Do you remember Prime Minister Robert Abela quoting the credit-rating agencies or international institutions about Malta’s economy? He’s like the head of an African country who boasts of his track record with the rubber stamp by intern analysts of big institutions. It’s mostly the low-end staff who does reports on developing economies as the most skilled are usually delegated to the more critical departments such as the credit market, big bans, and whatnot.
“Malta is going to have 100% economic growth according to Moody’s Analytics. This shows great confidence in our economy.”
Imagine the German Chancellor going to the World Economic Forum in Davos saying something of that sort, He doesn’t, because strong economies evoke strength and confidence. It’s only those who struggle that are desperate enough to boast about the rubber stamp given by credit-rating agencies, and of course, that’s why it should never be done. The effect of desperately quoting rating agencies all the bloody time is negative because it underlies insecurity and lack of confidence.
So, recently, the IMF issued a report on Malta and the Prime Minister didn’t quote it, because contrary to his great expectations, the report was negative. And that’s also another reason why you should never rely on institutions for your economic bragging – they will not necessarily play your tune. Although the credit-rating agencies may often be compliant with your wishes since they are paid by the client who issued the rating and is also the client who provides the data, the IMF and other institutions such as the European Central Bank will not necessarily bend to your will.
In addition, these kinds of reports are neither prophecies nor scientific reports – they are just forecasts and analyses based on data and events that are constantly changing. So, these reports can be wrong and they are not orthodox guides for economic policy either. Indeed, I actually disagree with the IMF’s report, even though I am in the pessimist camp about Malta.
The IMF report argues that Malta will probably have subdued economic growth whilst retaining its dependence on government expenditure for economic growth as its private consumption remains subdued. The debt to GDP ratio is to keep its upward trend. I agree that Malta’s economy will face serious challenges and we are already going through some, but it’s not for the reasons that the IMF is stating. The IMF argues that Malta’s economy is very dependent on the overall economic activity in Europe (true), but the IMF also forecast a recession in Europe and this is where I disagree. About Europe, I’m very optimistic given that the energy crisis has been averted, and inflation seems to have peaked, The US economy doesn’t look like it is going through a recession at all with a hot job market, and there’s nothing in the offing which can destabilising global supply-chains once again. The West has adapted to live without Russia as its economy transitions to its Venezuela 2.0 phase. Many fears about the international economy with Russia’s absence were naive, propagandistic, and held due to a strong ignorance of history: the Western economy has lived without Russia for many years and many times. This is nothing new. Neither was it new that rogue states would attempt to inflict disruption to Western economies via an energy war, yet this time round, the West fared much better. The Western economies are huge and very resilient – they don’t just go into recession unless serious structural shocks come into play.
Back to Malta, Malta’s economic problems are more owed to domestic reasons than international shocks, or rather how we have handled them. Remarkably, the IMF report explains an important feature of Malta’s gas purchases that the government hadn’t yet disclosed. Despite the fact the price of gas has crashed, the government is still paying for gas at a high premium to the extent that its energy subsidies are going to increase in 2023. This means that Miriam Dalli’s gas trade is probably even worse than I speculated. Read the exact wording from the IMF’s report:
The energy sector subsidies are expected to increase from 2½ percent of GDP in 2022 to 3½ percent of GDP in 2023, one of the highest in the EU. To accommodate the increased spending, the government plans to rationalize departmental budgets. If energy prices rise further and the shock continues for a prolonged period, this approach could place a strain on fiscal policy. In addition, by fully suppressing the price increase, this approach does not help incentivize energy conservation and investment in energy-efficient products (e.g., electric vehicles) and renewable energies (e.g., photovoltaics panels). Finally, the policy is regressive as high-income individuals (typically consuming more energy than low-income individuals) benefit more.
The authorities need to prepare an exit strategy from the current fixed price policy in anticipation of a prolonged energy crisis while protecting vulnerable groups. The objective of the exit strategy should be to contain fiscal costs and introduce market price mechanisms to enhance incentives for energy conservation and facilitate a transition to net zero emissions while protecting low-income households and, to a lesser extent, middle-income households. Various options should be explored, taking into account Malta’s institutional setting.
I’m ignoring the ridiculous part of the report where it mentions solar panels, and indeed, if you ignore the parts on green energy, the IMF is doing us the great service of disclosing very important information that the government is refusing to disclose. No wonder Miriam Dalli refuses to reply to my questions, while she hopes for gas prices to go up again so that she may be able to say she was right for purchasing gas at such exorbitant prices. And no wonder as well, that the Maltese government doesn’t want to disclose its energy deals in which Electrogas, the corrupt consortium is also involved. Most probably Miriam Dalli won’t have any chance of being proven right as gas prices are not expected to go up again and surely nowhere near last year’s exorbitant levels. Global gas supplies are actually higher than average.