According to the regular report published by the European Commission yesterday, Malta is still behind in its efforts to control government debt and deficit, price stability (inflation) and its exchange rate criterion although the country’s rating did not change from “Member state with a Derogation”.
In fact, Malta only fulfils the Long-Term Interest Rate criterion and does not fulfil the other four, at least by the end of 2005. Intriguingly, although the Commission said that the inflation rate is expected to edge closer to the reference value of 2.8 per cent in the coming months, it still does not fulfil the price stability criterion.
Meanwhile, in a press briefing called yesterday, parliamentary secretary Tonio Fenech pointed out that the figures quoted did not feature any data from this year. He said the figures all related to 2005 and that significant improvements had been made this year. He said that this year’s performance was better than 2005 and that Malta was more or less on track to reach convergence.
Malta is at present the subject of a Council decision on the existence of an excessive deficit (Council decision of 5 July 2004).
The Council recommended Malta to take action in a medium-term framework in order to bring the deficit below three per cent of GDP by 2006 in a credible and sustainable manner.
The general government deficit was 3.2 per cent of GDP in 2005 and government debt decreased slightly to 74.2 per cent of GDP.
Malta does not fulfil the criterion on the government budgetary position. The Maltese lira has participated in ERM II since 2 May 2005, i.e. for 19 months at the time of adoption of this report. Before entering ERM II, the lira was pegged to a euro-dollar-sterling basket. In the period of the assessment not covered by ERM II participation, the lira stayed close to the future central rate. Upon ERM II entry, the Maltese authorities unilaterally committed to maintain the lira at the central rate.
During ERM II participation, the lira has remained stable vis-à-vis the central rate and has not experienced severe tensions. Additional indicators, such as developments in short-term interest rates and foreign exchange reserves, do not point to pressures on the exchange rate. Malta does not fulfil the exchange rate criterion.
The average long-term interest rate in Malta in the year up to October 2006 was 4.3 per cent, below the reference value of 6.2 per cent. Average long-term interest rates in Malta have been below the reference value since EU accession.
Long-term yield spreads vis-à-vis the euro area have fluctuated at relatively moderate levels over the past years, hovering around 50 basis points in autumn 2006. Contained yield spreads testify to limited residual country risk priced in by markets. Malta fulfils the criterion on the convergence of long-term interest rates.
The Maltese economy is highly integrated with the EU.
In particular, trade and FDI relations with other member states are extensive and Malta’s financial system is substantially inter-linked with the financial systems of other countries, both in and outside the EU, via the establishment of financial intermediaries and the provision of cross-border services.
Malta’s current account balance has been rather volatile over the past years, reflecting the small size and narrow sectoral base of the economy. The external position shows large disparities in net trade in goods and services, with a high deficit in goods trade being partly compensated for by a substantial services surplus.
The current account deficit has increased significantly in recent years, reaching a level of 10.6 per cent of GDP in 2005.
This increase reflected difficult market conditions in the dominant electronics and tourism sectors and, in 2005, a strong increase in the oil bill. On the financing side, net FDI inflows have been substantial, albeit volatile.
The external position implies substantial financing needs in the medium term.