The Report included an introductory statement by the Governor which highlighted the economic and logistical events leading to Malta’s accession to Economic and Monetary Union (EMU), and looked ahead to the policy implications of euro area membership.

The Governor’s statement first recalled the positive assessments of Malta’s convergence process delivered by the European Commission and the European Central Bank (ECB) in May, which paved the way for the EU Council decision in July to admit Malta to membership of EMU, setting the permanent conversion rate for the lira against the euro at its central parity rate in ERM II of EUR1=MTL 0.4293. Following this decision, Malta successfully adopted the euro as its national currency on 1st January, 2008.

The Governor then referred to the expected long-term benefits of membership in a monetary union that has delivered price stability, job creation and economic growth.

The Governor went on to explain that since the processes of privatisation and trade liberalisation are now almost completed, further progress in strengthening productivity must be made elsewhere.

In the meantime, fiscal policy must remain supportive of macroeconomic stability through further consolidation. This is of the utmost importance not only in view of Malta’s commitment to achieve a balanced budget in 2010 and to reduce the debt ratio to below 60% by 2009, but also because fiscal policy is the only short-term countercyclical instrument available at the national level, he explained.

The achievement of a balanced budget is, therefore, a desirable objective, especially at a time when demand in Malta’s major export markets is slowing down and international commodity prices are rising.

The continued pursuit of fiscal balance should, in the Governor’s view, involve a greater emphasis on restraint in government spending, particularly in view of ageing-related cost pressures such as pensions and health-care.

This would eventually also create space for a further easing of the tax burden, and the release of more resources for growth-enhancing activities.

The Annual Report then went on to analyse global and domestic economic and financial developments in 2007. With regard to the former, it highlighted the resilience of the global economy in the face of turbulent financial market conditions triggered by the collapse of the high-risk credit markets in the US.

In its analysis of the Maltese economy’s performance in 2007, the Report noted that the continuing brisk pace of economic activity was reflected in an acceleration of the real GDP growth rate to 3.8% from 3.4% in 2006.

Domestic demand provided the main stimulus to growth, with net exports contributing positively but less markedly.

For 2007 as a whole, there was a decline in the domestic inflation rate, though prices rose more rapidly towards the end of the year in response to higher energy and food prices.

The Report then commented on fiscal developments, and noted that while part of the improvement in the fiscal position in 2007 reflected the favourable impact of the business cycle, it was also due to structural factors, as evidenced by a simultaneous decline in the cyclically-adjusted deficit.

In assessing monetary developments, the Report observed that growth in the monetary aggregates accelerated throughout 2007, following more moderate increases in the previous year.

This was a result of a significant rise in domestic credit, primarily in the form of loans to the non-bank private sector and, to a lesser extent, an increase in the net foreign assets of the banking system.

Money market interest rates rose during the year, as did long-term government bond yields.

Taking into account these developments, and also a tightening monetary policy stance in the euro area, the Central Bank of Malta raised its central intervention rate (CIR) by a quarter of a percentage point on two occasions during the year, in January and May.

Commenting on the Bank’s operations and activities, the Report described the Bank’s role in the preparations for euro adoption at both the policy and institutional levels.

On the policy level, the Bank continued to implement a monetary policy stance aimed at supporting the exchange rate peg, such that the Maltese lira remained unchanged from its central parity level in ERM II throughout the year.

At the institutional level the Bank participated actively in the work of the Steering Committee for Euro Adoption and the National Euro Changeover Committee.

In conjunction with the ECB, the Bank undertook an extensive publicity campaign related to the euro changeover.

Meanwhile, in exercising its statutory responsibility for maintaining financial stability, the Bank continued to monitor the domestic financial system, maintaining close contact with the Malta Financial Services Authority and the Ministry of Finance.

In 2007, the Bank’s operating profit rose to MTL12.3mn or EUR28.7mn, from MTL11.2mn or EUR26.0mn in 2006.