Issue link: https://maltatoday.uberflip.com/i/1444419
T he new year brought with it a stark reminder of the phenome- non of rising prices. Global food prices soared 28%, on an annual average, for all of 2021 compared to the previous year, according to a statement released last week by the United Nations Food and Agriculture Organization. is is part- ly attributed to the high cost of energy, high freight charges and the ongoing re- strictions caused by the global Covid-19 pandemic. Such factors leave little room for opti- mism about a return to more stable mar- ket conditions in 2022. Recent figures from the OECD, a group of 38 mostly developed countries, indicate that infla- tion is at a 25-year high, largely driven by soaring food and energy prices. Prime Minister Robert Abela was questioned by journalists on how the government intends to fight price inflation. He said the government is "sensitive" to the re- ality of inflation, recounting how it has reduced fuel taxes and absorbed higher energy costs to prevent fuel and electric- ity from becoming more expensive. A new political party, Volt Malta is pro- posing the minimum wage increase to €1,100 per month over a three-year pe- riod to address poverty. e party said a living wage directorate should be set up within the National Statistics Office to regularly calculate the living wage. It said that the recommendation of the European Commission for a decent min- imum wage is 60% of the median wage in the country. Eurostat data shows Malta's current minimum wage is 43% of the median wage. e Nationalist Party in oppo- sition, has urged the government to convince the European Commission to set up a €40 million rescue fund to help Maltese importers and exporters cope with higher transportation costs. e question rises whether Malta can afford to borrow more to help quell the rising tide of imported inflation. e an- swer is that the island is highly leveraged. It entered the European Union with a 150% corporate debt-to-GDP ratio and GDP at €4.8 billion, this estimates that corporate debt totalled €7.2 billion. Cor- porate debt peaked in 2011 at 230% of GDP and remained at over double GDP during the 2010s. e European Com- mission had warned Malta on its high corporate debt levels back in 2013. Back to the issue of price explosion, it is relevant to mention how last week the Hungarian Prime Minister announced that his government would cap the pric- es of six basic foodstuffs in order to fight rising inflation. is may not come as a surprise given the sudden rise in essen- tial food items. As can be expected, the wholesalers and importers lobby objected to this move saying consumers may be nega- tively affected by the decision, as shops will compensate for the losses on the six products by increasing the prices of others. Most blame the 'robbing Peter to pay back Paul' scheme as a futile exercise that will not solve the basic problem of imported inflation. For these reasons, it is not clear why consumers would ben- efit from the cap while having the prices of other products in their basket rise sig- nificantly. Does this mean that the State must not intervene in the free market to help sta- bilise prices? As can be expected, social instability will result caused by inflation linked with reduced mobility due to Covid health measures will exacerbate the level of protest by consumers. In Hungary, the government contends that the recent price caps are capable of re- ducing inflation by two percent. Opponents to the cap, argued that it is better to reduce vat on consumer pur- chases but the Fidesz government disa- greed with tax cutting - saying it would only benefit retailers and would not reach consumers, which is the goal of the current measure. Can history teach us a lesson as to the effectiveness (or other- wise) of state intervention to control im- ports and reduce cost of essential items. To learn from past the experience, we need to switch back the clock to inflation and unemployment ridden times of late seventies in Malta. As a hasty solution, the Mintoff admin- istration decided to ipso facto become the sole importer of all essential com- modities including tinned milk, cheese, butter, coffee, sugar, canned tuna, corned beef and luncheon meat. It was in 1978 that 17 leading food importers were summoned to the Ministry of Trade and formally, politely but firmly, informed that the government had essentially tak- en over absolute control of importation of essential commodities and that even communication with the principals abroad was henceforth banned as the Department of Trade would be solely re- sponsible for sourcing the products from whoever and wherever. is spurned the birth of the bulk buying scheme. Bulk buying was introduced as an at- tempt to keep the cost of living down. Linked to this was the imposition of a prices and wages freeze, in response to the massive hike in the price of oil. is State price intervention replaced a com- mercial activity previously handled by the private sector. Did it succeed to pro- vide quality products at reasonable and stable prices? e jury is still out, but with hindsight most agree that it was an intrinsically complex and flawed system which mostly served the purpose of sti- fling choice and spawned corruption at the expense of the consumer. Such draconian measures had their de- tractors. State controls always give way to suspicions of preference and kick- backs from leaked import licenses to fuel the black market. In defence of this State intervention introduced at a time when the economy was in recession, one needs to weigh the restriction of consumer choice and importers' freedom to trade with a flawed policy to cure chronic un- employment. Still, today, one can never justify State bulk buying monopoly as a pragmat- ic solution to help young families and pensioners to survive the spiralling cost of living. Perhaps a solution suggested by MEA to reduce vat over a number of items will be beneficial provided ad- equate supervision is forthcoming from the regulatory bodies to ensure that the cost reduction is passed to consumers (this is not easy). A fresh alternative is being suggested by the Opposition. It is advocating, that the State undertakes a large investment in a strategic international Intermodal hub which facilitates goods being trans- ported by different modes of transport to and from the country. As freight costs are a major factor attributing to price in- creases this hub has the potential of eas- ing prices of imported goods. In conclusion, nothing, is cast in stone and only time will tell if an effective cure to fight price inflation is found to lance the boil that is hurting consumers. Free market or state-targeted price interventions George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island 8 OPINION 20.1.2022