Area: 316 sq km (122 sq mi)

Population (1997): 375,000

Capital: Valletta

Chief of state: President Ugo Mifsud Bonnici

Head of government: Prime Minister Alfred Sant

Immediately after the election of October 1996, the new Labour Party government withdrew Malta from the NATO Partnership for Peace program. Prime Minister Alfred Sant declared that Malta would use its constitutional neutrality as a basis for its efforts to promote stability and security in the Mediterranean region. The new government also froze Malta's application to join the European Union (EU) but said it would seek the gradual introduction of an industrial free-trade zone between Malta and the EU and would also work for cooperation in the commercial, technical, financial, cultural and educational sectors.

The value-added tax (VAT), introduced in 1995 by the Nationalist Party government to supplant customs duties, was replaced on July 1, 1997, by a new taxation system, a combination of customs and excise duties. In March Minister of Finance Lino Spiteri, citing the country's weak economy, resigned and questioned publicly the wisdom of the decision to replace the VAT; previously, he had also criticized the freezing of Malta's EU application.

The budget for 1997 estimated that a deficit of 101.2 million Maltese lira between revenue and expenditure would be reduced to 82.6 million lira by means of foreign grants and loans. In September, however, it was predicted that the actual deficit would be between 120 million lira and 130 million lira. Faced with this financial gap and increased unemployment, the government was planning an austerity budget for 1998.