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James Debono
The Federation of Industry and the Chamber for Small and Medium Size Enterprises-GRTU have expressed their concern that increasing fuel costs will push inflation upwards while denting the country’s competitiveness.
Both business bodies have called on the government to intervene to help industry sugar the impact of fuel prices.
GRTU Director General Vince Farrugia is very clear on what the government should do to keep fuel prices under control.
One of Vince Farrugia’s proposals is a decrease in taxes and duties on fuel.
A considerable part of the price paid by the consumer for petrol and diesel goes into government coffers even if pump prices in Malta are among the lowest in Europe.
VAT and duty make up 50.7 per cent of the pump price of unleaded petrol. The tax component of LRP petrol amounts to 48.5 per cent. As regards diesel 45 per cent of the price paid by consumers goes in to government coffers.
“The government can sugar the impact by decreasing taxes on fuel,” added Farrugia.
The GRTU is also critical of the government’s policy on fuel purchasing.
“We cannot afford to buy fuel on a day by day basis. We should seek to purchase our fuel when the price on the international markets is most favourable to us.”
The downside of such a proposal is that if the price of fuel goes down, the country would be saddled with a higher market price. But Farrugia argues that what Maltese traders want is a degree of stability which can be achieved by buying fuel at a steady price.
The GRTU would also like the government to revert to the policy of price discrimination favouring diesel over petrol. Although the duty imposed on diesel is lower than that imposed on petrol, the price of diesel is no longer subsidised by the price of petrol.
Thus over the past years there has been a levelling in the price of petrol and diesel.
According to the GRTU this policy has had a negative impact on businesses which used to opt for diesel in order to cut on their fuel costs.
The FOI is less specific than the GRTU in its call on the government to assist industry.
One possibility mentioned by the FOI is the introduction of pro-active measures for industry, “as was done in the case of the energy surcharge.”
According to the FOI’s Director General Wilfred Kenely the fuel price hike “has had an unprecedented effect on local industry.”
To further aggravate matters, the increase in fuel costs has coincided with an increase in government induced costs.
“This has happened at a time when industry is still adjusting to new government-induced costs such as the eco-contributions, water and electricity surcharges and airport taxes,” added Kenely.
The FOI is also concerned that the fuel price hike will have a negative impact on Malta’s competitiveness because while foreign competitors can switch to alternative fuels like natural gas, this is not possible in Malta.
Kenely warned that small enterprises might be pushed to review their prices, “thus directly effecting the consumer and possibly resulting in loss of orders.”
He also warned “the private sector is being cornered to pass on the increases in its operating costs to its customers through higher prices.” This could increase inflation in a country where the rate of economic growth is still sluggish.
Sluggish economy
Inflation is usually a symptom of an over heated and growing economy. Commenting on statistics for the first quarter of 2005, the Central Bank’s Governor observed that rising inflation is inconsistent “with the weak levels of economic activity that were evidenced by the failure of the economy to expand during the first quarter of the year.”
GRTU Director General Vince Farrugia agrees with the Central Bank’s governor’s assessment.
“Inflation tends to increase when economic output is at its maximum levels. High rates of inflation are normally the consequence of an over heated economy and full employment.”
Farrugia noted that the only sectors of the economy, which are growing, are land and money speculation.
“The productive sectors of the economy are not experiencing any growth.”
According to Farrugia the NSO Labour Survey figure of 12,000 unemployed is evidence of a sluggish economy.
“The only reason why ETC unemployment figures are decreasing is due to schemes for over 40 year olds and a greater vigilance to keep unemployment figures in check.”
Vince Farrugia also took the Prime Minister to task for stating that he is “perplexed” by the increasing rate of inflation.
“This proves the GRTU’s point that the government lacks a clearly delineated and identifiable economic policy. If I who have attended so many meetings in the MCESD don’t know what the economic policy of the government is, I cannot blame the man in the street for being in the dark. The government should know exactly why inflation is increasing.”
Farrugia added that the government should be aware of the impact of government induced costs like the 3 per cent increase in VAT and the introduction of the eco-tax.
The Federation of industry concurs with the GRTU that inflation is related to increases in taxation and government induced costs.
“Furthermore, business related services are becoming more and more expensive whilst private enterprises have to comply with new EU standards and legislation,” added Kenely.
Cartels
In an interview published in last Sunday’s issue of MaltaToday the Prime Minister attributed inflation to price rigidities. In the interview Lawrence Gonzi warned:
“We have to see that there is free competition and not cartels.”
Asked whether cartels are responsible for inflation, Vince Farrugia acknowledged that there are price rigidities in a number of sectors.
One of the sectors identified by Farrugia is the pharmaceutical sector where “80 per cent of medicines are being imported by a handful of importers.”
Farrugia attributed this to new regulations on the registration of medicines.
“Small traders are finding it hard to sustain the present registration system for medicines.”
A GRTU survey shows that it costs around Lm 8000 to register imported medicines.
“This is bound to reduce the choice of medicines available to the consumer. One has to consider that the Maltese market is a limited one and the quantities of medicines sold are too small to sustain the costs induced by the new registration system.”
Farrugia also pointed his finger at price rigidities in the sale of fresh vegetables and fish.
“The GRTU has been pushing for reforms in the vegetable market system which is dominated by middle men in the ‘pitkalija’.”
Farrugia who is a member of the steering committee responsible for reforms in the ‘pitkalija’ lamented that this committee has not been meeting for a long time.
Farrugia attributes government inertia in this sector to the fact that the Minister responsible for food is primarily responsible for rural affairs.
“The first priority of a Food Minister should be that of ensuring the greatest variety of food at the lowest price possible and not that of protecting producers. This is a clear case of a conflict of interest.”
Another price rigidity mentioned by Farrugia is price fixing in the fish market, the so-called pixkerija, where the price of popular fish like tuna is not allowed to fall under a certain level.
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