Ignoring the Monetary Fund
The recent IMF report reminded me of the story I used to hear during my catechism lessons when I was a child
There was once a man stuck on his rooftop in a flood. He was praying to God for help. Soon a man in a rowboat came by and the fellow shouted to the man on the roof, “Jump in, I can save you”. The stranded fellow shouted back, “No, it’s OK, I’m praying to God and He is going to save me”. So the rowboat went on. Then a motorboat came by. “The fellow in the motorboat shouted, “Jump in, I can save you”. To this the stranded man said, “No thanks, I’m praying to God and He is going to save me. I have faith”. So the motorboat went on. Then a helicopter came by and the pilot shouted down, “Grab this rope and I will lift you to safety”. To this the stranded man again replied, “No thanks, I’m praying to God and He is going to save me. I have faith”. So the helicopter reluctantly flew away. Soon the water rose above the rooftop and the man drowned. He went to Heaven. He finally got his chance to discuss this whole situation with God, at which point he exclaimed, “I had faith in You but You didn’t save me, You let me drown. I don’t understand why!” To this God replied, “I sent you a rowboat, a motorboat and a helicopter, what more did you expect?”
A year ago, the IMF report outlined: “The authorities plan to reduce the overall deficit to below 3% of GDP by 2025. Public debt is, however, projected to hover just below 60% of GDP and could be put on an upward trajectory if growth underperforms. Accordingly, additional measures to mobilise revenues and enhance spending efficiency will be required.”
This year the IMF increased the dose and mentioned: “The 2024 Budget expects a small decline in the overall deficit from 5% of GDP in 2023 to 4.5% of GDP in 2024, with new discretionary spending measures, including support to pensioners and low-income earners. Beyond 2024, the authorities plan to gradually reduce the overall deficit to the target of 3% of GDP by 2027, assuming sustained strong growth and lower energy prices. Because of strong demand pressure, the authorities should consider a more sizable and front-loaded fiscal adjustment. The economy is at its full potential, marked by a tight labour market, strong domestic demand and elevated inflation, and thus, a tighter fiscal stance will help contain demand pressure. In addition, the public debt trajectory is exposed to important downside risks because growth could underperform, and energy prices could stay high. Accordingly, building larger fiscal buffers – above current levels – is essential to strengthen the economy’s resilience.”
In essence, the IMF is telling us to be cautious. Economic growth is important, but economic growth that depends on subsidies and expansionary fiscal policy that amasses debt to the tune of €1bn per annum is a risky path, especially if the projected economic growth does not materialise or if energy prices remain high or go to higher levels than forecasted.
Moreover, the IMF mentioned that they expect Malta to have a persistent and elevated inflation level above the 2% target until late 2025, in part reflecting tight labour markets and sustained demand pressure. This means that the risk we are running is that our expansionary fiscal policy, that is fuelling internal demand, which is in turn fuelling inflation, pushes us to consistently run an overall inflation level, which is higher than the EU average, notwithstanding all the energy subsidies. The bottom line here is that this risks hurting our competitiveness.
All this is in turn fuelling what, in my view, is one of the main structural deficiencies in Malta’s economy. We keep hampering that we need to be achieving higher productivity levels and that to do so we need to push our labour force to upskill itself to become more productive and for businesses to invest to become more efficient, possibly through digitalisation. Instead an expansionary fiscal policy is stressing the labour market even further, whereby workers have no real incentive to improve their skills as they know that even with mediocre skills and work ethic they can find employment and push their employers to get better wages, while businesses see that their bottom line is eroding and thus, rather than invest in making their business more efficient, prefer to defend themselves by diverting profits into building a new block of flats. We say one thing, but we do another and the IMF, who has no political agendas, can see this.
“The authorities plan to reduce the overall deficit to below 3% of GDP by 2025. Public debt is, however, projected to hover just below 60% of GDP and could be put on an upward trajectory if growth underperforms. Accordingly, additional measures to mobilise revenues and enhance spending efficiency will be required.”