News | Sunday, 27 December 2009

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An economy in pain

Undeniably, the PN government’s dream and primary target from the early 1990s until the much awaited 1 May 2004, was to lead the country into EU membership. The process triggered a political and economic rollercoaster ride which saw Maltese culture, governance, political style and mentality change overnight, DAVID DARMANIN writes.

The first years of EU membership were determined by government’s struggle to meet the Maastricht criteria set by the EU, short of which could have cost the country’s entry into the EU. The impositions set by the Commission established that inflation rates should not exceed 1.5 percentage points above the average of the three best performing states, that the ratio of the annual government deficit to GDP does not exceed 3%, that the ratio of government debt to GDP does not exceed 60%, that the European exchange rate mechanism is joined, that currencies do not in any way devalue and that the nominal long-term interest rate does not exceed two percentage points than the average of the three lowest inflation member states.
The opposition, then led by Alfred Sant, reinforced its anti-EU stance by criticising the government for being so obsessed with EU membership that Malta’s economic policy was being jeopardised. Sant had vied to devalue the Maltese Lira should he regain control of the government – a proposal that did not go down too well with the electorate.
In the years that followed, Malta has failed to meet some of the Maastricht criteria – opening itself up to sanctions set by the Commission for not being able to keep its deficit and national debt at bay. Infringement procedures have now been launched, with 2010 being a make-or-break year for Malta’s legal position with the EU. But leading economists argue that whereas the Commission was in the past very strict on its economic regulations, it is now closing an eye due to the recession afflicting the global economy as a result of the credit crunch whose effects started being felt as far back as in the beginning of 2008.

The dreaded recession
Malta did not feel the pinch as much as many other member states, but the national economy was bound to suffer anyway – particularly in tourism and the manufacturing industry. Bed-place occupancy in accommodation establishments last July went in sharp decline by 10.1 percentage points when compared to the same month in 2008, while ST Microelectronics – Malta’s largest private employer – last January announced that it will be doing away with 1,300 of its personnel in assembly plants based in Malta and Morocco. Between January and August 2009, Government had forked out almost €5 million in benefits to the manufacturing industry so that employees are not laid off at Trelleborg, Methode Electronics, Toly Productes, Stainless Steel Products, Dedicated Micros, Magro Brothers and Parmagan.

Energy cost
To cap it all, due to EU regulations forbidding direct subsidies to government-owned companies, last year Enemalta had to drastically increment the price of energy to make up for the international prices of oil as well its internal mismanagement and inefficiency costs. The Maltese population was affected to the extent that both household and commercial spending saw a major drop over last year.

Privatisation
The first decade of the millennium also saw the privatisation of many state-owned companies – including the National Lottery, the Malta International Airport, Maltapost, Sea Malta, Enemalta’s Gas division, Maltacom and Tug Malta. Privatisation processes for Enemalta’s Petroleum Division starting in 2006 and the Malta Shipyards starting in 2008 – are still under way.

Real estate and gaming
The real estate industry has defined this year’s drop in sales and prices of property as “a natural stabilisation” in response to certain property types that had unjustifiably increased in value throughout previous years. On the other hand, real estate saw an increase in demand for up-market apartments for rental in the Sliema and St Julian’s areas. This development was attributed to the effects of the liberalisation of the gaming industry in 1998.
To date, the gaming industry in Malta employs around 2,500 highly paid personnel – many of whom young foreigners. Directors of leading Malta-based iGaming companies calculate that the realistic figure of gaming companies’ contribution to the Maltese economy stands at €30 million per year when also calculating the spending of its employees in the local market. Last year, the gaming industry contributed to national coffers more than €15 million in taxes. However, commentators observe that iGaming is a “fragile industry” that can disappear overnight. In contrast, the number of pharmaceutical manufacturers that have established themselves in Malta are seen as forming part of a less risky and safer industry.

Politics
Throughout the past 10 years, ministers that have influenced Malta’s economic developments have had to face harsh criticism and at times, have even opened themselves up to a series of allegations or public controversies.
Shortly after losing his battle for PN leadership, former Finance Minister John Dalli had been sidelined by Prime Minister Lawrence Gonzi after a report containing false allegations over bribery had been published on Dalli. Gonzi had taken the finance ministry in his hands, facing the disapproval of those who perceived him as wanting to take too much on his plate. His parliamentary secretary Tonio Fenech was asked to assume office as Finance Minister after the 2008 elections, with the ensuing series of allegations and controversies in his regard.
Another Minister who has influenced economic development was the Transport, Infractructure and Communications Minister Austin Gatt. Known for his bulldozer tactics, Gatt has fallen short of gaining the support of many stakeholders due to his questionable political style. He is seen as the minister responsible for the hikes in energy prices, the controversial privatisations of Sea Malta and government’s 60% stake in GO – which was largely perceived as a carrot for the UAE buyers Tecom to enter Malta and later invest in the multimillion IT mega-complex SmartCity in Ricasoli.

Smart City
After government signed an agreement with SmartCity, March 2007 saw a master plan for the regeneration of Ricasoli into a futuristic internet village. The project received a unanimous parliamentary approval which led the PN government to launch a state-financed ‘feel-good’ campaign dubbed ‘Smart-Malta’ only months before the 2008 elections. From then onwards, the project was peppered with controversy. In June 2008, Gatt’s former right hand man Claudio Grech was appointed CEO of SmartCity while he still held tight to his chairmanship of MITA, the government IT agency. With the global recession and the Dubai economy starting to go haywire, SmartCity encountered problems with its similar project in Kochi (Kerala), setting off the alarm bells ringing for the local project that had been advertised as the cure for all our ills. Rumours about Grech’s resignation soon followed, but these were only confirmed last September after Grech had denied such intentions. Only days before he officially resigned, Finance Minister Tonio Fenech had confirmed that there was a slow-down in the development of SmartCity. The statement was followed by the resignation of key-people before Grech’s.

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