Charlot Zahra speaks to four financial experts – Lino Spiteri, John Cassar White, Karm Farrugia and John A. Consiglio – about the significance of the interim International Monetary Fund (IMF) report on Malta for 2009
Lino Spiteri: “There are no quick fixes”
The IMF said the Maltese economy will contract by 2 per cent this year, followed by a ‘modest recovery next year’. Do you agree? The IMF had access to macro indicators not yet available to the public. However, given the trend decline in visible and invisible exports one wouldn’t be surprised if there is negative growth of the magnitude indicated by the IMF.
The IMF also says Malta’s deficit would only fall below 3 per cent, with public debt reaching 70 per cent of GDP. I have to reiterate that the IMF has access to more up-to-date indicators than the public, as well as that the situation in our export markets is deteriorating.
All of that will translate into lower domestic earnings and spending, and so into a lower tax take.
The IMF calls on Malta to ‘close the income gap with the euro area’ and to ‘build consensus around a renewed reform strategy’. What are your comments? The IMF is calling for “reform’ in the government’s spending, probably on such items as social security, healthcare outlays and students’ stipends.
Deductions in these heads of expenditure, for that is what the IMF means, cannot be brought about without widespread consensus.
What structural reforms does Malta need to get out of the financial crisis? Waste has to be wrung out of government expenditure and various heads have to be revisited.
But the way out of the excessive deficit and sustainability depends largely on a turn for the better – that is a return to adequate sustainable real growth – in the global economy.
On public debt, the IMF recommends ‘a structural consolidation effort of at least 2/3 per cent of GDP per year over 2011 to 2014’. There are no quick fixes. What the IMF is projecting is based on its statistical model. Actual economic behaviour does not necessarily follow statistical predictions.
John A. Consiglio: “There seems to be some synchro between the IMF and the EC figures”
There seems to be some synchro in the envisaged picture of “negative territory for the end-2009, and only slight improvement for 2010”.
As soon as this hot summer is over our economic operators will be closer towards knowing the real extent of how badly the Maltese economy, and how their individual businesses will have performed.
The tourism and manufacturing sectors will also know to what extent the much reported early shoots outside Malta would have started to mean bookings and orders, and my assessment is that at this time this climb back is very slow.
And so return to surplus territory of only around 0.2 per cent makes sense for me.
Government finances might have looked better had envisaged privatisation proceeds been effectively received quickly enough.
Certainly that is a negative factor, but then on the other hand Malta would be a fool not to realise that asset values will – if not in 2010 then certainly in 2011— start the climb up again, and so giving stuff away for peanuts to anyone should certainly never be on the cards.
One wonders to what extent the IMF and the Commission go into such detail when in their reports they come pretty close to almost ordering the government what it must do in these famous ‘reform programmes’.
On top of that, with regard to Malta, it is surprising how very often these highly paid IMF and EC economic “now they’re here now they aren’t” experts never fail to say anything about the need for a new economic model for the country, that is, one which will move the economy away from the current tourism and building and construction model, and keep making noises about tinkering measures which ultimately have to do only with the present model.
In such circumstances what options or prospects other than to expect that in the coming budget we will see a totally new table for the expected evolution of deficit, growth and debt figures into the next five years to satisfy the Stability and Growth Pact?
John Cassar White: “There is a strong structural element in our fiscal deficit”
The IMF said the Maltese economy will contract by 2 per cent this year, followed by a ‘modest recovery next year’. Do you agree? Estimates will always remain estimates. There are variances in the economic estimates of the Ministry of Finance, the Central Bank, the EU, and the IMF.
Since our recession is being affected by the recession in other countries, developments in the world economy that are even worse than is being predicated at present could well make our recession even deeper.
I believe that a contraction in our GDP of between 1 and 2 per cent is to be expected.
The IMF also says Malta’s deficit would only fall below 3 per cent, with public debt reaching 70 per cent of GDP. There is a strong structural element in our fiscal deficit. Whether we hit our targets earlier or later than 2013 will very much depend on the measures the government will take to address its excessive expenditure.
This is even more difficult politically than increasing income through taxes. The government has so far not been very clear on how it intends to cut expenditure.
It is still also not quite certain whether there will be any increase in taxation, although it is unlikely that there will be.
The IMF calls on Malta to ‘close the income gap with the euro area’ and to ‘build consensus around a renewed reform strategy’. What are your comments? I agree with the IMF that, if our economy is to grow at a health rate to catch up with the major EU economies, we need to make major reforms in our economy.
These reforms will include health, education, pensions, the public service and other areas of public administration that so far have remained mostly untouched.
The difficult part is achieving broad political consensus on the way to undertake these reforms because any changes are likely to leave social consequences.
What structural reforms does Malta need to get out of the financial crisis? Health, pensions, education, and public administration all need to be addressed if we are to make public finances sustainable in the long run.
If we do not do this, we risk having rationing of certain social services in order to keep within limits of expenditure set by our membership of the Euro zone area. In some way many argue that this is already happening.
The IMF warned that the Shipyards’ privatisation and utility tariffs alone ‘would fail to achieve the necessary consolidation’. I think that most people now agree that further improvement in public finances must come from the expenditure side – in other words reducing the cost of running the country with all the services that the state provides.
This is politically difficult because many people still believe that the Welfare State will provide for them form the cradle to the grave.
I believe that we should be aiming for a situation where all services provided by the State are based on a financial model that is sustainable and that the State will continue to guarantee free essential services to all those who cannot help themselves.
On public debt, the IMF recommends ‘a structural consolidation effort of at least 2/3 per cent of GDP per year over 2011 to 2014’.
Very much depends on what “identified measures” the IMF have in mind. If they mean a one-time special tax to boost government income and reduce public debt, then I certainly do not believe that now is the right time to do this.
What is important is that when the economy starts to grow again at more encouraging rates, government should use this period to consolidate its finances rather than cut taxes to court popularity.
Reducing public debt in a short time can be achieved by increasing taxes or reducing social benefits.
This is sometimes inevitable, but I do not think that such measures will be socially acceptable at a time when our economy is still in recession and no one really knows when we will get out of it.
Karm Farrugia: “My feeling is that the IMF synchronises the desired fiscal adjustments with the probable ‘general election year’”
The IMF said the Maltese economy will contract by 2 per cent this year, followed by a ‘modest recovery next year’. Do you agree? Were we to follow IMF’s recommendations, even 2 per cent becomes conservative! Nonetheless, my projection is for a 1 per cent contraction, 1.5 per cent at worst.
Whatever eventually does occur, the recovery process is bound to be a modest one during next year.
A feature of our economy is that it nearly always lags behind by a quarter or two from those with which we generally trade, both on the upswing and the downturn.
The IMF also says Malta’s deficit would only fall below 3 per cent, with public debt reaching 70 per cent of GDP. Do you agree? No, I don’t. My feeling is that the IMF synchronises the desired fiscal adjustments with the probable ‘general election year’.
The IMF calls on Malta to ‘close the income gap with the euro area’ and to ‘build consensus around a renewed reform strategy’. What are your comments?
Who can but agree with the IMF’s rhetoric? However, a “renewed reform strategy” is easier preached than implemented, especially as this usually entails a high degree of consensus between the social partners.
What structural reforms does Malta need to get out of the financial crisis? A social contract or pact is now assuming much more importance than when it was unsuccessfully attempted a few years back. Indeed, it is essential. Not easy, and it involves sacrifices from everyone for a number of years, say three.
On public debt, the IMF recommends ‘a structural consolidation effort of at least 2/3 per cent of GDP per year over 2011 to 2014’. The IMF’s economists contradict themselves – whilst maintaining that Malta’s headline deficit will top 3 per cent of GDP every year from 2011 to 2013, they simultaneously and concurrently expect us to reduce the national debt by 2 to 3 per cent of GDP during each of these same years.
Just imagine what the economy’s growth rate would need to be for this to become possible!
I trust the government not to give in to the IMF’s behests by cutting down on the Capital Budget – an important growth engine – or from the social services in the recurrent one – a given for a social pact.
