During his first administration, from 1987 until 1996, Fenech Adami followed consistent domestic policies that were aimed at reforming economic and governmental institutions previously controlled by the opposing Malta Labor Party (MLP) for 16 years. One of his initial programs was to shift the economy away from the socialist controls of the MLP by giving more freedom to the private sector. At the same time, he promised to expand various social welfare programs, assuming that the economy would grow at an annual rate of 10%.
Fenech Adami also formulated policies that gave incentives to local and foreign enterprises in order to increase investment in Malta's economy. These included tax advantages and guarantees of secrecy to use the island as an offshore financial and trading center. A new emphasis was placed on tourism, financial services, and shipping registration. In other areas, Fenech Adami sought prosecution for corruption and attempted to uncover pro-Libyan terrorist groups operating within Malta. Infrastructure improvements were instituted for the national airport, power stations, desalination plants, and telecommunications system.
By the early 1990s, Fenech Adami began to direct his governmental policies toward fully integrating Malta into the European Union (EU). They included the removal of Maltese customs duties with the EU nations. This action caused a decrease in overall national revenue. In order to retain a balanced budget, Fenech Adami and his party-led Parliament adopted a controversial value-added tax (VAT) which amounted to a 15% increase on virtually all consumer goods that would substitute for the loss of tariff income.
Although the removal of customs duties was a necessary prerequisite for final EU membership application, it caused anger among many Maltese and brought into question whether it was economically feasible for Malta to join the EU. Moreover, Fenech Adami's pro-Western and European policies seemed to have compromised Malta's traditional policies of neutrality. The 1996 national election, seen by many as a referendum on Fenech Adami's policies, resulted in a loss for the Nationalist Party. Alfred Sant's MLP had unexpectedly gained 52% of the electorate's support. After conceding defeat, Fenech Adami ceded his post as prime minister and returned to Parliament as leader of the opposition.
Sant attempted to reverse most of Fenech Adami's policies, including withdrawing application for EU membership. Yet, in other respects, some of Sant's "New Labor" policies were more conservative than those of the previous government. Strict austerity measures adopted by the Sant government included more indirect taxes, higher utility rates, and budget cutting measures. Many perceived these measures as conflicting with campaign promises to reduce the cost of living in Malta. Moreover, the effect of withdrawing EU membership application and reverting to a more neutralist foreign policy led to a greater isolation of Malta within the Western European and Mediterranean communities. In response to Sant's policies, an ideological difference developed among MLP members. The more socialist-minded followers of the former prime minister, Dom Mintoff, withdrew their political support from Sant. That left the prime minister with only a one-seat majority in Parliament. In an attempt to reaffirm his 1996 electoral mandate and gain more seats in Parliament with other like-minded Laborites, Sant decided to call for new general elections for 5 September 1998.
In response to Sant's call for new elections, Fenech Adami undertook to lead his Nationalist Party's electoral campaign to regain control of the government under the slogan, "Prosperity, Confidence, Direction." Fenech Adami and the Nationalists claimed that the Labor government no longer had a social conscience, as demonstrated by its recent austerity measures. At times during the campaign, it seemed that the PN was campaigning more like the former Mintoffled Labor against the MLP itself. Ironically, the main issue of the election was the same as that which led to Fenech Adami's loss of power in the previous election—whether Malta could pursue its EU membership without sacrificing its standard of living. For the first time in Malta's electoral history, ideology took second place to the greater question of whether Malta should join the EU. By a popular margin vote of 12,817 and a percentage differential of 51.81% to 46.97%, the PN had regained power in the Parliament and premiership. On 6 September 1998, Fenech Adami was once again sworn in as prime minister.