Whether Malta joins the EU or not, the forthcoming enlargement will have an important bearing on the country’s future development. There is no doubt, however, that the country’s reforms have been spurred by the prospect of EU membership. Governor M C Bonello, Bank of Malta, explains why.
Whether Malta joins the EU or not, the forthcoming enlargement will have an important bearing on the country’s future development. There is no doubt, however, that the country’s reforms have been spurred by the prospect of EU membership. Although over the centuries Malta has been subject to the influence of rulers from every corner of the Mediterranean, its identity cultural and otherwise remains predominantly European. Malta’s most valued asset remains its skilled, flexible and multi-lingual workforce. Reforms that have been implemented in Malta during the past few years have been designed to enhance the country’s competitive edge. There is no doubt, however, that these reforms were spurred by the prospect of EU membership.
Malta’s relations with the European Union (EU) date back to December 1970 when an Association Agreement was signed with the then European Economic Community providing for the creation of a customs union in two five-year stages. The latter was never achieved as the Government of Malta at that time preferred to extend the initial arrangement without committing itself to a customs union. A change in government in May 1987 was followed by the submission of an application for membership of the EU in July 1990.
Since 1970 the EU has continued to gain in importance in Malta’s international trade and political relations, particularly since the application for membership. Today, in fact, the EU accounts for the bulk of inward investment and is the main market for Malta’s tourists. The EU absorbs close to half of Malta’s exports, while the proportion of imports originating from the Union is even higher at almost 70%, and some 80% of tourists come from ELI countries. MALTA’S IDENTITY REMAINS PREDOMINANTLY EUROPEAN Indeed, although over the centuries Malta has been subject to the influence of rulers from every corner of the Mediterranean, its identity cultural and otherwise remains predominantly European. This is mainly attributable to Malta’s association with the Order of the Knights of St John of Jerusalem, which lasted for more than three hundred years, as well as its status as a British colony for over a century and a half until independence in September 1964. The legacy of this latter period is reflected in the administrative set-up of the country, the day-to— day customs and habits of the Maltese as well as their fluency in English. Since independence, however, successive administrations have striven to build closer relationships with other European countries, particularly Italy, with which Malta has always shared a close affinity. Today, all political parties agree that Malta should seek a closer relationship with the ELI, although views differ as to the form, which this new relationship should take.
The Government, which was elected in 1998, pursued the application for accession to the EU and concluded negotiations in December 2002. Malta is one of the ten candidate countries that have been invited to be part of the next enlargement on 1 May 2004. A referendum on the issue will be held in March of this year prior to the signing of the Accession Treaty in April.
From an economic point of view, one of the most substantive benefits expected to be derived from membership will be the unfettered access to an enlarged EU market. Of additional value will be the improved access to markets of third countries, as a result of the ELI’s reciprocal trade agreements with other trading blocs such as the Southern Mediterranean countries, the Gulf States and countries in Africa. For many Maltese firms, EtI membership would also translate into an opportunity to outsource inputs at lower cost, and for consumers into a wider choice and cheaper products. For businesses, there is the additional prospect of lower interest rates and transaction costs and the elimination of exchange risks arising from Malta’s eventual adoption of the euro.
On the other hand, EU membership will bring with it new competitive pressures arising from the complete lifting of trade barriers on products originating from the EU. It will also entail additional administrative and financial burdens arising from Malta’s preparations for enlargement and its future representation on EU institutions, as well as the costs associated with the implementation of EU standards and regulations.
Whether Malta joins the EU or not, however, the forthcoming enlargement will have an important bearing on the country’s future development strategy. A number of countries which compete with Malta in the EU market are expected to be part of the 2004 enlargement and this will have implications for the ability of locally-based companies to access new markets. Malta continues to attract substantial investment from Europe, particularly from the United Kingdom, Italy and Germany. If it is to attract further investment from these and other countries, however, Malta will have to continue to implement structural reforms in order to enhance the economy’s competitiveness. It is also expected that the Government will actively pursue its policy of exploiting Malta’s position in the Mediterranean and its good relations with neighbouring countries to act as a bridge between Europe and North Africa.
Malta’s most valued asset, however, remains its skilled, flexible and multi-lingual workforce. The productivity and quick-response time of the workforce is singled out from amongst the many factors, which have attracted foreign companies to Malta. Language is a particularly important asset since most Maltese speak English, while Italian, French and German are widely taught and spoken.
MALTA BOASTS ONE OF THE MOST TECHNICALLY ADVANCED TELECOM NETWORKS
Malta is also close to major European and North African markets and has excellent air connections with long-haul destinations. A good number of shipping lines carry freight directly to major international ports, and several shipping lines operate from the Malta Freeport. In addition, Malta boasts of one of the most technically advanced telecommunications networks. Large operators such as Ericsson, Nortel and Datatrack are in fact already using the country as a base for their activities in the Mediterranean region. In 2001, for example, Malta had the third highest internet, PC and mobile telephony usage rate among EU candidate countries. Further progress is expected as the E-Malta Commission recently set up by the Government continues to promote the development of an information society and to put government services on-line.
Malta has also enacted legislation favouring direct investment projects. The new Business Promotions Act offers companies which have a high value added or a high employment potential substantial incentives ranging from reduced tax rates and investment tax credits to soft loans, interest rebates, training assistance and the provision of factory and office space at low rates. The benefits include reduced tax rates of between 5% and 15% for the first eighteen years of operation. Additionally, eligible companies may also benefit from investment tax credits of up to 65% of the total amount invested in specified areas within a stated time frame or, of the company’s wage bill in respect of new jobs created during the first two years of operations. In addition, a network of 38 double taxation agreements ensures that profits generated in Malta are either exempted from tax in the investor’s country of residence, or else the investor is granted a tax credit equivalent to the tax rebate resulting from the incentives provided.
EURO NOTES MAY BE PRINTED IN MALTA ONE DAY
It is the combination of all these factors that makes Malta such an attractive investment location. Over the years more than 200 foreignowned manufacturing companies have chosen to set-up operations here. These include wellknown names such as Arrow Pharmaceuticals, Brandstatter, Baxter, Carlo Gavazzi, Dedicated Microcomputers, Dowty O Rings, De la Rue, Methode Electronics, Motherwell Bridge, Pharmaco, the Italian textile manufacturer SITIP, STMicroelectronics and Toly Products. UNCTAD’s World Investment Report 2002 ranked Malta among 43 countries considered as ‘front runners’ in terms of high performance and high potential with regard to foreign direct investment.
It is also significant that many of these companies have not only established a presence that has withstood the test of time, but have also chosen to expand in Malta. A case in point is De La Rue Currency and Security Print Limited, which has been in Malta since 1975. The Malta plant is not only the largest of the company’s printing facilities, but today is probably the largest commercial banknote—producing plant of its kind and accounts for the bulk of banknotes produced by the company. Given De La Rue’s expertise in this field, it is not difficult to envisage the possibility of euro notes being printed in Malta one day.
VIENNA INTERNATIONAL AIRPORT PURCHASED A SUBSTANTIAL HOLDING IN THE MALTA
INTERNATIONAL AIRPORT In the services sector as well, Malta continues to attract foreign direct investment and this has gained momentum in recent years thanks to the privatisation programme. The privatization of the largest commercial bank in 1999 was followed by the sale of a large portion of the shares in the Malta Post Office to a New Zealand company in 2001. Last year the Vienna International Airport saw that there was potential for the creation of an international air traffic hub in the Mediterranean and purchased a substantial holding in the Malta International Airport. In a similar fashion, the German company, Lufthansa Technik, which boasts a network of 23 maintenance, repair and overhaul companies that service the aviation sector, recently set-up operations in Malta through an alliance with the national airline, Air Malta.
It is expected that this trend will continue in the future as policies aimed at enhancing the investment climate continue to be implemented. Within this context the Government is currently planning to intensify its investment policy efforts through the merging of the national external trade promotion agency (METCO), the national investment promotion agency (the Malta Development Corporation) and the Institute for the Promotion of Small and Medium-sized Enterprises (IPSE) into a single agency to be known as Malta Enterprise. In addition, an Export Network Programme (ENP) was recently launched to enable exportoriented manufacturing firms based in Malta to network with trading partners in order to improve the marketability of their products. Additionally, a Malta Trade Centre has been recently launched in the United Arab Emirates to promote trade with countries in the Gulf.
A FINANCIAL UNIT HAS BEEN CREATED TO COMBAT MONEY LAUNDERING
In the financial sector as well the Government has continued to adopt measures aimed at establishing Malta as a reputable international financial centre. Financial legislation was reviewed and updated to bring it in line with international standards and practices. In the process, the Malta Financial Services Authority became the single regulator for all financial services, while the Central Bank’s role in setting monetary policy and in safeguarding financial stability was enshrined in legislation, which also strengthened the Bank’s independence. A Financial Intelligence and Analysis Unit has just been created aimed at combating money laundering activities.
While Malta has an open economy, which is therefore vulnerable to external shocks, it has managed to achieve relatively high levels of growth in recent years. The rate of inflation is low and unemployment remains at a tolerable level. The balance of payments is stable, with a deficit on the current account being offset by a surplus on the capital and financial account and the official external reserves are equivalent to about seven months of imports, while the level of official external debt is extremely low. An area of concern in recent years has been the size of the fiscal deficit, although this is being gradually reduced in line with the Government’s targets which project a deficit/GDP ratio of under 4% by 2004.
It is the intention of the Government, if Malta decides to join the EU, to participate in EMU as soon as practicable after membership. Government policy is, therefore, aimed at achieving the Maastricht convergence criteria over the next three years. At the same time, further economic reforms are expected to be implemented to ensure that the country simultaneously achieves real convergence with existing EU Member States.
REFORMS SPURRED BYTHE PROSPECT OF EU MEMBERSHIP
The reforms that have been implemented in Malta during the past few years have been designed to enhance the country’s competitive edge. There is no doubt, however, that these reforms were spurred by the prospect of EU membership. The institutional and legislative framework is now largely comparable to that in the ELI, while the restructuring programme that has been going on in the productive sectors of the economy has ensured that Maltese goods and services meet EU quality and other standards. By attaining such standards, Malta should be able to develop into a hub in the Mediterranean that will link the European hinterland. This will soon develop into the largest regional bloc in the world with the North African littoral, which is richly endowed with natural resources and with significant growth potential.
Euroinvest, spring 2003