Strong GDP growth expected this year - CBM
Following last year’s one per cent growth in gross domestic product, the Central Bank of Malta has forecast this year’s GDP growth at between 3.1 and 3.7 per cent.
The positive forecast comes as a result of indications showing that investment and, to a lesser extent, exports are expected to be the main catalysts in driving economic expansion, according to the CBM’s recently issued annual report for last year.
Over the year inflation is expected to ease, while the projected pick-up in economic growth is subject to considerable risks stemming from the somewhat shaky international geopolitical situation.
The Bank notes how the international economic environment had remained fragile in 2002, with global economic growth estimated to have risen to just 1.7 per cent from 1.1 per cent in the previous year.
The Bank also reports that Malta’s economic activity had begun to recover, driven by stronger domestic demand during the first half of last year and a rebound in exports, particularly of electronic components, during the second half.
However, the important tourism sector saw a further decline in activity, although most of the drop was concentrated in the first six months of the year, when the industry was still suffering from the negative effects of the events of 11 September, 2001.
The slowdown in domestic demand during the third and fourth quarters partly reflected moderate growth in disposable income as a result of weak labour market conditions. In turn, a general absence of demand pressures contributed to the decline in the headline inflation rate.

The Central Bank of Malta has forecast GDP growth this year of between 3.1 per cent and 3.7 per cent, indicating that investment and, to a lesser extent, exports should be the main catalysts in driving economic expansion, according to its recently issued annual report for last year.
Inflation is expected to ease further, while the projected pick-up in economic growth is subject to considerable downside risks, however, stemming from the international geopolitical situation.
The Report notes how the international economic environment remained fragile in 2002, with global economic growth estimated to have risen to just 1.7 per cent from 1.1 per cent in the previous year.
Output, prices and employment
Analysing output, prices and employment in Malta, the Report comments that economic activity began to recover, driven by stronger domestic demand during the first half of the year and a rebound in exports, particularly of electronic components, during the second half. On the other hand, the tourism sector experienced a further decline in activity, although most of the drop was concentrated in the first six months of the year, when the industry was still suffering from the negative effects of the events of September 11, 2001. The slowdown in domestic demand during the third and fourth quarters partly reflected moderate growth in disposable income, as a result of weak labour market conditions. In turn, a general absence of demand pressures contributed to the decline in the headline inflation rate.
Balance of payments
Reviewing the country’s balance of payments, the Report says that the current account deficit is estimated to have widened slightly in 2002. This mainly reflected a lower surplus on the services account, whereas the merchandise trade gap narrowed for the second consecutive year. Meanwhile, net inflows on the capital and financial account continued to be recorded, leading to an expansion in the official reserves.
Public finances
In its analysis of public finances, the Report observes that the fiscal deficit for 2002 has been provisionally estimated at Lm78.5 million, down by Lm6.8 million from the previous year’s level. Thus, the fiscal deficit/GDP ratio is estimated to have declined from 5.2 per cent in the preceding year to 4.6 per cent. The shortfall was mainly financed through short-term borrowing and privatisation proceeds, and the year-end ratio of Gross Government Debt to GDP rose by 0.8 percentage points to 62.8 per cent.
Monetary and financial developments
Turning to monetary and financial developments, the Report explains that vigorous growth in the net foreign assets of the banking system brought about a considerable increase in broad money, notwithstanding a further slowdown in credit expansion. Investors also showed signs of continued preference for fixed-interest assets, such as bank deposits and bonds, instead of riskier financial products.
Governor’s statement
In his statement, the Governor expounds on the way in which the Central Bank contributes to long-term economic growth by promoting macroeconomic stability and the efficient allocation of resources. He explains that a monetary policy that is effective in delivering price stability is the Bank’s single most important contribution to sustainable growth.
The Governor observes that the fixed exchange rate regime has been an efficient tool for this purpose, with domestic inflation remaining within a reasonable range of the basket-weighted foreign inflation rate. In this respect, he states that the credibility of monetary policy has been strengthened recently through legislative amendments formally establishing the Bank’s full independence from Government.
Nevertheless, the Governor cautions that the objective of price stability can only be pursued successfully if accompanied by an appropriate fiscal policy, and stresses the importance of completing the process of fiscal consolidation on schedule. He also refers to the need to maintain a premium on interest rates in Malta, given the fixed exchange rate system, liberalised external capital flows and the additional risk associated with investing in a small and open economy. The Governor states that from the monetary policy point of view, the surest way to overcome the cost of a higher risk premium would be to adhere to a larger currency area. He also comments on the importance of a stable financial sector for macroeconomic resilience and an efficient allocation of resources.
The Governor recalls that sustainable long-term growth depends on the country’s ability to attract high-value added export-oriented operations. This necessitates further investment in human capital and a suitable balance between wage levels, productivity and taxation. In this respect, he underlines the need for a reassessment of the welfare system, with a view to moving away from universal schemes to focus on fulfilling genuine needs and to reward work.
The Bank’s operations and activities
The Report notes that recent changes to the Central Bank of Malta Act and developments in the EU accession process were key factors influencing the Bank’s policies, internal organisation and operations during 2002.
The amendments to the Central Bank of Malta Act formally established price stability as the primary objective of the Bank, reinforced its independence and increased its operational flexibility. The amendments also vested the sole authority on monetary policy in the Governor. The Monetary Policy Advisory Council, which was given a statutory basis, is responsible for advising the Governor on matters related to monetary policy.
The Bank’s monetary policy remained directed at achieving price stability by pegging the lira against a basket of three low-inflation currencies. The Report highlights the revision to the weights of the component currencies of the basket that was carried out in August, which resulted in a larger weight to the euro mainly at the expense of the US dollar. Over the year, the Bank continued to ease its monetary policy stance, lowering the central intervention rate by a total of 50 basis points, to 3.75 per cent, through two equal cuts in January and December.
During the year, the Bank strengthened its ability to ensure the overall stability of the financial system and also collaborated in an extensive exercise undertaken by the IMF/World Bank Mission under the Financial Sector Assessment Program (FSAP). In January, the responsibility for licensing, regulating and supervising credit institutions was transferred to the Malta Financial Services Authority (MFSA) and in October the responsibility for the supervision of the Malta Stock Exchange was also transferred to the MFSA.
The Report explains that amendments to the Central Bank of Malta Act put in place a framework governing payment systems that complemented the setting up of the first payment system in Malta compliant with international standards. In fact, the Bank, together with domestic credit institutions, established the Malta Real-time Interbank Settlement System (MaRIS), which started operating fully in October.
The Bank also continued to strengthen its relations with the European System of Central Banks (ESCB) and the European Central Bank (ECB). In particular, the Bank nominated the officials who will represent it on twelve committees of the ESCB in an observer capacity with effect from April 2003.
The Bank’s net profits fell to Lm19.8 million from Lm26 million in the previous year, as the sharp drop in foreign interest rates outweighed the positive income effect of the strong increase in the Bank’s external reserves.
The Annual Report, in full, will be available on the website of the Central Bank of Malta at www.centralbankmalta.com.