Malta’s geographical location is considered to be an ideal gateway to the European and North African markets and has allowed the islands to develop as an important trading post. Its location is further strengthened by an excellent communications infrastructure, a flexible and multi-lingual workforce and efficient air and sea connections.
During the second quarter of 2010, Malta’s economy grew at a slower pace, while first quarter growth was reported as 3.4%. Economic growth for 2011 is expected to reach a little over 2%. Possessing few indigenous raw materials and a very small domestic market, Malta’s economic development since the beginning of the 1990s has been based on tourism, accounting for roughly 30% of GDP, and exports of manufactured goods, mainly semi-conductors, which account for some 78% of total exports.
Tourist arrivals and foreign exchange earnings derived from tourism have steadily increased since the late 1970s. The introduction of low-cost flights in 2007 was the main contributor to the 10.6% increase in tourist arrivals over 2006. During 2009 the tourism industry faced a difficult external environment, as Malta’s major source markets were severely affected by the global recession. This was reflected in a substantial 8.4% fall in tourist arrivals to around 1.2 million. For 2010, the tourism industry indicates that it has picked up. As of September 2010, inbound tourists registered an increase of 13% when compared to the same period last year and outbound passengers went up by 7% when compared to the same period last year.
The cruise liner sector, which experienced 26.6% growth in 2007, saw passenger arrivals decline by 20.9% in 2009. The relatively flexible labor market kept unemployment fairly steady at 6.9% for 2009. With its highly educated, English-speaking population, Malta has seen growth in high value-added manufacturing and in the services sector, away from the traditional low-cost manufacturing in textiles. The banking system remains highly concentrated, with two of the four local commercial banks accounting for about 90% of total loans and deposits.
The Maltese Government has pursued a policy of gradual economic liberalization, taking some steps to shift the emphasis in trade and financial policies from reliance on direct government intervention and control to policy regimes that allow a greater role for market mechanisms. Malta’s accession into the EU marked the total dismantling of protective import levies on industrial products, increasing the outward orientation of the economy. Malta joined the Exchange Rate Mechanism II (ERM-II) in 2005 to put itself on the path to enter the Eurozone, and in January 2008 it formally adopted the Euro as its official currency.
Consolidation of public finances has improved over recent years. The budget deficit was brought down from 10.7% of GDP in 1998 to 2.5% of GDP in 2006, a figure that was below the 3% required by the Maastricht criteria. For this reason, in 2007 the European Commission had abrogated the excessive deficit procedure against Malta, only to reopen it in May 2009, as the country’s budget deficit for 2008 increased to 4.7%. The Government of Malta attributed the increase to one-off impacts in the 2008 budget. The budget deficit was revised for 2010, reaching 3.87% of GDP.