The current state of the Maltese economy The prospects for the creation of new economic activities opened up by EU membership come at an opportune moment. For while Malta’s growth rate in 2004, estimated at around 1.5%, registered a marked turnaround since 2003, it was low compared to the rates achieved by other new EU members whose level of development is comparable to Malta’s. This relatively weak performance, moreover, did not suddenly materialise last year, but has now been persisting since 2001. A relatively sluggish pace of export activity underpinned the low growth rate in 2004, while imports rose at a faster pace, partly in response to the removal of tariffs on certain products. This wider trade gap led to a current account deficit of over 10% of GDP, a development that was to a certain extent anticipated. For, while it is possible to absorb larger volumes of imports at short notice, penetrating new export markets is a medium-term project. It is nevertheless imperative that the country manages to exploit the new market openings, because the current account deficit experienced in 2004 is not sustainable. The economy’s relatively subdued performance last year can also be attributed to the short-term effects of the process of fiscal consolidation aimed at narrowing the budget deficit. Malta is still one of the EU Member States with the highest levels of general government deficit and debt expressed as percentages of GDP.
The free flow of goods in import-competing sectors such as agriculture implies unrestricted access for Maltese products to EU markets, while allowing reciprocal access to imported products. This represents both an opportunity and a threat, however, so that it should be met with appropriate restructuring of the sector so as to enable it to face foreign competition. In this regard Malta can obtain considerable market and development assistance from the EU for the agricultural and fishing sector, including for processing activities. As an EU Member State, Malta can also benefit from programmes aimed at promoting industrial restructuring, particularly with regards to SMEs. The freedom of movement of capital which Malta is experiencing as a Member State of the EU has significant implications. For one, it signals to investors that Malta is a developed market economy with a well regulated financial system where financial resources can find profitable employment. This contributes to the development of the sector, including of its intermediation function of transforming savings into productive investment. It also encourages the inflow of capital from abroad. For these same reasons, however, international investors will maintain a close scrutiny of developments in the local economy, and move capital according to their evaluation of prospective risks and returns. Freedom of movement of capital thus implies the need for more vigilance by the Central Bank of Malta not only to protect the exchange rate but also to preserve financial stability.