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Network News • 14-04-2022

Down the rabbit hole: inflation, oil spikes and shortages

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 14th April 2022

Remember the heady election days when the electorate was busy counting pennies from heaven promised by the Labour Party in its copious 1,000 give-away manifest? The omens were good for the Abela administration carrying the flag winning with a majority of 39,400 surplus votes.

Many rejoiced at how the island will now sail along the rivers of milk and honey promised by the red torch-carrying brigade. Yet, the honeymoon is already over, and the lipstick has dried on the blushing bride.

Finance minister Clyde Caruana addressed the MCESD and cautioned members to tighten their belts for a bumpy ride. The war in Ukraine and the global sanctions on Russia’s oligarchs and banks now mean that oil and food prices will shoot upwards and in the short term, there are no cheap substitutes. Malta imports many essential products from Ukraine and Russia, such as oats, maize starch and crude sunflower-seed oil, each making up a high percentage of total food imports.

The prime minister last week said shortages of these products could have had a major impact on the prices consumers had to pay locally had it not been buttressed by direct subsidies. It could have also impacted other local industries such as herding and animal husbandry.

But he calmed the party faithful saying “this is why it is so important to have a government that knows what it is doing, that has the experience, and the proven track record where it counts”.

And yet Caruana was more sanguine. He told awe-stricken MCESD members that government could not be expected to control the price of everything. Few of them remember how the Mintoff administration in the late seventies solved the oil embargo and scarcity of essential items. He unceremoniously usurped importation of all essential products, disenfranchised importers and started a bulk buying scheme run exclusively by MDC.

By comparison, the economy has more than doubled since then and it came as no surprise that Caruana warned his audience at MCESD that he cannot control everything as Mintoff did in the past. Readers may feel puzzled how the land of surplus budgets during the “Aqwa Zmien“ has morphed into a Nicaragua in a few short weeks.  Is this for real or is it a bad dream by Alice In Wonderland?

In Lewis Carroll’s “Alice’s Adventures in Wonderland”, the heroine falls down the rabbit hole which lands her ominously in Wonderland.  In our case, reading the tea leaves for our economic future, it seems that the wicked lady of austerity is knocking on our doors. Some may label the tantalising experience as if we woke up from a psychedelic dream. Going down the rabbit hole is a metaphor for a journey into the unknown, as Alice is now invited to comment how will the tiny nation is suddenly facing rising inflation, scarcity of essential items like grain, wheat, cooking oil, and a lot of imported products.

Domestically, prices are currently under control but how long can Castille maintain the artificial one-time subsidies. These cannot be maintained for two years as was the case with the lavish issue of free €100 vouchers, the €2 billion financial aid to hotels, restaurants, English school services, furlough schemes and bank interest support for ailing companies crippled by the pandemic. Like in the book “Alice in Wonderland”, voters woke up after the election euphoria feeling blessed by a blitz of wholesome promises which if enacted will lead them to a new world of unknown benevolence.

The manifests of both political parties they all cherished an invitation for all and sundry to set off on a quest to reach the golden pot at the end of the rainbow. Let us try to compare and contrast the balance sheet of tiny Malta. At the end of October 2021, Alice discovers that the cookie jam is empty and questions how solid were the election bites as Government debt crept up to €7,989 million.

Turning to the Chamber of Commerce, president Marisa Xuereb called for higher respect towards legal and regulatory frameworks and urged against taking advantage of loopholes “as is often happening when it comes to planning permits”.  She said, speculative development is allowing a few developers riding roughshod over the nation’s regard for the environment and cultural heritage.  Certainly sugaring the pill of speculative development by promising a new Green ministry charged with sprucing small gardens in village cores and planting more trees will not be the right antidote.

Another worry is the fragility of our financial services sector. The onslaught of new legislation aka transfer pricing, the banning of shell companies, imposing of a European common corporate tax, DAC 6 (7&8) and grey listing have all turned the tables against Malta as a preferred financial domicile.

So far, Malta has successfully attracted key international players in Financial Services, supported by the continuous improvement in the ease of doing business, a strong regulatory environment, unhindered access to the EU market, a long tradition of business support services especially auditing and legal services, enhanced tax competitiveness and the availability of skilled and English-speaking workforce. For a small island, it prides itself of twenty-six banks, including three branches of foreign banks and foreign-owned credit institutions amid a number of international insurance and funds companies.

Certainly, our future needs a strong direction to attract FDI and train our workforce to ride the digital bandwagon. EU funds will be made available under the RRP scheme to improve mobile digital connectivity and infrastructure. This needs immediate attention as Malta ranks low in the 2021 Digital Quality of Life Survey, taken among 110 countries.

Another face saver will be the planning to invest in Greening of the economy and waste-to-energy plant. This roadmap forms part of a series of ecological projects with an investment of around €200 million. When in operation, it will process waste that cannot easily be recycled. This treats 40% non-recyclable waste diverting it away from landfill disposal.

This environmental marvel has an annual capacity of treating 192,000 tonnes of waste and one cannot not mention the corollary “Material Recovery Facility” sporting an annual capacity of 70,000 tonnes. This machine also converts waste into biogas so farmers will be given free quality compost. All hazardous waste such as clinical and pharmaceutical material will be processed and free heat energy released.

To conclude, readers may be invited to contemplate this kaleidoscope of challenges arising from high oil prices (reaching $120 per barrel), the Ukraine war and spiralling inflation - all left Alice in a befuddled state. She will try to dig herself out of the rabbit hole to reach the surface where reality starts and Utopia ends.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 14th April 2022
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