The International Monetary Fund has, for the second year running, urged the government to scrap the cost of living adjustment (COLA) granted to workers through yearly budgetary provisions. In its place, the IMF has recommended the institution of “productivity-linked wage increases at enterprise level”.

The country’s larger employers who, due to inflation levels, could be looking at record COLA payments next year in line with the mechanism used to calculate the increment, will certainly welcome the advice.

Unions, on the other hand, will recoil at the mere suggestion of the government scrapping COLA once and for all, and instead leaving decisions on the increment in the hands of the employers themselves.

The previous IMF mission to Malta, in 2008, had also recommended doing away with the COLA, as well as dropping the controversial fuel surcharge and, in its stead, to introduce a rule-based mechanism for determining the fuel surcharge so as to “avoid the need for discretionary government decisions, which have often been protracted and unnecessarily controversial”.

While the latter bit of advice had been heeded later in the year, the former has not been acted upon.

The recommendation comes just as the unions and employers’ bodies start going head to head, as per the annual pre-budget custom, over the level of the controversial wage increment to be granted, or not granted, in Budget 2010.

Along such lines, the IMF recommended sealing the so far elusive social pact, noting that, “A social pact negotiated between the government and the social partners could offer a useful vehicle to forge consensus on policies.

“In a more competitive post-crisis world, it will take a concerted effort from all stakeholders to preserve cost competitiveness within the currency union and generate the required productivity gains to raise living standards.”

In the 2009 IMF mission’s concluding statement drawn up at the end of June and released by the IMF this week, the mission noted, “As inflation remains high, the mandatory inflation indexation of wages (COLA) risks hampering necessary cost adjustments, especially in manufacturing industries hit by the global downturn, and in low-skilled employment intensive sectors.

“The mission advises introducing productivity-linked wage increases at enterprise level instead.”

Along such lines, the IMF observes that the upcoming negotiations on the public sector collective agreement should set a “conservative benchmark” for the private sector. In the same vein, it advised that regular updates from the government on economic growth outlooks would provide businesses with more accurate expectations ahead of wage negotiations, especially given the current fluid economic environment.

The issue of the COLA is a tightrope between the toll of inflation on workers’ wages and wider competitiveness issues, where the IMF found that “wage developments will also need to play their role in strengthening Malta’s competitive position”.

Nor was the issue of the country’s excessive inflation missed by the IMF, which recommended a more proactive stance from the competition authority in tackling monopolies.

“The causes of persistent inflation have to be rapidly tackled,” the IMF team concluded following its visit to Malta.

“Inflation currently stands at four percent, substantially higher than in the rest of the euro area. While the lagged pass-through of oil prices to domestic energy prices accounts for part of the differential, food price inflation has remained high.

“The competition authority needs to adopt a more proactive stance, expeditiously addressing any monopolistic behaviour in the wholesale and retail markets, while the regulated segments of the markets should be liberalized. Adequate capacities and institutional independence should be granted to the competition authority.”

In terms of reducing state involvement in the economy, the IMF advised the current momentum should be maintained, and welcomed the introduction, as it had recommended last year, of a rule-based utility surcharge mechanism.

It adds, “The introduction of a rule-based mechanism to determine electricity and water tariffs is welcome; the reform needs to proceed to ensure full cost recovery for the state-owned utility enterprises while providing consumers with transparency and predictability in tariff adjustments.”

The team also noted how the shipyard privatisation and the unbundling of Enemalta’s gas and petroleum divisions are underway, and urged the government, market conditions permitting, to continue its search for a strategic partner for Bank of Valletta.

The IMF also sounded alarm bells over the government’s scheme for bailing out a number of manufacturing concerns feeling the brunt of the global recession and the lenient stance it has adopted in terms of late tax payment.

“Measures taken to support enterprises raise some concerns,” the IMF found. “Assistance is provided based on specific criteria related to investment and training plans. While this setting has allowed for rapid and targeted support, such measures could become entrenched and costly if the crisis continues. In addition, in some cases, they may only postpone required restructuring. Therefore, the mission recommends gradually winding down this type of support as the implementation of infrastructure projects gather pace.

“More recently, the authorities announced that they would tolerate late tax payments from companies with cash flow difficulties; they also invited hotels and banks to work on debt restructuring. Even if not widespread, these steps risk undermining tax compliance and contract enforcement. For these taxes in arrears, expeditious negotiation of a repayment schedule will be critical.”

The IMF also recommended informing the government’s own fiscal projections with independent forecasts, possibly by expanding the mandate of the National Audit Office.

Over and above that, the team advised the authorities on the need to strengthen their control capacity during the execution of the budget.

“A stronger involvement of Parliament, by having medium-term targets committed to in the annual budget act and by strengthening accountability, would also increase the credibility of the government’s consolidation plans.”

The IMF also poured cold water on the feasibility of the government meeting the European Commission’s 2010 deadline to correct its excessive deficit by finding that a recovery to below the three per cent of gross domestic product threshold would only be able to be met by Malta by 2013.

“The sustainability of the current fiscal loosening hinges on a well-articulated medium-term consolidation strategy,” the IMF said.

“In its absence, public debt and financing costs risk escalating. The government is committed to consolidation and has started taking significant steps with respect to the shipyards and the utility subsidies, two areas of traditionally large public outlays. However, these measures alone would fail to achieve the necessary consolidation: the mission estimates that the headline deficit would fall below the three per cent mark only in 2013, with public debt reaching 70 per cent of GDP.

“To secure a quick reversal in the public debt trend, the mission recommends a structural consolidation effort of at least two-thirds of a percentage point of GDP per year over 2011–2014 — double the current scenario — backed by clearly identified measures.”