Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent: 1st May 2022

The World Bank issued a warning saying that energy prices have surged since the Russian invasion of Ukraine and along with other commodities, are likely to remain at "historically high" levels, endangering economic growth.

The Russian invasion is leading to a dramatic decline in crops planted by Ukrainian farmers in the country this spring, with fears for domestic and international food security. Known for its fertile soils, Ukraine is a major exporter of cereals, barley and sunflower, in particular to North Africa.

In Ukraine, the escalation of the conflict raises concerns on whether crops will be harvested and products exported. The war has already led to port closures, the suspension of oilseed crushing operations and the introduction of export licensing requirements for some products. All of these could take a toll on the country's exports of grains and vegetable oils in the months ahead.

Much uncertainty also surrounds Russian export prospects, given sales difficulties that may arise as a result of economic sanctions imposed on the country. It stands to reason that planting, harvesting and exporting have all been disrupted by a lack of fertiliser, low or no fuel supplies for tractors, closure of ports and military activity. One sadly observes how at least one-third of the land normally used for spring crops such as maize and sunflower is likely to go unplanted. Russia and Ukraine, whose vast grain-growing regions are among the world's main breadbaskets, account for a huge share of the globe's exports in several major commodities, including wheat, vegetable oil and corn - their prices reached their highest levels ever last month.

Regrettably, the war resulted in Ukrainian ports being blocked by a Russian blockade and there is concern about this year's harvest as the war rages on during the sowing season. Quoting, the Food Price Index, issued by FAO, which tracks monthly changes in international prices for a basket of commodities, this averaged 159.3 points last month, up 12.6% from February. FAO said the war in Ukraine was largely responsible for the 17.1% rise in the price of grains, including wheat, oats, barley and corn. Together, Russia and Ukraine account for approximately 30% and 20% of global wheat and corn exports, respectively. Where will the impact of this crisis fall hardest? Though closed economies generally tend to face food insecurity, in this case the invasion of Ukraine will have more severe immediate impacts on those dependent on global markets.

Locally, we are facing high inflation and we are constantly reminded by the government that our energy prices are being subsidised by a one-time cash injection of €200m. Obviously, this subsidy will not last forever, after which energy prices will explode. Another concern is the escalating price of cereals which, due to the Ukrainian war, there is a drastic drop in cultivation and planting of the product this year. This will add to our sense of deprivation as food prices will soar upwards adding to poverty pressures among the lower-income cohorts and pensioners.

Perhaps, it is not surprising to observe two measurements resulting from an NSO survey set to calculate poverty. The survey measures people's perception of their ability to afford 13 material or social items. The findings reveal the existence of 28,000 people who suffered severe deprivation last year as poverty inched upwards. These people suffered deprivation in at least seven of the 13 categories measured by the European Statistics on Income and Living Conditions survey.

Also, 7.8% of children in 2021 were living in households suffering from severe material and social deprivation. The findings show that almost 50,000 people suffered deprivation in at least five of the 13 categories. All this points to pressure on government to combat poverty and assist the low-income workers as promised in the last election. In the meantime, Caritas continues to push government to consider announcing a living wage index as is the case in the UK.

It is a paradox, when we hear of thousands living on the poverty line when at the same time high street supermarkets are brimming with people in a frenzy shopping mode until they drop - burning their credit cards to the limit. Is there a two-tier economy running in parallel? Nobody doubted that the l-Aqwa Zmien halcyon days were the "best times ever" pointing to restaurants and pubs brimming with diners while champagne flowed in corporate parties. In reality, the disparity between the fat cats (sporting Ferraris, sailing holidays on expensive yachts to nearby islands and others sipping aged single malts relaxing at seafront villas) and the hoi polloi, is getting wider.

Ideally, this imbalance is reduced and attempts made to reach a fairer distribution of wealth. This ambivalence in inequality must not hoodwink us or lure us to wave a flag of complacency which yielded a feeling of despondency camouflaged with the distribution by the state of €100 cheques (a pre-election sweetener). Another chronic malady is the need to combat rising rents, which can be a social curse particularly for tenants earning lower incomes or having large families to sustain. As always, pensioners come in with their load of demands. There is a general feeling that the statutory two-thirds capped pension mechanism, unless supplemented by external income, is not sufficient to help people from sliding into the poverty trap.

To analyse this issue, four years ago PKF designed a number of "one-to-one" questionnaires and run a confidential survey among residents in old people's homes housed in three government-run centres. Not surprisingly, when one breaks up this data by age group or household type, one finds that the above mentioned "feel good factor" has not benefited everyone.

Sadly, the inadequacy of the current minimum wage and COLA adjustments affects different types of distressed households, including families with children with only one parent in low-paid employment, and elderly couples with insufficient income to cope with daily living expenses. Perhaps the confidential pre-election discussions at MCESD by Finance Minister Clyde Caruana will culminate in a serious reform in the mechanism of COLA and result in a judicious reduction in VAT.

Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent: 1st May 2022
Get in touch: info@pkfmalta.com