IMF warning

The Malta Independent on Sunday IMF warning

I read the IMF update report on Malta and I am writing this commentary thereon before I heard the government and opposition reaction to it. But then they are all too predictable.

The IMF report couched in technical verbiage and subtle hidden messages is essentially a warning signal to the whole country.` I strongly advice that we listen carefully to the general message rather than just pick the bits which suit either the government or opposition and throw it in the face of the opposing party.

In simple terms the general message is:

Whilst good progress has been made in containing and reducing the public deficit this has come solely from the revenue side by increasing and enforcing taxation.` The expenditure side has been neglected.

Taxation increases and enforcement has probably reached their` limit of efficiency and further progress must now come from the expenditure side.

Expenditure economies must necessarily touch the public sector payroll expenditure, pension reform and aggressive privatisation programme.

Currency weights in the Maltese lira basket have lost touch with reality and should be adjusted to reflect non-primary sector trade patterns.

Loss of currency reserves by the monetary authorities was quite worrying during 2000 and the country needs to reverse this trend soon and cannot reduce domestic interest rates in line with international trend before foreign reserves are rebuilt.

The government should review its medium term financial strategy and include off-budget fiscal operations.

GDP growth prospects for current year are optimistic as the export sector, which underpinned the growth of 2000, will be effected by the international slowdown especially in the technology sector. Maltese exports and value added- manufacturing is particularly exposed to the micro-electronic branch of the technology sector and as tourism has lost its growth,` government optimism for GDP growth in 2001` is not underpinned by realistic expectations.

The government and opposition can choose to ignore the real significance of the IMF report and continue to play their political games.` But as a country we can ill-afford to do so. Now that we are past the half way mark of the current year we can form a strong opinion on the extent IMF warnings have assumed added or lesser` importance by the outcome of current performance.

Government recurrent expenditure remains anything but addressed. Government debt continues to grow at worrying speed.` Privatisation has stalled after the Mid-Med fiasco and the only one on track, the Public Lotto, seems heading for a similar obscure process excluding the public at large.

The Maltese lira remains unrealistically overvalued by the undue weight of the US Dollar in the Maltese lira basket.` Foreign official reserves are still falling and GDP growth is down to a mere 2%, mostly underpinned by wage increases awarded to government employees whilst GNP has downright contracted.

And whilst government deficit is in line with the medium term strategy this is meaningless for two reasons. GDP growth is not in line with the medium term financial strategy and the off-budget financing is becoming so significant that` the budget deficit does not tell the full story.

In fact this question of off-budget financing is becoming a bit of a charade. Probably to many readers` it is news that the Ministry of Finance apart from the budget account known as the Consolidated Fund has` another account called the Treasury Clearance Fund` (TCF). Government is supposed to use this account to fund temporary loans which are to be repaid within a short time and therefore will self adjust without the need to `dirty` the consolidated fund. Now if anybody thinks that transfers and loans to Malta Drydocks, Malta Shipbuilding and Freeport are temporary and these will be repaid anytime soon if ever, then such body is a real eternal optimist. Yet in 2000 this TCF made payments equivalent to 1.5% of the GDP which must be something like a cool Lm23 million.

And if one neutralizes the 1998 camouflage engineered by the incoming Minister of Finance by taking long outstanding payments from the TCF and putting them through the consolidated fund to inflate the budget deficit then` it is not so difficult to conclude that the reduction in the budget deficit is more apparent than real. The increased tax revenues which have swelled government revenue, drained our pockets, and stalled the economy have in their large majority financed increased expenditure without really addressing the deficit.

The IMF has given us the yellow card.` Hopefully we will never need to knock on IMF`s doors if we continue losing reserves at the current concerning rate.` Yet some people in authority prefer exaggerating violence spectres of the past rather than tackling the problems of the present.