IMF’s advice needs to be taken very seriously


The International Monetary Fund has given Malta some very sound advice that needs to be taken seriously in Malta in what he has termed an uphill climb, Labour MEP Edward Scicluna tells Francesca Vella. He also asks why Malta did not achieve a budget surplus in 2010

 

Talking about the concluding statement of the International Monetary Fund’s mission to Malta, Prof. Scicluna said the IMF has given very sound advice that needs to be taken seriously.

The IMF used the word ‘challenges’ in every aspect of its report, he said, noting that in diplomatic and financial circles ‘challenges’ means that you have an uphill climb ahead. And when it referred to the long-term, the IMF used the word ‘daunting’.

The report is an executive summary, but it still gives a very accurate diagnosis of the economy, and the IMF will not change its judgement when the full report is published later this year.

Referring to the international environment, Prof. Scicluna said: “If certain things are beyond your control, such as the international environment, you need to concentrate your resources and focus your attention on what you can do.”

The country could have done without the burden of fiscal consolidation, he said, considering that Malta did not have a banking crisis and it did not apply an enormous stimulus package during the 2008-2009 recession. The government did help industry, but actually reduced the deficit in 2009, said the MEP.

“So why did we not reach the projected budget surplus in 2010? What went wrong? Now we find ourselves facing a percentage of debt close to 70% of GDP, with an additional €1 billion in guarantees, and the added burden of our European obligations.

“I would say if our debt was reasonable in the 40% to 50% region, we could have faced the international environment, concentrated on competitiveness and growth and we wouldn’t have needed an austerity programme. But recent budgets were full of one-offs, which the IMF refers to in its report. It is very difficult for the government to shed off the culture of borrowing itself through problems.”

Prof. Scicluna went on to observe that the IMF was pleased that the government took effective action to correct its deficit. However, he said that while the government has told the IMF and the EU that effective action is being taken, it has not given the public a proper explanation about its austerity programme (the €40 million cost-cutting exercise).

The government has spoken about freezing recruitment in the public sector and controlling overtime, but that only adds up to €10 million. There will be a €5 million budget cut in the area of maintenance, and that leaves a balance of €25 million.

Which programmes are going to be affected? he asked, noting that in the 2010 budget speech the finance minister said he had ordered all government departments to come up with a plan with respect to ways of reducing their expenditure. More than a year later however, said Prof. Scicluna, there doesn’t seem to be anything to report about that particular cost-cutting exercise.

“Effective action” means saying “we have to deliver”, because in the next month or so, Finance Minister Tonio Fenech will be invited by the European Parliament to explain what action the Maltese government has actually taken.

The Commission is pleased, the IMF is pleased, but are the Maltese convinced that the government is taking ‘effective action’? asked Prof. Scicluna.“The European Parliament is going to send for him because, like the Commission, it wants to flex its muscles. The Parliament is going to ask all the other countries that promised the Commission they will be taking action to correct their deficit, to give an explanation on the type of action taken.”

Talking about financial stability, he said the IMF has given it a lot of importance in its latest report. For the first time, somebody is telling Malta to be cautious with respect to the size of its financial sector and to make sure it doesn’t end up going down the same road as Iceland or Ireland.

The report reads: “The financial sector has continued to perform strongly, but – given the large external risks – it is important to further strengthen the sector’s resilience. Banking and insurance companies appear healthy with relatively sound capital and liquidity ratios, but the sector’s sheer size (above eight times GDP) and large foreign ownership represent a number of risks to financial stability and fiscal sustainability.

“These include concerns about too-big-to-save and the adequacy of backstopping resources in case of default or deposit run, the capacity to deal with a banking shock and its impact on the economy, as well as supervisory challenges.”

Prof. Scicluna noted that the prime minister has been quoted as saying that he would like the financial sector to grow by another three times.

“What strikes me is the size. At present the total assets of our credit institutions are valued at around €50 billion. Do we want a bigger sector? As happened in Iceland, our financial sector would be too big to save because we don’t have enough resources to bail it out.

“We shouldn’t be alarmed by the eight times figure, but we should definitely investigate and discuss this matter openly.”

Talking about what is referred to in the IMF report as “longer-term policy challenges” which “remain daunting”, the MEP explained that matters such as population ageing, energy policy, education and competitiveness will always be challenging, even for countries like Germany. However, they are ‘daunting’ because on all four counts, Malta is lagging behind other EU states, said Prof. Scicluna.

In the education sector, the country still has the highest rate of early school leavers and university enrolment is still low (about 25% of the age cohort when it should be 50%).

As for the issue of population ageing, he said that after 10 years of discussion, the reform of the pensions system is still incomplete. He clarified that he is not pushing towards the second pillar, at least not until the debt ratio is lowered, but, as the IMF said: “The projected increase in ageing-related expenditures is twice the EU average, reflecting an expected sharp rise in dependency ratios that renders the current pay-as-you-go system unsustainable.”

In the energy sector, the inefficient power stations operating past their due date have made it very difficult for the economy to reduce its dependence on energy imports and keep costs to reasonable proportions.

And finally, the IMF referred to the need to further improve competitiveness. The country’s relative price index (meaning the inflation rate vis-à-vis our competitors worldwide) has increased by about 15%, while that of Germany, France and the UK remained flat, noted the MEP.

“How are we expected to compete with such a high rate of relative prices? Clearly, a new government has to put economic governance on top of the agenda. We have to be transparent and come clean,” he said, warning that the country has a tough road ahead.

 

Independent, 1 February, 2012 
– by Francesca Vella
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