Editorial | Economy performs well but challenges await

Simonds Farsons Cisk plc announced a pre-tax profit of €15.3 million for the financial year ending on 31 January 2023. This represents a 25% increase from the previous year.

The Group’s turnover hit €118.2 million, an increase of almost 29% with the company reporting improved revenue across all areas of operation. The results will see shareholders receive a final dividend of 15c5 per share.

The positive results registered by Farsons are not an isolated case. In fact, they are symptomatic of an economy that has not only recovered from the doldrums of the COVID pandemic but is performing above par.

The European Commission’s latest Spring Forecast noted that Malta’s GDP last year topped 6.9% on the back of higher domestic demand and tourism which rebounded quickly and above earlier expectations.

For 2023, the Commission is forecasting a more moderate 3.9% growth in Malta as higher inflation applies the brakes on consumption. Nonetheless, Malta will still register the second highest GDP growth in the EU this year. Ireland is expected to top the list with GDP growth of 5.5%.

The Maltese labour force is set to continue growing at a robust pace this year and next as the country continues to attract foreign workers to fill labour and skills shortages.

The latest tourism statistics for the first quarter of 2023 represent a record of arrivals for the period, surpassing even the pre-pandemic numbers.

The headline figure of concern remains the deficit. Last year, Malta recorded one of the highest deficits in the EU at 5.8% as a result of government subsidies to keep energy and fuel prices unchanged.

With energy support expected to remain in place, the deficit is projected to decrease gradually as a ratio of GDP because of strong economic performance.

The European Commission is forecasting that the deficit will moderate to 5.1% in 2023 and decrease to 4.5% in 2024.

The high deficit will result in higher debt but nonetheless, Malta’s debt-to-GDP ratio will still remain below the 60% target over the next couple of years.

Debt is expected to increase to 54.8% in 2023 and 56.1% in 2024, leaving Malta in a much better position than most EU countries despite the increase,

The overall picture of the economy is positive and encouraging but it also has to be viewed within the context of continued government support to cushion the impact of energy and fuel inflation.

Economic growth to the levels Malta has witnessed over the past two years and what it expects to register this year and next has been partially possible because the country is insulated from the impact of rising energy prices.

This situation places more weight on government’s shoulders to have a carefully studied plan to gradually phase out the generous subsidies without creating shocks to the economy.

Similarly, a studied approach is needed when introducing the new minimum company tax regime mandated by the EU.

Malta will have to overhaul its company tax system in the next two years to introduce a minimum effective tax rate of 15%, effectively losing its low-tax jurisdiction status.

The new global rules will apply to companies with an annual group turnover of €750 million.

The high turnover threshold means that several important companies employing hundreds in manufacturing and gaming will be impacted.

The saving grace is that other EU jurisdictions will also have a minimum threshold thus making it pointless for these companies to close shop and move to other EU countries. But the new system will effectively remove one of Malta’s bargaining chips when trying to attract foreign investment, making it incumbent on government to introduce other credits and incentives that make it worthwhile for companies to consider Malta.

The economic picture looks good but the challenges ahead also call for caution.