Sustainability of Malta’s economic growth and the role of SMEs

In recent years, the Maltese economy has expanded very strongly. Since 2010, Malta’s gross domestic product has grown by 46%, whereas in the European Union the increase was of just 10%. Furthermore since 2012 Malta has consistently had the highest growth in employment amongst all European Union countries, such that the unemployment rate has fallen below 4%.

This growth has been accompanied by a significant turnaround in the country’s balance of payments, which now features a considerable surplus which contrasts with the deficits that had characterised previous years. At the same time, rapid growth has also resulted in a large fiscal surplus, as buoyant revenue has offset rising government expenditure.

Malta was largely unaffected by the financial crisis of 2007-08 and the subsequent European sovereign debt crisis. One of the main reasons for this was that Malta’s economic growth is based on a significant restructuring of the islands’ economic structure. Whereas in countries like Ireland, Cyprus and Spain, high economic growth before the crisis was due to the accumulation of macroeconomic imbalances, such as fast credit growth and a significant rise in consumption, in Malta most of growth has reflected an increase in exports. The latter reflected the fact that after accession to the European Union, a number of new high value added export oriented services were attracted, which complemented the islands’ strong manufacturing and tourism sectors. Access to the European Union’s single market, combined with flexible, well-trained and competitively priced labour resources and a business-friendly environment, led to increased foreign direct investment, while reforms to liberalise the economy strengthened existing sectors. The resulting diversification of economic activity made the country more resilient and less dependent on sectors such as semiconductor manufacturing and package tourism, which are more prone to cyclical fluctuations in demand.

When analysing recent economic developments, there has been a tendency to overemphasise the contribution of certain large foreign direct investments and particular sectors. However a closer look at official statistics paints a rather different picture where small and medium-sized entities accounted for the lion’s share of growth.

Between 2012 and 2016, the number of enterprises in Malta grew from just over 72,000 to nearly 95,000. This reflects the fact that the rate of new businesses being established nearly doubled to more than 11,000 a year, while the rate of business closures remained relatively stable.

Data published by the National Statistics Office1 indicates that the bulk of the increase in business units in Malta was due to small- and medium-sized entities. In fact, 99% of the overall increase was amongst firms that employ fewer than 10 persons, so-called micro firms. Overall the number of firms in this category grew by 32% in just four years. That said, there has also been significant growth in the amount of firms employing between 10 and 49 employees, which was up by 16%, and in the number of firms employing more than 250 employees, which was up by 22%. By contrast the number of firms employing between 50 and 249 employees rose by just 2%.

Official statistics show that small and medium sized entities in Malta are very diverse. Micro enterprises are dominated by the wholesale and retail sector, which comprises nearly a fifth of all micro firms. This is followed by the financial and insurance sector, at 16%, and the professional, scientific and technical activities sector, at 12%. While micro wholesale and retail firms have continued to grow healthily, rising by nearly 16% between 2012 and 2016, the largest relative growth has been amongst administrative and support services micro firms, whose numbers were up by close to 69% over their 2012 level. The number of financial and insurance micro firms, together with professional, scientific and technical micro firms also grew very strongly, with growth rates of 62.8% and 56.1%, respectively. Other services sectors, such as information, communication, education, remote gaming and real estate, also showed strong double digit growth in the amount of operating firms.

Growth in the number of small-sized entities, i.e. those employing between 10 and 49 employees, was also fairly spread across sectors. The largest growth appears to have been in the accommodation and food services sector, followed by remote gaming, wholesale and retail, professional, scientific and technical sectors. By contrast, growth in the number of medium-sized entities, i.e. those employing between 50 and 249 employees, was nearly equally divided between the education and the remote gaming sectors.

Besides information on the number of firms by employment size, the Eurostat database also gives a lot of additional data on their performance. For instance, it indicates that the value added of micro firms in Malta nearly doubled between 2011 and 2015 (the latest year for which data are available). In fact, Eurostat data suggest that while in 2011 micro firms generated 29% of all the value added of the business economy sector, by 2015, their share had risen to 37%. By contrast the value added of large firms, i.e. those employing more than 250 employees, rose by just 10% during the same period and their share of value added fell from 28% in 2011 to 21%. This indicates that over time, the relative contribution of small- and medium-sized entities to the generation of value added has risen greatly.

Small and medium-sized entities have also been the main generator of jobs according to Eurostat’s annual enterprise statistics for Malta. Between 2011 and 2015 there was an increase of 13,595 persons employed in the business economy sector. Out of this growth, less than 14% was due to firms employing more than 250 persons. Micro firms registered an increase in employment that was nearly double that observed amongst the largest firms. That said, while employment in micro firms grew by nearly 9%, in small- and in medium-sized entities the increase in employment was at 16% and 14%, respectively.

These trends show how vital the contribution of small- and medium-sized entities has been to the success of the Maltese economy. While large-scale investments are undoubtedly important, the reality on the ground is that a lot of the dynamism of the islands’ economy is due to the efforts of entrepreneurs and relatively small-scale operators. These have created the bulk of jobs and played a key role of the diversification of the islands’ economy.

A recent survey carried out by the European Investment Bank amongst Maltese firms indicates that micro and small firms2 in Malta are planning to focus their investment much more to be able to launch new products. They are also planning to focus much more than large firms to invest on software and information technology. This suggests the potential for further growth in this sector. However, the survey shows that micro and small firms are relying to a large extent on internal financing, on account of high cost of financing and the need for collateral.

Further innovation and diversification are key to the sustainability of Malta’s economic growth. Small and medium-sized firms have a big role to play, possibly even more than in recent years. Taking steps to ensure that they operate in an optimal business environment, particularly good access to finance, is therefore very important.

Footnotes

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