rate stability was never an issue and the strong presence of the euro in malta ’ s currency basket had also fostered convergence in interest rates. in fact, the interest rate criterion had been met long before eu accession. fulfilling the inflation criterion was not considered an obstacle either, as the inflation rate had been generally below the eu reference value, and the upward risks were largely related to the impact of the vat increase planned for january 2004. although inflation continued to exceed the eu limit for most of the period from the second half of 2004 until the autumn of 2006, this mainly reflected the introduction of measures aimed at aligning energy and fuel prices more closely with market rates at a time of spiralling oil prices. malta is totally dependent on oil, not only for electricity generation but also for water production. against this background, the authorities had two options : either to use the fact that malta did not meet the fiscal criteria to maintain the status quo and delay the implementation of sensitive reforms, with the risk of undermining growth prospects ; or to use the adverse impact of globalization on malta ’ s current account and the vulnerability of the fixed exchange rate regime to highlight the urgent need for a faster pace of reform, while holding out the promise of the expected benefits of the euro. the authorities chose the latter approach, including a rather ambitious programme of fiscal consolidation and a unilateral commitment to maintain the maltese lira / euro exchange rate at the central parity rate in erm ii. this appeared a natural way to buttress the economy ’ s long record of exchange rate stability, though it was also dictated by the need to counter harmful speculation at the time about the level of the exchange rate. three years after eu accession, that bold decision appears to have paid off. economic growth rose to 3. 3 % in 2005 and 2006, and is expected to stay around that level ; the unemployment rate stabilised, then eased slightly ; and fdi flows, which have always been important, strengthened further. the gap between productivity growth and wages narrowed to the point that unit labour costs are now increasing negligibly or falling, depending on the measure used. in 2006 the fiscal deficit ratio dropped below the 3 % reference value for the first time in several years, with the structural balance net of temporary measures shedding around 3. 7 percentage points since 2003. the debt ratio also trended downwards and is expected to fall below the 60 % limit by 2009. as the base effect of the energy price hikes

started to abate, moreover, the hicp inflation rate has stayed below the eu reference value since last november. meanwhile, the maltese lira continued to trade at the central parity rate against the euro in erm ii and the long - term interest rate converged further towards the reference value. as for the economic recovery, although this partly reflects stronger demand in malta ’ s main trading partners, it also owes something to the reforms implemented in recent years. these included measures aimed at increasing participation in the labour market and improving its functioning. school curricula have been modified and training opportunities broadened. there has also been heavy investment in ict infrastructure and education, as well as better targeted financial and technical support to smes, including a privately - managed venture capital institution. on the fiscal front, steps have been taken to reform the pension system and to avoid abuse of the social benefit system and tax evasion. in some areas, however, the pace of reform has been modest and the central bank of malta has repeatedly called for the remaining weaknesses to be addressed. in particular, more effort is required to ensure that domestic inputs are priced competitively, and hence the need for continued wage moderation ; to raise productivity levels ; and to ensure faster progress towards key lisbon agenda objectives such as educational attainment and innovation. measures aimed at strengthening the economy ’ s physical infrastructure and the quality of its human capital, a more efficient delivery of support services by the public and private sectors, and enhanced competition both in product and resource markets are crucial in this regard. this is the only way to increase the economy ’ s capacity to respond flexibly and competitively to new challenges and opportunities, and thus derive the full benefits of emu. a high level of economic convergence and flexibility, however, are not sufficient for a successful transition to the euro. this also requires both careful logistical planning and public acceptance of the single currency. as for the former, the necessary structures have been in place for two years and they seem to be working well. at the apex stands the national euro changeover committee ( necc ), which has drawn up a national master plan. the central bank of malta is represented on the steering committee which oversees the work of the necc, it participates in the financial sector committee of the necc and it is also present on a task force responsible for co - ordinating national training activities related to the euro. on a daily basis, moreover, the central bank of malta liaises closely with