The Malta Federation of Industry said it strongly believed that it must raise its concern over the steadily increasing prices of cereals and any plan for a cost of living increase adjustment in advance of next year.

Based on what is being reported by a cross-section of its members including large, medium and small businesses, the Federation stresses that it would be a gross mistake to interfere with an agreed mechanism (COLA) in a way which would be detrimental to the cost of manufacturing. In the past, when the COLA adjustment was high, industry was made to bear the cost, and it would be unfair on business operators that when the adjustment is at the lower end, the mechanism is apparently being overlooked.

The federation wishes to clarify that most firms in the private sector pay the COLA adjustment in addition to increases agreed in their respective collective agreements. The Federation has long been arguing that the COLA adjustment should not apply to employees who already have an equivalent increase in the collective agreement. Furthermore, many companies have bound themselves to freeze their prices for the forthcoming introduction of the Euro and hence have no way of passing significant increases in costs to the consumer.

The federation appeals to the government not to consider any increase over-and-above COLA irrespective of whether this is paid in advance of next year. The FOI stresses that currently, the business community is facing a particularly sensitive period, undergoing restructuring, facing high energy costs, being burdened by the endless list of mandatory requirements stipulated by new regulations including waste collection and regulatory established levels of operations, whilst at the same time facing stiff competition from cheaper manufacturing bases abroad.

The fact that the agreed mechanism of COLA wage increases is not being linked to productivity improvements is already having great repercussions on the business community. Should an increase outside the agreed mechanism become mandatory, the implications would be amplified and would be detrimental to the companies, as well as the employees themselves in the medium term. It is noted that the proposed intervention is tantamount to introducing the principle of awarding cost of living increases on the basis of anticipated, rather than actual, inflation, a practice which had been discontinued in a a number of developed countries years ago due to its deleterious effects on competitiveness and its tendency to fuel inflationary pressures.

The Federation of Industry must highlight that the manufacturing industry in Malta employs around 23,000 persons. For every Lm1 increase in the COLA on a weekly basis, manufacturing costs of production would rise by around Lm1.3 million on an annual basis, implying a 0.8 per cent increase in wage costs and a 0.2 per cent increase in total manufacturing costs. This would therefore dent competitiveness and investment prospects. It is to be further noted that these effects are likely to hit different sub-sectors in different ways, being particularly onerous on those which are relatively more labour intensive and/or which operate on the basis of narrow margins of value added. These include, amongst others, the food and beverages, furniture and electronics sub-sectors.

At the same time, it is to be noted that the operating surplus of the manufacturing sector is at only eight per cent of total production costs. This is important in the context of the fact that imported inflation is also likely to directly impact upon costs of inputs sourced from overseas, at a time when competitive and other pressures restrict manoeuvrability in selling prices. Thus, the competitiveness of the manufacturing sector is already to be adversely affected directly by international developments, and the situation should not be worsened further through domestically-induced increases in wage costs.

While the federation recognises that an exceptional situation with regards to the prices of cereals and other commodities is being anticipated, it feels that there should be other policy instruments, primarily of a fiscal stabilisation nature, which are to be utilised in such cases. The Federation strongly opposes measures which tamper with long-established arrangements in social and industrial relations, as this would dent the credibility of such arrangements in the long run, to the detriment of business investment. Above all, it should be recognised that adverse external shocks should be met by measures which enhance the economy’s ability to withstand their effects through an increased capability to generate output and incomes, and definitely not through actions which would have a negative impact on business competitiveness.

The federation strongly recommended that, in future, such matters are thoroughly discussed at the Malta Council for Economic and Social Development (MCESD) within the context of an appropriate technical preparation and debate.