Making his first speech as Governor of the Central Bank to the IFS annual dinner, Governor Mario Vella spoke about the challenges that lie ahead.

He said: The Central Bank of Malta’s prime responsibility is to ensure price stability.  From this perspective the challenge is to ensure that the Maltese economy continues to expand at a sustainable pace, without overheating.

It is vital that we avoid the formation of asset price bubbles.  The recent global financial crisis has shown the huge costs that can arise when asset prices depart from their fundamental values, eventually jeopardising the financial system and the economy as a whole.

At the Central Bank we are keeping a very watchful eye on the price developments in the property market.  Earlier this year we have published work by our Economic Research Department exploring property price misalignment with fundamentals based on an index of 5 separate indicators.  It shows that at the end of 2015 house prices were still below their equilibrium fundamental value but nevertheless price trends in this regard will continue to be closely monitored.

There are, however, other asset classes which need close observation to avoid formation of asset bubbles.  In the current low interest rate environment investors’ search for yield may stimulate excessive risk-taking behaviour.  More investors’ education is needed to ensure that there is better appreciation of the risks of unrated corporate debt, especially where markets are somewhat thin.

At the same time, we have to recognise that, as members of the euro area, the monetary policy tool is no longer available at the national level.  This means that action needs to be taken in those policy domains where we do enjoy some freedom of manoeuvre, that is, fiscal policy, macro-prudential policy and structural reforms.

Then he made the following policy recommendations: On the fiscal front, the recent developments I have just highlighted are encouraging. I would stress the importance of meeting our fiscal targets in terms of structural adjustment and reduction in the debt ratio.

Apart from compliance with domestic and European fiscal rules, it is important for Malta to build up sufficient fiscal buffers to allow us to counter eventual adverse economic shocks with fiscal policy if needed. In this regard, judicious control of government expenditure is essential, bearing in mind that some important government revenue streams may be past their peak and need to be replaced through new initiatives.

Enhancing labour productivity is critical - forgive me for possibly boring you by repeating myself but I am sure you will agree with me that better bored than sorry. This requires ongoing investment in our labour force, in our people.

In terms of the general business environment, it is important to ensure that Malta remains an attractive location for investment, especially foreign direct investment.  We need to keep costs competitive, not only labour costs but also the costs of ancillary services including energy, transport and finance, as well as transaction costs generally.

Permit me, at this point, to stress the importance of containing the asymmetries of knowledge facing investors, especially foreign direct investors. The Central Bank is doing its utmost and intends to boost its efforts and the quality of these efforts by providing top quality and highly reliable public domain quantitative and qualitative information. Our research capability is one of our top priorities. This enhancement of our capability to produce reliable knowledge will benefit all discerning stakeholders including the policy maker (who we are statutorily committed to advise) and the potential investor (who abhors any vacuum of knowledge concerning the target location).

Promoting a healthy business environment also requires action to reduce excessive bureaucracy, to increase the efficiency of our judicial system and to ensure that our legal and regulatory frameworks remain appropriately flexible.

At the Central Bank of Malta we have taken initiatives to help the business environment by launching the Credit Register and by promoting the setting up of the Development Bank to give better access to credit for SME’s and to infrastructure investments on the Public Private Partnership (PPP) model.

We are also piloting changes to pre-insolvency procedures in an effort to curb unnecessary liquidations and save businesses that deserve a second chance through financial restructuring.  We are also leading efforts to amend legislation to achieve more efficient contract enforcement procedures to address the long duration of NPL’s on bank balance sheets. These initiatives will help us climb the admittedly steep ladder of international rankings measuring business efficiency.

The great efforts of other public sector organisations, led by the Office of the Principal Permanent Secretary and Malta Enterprise, to radically streamline business enabling procedures across the board, are critical if we are to succeed to radically upgrade the business environment. I insist on the word “radical” because only a radical upgrade (an upgrade from the very roots of the system) will make a difference.

We need to enhance competition. It is essential to ensure that consumers and businesses can acquire the goods and services they need at fair prices.  Within the banking system, we believe that there remains scope for payment services charges to respond to more competition and for further pass-through of the current low interest rates to customers, although it is encouraging that we have seen reductions in recent months.

Fast economic growth does not come without some pain and costs.  Infrastructure development has not kept up the pace and translates into practical problems. There are no easy solutions to such problems.  Building infrastructure takes time and adopting urban development policies is inevitably complex, especially in a very small island where every space is somebody’s back yard.

At an international level, as an extremely open economy, we need to take a resolute stand against policies that close borders to trade and to international flows.   As a small open economy we need to defend open borders and globalisation.

However we need to acknowledge that the benefits of globalisation have been very unevenly distributed, even in the most developed economies where many wage earners have not seen a real increase in wages for decades and have lost their jobs and security.  This is what populism feeds on whilst certainly not offering solutions intended to ensure social justice.

Economic growth is only a means to the ultimate end of providing a higher standard of living and confidence about the future for all citizens.  But it is an absolutely necessary means.