The smallest EU member state, Malta has shown itself to be one of the Union’s most vibrant communities: a cosmopolitan society, an economy with a remarkable degree of diversification in spite of its small size and a social welfare safety net that promotes social inclusion.
Inevitably, in a small economy, the market is imperfect. Asymmetric information, concentrated market power, public goods and externalities are types of market failures that can be manifested in a small economy. In Malta, as elsewhere, the financing of infrastructure projects and access by small- and medium-sized enterprises to sources of finance have been two areas of occasional market failure for some time. Both considerations were drivers for the setting up of the Malta Development Bank (MDB).
Despite the authorities’ admirable reactions, Malta has suffered the economic fallout of the COVID-19 pandemic. For the first time in the past 60 years, the airport is seeing no incoming tourists. Many operators in the retail sector are still closed down, leisure and entertainment services are not operating and personal services are mostly at a standstill. In response, government has been rolling out a coordinate package of support measures to seek to address the raft of national and international challenges and to mitigate the impact of the pandemic consequences.
The virtual shutdown of key components of the economy has resulted in a sudden total halt in revenues for most businesses, disrupting their cashflow and threatening their survival. SMEs are typically the hardest hit in such a critical situation because of the much greater reluctance of banks to provide new credit to such enterprises due to their higher perceived risks.
Having access to liquidity for working capital requirements is critical for the survival of businesses. It is therefore vital to safeguard business continuity by ensuring that bank credit keeps flowing to businesses. As Malta’s first and only promotional bank, the MDB is an effective State instrument that is playing a significant role, in conjunction with support measures by other players, to help government achieve the massive scale of response currently required to mitigate the potentially devastating repercussions of the COVID-19 outbreak.
Rolling back the economic collapse requires extraordinary measures. The MDB has been entrusted by government to introduce support schemes aimed at enhancing firms’ access to bank credit and increasing the affordability of credit. As the implementing body of the COVID-19 Guarantee scheme, the MDB achieves leverage on a government guarantee of €350m by mobilising commercial bank liquidity into the flow of credit to the real economy. Through this scheme, the MDB is guaranteeing 90% of each loan extended by accredited banks to meet the working capital requirements of businesses whose liquidity has been acutely impacted by the COVID-19 outbreak. Commercial banks are thus being provided with very substantial credit risk reduction and capital relief enabling the creation of a portfolio of up to €777.8m in new working capital loans at discounted interest rates while being less stringent on collateral requirements. This will make credit for working capital much more easily accessible for firms during such difficult times.
From a cash flow perspective, businesses will also benefit from a moratorium of six months on both the interest and capital repayments. The moratorium can be extended up to one year on a case-by-case basis. The MDB has also been entrusted by government to implement the interest rate subsidy scheme through which businesses will benefit from an interest rate subsidy of up to 2.5% that goes directly to mitigate very significantly the headline cost of debt under the scheme, reducing the net interest rate borne by borrowers to as low as 0.1%.
After the pandemic has subsided, it is only the restoration of employment and dynamic market activity that will take Malta back to its erstwhile vibrant economic momentum. The COVID-19 Guarantee scheme and the Interest Rate Subsidy scheme are two key instruments that the MDB is deploying to complement the array of other support measures being provided by government and other stakeholders in order to ensure that the national economy can tide over this crucial stage of the pandemic and revert back resiliently on the recovery path towards sustainable growth.
Prof. Josef Bonnici is chairman of Malta Development Bank