SPEECH DELIVERED BY THE HON JOHN DALLI, MINISTER OF FINANCE, AT THE MALTA CHARTERED INSTITUTE OF BANKERS ANNUAL DINNER.

Corinthia San Gorg, St Julians

Mr President, Fellow Minister, Governor, Your Excellencies, Distinguished Guests, Ladies and Gentlemen,

It is indeed a pleasure for me to be invited to this annual event, which brings together so many senior representatives of the business and financial community in Malta besides esteemed members of the Diplomatic Corps. I congratulate you, Mr President, for the various initiatives that you and the Committee of the Malta Centre of the Chartered Institute of Bankers have taken over the years in organising such occasions, that encourage open discussion of financial and banking topics in a pleasant and social atmosphere. I also join the Governor of the Central Bank in paying tribute to the Institute for the significant contribution that it makes to banking education in Malta.

This dinner gives me the opportunity, as in years gone by, to express some views on key issues affecting our economy, particularly at a time when the Government is finalising its fiscal plans for the coming year. The Governor tonight provided an in-depth analysis of the vital role that financial stability plays in economic development. His remarks also provided a succinct yet comprehensive perspective of the primary issues that should be considered in developing and strengthening the financial services industry in Malta, which is a pillar of our economy today. The Central Bank has an important responsibility in ensuring overall stability of the financial sector and the payments system and I fully support its efforts to strengthen its internal structures to perform this task effectively.

The Governor also expressed his views about the banking supervision function and showed his concern about the manner in which banking supervision responsibilities could eventually be transferred to a single financial regulator.

I would like to stress that this decision has been taken way back in 1994 when a root and branch reform of our financial infrastructure was implemented. At that time we had instructed the Central Bank to start its preparation for the transfer of the responsibility for bank regulation to MFSC. Unfortunately it seems that we are still in the stage of setting a date for preliminary discussions.

I am certain in my mind that the nature of the services given by banks in the future would be so different from today that it will be hard to classify institutions as banks or as other financial institutions. If we do not change we will run the risk of either restricting our banks from metamorphosing into the flexible institutions that the market and international developments would require, or of having institutions falling within the regulatory space of two different organisations. I am informed that this is already the case in some instances where banks are venturing into other financial services. In such case we would be risking to have certain financial services falling between two stools and not be regulated at all, or of having onerous bureaucracy hacking our credit institutions in their development.

I appreciate the Governor's concerns about the aspects of information that is required by the Central Bank in the formulation of monetary policy.

I would like to assure him that a re-allocation of the banking supervision function to another Competent Authority when effected would ensure that all the necessary safeguards and procedures have been put in place to ensure a smooth transfer of responsibilities in accordance with a pre-announced timetable.

I would now like to focus my attention on the wider economic perspective and share a few thoughts with you about our strategic vision. Although, the Maltese economy is a micro participant in the international market-place, yet it is highly dependent on international trade for its well being. Let me take an example, for every lira worth of imports that Malta imports, it, on average, adds another lira in value. Of the ensuing output, worth two liri it is estimated that Malta exports around ninety cents, ten cents less than the value of the original good imported.

Such is the extent of the vulnerability of our open economy. In simple terms it says that a major challenge to the Maltese economy is the ability to maintain a sustainable position on the external account. Although the acquisition of capital goods from abroad that would be expected to improve the country's export base in future years may be a justifiable reason for running a deficit on the current account, we must be wary of the persistent shortfall of Malta's exports to its imports in recent years.

More effort has to be made to strengthen the country's export capabilities so that it is in a better position to finance its import requirements. Admittedly this is not a simple task and it is not being facilitated by developments in the global environment. Indeed, technological progress particularly in the field of telecommunications has contributed substantially to global integration and intensified competition in export markets. As a result the stakes and the risks for participants entering the international market become commensurately higher, calling for increased attention to the type of goods and services that are provided.

This calls for quality and specialisation to ensure that the right product, under the right conditions and at the right price is provided. It also calls for alertness and agility in responding to quick and frequent changes in the market.

There is therefore no doubt that, in the more hostile and demanding global environment, the long term sustainability of the economy will depend critically upon the country's ability to increase its productivity levels, enhance the value added element of its productive activities and direct a larger share of its output to the export sector. This, as I see it, depends on the attainment of three crucial, self-reinforcing conditions.

The first, and most important, albeit the most difficult, is to remove the sources of inefficiencies and waste in our economy. The second is to exploit the market niches where Malta, with its distinctive characteristics, can enjoy a competitive advantage. The third is to secure proper access for Maltese goods and services in the targeted export markets. Economic policy-making in Malta is at present steering a course towards the attainment of these conditions.

In this context the current stance of fiscal policy plays an influential role. It is recognised today that the fiscal deficit is at an unacceptably high level and is a major constraint on the growth potential of the Maltese economy. When Government expenditure particularly recurrent expenditure persistently exceeds revenue, a situation materialises where excessive consumption activities are stimulated without the realisation that public debt is accumulating and, will eventually have to be paid back by future generations. Such a situation is also characterised by negative developments in the productive sectors. Factors of production, or more appropriately a large part of our work force, tend to become increasingly dependent on the Government for their livelihood. As a result they grow less sensitive to the need to compete in the market place and in consequence they indulge in inefficient practices.

The end result of all this is that we create an economy that consumes excessively and is insufficiently prepared to face the competitive pressures of export markets. There is thus a tendency for factors of production to be deployed in the relatively risk-free and less stringent domestic markets. Needless to say, such an environment is not conducive to long term development and is detrimental to the type of investment that needs to be attracted to this country in order to stimulate export oriented activities. It is a pity that we have those who, for opportunistic reasons are condoning this inward looking mentality.

I am happy to say that the objective of fiscal policy today is to bring government revenues much more in line with expenditure. In this way an artificial stimulus to domestic demand will be avoided. Equally important, fiscal policy aims at delegating to the private sector those functions that can be more effectively performed by it. In this regard it is our intention to seriously consider a number of private / public sector initiatives. At the same time the Government will be free to concentrate on providing essential public goods and services in the most efficient manner possible, unfettered by financial constraints and without placing undue burdens on the private sector.

Monetary policy which today is formulated and implemented by the Central Bank, is also oriented towards promoting macroeconomic stability. The liberalisation of interest rates and the broadening of financial markets are clearly contributing positively to economic development as a number of business corporations seek access to the capital market in order to raise funds for capital projects. This activity in the financial markets is taking place under the strict supervision of the competent authorities, which remain ever vigilant to ensure that financial soundness and stability are maintained.

With the further liberalisation of exchange controls, our economy will be more integrated with the international capital markets, and will be better able to benefit from enhanced financing opportunities and investment vehicles. A prudent approach to monetary policy not only complements the current fiscal stance aimed at restoring macroeconomic balance but also acts as a clear signal to international operators that Malta is a place to do business with and to invest in.

I would like to say a word about another key feature of Government policies, the restructuring process. Structural policies are aimed at removing inefficiencies and better focusing the country's productive efforts towards export markets. While opening up to the global environment necessitates economic restructuring Malta's prospective membership of the European Union accelerates this process. I will not go into detail on these reforms but I would like to say that these are aimed at closely aligning the productive sector in Malta with those of our major trading partners in Europe. This will lead to an upgrading of productive standards in Malta, which in turn will attract foreign investment to the country. At the same time free access to the European market will ensure that Malta's exports are on an equal footing with those of our main competitors.

While I am pleased to say that over the past two years policy efforts aimed at restoring the viability of the economy have gathered strong momentum, much remains to be done.

On the fiscal side, while the deficit has already been reined in to a substantial extent, further efforts are needed to reduce it to a sustainable level of 3% of GDP. Expenditure will continue to be curbed to the greatest extent possible, while revenue collection and management will be further improved. The attainment of efficiency gains and reduction of the fiscal deficit to manageable levels would eventually permit a reduction in the overall tax burden. From a longer-term perspective, the demographic pressures on public finances need to be carefully evaluated and proper plans put in place to ensure the sustainability of the welfare system.

Structural policies also need to be pursued further with a view to increasing the availability of resources and improving the efficiency with which they are deployed. In particular, further measures are warranted to enhance the operation of domestic markets, including deregulation and the curbing of monopolistic practices and their effects. The country's productive base requires constant improvement and upgrading, particularly where the retraining of labour is concerned. The educational system also needs to be critically looked at in order to provide the skills that will be required in tomorrow's market-place. An emphasis on innovation and research to provide enhanced value added contributions across the entire spectrum of economic activity is also called for. In this respect, as I indicated earlier, innovative arrangements for the development of business ventures in the form of public private partnerships could be pursued with the aim of maximising the benefits emanating from synergies between the two sectors.

The challenges facing the Maltese economy are formidable yet are not insurmountable. I believe that the economic policy direction being pursued justifies a feeling of cautious optimism. With the consolidation of the fiscal position, the adoption of the appropriate structural adjustment policies and the alignment of the economy to European Union standards and practices, I am convinced that the seeds for sustained economic growth have been sown, for our benefit and for that of future generations.

I thank you for your attention.