(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001100780001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: January 12, 2017
• Document Release Date: August 20, 2010
• Sequence Number: 1
• Publication Date: October 9, 1984
• Content Type: MEMO

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Memorandum for:
(1b
The attached typescript was sent to Roger
Robinson, NSC Staff per the request of David Wigg.
EUR M84-10203
Distribution:
Original - Roger Robinson
1 - ADDI
1 - OD/EURA
2 - EURA Production
4 - IMC/CB
1 - WE Div. File
1 - CM Branch File
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EURA/WE/CM
E U R A
Office of European Analysis
Directorate of Intelligence
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
Malta's Economic Situation
9 October 1984
Summary
The Maltese economy, lacking natural resources and a
solid agricultural base, relies on trading and tourism and
is crucially dependent on foreign investment and
assistance. The recession in Western Europe -- which
accounts for some two-thirds of Malta's trade -- has slowed
economic growth from 11 percent annually in the 1970s to an
estimated 1 percent in 1983. Traditional industries --
shipbuilding and repairing, tourism, textiles, and clothing
-- have all been hard hit.
Malta is now hoping to reorient its industrial base
toward more sophisticated technology. Progress, however,
will depend to a large extent on attracting foreign
investment in relevant fields. Although the government is
offering strong inducements to export-oriented foreign
investors in an effort to stimulate employment, there are
several disincentives that make massive investment
unlikely:
-- Malta's infrastructure is poor: water shortages
are chronic, electrical generation capacity is
insufficient, and the telecommunications network is
inadequate.
-- The government presence in industry is pervasive
and tends to be both intrusive and heavy-handed.
This memorandum was prepared for Roger Robinson of the NSC Staff by
Office of European Analysis. If there are any questions
please contact
EUR M-84-10203
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-- The political situation is volatile; tensions
between the ruling Labor Party and the
Nationalists, as well as between the government and
the Church are likely to persist for some time.
Prime Minister Mintoff is capricious, and his most
likely successors do not seem any more likely to
provide a stable and attractive environment for
investors.
Prospects this year are for a modest recovery. It will
be accompanied, however, by a continued rise in
unemployment, which may further discourage investors since
it will probably ensure that the government ll continue to
deny permission to lay off workers.
Economic Background
The 1970s marked an important turning point in Malta's economic
history. After closing a NATO base which at its height employed 5 percent of
the total labor force and contributed roughly 30 percent of GDP, Malta
diversified into textile manufacturing and mass tourism. But as the Labor
Party government increased benefits to its working class constituency, Malta
slowly lost the labor cost advantage that had given it a competitive edge. It
now hopes to restructure its industrial base toward high technology sectors to
accommodate more highly skilled labor, but it lacks any specific long-range
industrial plan.
With no significant natural resources and lacking a large local market,
Malta is by nature a trading economy. Exports of goods and services totalled
nearly $700 million in 1983 (equivalent to about 73 percent of GDP) while
imports stood at about $850 million (some 90 percent of GDP). Because
manufacturing is primarily geared to assembling products, imports are
dominated by industrial supplies, capital goods, and fuel. Foreign exchange
earnings come principally from textiles (which account for over half of
merchandise exports), tourism, engineering products, and ship repair
services.* Malta has shown a persistent structural deficit on the merchandise
trade balance, but the current account has maintained a surplus based on the
strength of tourism earnings, remittances from Maltese workers living abroad,
and official grants. Investment inflows also have helped the overall balance
of payments.
Government influence in Malta is pervasive. Public enterprises and
parastatal companies have assumed an increasingly important role in recent
years, particularly in banking, transportation, overseas trade, and
communications. The public sector directly employs 24 percent of the total
labor force and has a controlling interest in over 50 companies. Although
some of this growth is the result of a concerted program of government
intervention, much of it reflects ad hoc responses to specific crises and
opportunities -- or retaliation against political opponents.
*Soviet trade data, which includes ship repairs shows that ship repairs by
the Maltese increased from about $100,000 in 19A2 to $4,000,000 last year.
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Impact of Recession
Partly because of the recent recession in Europe, Malta's economic growth
in 1982-83 slowed significantly after the heady average annual pace of about
11 percent sustained during the 1970s. In 1982 real growth slowed to an
estimated 2 percent, and last year it was down to about 1 percent as nominal
GDP reached nearly $1 billion. All of Malta's economic mainstays -- ship
repair, textiles, and tourism -- have suffered. The most dramatic consequence
of Malta's 1983 recession was the surge in unemployment: the official figure*
almost doubled during 1981-82 and increased a bit more in 1983. The socialist
government responded by:
-- Seeking foreign assistance in the form of grants and loans.
-- Working in tandem with the General Workers Union to block ailing
companies from shedding workers.
-- Expanding public sector employment (principally on public works
projects).
-- Imposing profit limitations (10 percent for importers, 10 percent for
wholesalers, 15 percent for manufacturers, and 20 percent for
retailers).
-- Restricting import licenses and limiting business travel.
-- Makin4 capricious tax assessments that favor political supporters.
In addition, the government has favored countries that agree to buy the
equivalent in Maltese goods and penalized those with which the balance of
trade is unfavorable. Over 65 categories of imports have been banned. Most
notably, this past year Valletta has forbidden the import of Japanese and
French goods because the government alleges that these two countries are not
doing enough to redress their trade imbalances with Malta.**
Prices were frozen indefinitely in November 1982, and a "voluntary" wage
cap was decreed on 1 January 1983. The price freeze is of indeterminate
duration and has effectively leveled living cost increases for over a year and
a half. The wage cap will remain in effect "as long as necessary." It has
somewhat improved Malta's relatively uncompetitive labor rates.
*Official government statistics admit to a 9 percent unemployment rate, but
the opposition Nationalists insist the real figure is closer to 14 percent and
some party leaders put it substantially higher.
**Imports from Taiwan, Hong Kong, and Israel have been forbidden for some
time, but political reasons were also a factor.
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The Tourism Industry
The tourism sector traditionally depends heavily on lower- and middle-
income tourists from the UK who tend to cancel travel plans in periods of
general economic decline. Although the islands remain attractive to tourists,
both Greece and Spain now offer equivalent facilities at lower prices.
Morever, Malta lacks the diversity of facilities that encourage repeat
visits. Tourism experienced a 16 percent decline last year. Even so,
earnings totaled about $160 million in 1983, or some 16 percent of GDP, and
the industry accounted for about 6 percent of total employment.
Maltese officials have high hopes for a newly refurbished gambling casino
that opened last July under new Lebanese management. (The former British-
based owners were forced to sell out and are currently appealing their case
before the Maltese courts.) Mintoff cohorts are heavily involved in the new
venture, which probably accounts for management's ability to fire 20 union
workers in order to hire attractive hostesses. The success of this new
venture depends not only on Lebanese marketing ability, but also on the
attractiveness -- currently dubious, according to Embassy reports -- of
neighboring hotels and rest ts. The Maltese themselves are prohibited
from using the casino.
Symbolic of the problems faced by the tourist industry was the closing of
the country's major hotel last year, which was accelerated when the Labor-
controlled General Workers Union (GWU) would not allow the hotel to discharge
35 workers. Moves by private industry to lay off workers are ,routinely met by
strike threats and charges that the owners are "unpatriotic."
Maltese Socialism -- and Pragmatism
The Labor Government has set up an extensive social welfare system,
including free medical care and a generous pension system. The cost of these
programs has been bearable thus far because of the relatively small number of
retirees and because foreign aid* has paid for much of the Government's
capital development program. Financing such an expensive social welfare
system has become increasingly difficult, however, and has reduced the funds
available for developing infrastructure to support tourism and industrial
expansion.
Despite its leftist political ideology, the Maltese government is
fiscally conservative -- budget deficits are rare and always small relative to
GDP. When they occur, deficits are financed by concessional foreign grants
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and loans* -- usually linked to specific development projects -- or by drawing
down accumulated cash surpluses. Monetary policy has traditionally been geared
to supporting development goals rather than playing an active role in demand
management. The Central Bank, three commercial banks, and five other
financial institutions comprise the Maltese financial system. The government,
mainly through equity ownership, has substantial influence over the operation
of the system.
Mintoff is currently considering creating offshore banking facilities in
hopes of attracting foreign investors. Malta's proximity to the established
financial centers in Switzerland, its lack of a legal framework, and the
government's record of interference in the private sector, however, all
militate against Malta becoming an important offshore banking center.
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Foreign Trade and Investment
Malta's foreign trade is oriented overwhelmingly toward the European
Economic Community. In 1982 the EC supplied almost three-quarters of Malta's
total imports, and bought a like percentage of its exports. Despite a
continuous flow of ministerial and parliamentary visitors to Communist
capitals, Malta's trade with the East remains small. In 1983 Malta sent 5.3
percent of its total exports to Eastern Europe, and 2.0 percent of its total
imports came from the Bloc. Maltese officials claim that this represents an
increase of over 25 percent in total trade with the East, but they clearl are
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Last January, Mintoff visited Tripoli, ending the three years of cool
relations that followed Libyan armed interference with Malta's oil-drilling
operations. Libya has long been one of Malta's best export markets, and
Libyan investment in joint ventures has been high (see Annex). From the
Maltese point of view, the primary focus of relations with Libya is the
development of economic, trade, and industrial relations. Mintoff has also
played the Libyan card in the past to extract a better bargain when he
negotiates renewal of the Italy-Malta aid agreement. He has balked, however,
at Libyan requests that impinge on Maltese sovereignty. In 1980, for example,
he refused Tripoli's demand for military bases even though it meant losing the
oil provided by Libya at concessionary prices -- a subsidy worth some $35
million annually.
Private foreign investment remains crucial to Malta's industrial
development. Most of the export industry is foreign owned, and the largest
private employer is a subsidiary of a US clothing manufacturer. There are
currently about 150 foreign companies operating in Malta, most of them
subsidiaries of West European firms, primarily West German (47 firms) and
British (40 firms).
*In 1983, Malta hoped to help finance the projected deficit of $46 million
with $32 million in foreign loans and grants. Valletta expected a total of
just over $14 million of these loans from Saudi Arabia and Abu Dhabi, mainly
earmarked for the Marsaxlokk port project. The largest portion of grants was
due to be provided under the Italian bilateral agreement, with EC grants
making up the remainder.
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Recently Valletta has been encouraging investment in areas such as
optical equipment, aviation, medical and surgical supplies, light engineering,
exploration for oil on a joint basis, and marketing. Malta leases government-
built factories at concessional rates and offers foreign investors the same
tax incentives available to domestic investors -- including tax exemptions for
imported capital equipment and tax reductions for reinvested profits. The
adaptibility of the labor force, the low level of industrial unrest, and the
duty-free access to the EC (except for certain textile and
agricultural
products) have been important factors in attracting foreign
investors.
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Disincentives to Foreign Investors
There are several important disincentives, however, the most obvious
being Malta's weak infrastructure. The island's inadequate water supply and
distribution system have already hampered the manufacturing and tourism
sectors and visited considerable hardship on individual households. Recent
contracts for two desalination plants should eliminate major shortages,
although managerial inefficiency may limit their effectiveness. Electrical
generation capacity is insufficient, and installation of additional generators
is behind schedule. Malta's telecommunications network.. mfr, is
inadequate for an increasingly sophisticated economy.
The political situation presents an equally serious drawback. A
prolonged dispute between Malta's two political parties is exacerbating the
economic crunch. Polarization of Malta's class-conscious society is nothing
new, but the rift has deepened since controversial parliamentary elections in
1981, when Mintoff kept Labor in power through gerrymandering. The opposition
Nationalists have tried passive resistance, boycotts, and refusal to take
their seats in Parliament to force Mintoff to accept "the will of the
majority," but Mintoff remains in control. It seems likely that he will
postpone elections -- due in 1986 -- if he is not confident of winning.
More recently, the opposition and government have locked horns over
government attempts to seize control of all private education, including
Catholic schools. The Education Act of April 1984 has pitted a large segment
of the population -- including some Labor Party members whose children attend
Catholic schools -- against government and Labor Party forces in increasingly
violent confrontations. An attempt by Mintoff to appropriate some Church
property has been declared unconstitutional by the courts (whose judges are
still predominantly Nationalist-appointed). The ransacking of the
Archbishop's curia and of the Valletta law courts by Labor Party bully boys
last week is a clear sign of deep underlying tensions that will continue to
shake investor confidence.
Another source of potential concern for investors is Dom Mintoff's
authoritarian and capricious style of governing. The Labor government has for
years had an adversarial relationship with the predominantly Nationalist
business community. In addition to forbidding layoffs and generally taking
the union's side in disputes with management in both local and foreign-owned
firms, the government has resorted to petty harassment. In a recent dispute
between the General Workers Union and a concrete company, for example, the
government cut off teleohone ervice to the factory and the managing
director's house.
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Leading businessmen responded to this hectoring by forming the
Confederation of Private Enterprise (COPE), which has published a summary of
private sector proposals for spurring Malta's economic recovery. Their ideas,
not surprisingly, clash with most of the Labor government's tenets and have
fallen on deaf ears. COPE's leaders, who head Malta's two largest companies,
have been personally threatened by Mintoff.
Although we doubt that Mintoff will ever drop his basic antipathy to big
business, the new laws on offshore banking and other service activities under
consideration suggest that he is being forced by economic realities to soften
his anti-capitalist posturing. It may be significant that the delegation
picked to attend the Maltese-American Business Council meeting last May
represented the best of Malta's business community -- rather than the usual
collection of government hacks.
Outlook
The Maltese manufacturing sector will benefit somewhat from the moderate
economic recovery in Malta's export markets this year. Export gains, however,
will be limited by the relative strength of the Maltese lira, growing
competition in textiles and clothing from LDCs, and protectionism among
Malta's customers. Prospects, therefore, are for only a modest economic
rebound this year and a continued rise in unemployment.
In the longer run, Malta's economic future will depend largely on the
strength of economic growth in Western Europe and the extent to which it will
translate into demand for Maltese exports. Given stable external conditions,
Malta's economy should continue to expand, although the high growth rates of
the 1970s are unlikely to be repeated. Malta's ability to attract new
investments in higher-value-added industries will also be crucial.
For US investors, the most promising avenues appear to be Malta's newly-
discovered interest in facilitating offshore banking and other service
industries. The US Embassy in Valletta suggests that design and engineering
firms could find it profitable to form joint ventures with local companies
which have good contacts in the Middle East and Africa. In addition, US-flag
shipping firms could use Malta's excellent port facilities for a transshipment
point. If Mintoff really has decided that the plight of the Maltese economy
will force him to bite the bullet and "deal with the devil" (multinational
companies), he could bulldoze through legislation that would make Malta's
services sector competitive with Greece, Cyprus, and the Persian Gulf
States. In this case, Malta would become attractive to American companies
that plan to deal with Africa and the Middle East.
The drawbacks and risks for foreign investors would still be
considerable, however. In addition to infrastructure problems and political
volatility, potential investors would have to bear in mind Malta's remarkably
poor track record in its dealings with foreign companies. Firms already
established in Malta complain about difficulties in obtaining import permits
and foreign exchange, complications with local tax authorities, and whimsical
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changes in government regulations. Moreover, Mintoff -- who usually reviews
and approves each new commercial deal personally -- favors a number of
tactical ploys that frequently drive potential investors away. One of his
favorite gambits is to wait until a firm is ready to sign the contract and
then spring unacceptable demands on them. We do not believe that Mintoff is
about to relinquish power (even if he does move up to the Presidency or over
to the ministry of trade as rumored), and in any case his most likely
successors do not seem any more likely to provide a stable and attractive
environment for investors.
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Malta's Vital Statistics:
The Republic of Malta consists of 3 islands -- Malta, Gozo, and
tiny Comino, covering a total of about 122 square miles. Its
capital is Valletta.
Position: Malta is located 60 miles south of Sicily, 180 miles
from the North African mainland.
Climate: Temperate. Mild winters, warm, dry summers. Average
yearly temperature of 65 degrees. Average
rainfall 22 inches a year, but almost no
rainfall between May and September.
Population: About 315,000.
Physical features: No mountains or rivers, but a series of low
hills with terraced fields on the slopes
characterize the island. A well-indented
coastline provides numerous harbors, bays,
creeks, sandy beaches and coves.
Religion: Predominantly Roman Catholic.
Language: Though they have their own language, English is spoken
fluently by the majority of the Maltese.
Government: Malta's Constitution provides for a parliamentary
democracy.
Political
Parties: The 2 dominant parties are the Labor Party now in
power and the Nationalist Party currently in
opposition.
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Libyan Investment in Malta
There are no figures available on total private foreign
investment in Malta. The US Embassy estimates that the UK has
probably been the largest source of foreign investment in money
terms, followed by the US, Libya, and West Germany. The book
value of Libyan investment is estimated at about $50 million,
compared to $65 million for US firms. Libya participates in at
least 21 companies. The most significant involvement is through
the Libyan Arab Foreign Investment Company (LAFICO), which has
controlling interest in two Libyan-Maltese investment companies
-- the Libyan Arab Maltese Holding Company (LAHMCO) and the
Libyan Maltese Investment Company (LMIC). LAHMCO, the larger of
the two holding companies, has a stake in 9 companies, most of
which have received investment funds from France, the UK, Brazil,
and Italy. These companies export a significant proportion of
their output to Libya.
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Table 1. Maltese Foreign Trade
Thousand $
Exports*
Imports
1979
1983
1979
1983
Total
424,290
363,340
753,670
732,540
OECD
338,730
284,380
686,990
674,540
Of Which:
France
13,310
7,870
39,432
25,082
FRG
143,520
116,750
107,540
117,130
Italy
17,980
36,050
167,440
196,130
United Kingdom
84,600
61,520
161,850
123,370
United States
8,480
11,570
47,390
83,790
USSR
60
5,840
2,470
1,640
Eastern Europe
12,710
13,390
12,020
13,260
Romania
0
0
1,790
300
Poland
7,870
4,030
3,790
4,680
East Germany
570
1,170
560
520
Hungary
40
770
1,410
1,280
Czechoslovaki
3,950
5,690
4,440
3,610
Bulgaria
280
1,730
30
2,870
Albania
NA
0**
NA
2,265
Cuba
0
0
50
40
PRC
110
10
5,590
3,420
Yugoslavia
210
260
320
11,800
Libya
33,170
11,990
540
250
North Korea
0
0
20
680
*
Includes re-exports.
**1982 data.
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Table 2. Why Negotiations With Malta Can Be Difficult:
Some Recent xamp es
US -- In 1983, when Bluebell, Wrangler's local subsidiary
in Malta, wanted to lay off up to 330 workers
because of declining profits, the Maltese
government refused permission. So far, Bluebell
has settled for shedding workers by attrition and
instituting a 4-day work week. At some point,
however, Bluebell may have to choose between
defying the government and closing down the Malta
Norway -- In June 1983 Norwegian honorary consuls and
business leaders met with Foreign Minister
Sceberras Trigona. They were "astounded" by his
implication that Norway somehow "owed" something to
Malta, and that it was Norway's responsibility to
promote Maltese exports to Norway and o encourage
Norwegian investment in Malta.
Austria -- Tripoli-based Austrian Ambassador Matsch,
interested in establishing a consular presence in
Malta, was "rudely shooed out" of the Foreign
Minister's office last March. His request for an
exequatur was dismissed with the words, "You have
to do something about buying more Maltese goods and
changing your lop-sided trade balance before we can
consider exequaturs and the like."
France -- In March 1983, the French commercial counselor in
Valletta remarked that Maltese officials cannot
understand why the French government is not able to
direct its parastatal corporations to come to
Malta; he complained of the difficulties he had in
satisfying the Maltese government, which wants
instant gratification from its political/economic
USSR -- After a 5-day visit in Malta to discuss building a
new surgical instrument factory in July 1984, the
Soviet delegation left without reaching any
agreement. Negotiations were broken off in part
because of problems concerning price and quality of
goods, but the final straw came when the Maltese
government refused to give bank guarantees for
payment of Soviet equipment to be installed in the
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Italy -- Following a meeting with Maltese officials in May
1984 to negotiate a new financial protocol, the
Italian Ambassador commented: They wanted every
last penny from the old protocol, with no strings
attached, before they would begin discussing a new
protocol -- "as if they were doing us a favor by
negotiating a new protocol." The Deputy Director
of Political Affairs in the Italian Foreign
Ministry told Ambassador Rentschler earlier this
month that he "lamented the naivete of the Maltese
in believing that the Italian government could
simply order one or another firm to open shop on
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Unbridle private enterprise from the effects of 700
government price orders, licensing controls, and frequent
policy changes. In short, let the profit motive play a
positive role in the economy. -- Have the government invest
more of its resources in the economy. While the government
has been husbanding its resources (as evidenced by the large
foreign exchange surpluses), the slack in investment has been
taken up by the private sector. Private investment, which in
1976 represented 43 percent of total investment, now accounts
for 73 percent of total investment.
Privatize the banks in order to streamline this sector. Also
allow foreign banks to come and create an off-shore banking
center.
-- Eliminate "ex-officio" tax assessments.
-- Create foreign investment incentives. The previous
nationalist government offered a 10-year tax holiday for
foreign investors. The current government ended this
practice and current incentives are minimal.
-- Education. Upgrade trade schools. In the longterm,
integrate science and technology training with Malta's
industrial development.
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