9 - 15 August 2001

The IMF report

The latest report by the International Monetary Fund on Malta is good news for the government and a feather in the cap of Finance Minister John Dalli.
The report, released last Friday, praises Malta’s economic performance for the past two years, proving that the government’s fiscal and economic policy has had a positive effect. The IMF report, however, also warned the government to pay attention to its high external deficit and to opt for better reform of its expenditure rather than added taxation.
The IMF Executive Board’s report, known as a Public Information Notice, said the performance reflected strengthened policy and a benign external environment. “The long deceleration in economic growth has stopped, employment has risen strongly in 2000 taking unemployment down towards four per cent, and inflation remains low, anchored by the fixed peg exchange rate regime. These achievements leave Malta well placed to pursue its application to join the European Union,” it said.
Undoubtedly very good news for the government and a welcome relief from the criticism that has been levelled at it over the past 10 months. The report adds that strong external demand boosted economic activity in 1999 and 2000, and in combination with fiscal consolidation structural reforms underpinned a strengthening of overall economic performance.
“Real GDP growth in 1999 and 2000 was robust, estimated at 4 and 4.7 per cent respectively, driven by strong fixed investment and exports, and reflecting, inter alia, the expansion of activities of a large microchip plant. Private consumption also remained strong, on the back of declining savings,” it said.
Economic growth, the report continued, was accompanied by rising employment. Private sector employment rose three per cent in 2000, while nominal and real wage growth declined, led by wage restraint in the public sector.
The IMF report said inflation was controlled thanks to the fact that rising oil prices were not passed on to the consumer.
“The fiscal position improved significantly in 1999 and 2000, reflecting the impact of economic recovery and better tax enforcement. The government deficit, including off-budget items, was 8.6 and 6.9 per cent of GDP in 1999 and 2000, respectively, a cumulative improvement of four percentage points since 1988,” it said, adding that the fiscal consolidation in 1999 and 2000 marked significant progress towards the authorities’ medium-term plan to reduce the fiscal deficit to 3-4 per cent of GDP by 2004.
With regards to the fiscal deficit, the IMF report says that this was achieved much faster than expected by the government itself. This, in turn, boosted domestic saving, thereby supporting fixed investment, the external current account balance and the fixed exchange rate peg.
Despite such a good showing, however, the IMF warned that challenges ahead remained and that 2001 would prove to be much more arduous than the previous two years, something which is quite evident, judging from the negative economic period the country is passing through.
The IMF warns that external deficit remains high and this will be further increased by a weaker external environment this year.
Reducing the fiscal deficit has been on the government’s cards for the past two years and this newspaper has concurred with the Finance Minister that this and better tax enforcement are the keys to economic success and a positive turnaround for the country.
However, as the IMF also suggests, the government must do so not by increasing taxation but rather by getting its own house in order.
The government must speed up its efforts to reduce the fiscal deficit in the medium term and “to be more ambitious than anticipated if the macroeconomic framework is to remain sustainable”.
This means that such fiscal deficit reduction would best be achieved through expenditure reform rather than through further increases in the tax burden. What is worrying, however, is that the authorities are quoted in the report as saying that an increase in taxes is not ruled out. The Malta
Business Weekly hopes that this will not be the case, especially if this means that the middle class and the private sector will be made to pay more to reduce the country’s deficit.
The IMF commends the government’s efforts and initiatives, notably on welfare, privatisation, subsidies to public enterprises, and the public wage bill. These are initiatives that we fully support, even though their implementation is taking way too long. It would, however, be unwise of the government to further supplement these initiatives by adding more burdens on the people and, more importantly, on industry and the private sector.
We feel that, in line with the IMF’s recommendations, the government must make a greater effort to curb tax evasion. There is no doubt that government would bring in many more millions by proper enforcement than by increasing the number of taxes. More taxation only leads to greater tax evasion.