The annual speech by the governor of the Central Bank to the Institute of Financial Services is always an eye-opener. Michael Bonello does not play on hype or try to sensationalise issues in the same manner that our politicians unfortunately have a habit of doing. He is clear, to the point and simply states what is white and what is black.

Mr Bonello highlighted three areas of concern in his speech on Friday – globalisation, the rising price of oil and changing demographics. Globalisation has been with us for a good number of years now and it represents both a threat to Malta’s economy as well as a new source of business opportunities. The main challenge, as Mr Bonello pointed out is to improve our capacity to exploit these opportunities. You cannot but get the impression that the Maltese have a tendency to sit back and wait for the proverbial “manna” to fall from the sky, or else expect the politician to do everything for them.

The second challenge is to counter the effects of higher fuel prices. Mr Bonello made it very clear that there was only one long-term remedy and that was to expand productivity and output, and therefore incomes. Further borrowing is out of the question.

“Since the expected rise during 2006 in Malta’s fuel bill will be equivalent to this year’s estimated expansion in nominal GDP, growth next year would have to come primarily from an acceleration in the pace of underlying economic activity,” the governor said.

This is going to be a major challenge for the government and for local industry. Increasing productivity levels will be a massive task for industry that has been burdened with increased costs over the past months. The increase in surcharge (although somewhat mitigated by an increase in the capping) and the cost of living adjustment of Lm2.25 will put added pressure on industry’s production levels. The budget presented last week includes a number of incentives and tax credits to aid investment however we believe that the government can still give a helping hand to improve competitiveness levels of Maltese industry. Why is industry always left to fend for itself?

That said, economic growth and social protection can only be achieved if there is flexibility in the product and labour markets. As the governor said, further investment in the technological base and in people is required. The government has announced initiatives in this regard but the link between industry and education is nearly non-existent.

The third challenge is a consequence of an ageing population, which has already produced an acceleration in pension expenditures this year. In 2000, the government had begun the process to look at reforms of the pensions system. Five years down the line, we are still in the same spot. We have lost count of the number of committees, reports, white papers and conferences that have “tried” to address the problem. But the fact remains that nothing tangible has been done since.

There must be no further delay in pension reform. What is the government waiting for? The time for consultation – five years should have been enough – is over, and the government, if it has the will and courage to do so, should start introducing some changes. Otherwise, the burden on the country will become an unsustainable burden for the productive sectors of the economy (which have enough problems already).

To make up for the increased dependency ratio associated with the ageing population, for example, the economy would have to grow by around one per cent per annum over the next 20 years, the governor said. With an growth rate of 1.1 per cent estimated next year, this will only be enough to address part of the ageing population problem.

Reducing the deficit has been a major task for the government. However, we agree with the governor that productivity levels remain low. Industry confidence, according to the Federation of Industry, was negative in September and less so in October, so the country does not have an industry brimming with confidence.

All three challenges are linked. Without productivity increase, we cannot cope with competition, we cannot have a decent economic growth and the ageing population will become an even greater burden on the country. What is being done?