316 sq km. The islands include Malta (246 sq km), Gozo (67 sq km) and Comino (3 sq km)
392,000 (September 2005)
Population in ‘000 (1995 census)
Valletta (capital): 9.1
Mediterranean (hot summers and mild winters)
Weather in Valletta (altitude 1 metre)
Hottest month, August, 23-29°C (average daily minimum and maximum); coldest month, January, 10-14°C; driest month, July, 0 mm (average monthly rainfall); wettest month, December, 110 mm
Maltese and English
Metric and UK (imperial)
Maltese lira (Lm)=100 cents=1,000 mils
Average exchange rates in 2005: Lm0.35:US$1; Lm0.63:£1; Lm0.43: ?1
Exchange rates on January 25th 2006:
Lm0.3505:US$1; Lm0.6259:£1; Lm0.4307: EURO1
1 hour ahead of GMT (2 hours ahead in summer)
January 1st (New Year’s Day), February 10th (St Paul’s Shipwreck), March 19th (St Joseph), Good Friday, May 1st (Workers’ Day), June 7th (Sette Giugno), June 29th (St Peter and St Paul), August 15th (Assumption), September 8th (Victory Day), September 21st (Independence Day), December 8th (Immaculate Conception), December 13th (Republic Day), December 25th (Christmas Day)
The centre-right Nationalist Party (PN) led by Eddie Fenech Adami was returned to power in April 2003. In March 2004 Mr Fenech Adami resigned as prime minister and was appointed president of the republic a month later. Lawrence Gonzi is the new prime minister. The next general election is to be held no later than the middle of 2008.
Recent political developments
Independence was achieved in 1964
Following the departure of the Order of St John in 1798, French Napoleonic forces occupied Malta until 1800, when they were expelled by Britain. In 1814 Malta formally became a British possession. The island gained independence in 1964 and became a republic in 1973. The economy was restructured from one almost wholly dependent on servicing UK military forces based on the island to a services-oriented market economy. From 1971 until the 1987 the then left-wing and highly interventionist Malta Labour Party (MLP) governed uninterrupted.
The confrontational nature of politics, which sparked outbreaks of low-level political violence in the 1980s, has moved towards normality since the early 1990s. The centre-right PN has held power since 1987, with the exception of 22 months between 1996 and 1998. Since 1987 there has been a gradual withdrawal of the state from involvement in the economy, although this process is still far from complete. The major question that has dominated politics for more than a decade was answered in early 2003, when Malta voted in favour of joining the EU. This decision was confirmed shortly afterwards, when the pro-EU PN was re-elected to office, defeating the anti-membership MLP. On May 1st 2004 Malta became a member of the EU. In May 2005 the country joined the revised European exchange-rate mechanism (ERM-2), pegging the lira to the euro. Adoption of the euro in 2008 is among the government’s main priorities.
Constitution, institutions and administration
Malta has a written constitution. The president is the head of state, a largely ceremonial position. A two-thirds majority in parliament is needed to change the constitution. Elections to the 65-member unicameral legislature?the House of Representatives?are on the basis of proportional representation using the single transferable voting system.
Judges and magistrates are independent of the executive, although they are appointed by the president. They enjoy security of tenure and can be removed only by a two-thirds majority vote in the House of Representatives.
A history of political polarisation
Maltese politics has traditionally been polarised between the two main parties (the PN and the MLP) which continue to enjoy roughly equal levels of support. Divisions between the two parties have been deep, and most of the electorate has traditionally been closely affiliated to one party or the other. As distinctions between the social classes blur and levels of education increase, traditional party loyalties are starting to erode, as evidenced by growing swings in voting patterns, even if these remain small by international comparisons.
While in broad terms the centre-right PN has been socially conservative and relatively economically liberal (the traditional home for the middle classes and business), its long period in opposition in 1971-87 caused it to lean towards acceptance of higher levels of taxation and social spending. However, the party remained largely opposed to the state-centred and protectionist policies of the period and dismantled many of the mechanisms of state control after returning to power in 1987. The anti-Western foreign-policy stance of the period was also abandoned, leading the government to apply for membership of the EU in 1990. With the notable exception of Malta’s relations with the EU and related matters, the two parties’ policy positions moved closer in the 1990s.
International relations and defence
Military neutrality is enshrined in Malta’s constitution. The MLP has consistently been a strong advocate of neutrality and was responsible for the country’s membership of the Non-Aligned Movement. Despite this, Malta has a bilateral defence agreement with Italy to ‘guarantee Malta’s neutrality’. Following an MLP election victory in 1996, the MLP government discontinued participation in the NATO-sponsored Partnership for Peace framework. In 2005 Malta remains the only non-participating European country. Malta’s armed forces number about 1,500, representing 3% of public-sector employment.
Relations with the EU
In the early 1970s Malta signed an Association Agreement with the European Economic Community (EEC, now EU), dealing largely with trade matters. From the late 1980s Malta’s bid to join the EU dominated the domestic political debate. The MLP demonstrated the seriousness of its opposition to membership during a brief spell in power in 1996-98, when it placed Malta’s EU application in abeyance and attempted to negotiate an industrial free-trade agreement in place of proceeding towards membership.
Following the reactivation of its EU application in the second half of 1998 on the return to power of the PN, Malta’s diplomatic efforts were concentrated on securing membership in the next wave of enlargement. Accession negotiations started in March 2000 and were completed at the end of 2002. After signing its treaty of accession in April 2003, Malta became an EU member on May 1st 2004 along with nine other countries, mostly from central and eastern Europe. Although membership has been secured, economic adjustment is ongoing, as the effects of the removal of trade barriers and capital controls with the EU are still being felt. The country’s institutions of government are adapting to the considerable challenges of membership. On May 1st 2005 Malta began its participation in the EU’s ERM-2, pegging the Maltese lira to the euro, with the aim of adopting the European single currency by the start of 2008.
Extremely high population density
The population increased in the early 20th century, then declined between 1957 and 1974 as a result of emigration. Since then growth has resumed, and the population stood at just over 392,000 at the end of September 2005. The average annual rate of growth in 1997-2005 was 0.5%, a deceleration compared with the previous two decades. Life expectancy at birth is 80.4 years for women and 76.4 years for men, against a European average in 2002 of 81.3 years for women and 74.8 for men.
With over 1,200 inhabitants per sq km, Malta is one of the most densely populated countries in the world. Pressures on land and water resources are considerable (see Natural resources and the environment). There are no fundamental regional differences, although industrial development is concentrated in the centre and the south of the island, while tourism and agriculture are concentrated in the north and on Gozo, a smaller sister island. The population is predominantly Roman Catholic, with over 60% participation in church-organised activities, among the highest rates in Europe.
Education in public institutions, including the University of Malta, is free. The 1988 Education Act empowers the education minister to set and monitor the national curriculum. This applies to pre-primary, primary, secondary and post-secondary (non-university) education, whether state or private. There are also privately run, usually church-owned, primary, secondary and post-secondary schools, which cater for over one-third of the school population.
Free universal health care
The government provides a comprehensive and entirely free health service to all Maltese residents. Care is provided by a hospital in Malta and another in Gozo. Further major investment in a new public hospital in Malta is under way. Despite low levels of expenditure the health service is one of the best in the world, according to the World Health Organisation. There is growing pressure to introduce means testing in both healthcare and education, as costs rise and fiscal pressures continue. A parallel private healthcare system has also expanded in recent years as the number of people with private health insurance has risen.
Natural resources and the environment
Even the most basic resources are in short supply
Like most islands in the Mediterranean, water supply has for centuries been a constraint in Malta. With the population now close to 400,000 and 1.2m tourists visiting the islands each year, the demand for water has increased significantly. Furthermore, given the small size of the island and the extremely high population density, the number of freshwater reservoirs is limited. As a result, desalination plants, despite their high cost, have accounted for a growing percentage of supply since the late 1980s. Today around one-half of total demand is met this way, with rainwater and extraction from boreholes accounting for the remainder. Poor soil, limited arable land and water shortages combine to limit agricultural output. Malta has practically no other natural resources, although since the early 1980s the government has from time to time sponsored off-shore oil exploration, so far without success.
The high population density, together with the boom in construction activity during the past 15 years, has placed severe strains on waste management. The island’s sole landfill site has been closed as it does not conform to EU standards. An alternative site has been identified close to the old one. The construction industry generates a high proportion of waste and in the past year this has been used to fill disused quarries. Malta is now considering using such waste for land reclamation purposes. EU funding has been secured for a major new investment in a plant to recycle domestic waste.
Transport, communications and Internet
Road, sea and air links
The total length of the road network in Malta is 2,200 km. There are no railways or inland waterways. The number of private cars is estimated at just about 207,000, a ratio of more than one private car per two inhabitants?one of the highest rates in the world. Significant capital investment is required to upgrade the road network and in 2005 some major road networks, financed by EU structural funds and from an agreement with Italy, were completed. Malta has air links with most major European cities and with North African and Middle Eastern countries, although limited competition and high taxes makes air travel costs to and from the island relatively high.
The state-owned Malta Freeport, which from the start of 2005 has been run by the French CMA-CGM Group, was set up in 1988 to develop the port of Marsaxlokk (in the south-east of the island) into a commercially viable hub port for the central Mediterranean region. Its three main activities are container handling, storage and blending of oil products, and consultancy services for coastal engineering. The port ranks 12th among Mediterranean trans-shipment ports by volume handled and has network connections to over 100 ports worldwide. Although the Freeport mainly targets trans-shipment traffic, it also handles most domestic containerised trade.
State-of-the-art telecommunications infrastructure is critical for a peripheral island economy (see Economic structure). Given pressures internally (to stimulate competitiveness for the benefit of business and consumers) and externally, liberalisation of the sector (largely EU-related) has been ongoing over five years.
(per 100 population)
|Cable TV subscriptions||23.9||24.9||25.1|
Source: National Statistics Office.
A telecoms regulator has been fully functional for the past two years and promotes the interests of consumers, purchasers and other telecoms users. The penetration rate for mobile phones in Malta has increased significantly since the introduction of a second mobile phone operator.
There are four daily newspapers?two in Maltese and two in English. There are also a number of weekly newspapers and six Sunday papers, as well as a daily electronic newspaper. There are four terrestrial television stations, two of which are owned by the major political parties, as well as a number of cable stations. Malta also has a number of privately run radio stations.
Malta imports all its energy needs. The total fuel bill was about 9% of the total value of imports in 2005. Energy is heavily subsidised in Malta, although market mechanisms are being gradually introduced. Efforts, partly via tax-saving incentives, to develop alternative energy sources have so far brought limited results, even though the potential to exploit solar and wind energies exists. The Malta Council for Science and Technology (a government body) is identifying alternative, economically feasible energy-saving and renewable sources to reduce the island’s dependence on foreign fuel supplies.
Main economic indicators, 2004
Real GDP growth (%) 0.1
Consumer price inflation (av; %) 2.8
Current-account balance (US$ m) -549.6
Exchange rate (Lm:US$) 0.34
Population (1000) 392
Sources: National Statistics Office; Central Bank of Malta.
EU membership determines most policy
A period of strong government intervention in the 1970s and 1980s involved the nationalisation of swathes of industry, the creation of a web of price controls, and an import-substitution regime involving the imposition of high import tariffs and quotas. A change of government in 1987 led to a period of gradual external and internal liberalisation. For most of the past decade there has been broad political consensus that this was the right direction in which to take the Maltese economy, although differences between the two major political parties remained on EU membership and the tempo at which further liberalisation should be implemented. However, since the 2003 general election settled the EU membership issue once and for all, policy differences have, for all intents and purposes, narrowed to near insignificance. Malta is now implementing the wide-ranging reforms that go with EU membership, notably, a strengthening of competition policy, a reduction in state aid to industry and an upgrading of environmental protection legislation.
In 2003 there was no privatisation of state assets. In early 2004 an agreement was reached on the privatisation of the public lottery, while at the end of the year the Government granted a 30-year concession to the French CMA-CGM Group to operate and develop Malta Freeport. In late 2005 another 40% stake in Malta International Airport was sold to the public, with the state retaining a 20% shareholding. The government also decided to wind down activity in the state-owned oil bunkering company, and will use its facilities to store its strategic oil reserves. There are continuing delays in disposing of Bank of Valletta. Special attention will also be given to the part-privatisation of the telecoms operator, Maltacom (which is already partially in private hands), via a strategic partnership arrangement. Attempts to sell-off the national sea transport carrier, Sea Malta, failed in 2005 after lengthy negotiations with an Italian firm collapsed. The government subsequently decided to put Sea Malta into liquidation. Nevertheless, the negotiation process of the sale of Sea Malta marked a significant change from its previous privatisation policy, where the government no longer sought a commitment from potential buyers to protect existing jobs.
In the 1990s large budget deficits led to a rapid increase in the stock of government debt, which more than doubled to 76% of GDP in 2004, from 37% in 1996. The cause of the large deficits was unsustainable growth in current expenditure, notably social welfare transfers and public-sector pay. In 2003 public finance statistics were published for the first time according to EU standards and definitions. The latest data show that between 2000 and 2002 the fiscal deficit declined slightly, from 6.5% to 5.8% of GDP, but then surged to 10.4% in 2003. However, most of the rise in the latter year was the result of a one-off transaction connected with the restructuring of the state-owned ship-building and repair company, which amounted to 3.2% of GDP. In 2004 the fiscal deficit fell to 5.1% of GDP.
The Central Bank of Malta, set up in the late 1960s, is responsible for monetary and exchange-rate policy. Its chief means of maintaining price stability is to target the exchange rate. In the 1990s the framework for the implementation of monetary policy was substantially overhauled and modernised. The Central Bank operates in the domestic financial market to influence liquidity in the banking regime and thus ensure that short-term money market interest rates reflect its monetary policy stance.
Recent developments in interest rates reflect the principal aim: controlling inflation by ensuring exchange-rate stability. The key intervention rate, the discount rate, was cut progressively, from 3.75% in May 2003, to 3% in September 2003. It remained at this historically low rate until March 2005 reflecting subdued inflation. Inflation ticked up from late 2004 and the Central Bank tightened monetary policy at the end of the first quarter, raising rates by 25 basis points. In early January 2006 the central intervention rate remained at 3.25%.
In 1972 the link with UK sterling was broken and the Maltese lira was pegged against a basket of currencies weighted according to their relative importance in visible and invisible trade flows. The basket, until the end of April 2005, comprised three currencies: the ECU (and euro from 1999), sterling and the US dollar, with their respective weights revised in September 2002 to 70%, 20% and 10% respectively.
On May 1st 2005 Malta began its participation in EU’s exchange-rate mechanism (ERM-2), pegging the Maltese lira to the euro at the a rate of Lm0.4293:?1. The authorities announced (unilaterally) that this would be a fixed peg and that the Lira would not make use of the 15%+/- fluctuation band allowed for currencies participating in ERM-2, and has so far succeeded in maintaining the central parity rate. The government’s objective is to seek participation in the final stage of economic and monetary union (EMU) at the start of 2008, that is, to adopt the euro and forego the lira.
Economic growth remains weak
After the rapid economic growth experienced in the 1970s, reflecting significant inflows of foreign direct investment, the Maltese economy entered a period of expansion well below potential during the 1980s. This partly reflected the severe recession in the UK in the early 1980s, when Malta remained dependent on its former coloniser, but was mostly the result of highly interventionist policies (which inhibited private initiative) and domestic political instability (which undermined investment). After 1987 partial liberalisation and the restoration of political stability unleashed considerable catch-up growth. However, as the 1990s progressed, an over-expansionary fiscal policy created unsustainable external and internal imbalances. In recent years these imbalances have been partially unwound, resulting in a deceleration of economic growth.
After 2000 the Maltese economy entered a period of stagnation, recording on average zero growth in GDP during the 2001-04 period. In 2001 GDP grew by 0.9% and by 0.8% in 2002 before contracting by 1.7% in 2003. In 2004 it grew by just 0.1%, as stronger domestic demand growth offset the continued negative contribution of net exports. Indicators for the first three quarters of 2005 show that GDP expanded by 1.7%, mostly underpinned by continued stockbuilding and public-sector investment, financed by foreign grants from the EU and Italy.
Inflation rises, but unemployment eases
Inflation in 2004 picked up, rising to 2.8%, mainly reflecting the effects of the hike in the standard value-added tax (VAT) rate from 15% to 18%. Despite the weakness in domestic demand and in trade union bargaining power, inflation accelerated to 3% in the first 11 months of 2005. In 2005 inflation was expected to recede, as the effects of the rise in the VAT rate dissipated. However, the rise in oil prices led to higher administered prices, particularly in respect of electricity bills, where a 55% surcharge was introduced in November. This accounted for about half the rate of inflation in 2005. Also contributing to the rise in inflation were higher housing costs and food prices.
The increase in unemployment observed in 2002-03, as measured by International Labour Organisation (ILO) standards, was reversed in 2004. From 6.4% in 2001 joblessness rose to 7.6% in 2003, but then eased to 7.2% in 2004. The employment rate also recovered, increasing from 53.7% in 2003 to 54% in 2004, although it still remains the second-lowest among the EU25 countries. The recovery in employment was mainly attributable to the services sector (excluding tourism), as job losses in manufacturing, particularly the electronics, chemicals and food sectors, continued. During the first eight months of 2005 the unemployment rate crept up slightly to 7.3%, while the employment rate fell marginally to 53.9%.
Fish farming is becoming a mainstay of the sector
Agriculture faces severe constraints in Malta, including acute water shortages, small average farm size, and limited investment and research. Full-time employment in agriculture and fisheries is 2.6% of the total and generally on a declining trend, although part-time employment remains quite important, accounting for about 30% of total employment in the sector.
Malta’s agriculture is skewed towards meat and dairy farming, resulting in high rates of self-sufficiency in pigmeat, poultry and eggs. In the first nine months of 2005, the total volume of slaughtered meat declined by 10%. While the volume of slaughtered beef and pork increased by 12% and 3.5% respectively, that of broilers slumped by 30% because of strong price competition from foreign produce. Imports of frozen/chilled beef (there is no grazing in Malta), cheese, cereals and fruit are required to supplement limited domestic supplies. Malta’s principal vegetables are early potatoes, tomatoes and onions. Production of fruit expanded by 6.6%, mainly because of the rise of viticulture, while that of vegetables declined by 3.5%. Overall, production of fruit and vegetables declined by 2.8% in the first nine months of 2005.
The implications for this sector of EU membership are considerable, as the removal of protective barriers have exposed the sector to competition from larger producers in the EU. Nor is there much offsetting benefit from the EU’s common agricultural policy (CAP) as price supports do not exist in for most of the farm goods Malta produces. The government is providing financial assistance to the sector to help it restructure. As Malta imported food products at world market prices prior to accession, which were almost invariably lower than those in the EU, the effect of accession on Maltese consumers has been higher prices for foodstuffs, especially meat products and cereals. Indeed, the value of imports of agricultural products increased by 7% in the first nine months of 2005, while in the previous three years it ranged from 1.5% to 2.5%, suggesting that average prices have increased. However, this has been partly offset by lower prices of products that were previously subject to domestic protective levies, namely pasta, biscuits and wine.
Fish farming is growing in importance, as overfishing and pollution in the Mediterranean Sea have affected the industry badly. Annual production from fish farms has grown to over 2,200 tonnes, mainly exported to Italy and Japan. This is well over double the 1,068 tonnes landed from wild fisheries in 2004. Malta’s main fish exports are sea bass, sea bream and tuna. In the first nine months of 2005 export volumes of fish exports were up by over 60%. In order to prevent the further depletion of stocks and protect the domestic fishing industry, Malta has secured a derogation from EU rules, which will allow it to maintain a fisheries conservation zone of 25 nautical miles.
Total manufacturing turnover, based on a survey of about 440 manufacturing firms, declined by 1.2% in 2004 after increasing by 3.7% in the previous year. The dominant radio, television and telecommunications sector, which in 2004 accounted for almost half of total turnover in manufacturing, recorded a 0.5% drop in sales revenue. This sector is, in turn, dominated by a large foreign-owned semiconductor plant, which accounts for around one-third of total exports of goods and services, but just about 2.5% of private-sector employment. Turnover in Malta’s second-largest sector?food, beverages and tobacco?which accounts for almost 15% of total sales, recorded a drop of 3.2% in 2004, reflecting mainly the effects of the removal of the protective levies on EU imports. The paper and printing sector, the share of which in total sales amounted to 5.5%, also recorded a drop in sales, down by 1%. Other important subsectors in Malta’s manufacturing industry, such as textiles, clothing and footwear, and furniture, which respectively accounted for 6.7% and 4.4% of the 2004 total, also registered a drop in turnover of 0.7% and 8.8%.
In the first nine months of 2005, turnover by these manufacturing firms continued to decline, shrinking by 8.6%. This was mostly attributable to the semiconductor industry, although other sectors, namely clothing and footwear, food and beverages, and paper products also contributed. By contrast, the newly expanding pharmaceutical industry witnessed an increase in turnover, with output mostly destined for foreign markets.
Malta’s manufacturing industry is characterised by some 400 medium- to large-sized export-oriented firms, mostly foreign-owned, and a large number of micro and small enterprises, most with fewer than ten employees and primarily oriented towards the domestic market. The larger enterprises are highly capital-intensive, and their relative importance in terms of employment is much lower than their share in turnover. Overall, employment in manufacturing continued its decline in 2004, with the chemicals industry and food and beverages sector shedding most labour. The latter sector was particularly affected by the removal of tariff barriers upon EU membership. Manufacturing’s share of overall employment fell from 23% in the mid-1990s to just under 20% in 2004. This trend continued in 2005, when in the first nine months employment in manufacturing declined by 2.6% and its share in total employment fell to 17.6%.
Value added generated by the construction industry increased from 5% of GDP in 2003 to 5.1% in 2004. This increase was also accompanied by an increase in employment in the private sector, which rose to 5.7% of total employment in 2004 from 5.6% in 2003. The rise in value added in 2004 reflected better profit margins. Activity in the sector reflected strong private housing investment and public expenditure on infrastructure projects.
The rise in value added by the construction industry continued in the first nine months of 2005, rising by 5.8% and its share of GDP edging up to 5.3%. Property prices in 2004 accelerated sharply, and were estimated to have risen by around 24%, after having increased by around 10% in 2002 and 2003. The strong rise in property prices in 2002 and 2003 was partly the result of capital repatriated during 2002 and 2003 (see Financial services) and an increase in funds channelled for investment purposes following the reduction in the rate of return on financial assets. The acceleration in property prices in 2004 appears to be spurred by further easing in credit conditions offered by banks to buyers, principally by extending the maximum repayment period from 30 to 40 years, possibly in anticipation of a probable rise in the statutory retirement age in the forthcoming pension reforms. Meanwhile, EU membership may have also played a role in property price expectations, although purchases by non-Maltese EU nationals following the ratification of Malta’s entry into the EU were not significantly higher than those seen in recent years. In 2005 property price inflation eased somewhat.
The financial services industry, dominated by banking, investment and fund management, continues to grow. The share of financial intermediation in Malta’s GDP increased from 5.6% in 2003 to 6.6% in 2004. This increase in value added by the financial services industry was underpinned by stronger profitability, as the rate of return on equity improved to almost 14% in 2004, from 10.2% in the previous year, in part the result of cost-cutting measures which reduced operational costs by over 6.7%. Meanwhile, the banking sector in 2004 also recorded a lower rate of non-performing loans, which declined to 6.6% of total loans in 2004 from 8.1% a year earlier. The positive performance of the banking sector continued in the first nine months of 2005, as its share of value added advanced to 7.6%. The banking system in Malta is dominated by two major clearing banks, HSBC Group and Bank of Valletta.
Although competition between domestic credit institutions has increased, and diversification into other financial services has taken place, there remains some way to go before the financial system is fully modernised. A package of liberalisation measures came into effect at the beginning of 2000. These focused primarily on the removal of restrictions on long-term inward and outward investment flows. Exchange controls were eased further in 2002, and on May 1st 2004 they were completely lifted with the exception of life-insurance contracts with residents of non-EEA countries. A de facto tax amnesty (Investment Registration Scheme) in 2002 to encourage the repatriation of funds invested overseas resulted in almost Lm300m (US$700m), being registered with the local authorities, although only about Lm55m was repatriated. This scheme was reopened for a brief period towards the end of 2003 and once again in June 2005. To some extent, this capital injection provided a boost to the financial services industry.
In 2002 the Malta Financial Services Authority (MFSA) was set up. It has become the sole regulator for all banking, savings, investment and insurance business in Malta. The major change essentially concerns the shift in responsibilities of banking supervision from the Central Bank of Malta to the MFSA. The MFSA is also responsible for regulating stockbrokers?a function that was previously carried out by the Malta Stock Exchange, the supervision and monitoring of international financial activities, including trusts, collective investment schemes, investment services providers and insurance activities. It is also responsible for the approval of applications for the registration of companies with non-resident directors. In 2003 the MFSA also launched the Depositor Guarantee Scheme, modelled on the EU directive on deposit guarantee schemes, to provide for compensation to eligible depositors in the event of a bank failure. An accord was reached with the OECD in 2000, whereby Malta was removed from the OECD’s list of tax havens in return for establishing a Money Laundering Compliance office. In March 2002 the government set up the Financial Intelligence Analysis Unit to enhance Malta’s reputation as a financial services centre. In 2002 the MFSA was admitted as a full member of the International Organisation of Securities Commissions. In 2004 the MFSA amended various directives governing banking, insurance and investment services sectors to harmonise the local regulatory regime with that of the EU.
Tourism remains a mainstay of the Maltese economy, although the sector is facing a number of structural difficulties. These include the price and quality of the overall tourist package, the reliance on a small number of major tour operators in positioning Malta, although the share of non-package holidays via internet bookings is rising, and increasing competition both from other Mediterranean destinations, such as the countries of the former Yugoslavia on the Adriatic coast, and long-haul destinations. Furthermore, high airport charges are keeping low-cost airlines from operating to Malta. Although the number of tourists visiting Malta increased by 3.5% in 2004, the number of nights spent in the country declined by 1.3%. Nevertheless, gross earnings from tourism rose by 2.9% in 2004. As a result, the share of gross earnings from tourism increased to 17.1% of GDP at factor cost, up from 16.4% in the previous year. These trends continued in the first nine months of 2005, when the number of tourists rose by 1.2% and stays were shorter?the number of nights spent fell by 1.4%. Nevertheless, gross earnings rose by 1.3%, although the value added of hotels and restaurants in 2005 rose slightly, by 0.8%.
The UK continues to be the largest source market for inbound tourism, although its market share contracted in 2004. UK tourists dipped from 42.3% of the total in 2003 to 39.1% in 2004. In the first nine months of 2005 this recovered to 41%. The second most important market, Germany, witnessed a recovery in 2004, as the number of German visitors rose, from 11.2% to 11.7% of the total. This mainly reflected the recovery in growth in the German economy in 2004. Although the number of tourists continued to increase in the first nine months of 2005, Germany’s market share declined to 11.1%. Similarly, the French market grew from 6.9% of the total in 2003 to 7.5% in 2004 as economic growth in France also picked up. However, in 2005 the number of French tourists decreased by 6.4%, shedding around 0.5 percentage point in market share. By contrast, the Italian market was stagnant, with its market share remaining virtually unchanged at 7.2%, but in 2005 this declined by around 1 percentage point, as the number of visitors from this country declined by just over 10%.
The cruise liner niche saw weaker activity during 2004. The number of cruise passengers slumped by almost 26% in 2004, as the two largest markets?the UK and Spain?together saw a 45% drop in the number of cruise passengers, even if they remain by far the largest markets, accounting for, respectively, 21.3% and 20.9% of total cruise passengers in 2004. This niche will be given a substantial boost by the completion in 2005 of a new and larger cruise terminal, which is expected to attract a number of companies to Malta as their Mediterranean hub. In the first nine months of 2005, total cruise passengers increased by 10.5%, mostly as a result of increases from Germany and Italy, which more than offset strong losses from the UK market.
The general trend towards upgrading accommodation continues, and another new five-star hotel was opened towards the end of 2005. The share of beds in five- and four-star hotels increased marginally to 15.9% and 48.3%, respectively, while the share of three-star hotels declined to 32.4%. However, overall supply of hotel beds shrank by 4% in 2004 as a number of hotels have closed down to be converted into residential apartments, and the trend continued in 2005, because of a combination of an increase in property prices and weak profitability in the tourism industry. Supporting infrastructure, especially roads and ancillary services, continues to lag, and requires considerable investment. The Malta Tourism Authority will encourage the private sector to play a more active role in the strategic planning of this increasingly price-sensitive sector.
Trade in goods
Trade gap widens sharply
In 2004 the value of merchandise exports continued to decline, falling by 1.4% to Lm915m (US$2.7bn). This drop partly reflected the winding down of the state-owned oil bunkering activity. Exports of food were also somewhat lower and foreign sales of beverages and tobacco also declined. Meanwhile, the value of exports of machinery and transport equipment, which includes semiconductors, and chemicals increased by 1.4% and 25% respectively. During the first ten months of 2005 the value of exports declined further, contracting by 12.5%. Around 30% of this drop continued to reflect the winding down of oil bunkering activity, while the remaining drop was mostly attributable to the semiconductors industry.
At the same time, the value of imports continued to grow, rising by 2.9% to Lm1,318.8m. Around half of the increase in imports was attributable to purchases of capital goods (to a large extent this reflected the registration of yachts to benefit from a temporary reduction in the value-added tax (VAT) rate prior to EU membership). The other half of the increase in imports was attributable to a surge in imports of consumer goods, especially of food and beverages, which were spurred by the removal of the remaining trade barriers on EU imports following accession on May 1st 2004. Meanwhile, official data show that imports of fuel were only 2.5% higher in value terms in 2004. However, if one accounts for the importation of oil used for oil bunkering purposes, the fuel import bill for domestic purposes shows an increase of almost 30% in 2004, largely reflecting the surge in oil prices in that year. In the first ten months of 2005 the value of imports declined marginally. Imports of capital goods declined by 6%, while imports of consumer goods grew by 4.7%. Meanwhile, the fuel import bill grew by 67%, reflecting higher international oil prices. In 2004 the trade deficit widened to Lm404m, equivalent to 22.1% of GDP, while in the first ten months of 2005 it widened further, by 29%, to Lm402m.
The EU15 continues to be Malta’s main trading partners, and their share in total trade grew further in 2004, rising to 61.2%, up from 57.9% in 2003. The share of imports from the EU15 rose further from 67.8% in 2003 to 69.7% in 2004, after falling to a low of 63.6% in 2001, while the share of Maltese exports recovered further to 48.9% in 2004, up from 44.3% in 2003 and from 41.3% in 2001. In the first ten months of 2005, the EU15’s share of trade expanded further to 64.3%, with the share of both imports and exports rising, to 72.5% and 51.2% respectively.
Invisibles and the current account
During 2004 the current-account deficit once again widened significantly, almost doubling to Lm186.9m, or 10.2% of GDP, up from Lm105.3m in 2003. Merchandise trade accounted for almost half of this widening of the payments gap. The performance of services deteriorated in 2004, with the surplus falling by 5.6%. This was accounted for by a rise in freight payments in the transportation account and a sharper drop in receipts from other services. The widening of the deficit on the goods and services account was exacerbated by a deterioration in net investment income, where net inflows of Lm15.4m in 2003 turned into net outflows of Lm17.1m in 2004. In the first half of 2005 the current-account deficit almost doubled compared with the same period in 2004.
Foreign reserves and the exchange rate
Developments in the balance of payments during 2003 led to a rise of Lm54.7m in official reserves, continuing the upward trend observed since 2001. However, in 2004 foreign currency reserves of the Central Bank of Malta declined to Lm860.6m from Lm935.5m a year earlier, although by November 2005 this loss was completely recovered and official reserves climbed back to the level seen at the end of 2003.
Up to the end of April 2005 the Maltese lira remained pegged to a basket of currencies composed of the euro, the US dollar and the pound sterling. International financial markets during 2004 were characterised by a further slide of the US dollar against non-Asian international currencies. These developments were reflected in the external value of the Maltese lira, which appreciated by almost 10% against the US dollar in 2004. By comparison, the currency lost 0.4% of its value against the euro, and depreciated by 2.4% against sterling. On May 1st, the three-currency basket against which the Maltese lira had been pegged was replaced by a straight bilateral pegging to the euro (at Lm0.4293:?1). While this has since meant full currency stability vis-a-vis the euro, the absence of the US dollar and the pound sterling in the basket meant that volatility against these currencies has increased.
Following a favourable opinion from the European Commission, the government began Malta’s participation in the EU’s exchange-rate mechanism (ERM-2) on May 1st 2005, with the aim of adopting the euro at the earliest possible date (the start of 2008). This may be overambitious. The major obstacle is conforming to the fiscal criteria, as both the budget deficit and public debt are well in excess of the required targets. The European Commission once again issued a warning to Malta about its public finances, although it appeared satisfied that in 2004 the deficit target, set out in its three-year Convergence Plan had been attained. Furthermore, the recent hike in energy prices has pushed up inflation significantly, and this could pose a threat to the achievement of the inflation criterion.
The lifting of capital controls on May 1st 2004 may make the maintenance of Malta’s fixed exchange-rate regime more difficult. Indeed, the lifting of the remaining trade barriers, among other factors, have led to a sharp deterioration in the current account, which led to a sustained loss in external reserves during the second half of 2004, up to the first four months of 2005. In the past decade successive financial crises around the world have shown that there are considerable risks attached to liberalising capital controls while attempting to maintain a currency peg, particularly when an economy is running large fiscal and external deficits, as Malta has been for some time. That said, Malta is different from countries that have suffered currency crises in recent years, in that short-term capital inflows have been small and there is therefore little scope for a sudden loss of confidence leading to a ‘rush to the exit’ by foreign investors. Domestically, Maltese residents, who hold the majority of government debt (95.2% at end-May 2005), have not yet demanded higher premiums for holding government paper as the stock of public debt surpassed 75% of GDP (yield spreads over German bunds have actually declined to around 105 basis points, and bond issues in 2005 were systematically oversubscribed). Official reserves recovered after Malta began its participation in ERM-2. This is not to say, however, that there is no cause for concern. While Maltese residents continue to believe that the present spread is sufficient for the risks involved, this could change (perhaps suddenly) if the public finances are not stabilised, and particularly if the target of adopting the euro by 2008 does not materialise as alternative foreign investment options are now available without limit.
Membership of organisations
Since May 1st 2004 the EU has comprised 25 member states: Austria, Belgium, the Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the UK.
According to the 1992 Treaty on European Union, the European Community (EC) forms the first of the three pillars that make up the EU, along with the Common Foreign and Security Policy (CFSP) and co-operation in the field of Justice and Home Affairs (JHA). The CFSP is inter-governmental. It is co-ordinated by the member states’ high representative for the CFSP. JHA is partly inter-governmental.
The European Coal and Steel Community (ECSC) was set up by the Treaty of Paris, signed on April 18th 1951, to pool the coal, iron and steel resources of the six original member states: Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands. In March 1957 the six founding members of the ECSC signed the Treaty of Rome, establishing the European Economic Community (EEC). Its immediate aims were to achieve a customs union and common market in goods and services. The European Atomic Energy Community (Euratom), was set up at the same time to develop the peaceful use of nuclear energy, but has proved of lesser importance. The 1987 Single European Act (SEA) was a major step in the evolution of the EC?as the above three communities were jointly known?by sanctioning qualified majority voting (QMV) for directives and regulations to liberalise the movement of goods, services, capital and people.
The Treaty on European Union (Treaty of Maastricht) established the EU in its present form, and committed its members, with the exception of the UK and Denmark, to economic and monetary union (EMU). It came into effect in November 1993. The Treaty of Amsterdam, which took effect in May 1999, incorporated the Schengen agreement to abolish frontiers between all member states other than the UK and Ireland. The Treaty of Nice, signed in February 2001 and taking effect in February 2003, dealt with three issues linked to prospective enlargement: the number of commissioners, the reweighting of votes and the extension of majority voting.
In October 2004 the EU heads of government signed a proposed new constitutional treaty which, if ratified, would have replaced all the above treaties. However, following its defeat in two referendums, in France on May 29th 2005 and in the Netherlands on June 1st 2005, it is extremely unlikely to come into effect. For the short term, at least, the EU will continue to work under the existing treaties.
The European Council is the regular meeting of heads of state or government and the president of the Commission; it takes place three to four times a year. It has no direct legislative powers but sets the guidelines for policy.
The Commission consists of a college of commissioners and a civil service of about 23,000. There are 25 commissioners?one from each member state?meant to be independent of their national governments. The Commission’s staff is organised into directorates-general for specific policy areas, and various other agencies and services. The Commission oversees the enforcement of legislation, although it has no police powers. It has sole responsibility for drafting legislation, but its drafts can be amended by the Council of Ministers and Parliament. Its executive powers are limited, consisting primarily of competition policy (subject to appeal to the Court of Justice), regional policy and agriculture. It is responsible for administering a budget, limited to 1.24% of EU gross national income (GNI) and currently amounting to about 1% of GNI.
The Council of Ministers directly represents the member governments. On some issues the Council functions as an executive, on others it functions as one branch of the legislature, the other being the European Parliament. Some legislation requires unanimity, but the majority of legislation governing the internal market, as well as some environmental, social and other legislation, is by QMV. The votes of each country are weighted according to its size, but with smaller countries receiving a bigger weighting than larger countries in relation to their populations.
The European Parliament, which has 732 members, is directly elected for a five-year term. It has powers of co-decision with the Council on most legislation that is voted on by QMV. It must also ratify all external agreements.
The European Court of Justice consists of 25 judges, one from each member state, who decide whether acts of the Commission, the Council, member governments and other bodies are compatible with the treaties. The European Court of Auditors has recently stepped up its role as a severe critic of financial management.
Economic and monetary union (EMU)
In January 1999 11 member states?Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain?formed an economic and monetary union (EMU), with the euro as a single currency and a common monetary policy conducted by the European Central Bank (ECB). Euro notes and coins replaced national currencies in early 2002. Greece became the 12th member of EMU in 2001. Denmark rejected EMU membership in a referendum in 2000, as did Sweden in 2003, while the UK is keeping its options open. All ten new member states are committed to joining EMU. Some could do so as early as 2007.
In addition to the six original members of the EC, Denmark, Ireland and the UK joined in January 1973. Greece became the tenth member in January 1981. Portugal and Spain joined in January 1986. Austria, Finland and Sweden became members of what was by then the EU in January 1995. In June 1993 the Copenhagen European Council decided that the central and east European countries (CEECs) could apply to join the EU. In May 2004 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU.
Negotiations with Bulgaria and Romania were concluded in June and December 2004, respectively, with a 2007 target date for accession. Negotiations with Croatia opened in October 2005 after a period of delay, as some EU members thought that it was not fully complying with its obligations to the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague. Turkey was given full candidate status at the Helsinki European Council of December 1999. In December 2005 the European Council approved the recommendation by the European Commission, made on October 3rd 2005, to start negotiations with both Turkey and Croatia. Progress in Turkey’s negotiations is likely to be slow and its earliest possible date for actual accession is 2015.
The EEA and Switzerland
The European Economic Area (EEA) consists of the 25 members of the EU, plus three members of the European Free-Trade Association (EFTA), Norway, Iceland and Liechtenstein. It enables the latter to participate in most aspects of the single market, with the notable exceptions of agriculture and primary energy. Switzerland is also a member of EFTA, but not the EEA. Economic relations between the EU and Switzerland have been made closer by seven bilateral agreements which came into force in 2002. A second package of agreements was ratified in June 2005.
The EU has association agreements in force with Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the Palestinian Authority and Tunisia. One has been signed but not yet ratified with Syria, and Libya is also foreseen as part of a Mediterranean free-trade area by 2010.
Stability and Association Process
In June 1999 the EU launched the Stability and Association Process for south-eastern Europe?Albania, Bosnia and Hercegovina, Croatia, Macedonia and Serbia and Montenegro. This provides for the negotiation of bilateral Stability and Association Agreements as a first step towards these countries’ eventual accession into the EU.
There are partnership and co-operation agreements (PCAs) in force with all former Soviet countries except Belarus and Turkmenistan. In May 2004 the European Commission adopted a strategy paper outlining the scope and objectives of a new European Neighbourhood Policy (ENP), aimed at strengthening ties with those countries that form the borders of the newly enlarged EU?although Russia has been excluded at its own request.
Established in 1972, the Conference for Security and Co-operation in Europe (CSCE) was initially a non-institutionalised multilateral forum for East-West dialogue, and served for almost 20 years as a convenient and flexible arrangement for easing cold war tensions. The organisation gradually expanded in aim and strengthened its organisational structure in the 1990s. After the end of the cold war the role of the body started to change quickly, and in December 1994 the conference was officially renamed the Organisation for Security and Co-operation in Europe (OSCE). With 55 member states, the OSCE is the only inclusive pan-European security organisation. Canada and the US are also members of the organisation.
The OSCE has played a major role in conflict prevention and resolution, as well as post-conflict reconstruction in Europe. Its activities embrace three dimensions: security, economy and human rights. The OSCE is engaged in preventive diplomacy, arms control and confidence-building activities. It undertakes fact-finding and conciliation missions, and carries out crisis management. The organisation is a component of the European security architecture. It is a «regional arrangement» in the sense of Chapter VIII of the UN Charter, which gives it the authority to try to resolve a conflict in the region itself, before referring it to the UN Security Council. Since the early 1990s the OSCE has been heavily involved in the Balkans and the Transcaucasus.
The activities of the OSCE are performed by a web of specialised agencies. The High Commissioner on National Minorities, based in The Hague, is the primary source of «early warning», with responsibility for identifying ethnic tensions that might endanger peace. The Office for Democratic Institutions and Human Rights (ODIHR), based in Warsaw, focuses on promoting human rights, democracy and the rule of law. It monitors elections, assists in developing national electoral and legal institutions, promotes the development of non-governmental organisations (NGOs) and civil society, and conducts meetings, seminars and special projects. The Office of the Representative on Freedom of the Media, based in Vienna, assesses the implementation of the member states’ commitments concerning freedom of journalism, broadcasting and access to information.
Economist Intelligence Unit , February 1, 2006