POINT OF VIEW | Wednesday, 25 July 2007

The restructuring of Malta’s economy (part 1)

With a GDP of around €4.9 billion and a population of some 400,000, Malta is the smallest and most densely populated EU Member State

When we embarked on our economic project three years ago, as a Government we set a vision for Malta, and that was not to adopt the euro but rather to have a dynamic, high-value added economy founded on competence, skills and excellence and capable of sustaining a high standard of living for our citizens. To this end as a Government we set our main policy objectives that continue to direct our strategic economic vision. In essence these were and still are that of:
• Attaining sound public finances, to ensure that we operate in a sustainable economy and one that gives confidence to both local and international investors;
• Reducing Government expenditure, through restructuring of public entities, better control over employment in the public sector and attacking abuse;
• Undertaking the necessary structural reforms that will fine-tune government’s role in the economy and improve the country’s ability to thrive in an increasingly competitive world economy; and
• To take the necessary steps to make our productive sectors more competitive and through a number of incentives and incentives encourage more private investment and thus the generation of new jobs.
We have actively involved the social partners and members of civil society, the ever-increasing number of voluntary organisations, professional bodies and the general public. The number of structured consultation initiatives is endless, the attempt towards a national social pact, the National Reform Programme, three pre-Budget consultation documents and the consultation process linked to the National Strategic reference Framework programme dealing with the way the Euro 855 million European funds should be invested during the 2007–2013 period.

Economic Restructuring
To achieve these goals we faced the challenges before us and embarked on an exercise of restructuring. In today’s global economic environment, where jobs are lost just as fast as they are created and the movement of capital knows no boundaries, it was evident that Malta did not remain an ideal location for certain types of low-value, labour intensive manufacturing concerns. As a result, we had to turn our focus on the creation of an environment conducive to attracting investment from the sectors that add value to our economy and tap the best of our human resources. The latter being our greatest asset.
Substantial changes in economic structures are happening all over the world and Malta is no exception. Besides the effects of globalization we have also had to face a period of steep oil prices, the ongoing problem of illegal immigration, and changes in tourism trends. With such uncertainty the need for clear and determined policies to promote stability and foster growth is required more than ever.

EU Membership
The process that led to having a sound economy that is conducive to growth and capable of sustaining a good living standard for our people was not easy and definitely not something achieved overnight. It took years of planning and maintaining a clear focus of where we wanted to arrive at. This was not straightforward and at times necessitated sacrifices.
In spite of constant criticism, we stuck to our principles and over the years managed to implement policies, enact legislation, attract investment, and foster growth that was beneficial to our economy. A decision was also taken that Malta stands to gain by becoming a member of the European Union and in spite of political disagreement at the time we were steadfast in this belief and went through the process of aligning our policies and legislation with the acquis. After much heated discussion and debate, which saw our people going to the polls not once but twice, we became EU members in May 2004.
More than three years after membership of the European Union we have benefited from more opportunities, higher investment flows, and structural and cohesion funds which are helping us make a quality leap in our infrastructure, human resources and support to various industries. For the period 2007-2013 we have been allocated a further €855 million in EU funds which we will continue to provide us the much needed investment in training our human resources, improving our infrastructure, restructuring of our economy where necessary, and upgrading our country as a whole.
Thankfully, there now seems to be political consensus on the issue of EU membership and this is a positive factor as by working together towards a common goal we stand to achieve more. However, to fully experience the benefits of EU membership it is necessary to integrate further. This must not just be done by government at a national level but also by Maltese businesses and citizens at an economic and social one. It is only by being fully integrated that we can benefit from the opportunities and programmes EU membership has to offer, the euro was seen by Government as the natural next step within this process.
Euro Adoption
With a GDP of around €4.9 billion and a population of some 400,000, Malta is the smallest and most densely populated EU Member State. In 2006 it had the fourth most open economy in the EU, and its average trade-to-GDP ratio hovered around 82% in recent years. These characteristics constitute a challenge for both policymakers and analysts in those key economic variables are prone to volatility, being highly sensitive to external events and to shocks in specific sectors or individual enterprises which, though small in absolute terms, can have a disproportionately large impact in a small country context.
It was always Government’s stated policy to join the euro area sooner rather than later following EU membership and this because of the obvious benefits euro membership could give us. It was clear that our economy stood to benefit from closer economic and monetary integration with the euro area, particularly in terms of lower transaction costs, exchange risks, greater economic stability and policy credibility.
The Maltese economy is well suited to participate in the EU single currency area as it is already closely integrated with the EU through trade and finance, has close similarities with the euro area in the sectoral composition of output and employment, as well as in terms of business cycle synchronization, enjoys a relatively high level of development and the Maltese currency has a long history of stability, with a strong peg to the euro in recent years.
Adopting the euro as our national currency was an inevitable step we had to take if we really wanted our economy to reach European standards in a sustainable manner. This necessitated that we join ERM II and fulfil the Maastricht convergence criteria.
While Malta has a good track record when it comes to interest rate policy and exchange rate stability, the two main criterion that were considered difficult to satisfy were the deficit and debt levels, that is reducing them to internationally accepted sustainable levels. More recently inflation was also a concern, although this had more to do external global developments than anything we had control over.

ADDRESS BY THE HON TONIO FENECH, PARLIAMENTARY SECRETARY IN THE MINISTRY OF FINANCE, DELIVERED AT THE VODAFONE ECONOMIC FORUM HELD AT THE RADISSON SAS BAY POINT HOTEL, ST JULIAN’S ON TUESDAY 17TH JULY 2007