More research and innovation

The latest Central Bank report, covering the next three years, predicts that the economy is expected to remain strong, although slightly lower than in 2017, with growth stronger in the private consumption and net exports sectors.

This growth will be supported by factors of supply and demand, including the continued impact of energy reforms, new investment projects, an increase in participation in the labour market and strong exports of services.

The Central Bank statement added that the labour market is expected to remain level, with the unemployment rate continuing to fall while inflation will remain under two per cent in 2018. The startling revelation is that debt will go down from the peak of 72 per cent reached in 2012 to just over 45 per cent in 2020. This is commendable.

The IMF report on Malta talks of challenges looming ahead but, equally, there are considerable opportunities. Whilst noting the closer integration of the world economy, this has magnified the impact of the current Euro sluggishness and Brexit’s negative effect on Sterling while, on the contrary, other EU countries (eg the Czech Republic) have succeeded in reforming their structure. In its annual report, the IMF has quaintly declared that our economy is ‘enjoying a cyclical upswing, but the momentum is expected to slow down’.

The report continues to placate us that, having a small and very open economy, Malta is adjusting well to the challenges posed by globalisation. Progress is being made in diversifying the economy into higher value-added activities, including aircraft maintenance, pharmaceuticals, financial services, Fintech, aviation and more. It tells us to never concede in our unending drive to upgrade and promote synergies between the various economic clusters. Any hesitancy in this task would augment the risks stemming from potentially unfavourable changes in the frail international recovery.

At this juncture, it is pertinent to recall that the Governor of the Central Bank of Malta cautions us to monitor wage increases to ensure that these reflect productivity developments. Competitiveness is also suffering from a low participation rate coming out of a vast pool of women (mostly educated to tertiary level) who do not participate fully in the workforce (although family-friendly measures such as free child care are encouraging more women to work). It goes without saying that while politicians are telling us to be happy, we cannot rest on our laurels.

Economists tell us that a robust competitiveness policy must encourage dynamism and transition into an open market place in the global context. Consequently, if our national policy is not formulated in this way, it could hinder and/or undermine the motivation that is needed for exporting firms to succeed. Economist Gordon Cordina thinks that growth is just a tool for development – probably an essential one but, of course, not a final goal in itself.

We now have sufficient affluence to enable us to become a little choosier, questioning each growth opportunity in terms of its ability to deliver genuine development. Should we rest on our laurels, given that tourism and iGaming are flourishing? Both sectors are volatile and, in the case of IGaming, there is very little research and development sunk in the local industry so that once (God forbid) the Commission succeeds in modifying our tax regime, then an exodus will prevail.

Our manufacturing sector faces stiff com- petition from low cost EU countries and sheer geographical isolation so they need help in speeding up the process of penetrating new markets and seeking ad hoc networking opportunities to improve levels of competitiveness and innovation. This may seem too utopian to be true and yet very few are making use of innovation to help them penetrate overseas niches which, to some extent, is not so easy now due to the rising price of oil.

Naturally harnessing innovation is a long journey that needs to be tackled astutely, fully aware of the formidable task in co-ordinating various aspects of the complex ecosystem which is in a fragmented state. Government institutions such as Malta Enterprise and Trade Malta will need new strategic plans to assist companies seeking ways of improving their performance by minimising costs, reducing risk, fostering collaboration, increasing transparency and even sharpening their focus to improve their research and development abilities, no matter what industry they are in.

Thus, the competitiveness of a firm depends not only on its own strength, but also on the support it receives from the external environment in which it operates. Clearly, this support varies considerably from industry to industry and from country to country. It goes without saying that a national competitiveness policy for exporters must be in force to encourage dynamism and transition into an open, yet highly competitive market place. If a robust policy is not formulated now for 2018, it could hinder and undermine the motivation that is needed for our nascent manufacturing sector to survive the storm.

In this context one has to keep in mind an important factor that contributes towards accomplishing trade facilitation. In fact, the IMF report mentioned earlier states that our economy is presently enjoying a cyclical upswing and growth is projected at around six per cent this year but goes lower next year. On its own this is commendable, as it matches the stellar growth registered by Germany. But the IMF reports warns us that in order to achieve strong and sustainable growth in the medium term, policymakers need to adopt a strategic approach that includes growth coupled with ambitious fiscal consolidation and continued progress in establishing high-value added export activities.

In our open economy, it is no secret that more effort is needed next year to protect financial stability in the banking sector and safeguard against systemic and fiscal risks. As can be expected, following trends in changing technology, the need to move to a human resource-efficient economy and the continuing rapid development of the Broadchain and Fintech based entities will better equip us to penetrate niches in the global markets.

All this is a do or die scenario. Naturally we need to ensure our growing firms have easy access to finance, world class innovation and science and research through university graduates, coupled with a superior digital infrastructure. It is a sad fact that banks are becoming more risk averse and, due to gold-plating the AML rules, they are doubly cautious of supporting new business, even though their liquidity ratios continue to increase. Could this be because of what was noted in the IMF report regarding their exposure to real estate lending to mega developments – exposure that cost one bank an impediment charge of €26million in 2016.

In conclusion, we must be vigilant and face 2018 with renewed vigour and greater determination to surmount future challenges. Political bickering and extreme partisan attitudes must calm down – possibly by each side becoming magnanimous and burying the hatchet at least to combat the challenges of competition. We need to unite and pull on the same rope in order to safeguard jobs and the well-being of our workers.

A merry Christmas to everyone.