‘Vaccination policy is economic policy’, says Central Bank Governor Edward Scicluna

Speaking at a press conference to launch the Central Bank of Malta’s 2020 Annual Report, CBM Governor Edward Scicluna emphasised the impacts restrictions, lockdowns and vaccine policy are having on society at large, stressing that:

“Vaccination policy is economic policy”.

Prof Scicluna, who served as Finance Minister between 2013 and 2019, gave a breakdown of the various ways Malta’s economy was impacted throughout 2020.

He observed that damage to Malta’s economy was limited for two main reasons, because banks were well prepared and because of the level of liquidity support facilitated via the Government.

Prof Scicluna remarked that thanks to the regulatory reform imposed on the banking sector following the 2008 global financial crisis, such as regular stress tests and higher capital requirements, banks were better positioned to deal with the pandemic.

He said that whether it was regulatory relief, or the injections to the banking system via Government aid, one can say the banking system was instrumental in supporting the private sector, through the moratoria and the “smooth flow of credit”.

“It could have been worse when you look at it objectively. When you see the enormity of the shock, I think we should be sort of satisfied that we have avoided the worst,” he said.

CBM Chief Economist Aaron Grech

Chief Economist at the Central Bank, Aaron Grech highlighted how Malta’s GDP fell by a staggering seven per cent at the beginning of the pandemic, higher than the EU average, in large part due to its higher dependence on tourism.

He stressed that following the 2008 recession, the country’s GDP decreased by one per cent, providing context as to the scale and scope of COVID-19 on global economies.

Dr Grech spoke of the strength of Malta’s labour market, where he commented that the resilience of domestic demand is a principal reasoning behind this. He said that at the end of 2019, Malta registered a relatively high number of outstanding job vacancies.

When the pandemic hit, there were some job losses, but the onset of the COVID-19 wage supplement led most employers to hold onto staff, he added.

“Maltese businesses tend to hoard labour. Like in the great recession, they prefer to reduce hours rather than reduce labour.”

Malta has registered a slow decline in unemployment since June, however the CBM expects firms to increase working hours, rather than hire new staff. Therefore, it is not expecting a steep rise in employment in 2021.

On investment trends, Dr Grech said the CBM expects the resumption of private investment with continued public investment. Overall, investment is projected to increase by 17 per cent.

2020 Annual Report key observations

The Central Bank of Malta has released its Annual Report for 2020, including its detailed financial statements, an opening statement by the Governor, an analysis of economic and financial developments in Malta and abroad, and a review of the Bank’s policies and operations.

The Report also includes articles on the financing conditions affecting firms in Malta, public debt sustainability and the balance sheet of different institutional sectors. It also includes – for the first time – an analysis of sectoral developments in labour productivity and unit labour costs using new official statistics.

The Report notes that the global economy was hit by a severe economic shock as result of the COVID-19 pandemic. In most countries, activity contracted at an unprecedented pace, predominantly affecting the services sector. Other sectors, though less severely impacted, were also negatively affected by border restrictions, quarantine requirements and disruptions to global value chains. The slump in activity also created some financial market volatility.

This was, however, mitigated partly by regulatory changes that occurred in the post-global financial crisis period, but also as a result of unprecedented liquidity support to the banking sector and temporary relief by the relevant authorities from certain regulatory requirements. Indeed, the banking sector was instrumental in supporting the private sector – through moratoria on loan repayments and the continued smooth flow of credit through the liquidity injected by central banks.

The pandemic interrupted the pattern of strong growth that had characterised the Maltese economy in recent years. In fact, gross domestic product (GDP) contracted by seven per cent, mostly on account of lower net exports. Domestic demand also declined but to a lesser extent, due to the unprecedented level of fiscal support, which prevented a sharper fall in private consumption.

Despite the drop in output, employment continued to increase – though at a slower rate than in previous years – with the Government’s Wage Supplement Scheme effective at preventing large-scale layoffs. Even though the unemployment rate edged up to 4.3 per cent, it remained well below its historical average and substantially lower than the average rate in the euro area.

The annual rate of inflation based on the Harmonised Index of Consumer Prices fell to 0.8 per cent in 2020, from 1.5 per cent in 2019, primarily reflecting slower growth in services prices and falling energy prices. Inflation based on the Retail Price Index showed a similar development, easing to 0.6 per cent from 1.6 per cent in 2019.

Public finances deteriorated sharply in 2020, partly reflecting the decline in economic activity, as well as the introduction of COVID-19 related fiscal support. The Bank estimates that the fiscal balance will show a deficit of close to 9.5 per cent of GDP in 2020. The general government debt ratio rose to around 55.3 per cent of GDP, while remaining well below the euro area average. The pandemic also left its mark on the current account balance, which is estimated to have registered a deficit for the first time in four years.

The report notes that – given that the country’s productive capacity remained relatively unchanged – once foreign demand recovers and the lingering uncertainty surrounding the medical crisis dissipates, the Maltese economy can be expected to rebound from the COVID-19 shock. The Bank expects pre-pandemic GDP levels to be attained towards the end of 2022, conditional on the successful rollout of a vaccine in 2021. Inflationary pressures are expected to remain very subdued in 2021, but should start to pick up from 2022 as demand conditions improve. The general government deficit is projected to narrow over the projection horizon. Government debt is set to reach 60.3 per cent of GDP by 2023.

The recent increase in the COVID-19 infection rates, both in Malta and its key trading partners, which led to tighter containment measures, presents a downside risk to activity in the near term and to public finances. Risks are assessed to be more balanced after 2021, as the implementation of vaccination programmes should allow a broader economic recovery in line with the Bank’s expectations.

During the year, the Bank continued to implement the Eurosystem’s monetary policy decisions in Malta through standing facilities, liquidity-providing operations and asset purchases. Although credit institutions established in Malta participated only once in the main refinancing operations, they made more use of long-term refinancing operations compared to 2019, partly due to new pandemic related support provided by the Eurosystem. Use of the European Central Bank’s (ECB) US dollar liquidity operations also increased. As in 2019, Maltese credit institutions did not use the marginal lending facility, while recourse to the deposit facility decreased.

The Bank purchased sovereign bonds under the public sector purchase programme (PSPP) and the pandemic emergency purchase programme (PEPP). It purchased €85.0 million worth of Maltese sovereign bonds under the PSPP and €235.9 million under the PEPP. The Bank also made additional purchases under the two programmes for the ECB’s portfolios.

The Bank’s balance sheet continued to expand, reaching €10,035.4 million at the end of 2020 from €9,288.2 million a year earlier. Operating profit before transfer to provisions decreased to €42.8 million from €49.5 million in 2019. Following the transfer of €9.8 million to provisions, the amount of €33.0 million is payable to the Government of Malta, up from €31.5 million a year earlier.