Author: George Mangion - Senior Partner PKF Malta
Published on Malta Business Weekly: 26th May 2022

Good tidings come from the energy minister as she reminds us that a buffer sum of €200m was allocated during the last budget to cover increases in energy costs.

Another subsidy is being offered to farmers and herders to blunt the astronomic increase in fertilizer and animal fodder cost. Since the effect of the Ukraine war and the rising cost of cereals, we have taken a band-aid approach and subsidised importation. Regrettably, such one-time injection in our budget has cocooned us to living on borrowed time as food cost and most living expenses continue to spiral upwards.

UK reports a 9% internal inflation rate yet ours is still hovering at 5.6%. How long the honeymoon will last depends on the continued capping of energy and food prices. The decision by government to try to shield households and businesses from the full force of adverse inflationary forces means that general economic conditions are expected to remain broadly benign in 2022, albeit less favourable than envisaged at the last PL electoral manifest.

The real GDP growth forecast for 2022 has been lowered from 6.5% to 4.4%. Economic growth is then expected to ease gently to 3.5% by 2025. In real terms, the Maltese economy is thus forecast to grow at a slower rate than in pre-pandemic years. Such prognosis hit SMEs badly. These have always played a vital role in our economy and will continue to do so for many years to come.

According to the World Bank, SMEs represent about 90% of businesses and more than 50% of employment worldwide. It is estimated that by 2030, 600 million jobs will be needed to support the economic growth in many countries and SMEs are at the very centre of this progression. But, locally SMEs have not always benefitted from perks enjoyed by the larger players. As a result, SMEs complain that managing risks has never been more challenging than now.

They strive to ease the daily pressures when managing cashflows, accessing finance from risk averse bankers and securing trained workers. Moving on the next headache – let us visit the hospitality sector, which mushroomed during the past decade comforted by the cheaper mix of low-cost airlines and collective accommodation. Needless to remind readers, how international travel stopped almost completely between March and May 2020, as four-fifths of the countries closed their borders.

This sudden drop in revenue for tourist and associated business has been the subject of many debates and we recall how European countries dug deep into their pockets to offer up to 80% of average pay to workers out of work. Politically, the Labour government in Malta spared no expense to keep workers on furlough pay for two years and now that normality is in sight, it is leaning heavily on subsidies to buttress the influx of raging inflation. As our debt to GDP ratio approaches the 60% mark, we have to tighten our belts hoping for a miracle of a watershed income from tourism and an artificial boost in domestic demand.

Many hope that the travel bug will outlast the virus (now watch out for monkeypox!). Party apologists calm us by recounting how our transition to normality since the outbreak of pandemic has been cushioned by ad hoc subsidies. They pray that inbound tourism will catch up with the peaks reached in 2019 of almost 3 million travellers excluding cruise liner visitors. They spin tales of fortune saying that “revenge tourism” will come to our rescue as people want to get away after two years of lockdowns and quarantines. But good tidings will take time to bring back the teeming crowds of visitors, attracted by cheap low-cost tickets and Airbnb accommodation.

A perfect example on how lockdowns have hurt our economy is news that Malta International Airport registered a mere €7m net profit last year, up from a loss of over €4.3m in 2020. Despite the increase in profits, this is still significantly lower than 2019’s profit after tax which amounted to €33.9m. It has been said that the pandemic set the tourism sector back two decades in terms of passenger numbers. Let us see how other countries have been proactive to revive their movement of inward and outbound travel. Typically, Cyprus has promised to meet the quarantine, health-care and holiday costs of any visitor who contracts the virus.

At the start of the pandemic, Italy unveiled a “holiday bonus” scheme costing €2.4bn, under which Italian families, on low incomes, received up to €500 towards domestic holidays. To lure both foreign and inward tourism, Sicily’s regional government recently approved spending €75m on vouchers, redeemable for accommodation, guided tours, museum tickets and more. To avoid subsidising the rich, Italy only targeted households with incomes of under €40,000 a year.

Voucher schemes have also been used extensively in Malta to help cushion the cost of business recovery and stimulate demand. Despite their apparent political appeal in Malta, the cash schemes (one batch of €100 vouchers was paid during the week prior to a general election) are proving to be pennies from heaven.

To conclude, as temperatures rise, islanders will be joining visitors on their holy grail to sandy beaches. Nurture the experience how to enjoy taking free bus trips on bucket and spade adventures in air-conditioned comfort. 

Author: George Mangion - Senior Partner PKF Malta
Published on Malta Business Weekly: 26th May 2022
Get in touch: info@pkfmalta.com