed costs.
"We have had other achievements such as the sweeping reforms we have re-enacted in financial services. These include the revision of the structures of the financial sector, the autonomy given to the Central Bank of Malta the creation of a single regulator in the MFSA. This has revamped our financial sector and I believe this is working very well."
Only time will tell if Dalli’s vision for Malta as an EU member will bear the fruit promised, or if Labour’s alternate route for the country will lead to economic isolation and disaster. Sadly, the electorate will have only one tangible option against which to gauge the country’s progress after 12 April and the weight is on its shoulders to make an educated choice.