Issue link: https://maltatoday.uberflip.com/i/1226904
9 maltatoday | SUNDAY • 29 MARCH 2020 INTERVIEW rates on mortgages, personal and business loans and that they will also waiver any relat- ed fees to these extensions. These strategies will mean that the interest rates charged during this period of crisis will be effectively zero. The banks know that their policies direct- ly influence most economic ac- tivity; and that in this time of crisis, they cannot put unrea- sonable burdens on households and businesses. The banks know that they can only survive if households and businesses survive. So the commercial banks are offer- ing packages which will keep households and businesses afloat to avoid unnecessary hardships to many economic agents. The economic stimulus pack- age will see the government increase public debt to around 50% of GDP. This is still a long way from the debt-to-GDP ratio Malta had back in 2013 (around 70%). This gives government more space to manoeuver. Should government have used more of that space to widen the reach of its aid package? The current debt to GDP ra- tio stands around 43%. This ratio declined steadily from around 70% in 2013, due to the significant economic expan- sion and fast economic growth witnessed in these last seven years. This ratio is expected to rise to around 50% after the debt incurred through this stimulus package. So yes, the govern- ment has a lot of 'fiscal space' available to extend further its stimulus package. The current situation, howev- er, is that no one knows exact- ly how long the effects of this crisis will last. Moreover, this pandemic is reaching several countries at different points in time, causing economic contractions in big economies at different times. We had an economic contraction in China around January to February; in Europe, from March to April; and in the USA, just starting in March. This will add to further negative spillover effects in the world economy over a longer period of time. The Prime Minister said that the Government is being cau- tious, and that it will continue to monitor closely the situa- tion and offer further stimu- lus when the need arises. So given the uncertainty around the length of time and severity of this global crisis, the Prime Minister has opted to proceed gradually increasing the stimu- lus as the crisis deepens. This newspaper has editorial- ly called for a windfall tax on companies (including banks) which have posted substan- tial profits in recent years, to help mitigate the crisis. Do you agree with such a measure? The banks have also issued a statement this week, strongly opposing this idea of a windfall tax on their profits. They have stated that the banks are heavi- ly supervised and that they have to face a lot of regulations, in- cluding having adequate share capital to protect them in times of non-performing loans. Traditionally, banks pay 35% corporate tax on their profits, and distribute around another 35% as dividends to their share- holders, which include a lot of pensioners using this dividend to supplement their pensions. The last 30% of profits, the banks keep as retained earn- ings to continue to strengthen their share capital base. The banks stated that they employ a lot of workers, and that they have a very important role to play in the economy, because through their lending they help businesses contin- ue to expand their businesses and promote further economic growth and employment in the overall economy. For these reasons, and to avert any possible banking cri- sis (also to protect the vast de- posits of clients in the banks), I think that the banks should be incentivized to remain healthy to be able to continue perform- ing their crucial role in the economy. Prime Minister Robert Abela has argued that it is unwise to use all the country's war chest at one go; drawing a parallel be- tween the staggered approach in the health response, with a staggered approach of increas- ing the stimulus package as we go along. But if the country eventually goes to a total lock- down, will not that also mean that the government would have to extend assistance to more businesses? As discussed above, the Prime Minister is adopting a cautious approach, similar to the cau- tious and staggered approach the Government is adopting in the health system. The Prime Minister also said that this might not be the last stimulus to be announced and that the Government will increase the stimulus if the situation dete- riorates and more workers will be affected. If the country will eventually go into total lockdown, then yes, many more workers will be affected as not all workers will be able to work remotely from home. In such a case there would be a bigger drop in GDP, and a bigger drop in salaries and income of families. This is why we should all do our part and follow closely all directives of the Health Authorities so as to prevent this virus from spreading further in Malta. How easy do you envisage eco- nomic recovery be after the cri- sis? Will the Keynesian model, adopted during the crisis, out- last it in future: with govern- ments taking a more active role in the economy? The Keynesian model was born in the middle of the Great Depression in the 1930s: advo- cating government interven- tion with fiscal policy to off- set the huge decline in private sector investment. Economic history suggests that the pri- vate sector is more efficient in the production of goods and services in a market economy. However, the government still has an important role to play in providing fiscal stimulus when needed, to avert unemploy- ment and undesired declines in income and output. Having said this, it is not easy to predict how the recovery period will be, because no- body knows exactly how long the crisis will last, and how far-reaching its effects will be. It is challenging to accurately predict how many persons in the world will be affected, or how many deaths will occur. The same applies to Malta. Nobody knows exactly how far the virus will spread, or the se- verity of its impact. Much will depend on the cooperation of the general public with the Health Authorities. If there is no general lockdown, many thousands of jobs will be pro- tected, and thousands of work- ers will continue to receive their weekly income. If there is a general lockdown, the whole economy will be shut down, except fot a few of the vital ser- vices, and those workers who can continue to work remote- ly from home. However, many more will suffer from a total lockdown. The more businesses shut down, the more difficult and longer the recovery will be. If this would be the case, than it would be helpful for the government to create further schemes to continue to support businesses during recovery. Moreover, it will also depend on what will happen in Europe, with which the Maltese econ- omy is so closely linked. Will tourism in Europe be the same after the crisis? Will Malta be able to continue to attract over 2 million tourists per year? Will the tourism and hospitali- ty industry in Malta ever be the same again? In the case of the Maltese economy, a lot will depend on positive answers to these ques- tions. The more businesses shut down, the more difficult and longer the recovery will be. If this would be the case, than it would be helpful for the government to create further schemes to continue to support businesses during recovery