After 12 years of stop-start talks, Malta is on the home straight to join the EU on 1 May 2004. The issue revealed deep political divisions over the matter in the three relatively poor small islands that make up Malta. The economy improved in 2002, helped by an upturn in its key electronics exporting industry as well as domestic consumption, which was boosted by lower interest rates.
Maltese say yes
This former UK colony, which gained independence in 1964, voted in favour of joining the EU in a national referendum in March 2003. The result was a close call, with only 53.6 per cent voting in favour of joining, and held just days before signing the EU’s accession treaty. This was confirmed when the government won re-election in the April 2003 election.
The ruling Partit Nazzionalista (PN) (National Party) and its leader, Prime Minister Eddie Fenech Adami, has been a keen supporter of EU entry, while the opposition Partit Laburista (PL) (Labour Party) opposes membership, although it is in favour of joining a free-trade zone. The PL argued that complying with EU economic regulations would dent Malta’s competitiveness, leading to increased inflation and a rise in unemployment. Adami, who has led the PN for 25 years, is expected to step down sometime after 2004; contenders for the post include the deputy prime minister, Lawrence Gonzi, and the finance minister, John Dalli.
The PN government has been in power since September 1998 and has been busy aligning most of Malta’s law with that of the EU, introducing sometimes painful economic reforms and taking a knife to the country’s budget deficit.
During 2002, the government won praise for its tough negotiating style with the EU and it managed to obtain a number of special concessions. EU citizens will be prevented from flooding the Maltese labour market or from purchasing a secondary residence in Malta, already the fourth most densely populated country in the world, with most of its 393,120 inhabitants squeezed on to Malta’s main island, which is only 27km across.
Economy shows signs of progress
About 90km south of Sicily and 290km from the coast of Libya, the number of tourists to the stony outcrop fell by almost 10 per cent in 2002, due to the reluctance of tourists to fly during a period of geopolitical uncertainty. This was expected to be exacerbated by the 2003 Iraq War.
Manufacturing, which employs around 20 per cent of the 150,000 workforce, generally remained subdued, affected by the weakness of its export market caused by the global economic slump. Electronics were the exception to the rule, tending to register improved demand. Tourism and exports account for around 50 per cent of GDP in a country where everything is imported with the exception of stone.
After contracting by 0.8 per cent in 2001, the economy grew by 4.5 per cent in 2002, underpinned by the high level of net exports and a strong contribution from the household sector, which was boosted by a rise in construction activity, itself helped by lower interest rates from the central bank.
The Maltese Pre-accession Economic Programme (PEP) forecasts economic growth to be in the range of 3.1-3.8 per cent over the 2003-05 period. However, these estimates do not take into account the likely dynamic effects of EU membership and ‘could well prove optimistic’ in light of the continued weak global economy and the Iraq War, according to the Central Bank of Malta (CBM). Household demand was expected to moderate as a result of a rise in unemployment.
The CBM expects the recovery from the 2001 nadir to continue in 2003 with investment and exports expected to be the main sources of economic activity.
Fiscal policy remains tight. The government reduced its deficit to 5 per cent in 2002 from 11 per cent in 1998 and it is forecast to fall to 3 per cent in 2003, meeting the Maastricht criteria for joining the euro-zone and adopting the euro currency. The reduction of the deficit has been achieved through tax increases and stricter enforcement of tax collection, which has not gone down well with the local population.
The public sector is seen as being generally inefficient and there have been signs of increased militancy as a result of the government policies. Fuel pumps ran dry for a few days in February 2003 as a result of industrial action at the state energy corporation, Enemalta.
Business wants the government to make the economy more competitive by introducing greater flexibility into the labour market, speeding up privatisation and reducing taxes.
After the sale of Mid-Med Bank to the UK’s HSBC in April 1999 (it was renamed HSBC Bank Malta), the only state-owned company privatised was Malta International Airport in April 2002 with 40 per cent being sold to a consortium led by Vienna International Airport. The Malta Freeport, the Libyan Arab Maltese Holding Company, the Public Lotto, Maltacom and Air Malta are all targets for privatisation. The Bank of Valletta was floated on the Malta Stock Exchange, with the government retaining a 24.5 per cent stake.
The government is trying to make other savings. The Malta Drydocks and Malta Shipbuilding, long a cash drain on the government’s finances, was slimmed down in 2002 and subsidies to the yards are due to end by 2008.
The CBM is responsible for monetary policy, with the main objective being price stability, through a fixed exchange rate regime. The Maltese lira is pegged to a basket of foreign currencies made up of the euro, the dollar and sterling, with weights of 70 per cent, 10 per cent and 20 per cent respectively in 2002.
The CBM argues the peg is a discipline to contain domestic price pressures and ensure exchange rate stability, which is important in a small and open economy. As a result, interest rates are changed with the exchange rate in mind and in 2002 were at their lowest level for many years. In December 2002, the CBM lowered its key central intervention rate and discount rate by 25 basis points to 3.75 per cent. The CBM has also lowered reserve requirements to increase liquidity into the system.
Unemployment tended to rise during 2002, hitting 5.2 per cent in September 2002, although inflationary pressures were well contained, falling to 1.3 per cent in October, its lowest level since February 2001. Inflation fell from 2.9 per cent in 2001 to 2 per cent in 2002 and is forecast to remain subdued in 2003.
The Maltese stock exchange, the Borza Ta’ Malta, remained under pressure, although some analysts said in early 2003 that the worst was over for the equity markets.
The dispute over joining the EU has revealed deep divisions in the country but now the matter has been settled, Malta can get on with the business of preparing for membership in 2004.
The Maltese economy appears to have hit its lowest point in 2001. Growth was still below trend in 2002 and the CBM remains cautious for 2003. External events have a big impact on the level of domestic economic activity for the open economy and it is heavily reliant on its electronics industry and tourism sector for future growth. Much will depend in 2003 on the outcome of the Iraq War, as well as the global economy, which is expected to pick up later, although there remain persistent fears of a double-dip recession.
Stock market Improving
Janet Matthews Information Services October 20, 2003