MALTA - ECONOMY

mportant imports are machinery, fuel, and other products vital to the tourist industry, such as transportation equipment, live animals, food, tobacco, and chemicals. Exports also include chemicals and food. The European Community accounts for slightly more than three-quarters of foreign trade and most foreign investment.

The strengths of the Economy of Malta are its limestone, a favourable geographic location, and a productive labour force. Malta produces only about 20% of its food needs, has limited freshwater supplies, and has no domestic energy sources. The economy is dependent on foreign trade, manufacturing (especially electronics), tourism and financial services. In 2003, over 1.2 million tourists visited the island. Per capita GDP of $23,200 places Malta just above the middle of the list of European Union (EU) countries in terms of affluence. The island has joined the EU in 2004 despite having been divided politically over the question earlier. A sizable budget deficit was a key concern, but recent initiatives by the government have changed this situation dramatically enough for the country to be admitted into the euro zone as of 1 January 2008.

Possessing few indigenous raw materials and a very small domestic market, Malta based its economic development on the promotion of tourism and labour-intensive exports, though reliance on services and capital-intensive exports has been increasing dramatically for many years. Since the mid-1980s, expansion in these activities has been the principal engine for strong growth in the Maltese economy. Investment in infrastructure since 1987 has stimulated an upswing in Malta’s tourism economic fortunes.

Tourist arrivals and foreign exchange earnings derived from tourism have steadily increased since the 1987 watershed. Following the September 11, 2001 Terrorist Attack, the tourist industry did suffer some temporary setbacks.

With the help of a favourable international economic climate, the availability of domestic resources, and industrial policies that support foreign export-oriented investment, the economy has been able to sustain a period of rapid growth. During the 1990s, Malta’s economic growth has generally continued this brisk pace. Both domestic demand (mainly consumption) boosted by large increases in government spending, and exports of goods and services contributed to this favourable performance.

Buoyed by continued rapid growth, the economy has maintained a relatively low rate of unemployment. Labour market pressures have increased as skilled labour shortages have become more widespread, despite illegal immigration, and real earnings growth has accelerated.

Growing public and private sector demand for credit has led - in the context of interest rate controls - to credit rationing to the private sector and the introduction of noninterest charges by banks. Despite these pressures, consumer price inflation has remained low (2.2% according to the Central Bank of Malta 2nd Quarterly Report in 2007), reflecting the impact of a fixed exchange rate policy (100% hard peg to the euro, in preparation for currency changeover) and lingering price controls

The Maltese Government has pursued a policy of gradual economic liberalization and privatisation, taking some steps to shift the emphasis in trade and financial policies from reliance on direct government intervention and control to policy regimes that allow a greater role for market mechanisms. While change has been very substantial, by international standards, the economy remains fairly regulated and continues to be hampered by some longstanding structural weaknesses.

There is a strong manufacturing base for high value-added products like electronics and pharmaceuticals, and the manufacturing sector has more than 250 foreign-owned, export-oriented enterprises. Tourism generates 35% of GDP. Film production is another growing industry (approx. 1,400,000 euro between 1997 and 2002), despite stiff competition from other film locations in Eastern Europe and North Africa, with the Malta Film Commission providing support services to foreign film companies for the production of feature cinema (Gladiator, Troy, Munich and Count of Montecristo, amongst others, were shot in Malta over the last few years), commercials and television series.

In 2000 the economy grew by 7% in nominal terms and 4.3% in real terms. Unemployment was down to 4.4%, its lowest level in 3 years. Many formerly state-owned companies are being privatized - and the market liberalized.

Fiscal policy has been for some years directed toward bringing down the budget deficit after public debt grew from 24% of GDP in 1990 to 56% in 1999. By 2007, the deficit-to-GDP ratio is comfortably below 3%, as required for euro zone membership.

Malta’s economy is 66 percent free, according to 2008 assessment, which makes it the world’s 47th freest economy. Its overall score is 0.1 percentage point lower than last year, reflecting worsened scores in three of the 10 economic freedoms. Malta is ranked 24th out of 41 countries in the European region, and its overall score is slightly lower than the regional average.

Malta scores highly in property rights, trade freedom, monetary freedom, business freedom, and financial freedom. The judiciary is independent and not politically influenced. In accordance with European Union standards, the average tariff rate is low, although Malta’s trade freedom score is hurt by the standard EU subsidies of agricultural and other goods. All aspects of business formation are relatively efficient and straightforward, providing a flexible commercial environment. The financial market is small but sound and open to foreign competition.

Fiscal freedom, government size, and labour freedom are relatively weak. Total government expenditures remain high, representing nearly half of GDP. The labour market is inflexible, with rigid employment regulations that hamper employment opportunities. Foreign investment is deterred somewhat by government scrutiny, as decisions on foreign capital are made individually to judge the likely impact on domestic businesses.

Malta’s GDP growth this year will be slower than in 2007 but its economy will grow at a faster pace than the euro area average, according to the European Commission’s assessment of the future performance of the Maltese economy.

According to the EU executive’s ring economic forecasts published yesterday in Brussels, Malta’s economy is expected to slow down to 2.6 per cent this year and 2.5 per cent in 2009 after reaching a GDP growth of 3.8 per cent 1n 2007. Malta’s forecasts are in line with the current trends in the EU which this year is expected to register moderate economic results.

The Commission has revised its forecast for Malta downward. In its autumn economic forecasts issued last year it had projected a GDP increase of 2.8 per cent in 2008 and 2.9 per cent in 2009.