Malta competitiveness report 2020

Abstract

The Malta Council for Economic and Social Development (MCESD) act Article 8(b) stipulates that the National Productivity Board shall be tasked with ‘preparing an annual report outlining the main competitiveness and productivity challenges facing Malta, and the policy responses required to meet them and any recommendations thereto.’ In this regard, this report seeks to present an analysis of the current economic scenario in Malta and subsequently provide policymakers with several recommendations intended. In the most recent years, the macroeconomic scenario in Malta has been relatively buoyant. Indeed, growth in GDP had reached a peak of 10.9% during 2015 before stabilising somewhat in subsequent years, with a growth of 4.7% in 2019. This deceleration in growth is partly attributed to the less prevalent external demand conditions in key foreign markets, with EU-27 and EA-19 registering growth rates in GDP of only 1.5% and 1.3%, respectively in 2019. At the same time, in terms of public finances, the general government balance had exceeded its medium-term budgetary objective of budget balance in 2016, while the debt-to-GDP ratio had fallen significantly below the 60% threshold, reaching 43.1% in 2019. The COVID-19 pandemic is expected to disrupt the robust economic growth experienced in recent years, due to its impact on key sectors of the Maltese economy, particularly on tourism related industries. Also, as a result of the series of stimulus measures announced by the Government to cushion the effect of the pandemic on the Maltese economy, public finances are also expected to deteriorate, with the fiscal surplus registered in 2019 expected to turn into a deficit for 2020, while the debt to GDP ratio is expected to rise from the record lows recorded in previous years. The COVID-19 pandemic will therefore disrupt the economic reality experienced in recent years. Even though assessing the full impact that COVID-19 will have on the economy is currently a complex task, due to the high level of uncertainty surrounding various aspects of the pandemic, this report seeks to analyse the short-term impact of COVID-19 on the Maltese economy with an application of input-output analysis, and the medium-term impact on potential output, utilising a production function approach. The analysis considers three different scenarios, each carrying different assumptions on the impact of the pandemic; a mild, a medium and a severe scenario. The results show that in the short-term, the Maltese economy may experience a contraction in gross value added generated ranging between 8.7% and 15.3%. Indeed, this will in turn have a heterogeneous impact across the various industries and sectors of the economy. The most impacted sectors are of course those related to the tourism industry, given the several restrictions on travel put in place across Europe and the World. On the other hand, in the medium-term potential output is estimated to be around 5.5% to 10.6% lower in 2020 when looking across the different scenarios. The accumulated discrepancy in the generation of potential output after 2020 is however expected to have a permanent effect on the economy’s productive capacity in the medium-term. A recovery strategy from the crisis should therefore also incorporate the plans to enhance efforts toward further economic diversification in the Maltese economy. The Next Generation EU as well as the 2021–2027 EU Multiannual Financial Framework (MFF) provide adequate financial opportunities for the Maltese Islands to restructure our economy and boost recovery. The analysis in this report goes beyond the measure of national productivity and GDP growth, but rather endorses the idea that the quality of life of people is in itself an important element to make a country competitive, productive, and attractive for investment purposes. This report also looks at the different factors that determine competitiveness. The competitiveness enablers reviewed include factor (input) conditions, which include human capital and social infrastructure, physical infrastructure, and ease of doing business. The analysis of factor conditions is followed by an analysis of institutional quality, monetary and fiscal policy, market conditions, and innovation. Following this analysis, an overview of Malta’s overall competitiveness and sustainable competitiveness is provided. Of course, several challenges and opportunities for Malta have emerged as a result of COVID-19. Given that productivity is a key driver of economic growth this report seeks to provide econometric evidence of its key determinants. In particular, the possibility of a causal link between foreign direct investment (FDI) and total factor productivity (TFP) across the EU Member States is analysed. The empirical results confirm that average effective corporate taxes are strongly and negatively related to FDI. In turn, FDI is an important and positive determinant of TFP, with the results suggesting that a 1.0% increase in FDI leads to a 14.0% increase in TFP. Of course, these results are highly relevant with regards to policies aimed at enhancing productivity in the Maltese economy, especially in the light of a possible shift post COVID-19 towards tax alignment across the EU, as well as the role of FDI as a tool to enhance medium and long-term economic growth. The corporate income tax is an important variable which influences the location of new investment by companies, thus supporting the behaviour of governments towards fiscal policies. This supports the fact that governments offer an investment-friendly environment through competitive tax rates, as it encourages more foreign investment. Additionally, good governance that protects investors and entrepreneurs against expropriation and trade openness also influences the degree of investment a country will receive. This implies that a country like Malta, situated at the periphery of the EU, should give priority to policies that aim to attract FDI whilst stressing other determinants of TFP within the context of enhanced digitalisation and investment opportunities resulting from the European Green Deal. The final chapter of this report provides several overarching recommendations, which are provided on the basis of the analysis carried out in this report and based on expert opinions. These recommendations are based on three key areas being; enhancing the labour productivity and human capital, focusing more on the digital economy and innovation and recommendations on the environment based on the Green Deal Policy. Of course, COVID-19 has shown that the digital revolution could play a critical role in increasing our societies' crisis resilience. Investing in digitalisation of essential services and increasing the ability of our public administration and public regulators to deliver their services efficiently and effectively is vital to support sustainable economic growth. At the same time, digital technologies are a means to an end and that developing human resources should always be the priority for our economy. The recommendations are categorised in terms of implementation priority from low to high. High priority recommendations are those requiring immediate attention especially when taking into consideration the need to enhance productivity and economic resilience. Medium priority recommendations on the other hand are not deemed to require immediate attention to the same degree as those identified as high priority. Nonetheless, they are still deemed to be of significant importance to the overall productivity and competitiveness of the Maltese economy. This chapter also refers to the 2019 recommendations and provides an update covering implementation priority, implementation progress, and consistency with the recommendations contained in this chapter. This is considered highly relevant as a link with the 2019 report and is supported by evidence wherever possible. This report is set up as follows. Chapter 1 provides an overview of the Maltese economy with a focus on the macroeconomic outlook and the developments in its key sectors. Chapter 2 then analysis the impact of the COVID-19 pandemic on the Maltese economy both in the short-term and in the medium-term. Chapter 3 gives a comparative analysis of the key drivers of competitiveness in Malta, while Chapter 4 discusses the key drivers of productivity. Chapter 5 then presents a list of recommendations emanating from the analysis carried out in this report. Chapter 6 presents the Report’s concluding remarks.