Economic Survey 1995

During 1995, the Maltese economy registered a substantial rate of economic growth, full employment conditions and a relatively stable price level. This was the direct result of the measures being implemented by government to modernise the domestic economy and to sustain the rhythm of economic activity that has been the hallmark of the past years. An important development was the introduction of VAT which continued to overhaul Malta's fiscal regime and established an appropriate relationship between the collection of taxes and the level of economic activity. During the year, Malta continued to participate actively in a structured dialogue with the EU across various spheres of economic activity, thus facilitating the transition towards full membership of the EU.

The Maltese economy sustained the expansionary momentum it gained during the past years. In fact, during 1995, Gross Domestic Product at factor cost increased by 9.1 per cent to exceed Lm933 million. This represents an estimated rise of 5.6 per cent in real terms. Higher employment and property incomes as well as higher gross trading profits were the main sources which generated this economic growth. Such growth patterns are commendable, especially in the wake of the relatively weak economic performance registered by Malta's main trading partners.

The labour market conditions tightened further during the year under review. Although the labour supply increased by 5,245, the job creation capability of the economy increased at a faster pace, thereby pushing down the unemployment rate to 3.6 per cent by the end of 1995. A similar expansion in the gainfully occupied population is explained partly by the introduction of VAT and partly by increased economic activity at a real level. An important role was also played by the Employment and Training Corporation in consolidating further the skills of the domestic manpower.

Output by the manufacturing industry expanded by 10.5 per cent during the year under review. Most encouraging is the fact that the larger part of the net increase in manufacturing output was generated by expansions in the export related activities. In fact, the share of exports in total manufacturing output increased to 75.7 per cent during 1995. The Survey underlines the substantial restructuring efforts which are reshaping the manufacturing industry. In fact, while lower value-added activities are scaled down in response to fierce price competition waged by cheap-labour economies, output levels of higher-skilled sectors such as machinery, paper and printing, leather and rubber and chemicals are on the increase.

Various policy measures were adopted by government to support the agricultural and fisheries sector, which continue to maintain its share in GDP. On the other hand, active steps were taken toward the restructuring of the ship repair and shipbuilding sector in an endeavour to achieve economic and financial viability.

Service activities have contributed significantly during the past years towards the generation of output, employment and economic growth. During the period under review, Malta attracted over one million tourist, marginally below the all-time-high achieved in 1994. Efforts to diversify Malta's tourist source markets and to alter the seasonal pattern of tourist arrivals continued to yield overall positive results. A more even spread of tourist arrivals does not only lead to a better utilisation of the country's infrastructure facilities but it can also serve to boost tourist per capita earnings.

Interesting developments were also registered in other services activities, notably in transhipment and financial services. Indeed, Malta Freeport continued to operate at high capacity levels whilst the Malta Financial Services Centre issued licences for a number of investment services and collective investment schemes. The gradual development of such sectors is providing new and challenging employment opportunities and reduce further the dependence on low-skilled, low-compensation jobs.

In spite of the buoyant economic conditions prevailing during 1995, it is positive to note that the inflation rate in Malta as measured by the Retail Price Index was below 4.0 per cent. This represents a decline in the inflation rate over that registered during the preceding two years.

The increased level of economic activity had a direct bearing on Malta's external payments position. In fact, while total exports increased by Lm79.7 million, total imports increased by Lm142.5 million. In anticipation of lower prices on a wide range of goods following the introduction of VAT, consumers postponed purchases during 1994 whilst business re-stocking was experienced in 1995. As a result, during 1995, imported consumer goods registered an exceptional increase of Lm61.7 million over the preceding year. The EU continued to remain Malta's main trading partner.

Both government ordinary revenue and recurrent expenditure increased during 1995. The increase in government ordinary revenue to Lm487.3 million was largely underpinned by revenue from customs and excise, income tax, licences, taxes and fines, VAT and social security. On the other hand, recurrent and capital expenditure, excluding debt servicing payments, increased to Lm498.1 million. Recurrent expenditure increased by Lm39.2 million mainly as a result of additional disbursement of arrears to cover increases in salaries payable to public sector employees under the public service reform. Capital expenditure also increased by Lm8.0 million. The shortfall of revenue over expenditure was mainly financed through loans raised locally by government.

Higher employment and disposable income levels were also reflected in quasi-money (savings and time deposits) which expanded by Lm147.9 million to Lm1.25 billion by the end of 1995. Moreover, the increase in total domestic credit, which expanded by Lm258.9 million to Lm1.23 billion, is also indicative of the buoyancy of the domestic economy. Developments in the international foreign exchange market show that during 1995 the Maltese lira was on average higher against the US dollar, Pound Sterling and the Italian lira. Conversely, it weakened against the Deutsche mark and the Japanese Yen.

In the context of these developments, the prospects for the domestic economy remain favourable as the economy is expected to sustain a brisk expansionary pace, sustained by an increase in both domestic demand and the demand for Maltese exports of goods and services.