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Surviving the
Financial Shock post-pandemic
Governor of the Central Bank of Malta, Prof. Edward Scicluna says that from a financial stability perspective, things could have been far worse for banks and financial institutions were it not for the massive regulatory and supervisory changes which took place in the aftermath of the international financial crisis. You have remarked in the past that things were not as bad as they could have turned out to be for the local banking sector and the economy. However, there was a degree of ‘financial shock’ that the pandemic has brought about. How long do you think it will take for Malta to recover from that? There is no doubt that the COVID-19 pandemic presented a major challenge for the economy and for the financial system. Looking back, I think it is safe to say that the policy response was successful in avoiding the economic crisis from becoming a financial crisis. The Central Bank of Malta played its part in the implementation of the extraordinary monetary policy support measures launched by the ECB, while the fiscal and supervisory authorities also played a key role. From a financial stability perspective, things could have been far worse for banks and financial institutions were it not for the massive regulatory and supervisory changes which took place in the aftermath of the international financial crises. As for the near future, the economy is projected by the CBM to grow strongly by 5.1% in 2021 and by 5.9% in 2022 with GDP expected to exceed its pre-pandemic levels in 2022. The recovery is also visible in the labour market, where the unemployment rate has returned to pre-pandemic levels. Inflation is likely to pick up next year as the recovery progresses, but it is projected to remain around 2%, as the recent increase in international commodity and import prices is expected to decelerate. Hence, I would say that our outlook is cautiously optimistic.
The ramifications of the ceasing of economic activity and commerce due to COVID-19 lockdowns and other measures continue to be felt. What impact has this had on the local banking sector? A key difference with respect to the 2008 Financial Crisis is that this time the financial sector remained in a much stronger position, the result of the reforms referred to above. Thanks to them and to its strong fundamentals, the domestic financial system proved itself resilient. According to the Central Bank of Malta’s Interim Financial Stability Report, the banks remain well-capitalised and highly liquid. Profitability was indeed affected by the crisis but has improved with the reopening of the economy. Moreover, the level of lending remained generally stable, while the banks’ balance sheet expanded following a large increase in deposits. Accommodative fiscal and monetary policy were an important source of liquidity. The government has said that it plans to halve its deficit of the next year to 5.6% of GDP, as the economy picks up postCOVID. Do you think that this is feasible? Success or otherwise in controlling the deficit and the debt depends on the extent to which the economic growth rate exceeds the interest rate. Also helpful would be the drastic reduction of COVID-19 related expenditure and the return of strict EU spending rules.
You have stated that digital currencies/ transformation offered “enormous opportunities” in various spheres, such as facilitating cross-border payments and promoting financial inclusion, but we should go for a “cautious approach”. What exactly do you mean by that? Digitalisation, innovation, and changes in consumption patterns have promoted the creation of several digital currencies. These currencies can potentially reduce transaction costs, facilitate cross-border payments and foster innovation across several sectors, leading to efficiency gains and enhanced availability of financial services. However, they also pose serious risks. Unregulated or poorly designed digital currencies can be used for illegal activities, damage the monetary policy transmission mechanism, increase the cost of borrowing, make economies more vulnerable to abrupt movements of capital or destabilise emerging markets. This is precisely why we need to be cautious. Regulation may help us to take advantage of these benefits, while mitigating some of the risks. In July, the ECB decided to launch the investigation phase of a digital euro. The Central Bank of Malta, as part of the Eurosystem, is participating in this project. What do you think are the main changes needed for Malta to be taken off the grey-list as soon as possible? The fact that Malta passed through the Moneyval examination but got stuck on the FATF one means one thing – we have very little to show in terms of effectiveness, considering the reforms we have carried out. Our credibility requires us to score, not just play well. For this to happen the police, the prosecutor’s office and the courts need now to focus on raising their efficiency. One expects the courts especially, but as well the whole legal profession, to get the best systems expertise to rehaul our antiquated court system and bring it on par with our European peers. n
