National reform programme 2008-2010 Malta - European Commission

The improvement in the current account during the first quarter of 2008 is mainly attributable
to the current transfers received as well as lower profits of foreign-owned companies
repatriated abroad which compensated for the deterioration in the trade and services
balances. In fact, the goods account was negatively affected by a fall in merchandise receipts
as well as an increase in expenditure on merchandise imports. Increased receipts from
tourists travelling to Malta contributed positively to the services account, however, such an
effect was more than offset by increased expenditure of Maltese travellers going abroad.
HICP inflation reached a low of 0.7% during 2007 marking a substantial decline from a level
of 2.6% registered during the previous year. The rate of HICP inflation has, however, started
to increase, partly reflecting the effect of international price pressures. In fact, the HICP
inflation rate during the month of August in 2008 stood at 3.7%.
The positive economic growth registered in recent years was reflected in a tightening of
labour market conditions. The employment rate increased by 0.9 percentage points from
54.8% in 2006 to 55.7 per cent during 2007. The employment rate stood at 54.7% in the first
quarter of 2008. There has been an increase in full time employment, while part-time
employment has also continued to increase. While the employment rate has improved it
remains significantly below the EU27 average which stood at 65.4% in 2007 and 65.5% for
the first quarter of 2008. The unemployment rate declined by 0.8 percentage points reaching
6.5% in 2007. The rate of unemployment in Malta continued to decrease in the second
quarter of 2008 reaching 6.0% thus continuing to remain below the EU27 average.
With respect to international competitiveness, growth in nominal unit labour costs has been
relatively contained since 2003, reaching levels close to zero during 2004 and 2005 before
somewhat increasing again in 2006. The growth in nominal unit labour cost has, however,
decreased again in 2007 and data for the first two quarters of 2008 shows a negative growth
rate of 0.1%. Since 2003, the real unit labour cost growth rate for both Malta and the EU27
was negative, with a relatively stronger average annual decline for Malta (-2.0%) compared to
the EU27 (-0.9%)Such trends contribute positively towards the competitiveness of the
domestic economy.
The budgetary consolidation that commenced in 2004 has continued in 2007 with the general
Government deficit declining further to 1.8% of GDP. The general Government debt-to-GDP
ratio has also followed a downward trend, decreasing by 1.6 percentage points from 63.8% in
2006 to 62.2 per cent in 2007.
Macroeconomic Policy
Issues and Opportunities
Ensuring a stable and sound macroeconomic framework, which is conducive to price stability,
is a necessary precondition to achieve sustainable economic growth and employment
creation. In the run up to the adoption of the Euro, Malta’s macroeconomic environment has
been strengthened. In particular, inflation has been relatively low whilst significant progress
has been made in the consolidation of public finances. Participation in the Euro Area is
conducive to further strengthen the macroeconomic framework. In particular, adoption of the
euro has removed the exchange rate risk associated with the Maltese lira. Furthermore, it is
widely acknowledged that the framework governing the euro makes it a stable currency with
low inflation and low interest rates, and encourages sound public finances. Moreover, the
adoption of a single currency increases price transparency, eliminates currency exchange
costs, facilitates international trade and improves the integration of financial markets.
The current international economic scenario presents downside risks to the growth outlook for
the Maltese economy. These primarily relate to the financial turmoil, the slowing down of
world economic growth, particularly in Malta’s main trading partners, inflationary pressures
stemming from the relatively high international oil and commodity prices, as well as the
appreciation of the Euro against the US dollar and the Pound sterling.
Malta National Reform Programme 2008-2010 - 50 -