Under article IV of the International Monetary Fund’s Articles of Agreement, the organisation’s officials participate in an ongoing process of country surveillance of member states.
The IMF team visits a country annually to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.
This year’s article IV defines the challenges the Maltese economy faces and gives some much-needed sobering advice. In an interview with Times of Malta, the IMF mission chief for Malta, Kotaro Ishi, gave crucial indications of what the final article IV report will reveal about the country’s economic successes and the existing threats.
The headline comment of the report will be that Malta’s economic recovery from the pandemic has been “remarkably strong”. However, future economic success will depend on how soon the government acts to reduce the energy subsidies in order to safeguard public finances.
IMF reports are usually the most reliable source of expert and independent opinion on what a country needs to do to achieve economic success. The IMF team can be relied upon to give governments candid, even if often uncomfortable, advice.
Ishi argues that “it is good to keep prices low for low-income and, to a lesser extent, middle-income families after next year but the government could ask richer or more wasteful consumers to pay a price that is closer to the import price”.
This argument has been made before by local commentators, among them Times of Malta. Many observers fret about the government’s reluctance to commit itself to a date when it will start tapering off the high energy subsidies to discourage waste and mitigate the risk of over-reliance on state aid.
The Ukraine war, the slowing European economies, the still high energy prices and weakening public finances all pose a formidable challenge for Malta. The fiscal burden imposed by the different COVID and Ukraine war schemes to help households and businesses is not sustainable in the long term.
The IMF notes the government’s commitment to reduce the deficit from 5.8 per cent of GDP this year to 5.5 per cent next year.
Public debt is growing fast and, should the economy underperform, the risk of missing the fiscal targets must not be underestimated.
One sobering IMF advice is that “additional measures to mobilise revenues and enhance spending efficiency” must be implemented. The relevance of this advice is corroborated by the National Audit Office report which has confirmed that €1 billion of tax dues still need to be collected by the government.
The IMF’s concern about Malta’s reliance on low taxation to attract investment is shared by other international institutions. It will call on the government “to reform the taxation of multinational firms”.
The local banking system passes the IMF test, which describes it as “sound, with ample capital and liquidity buffers and adequate provisioning”.
This has been mainly due to the generous subsidy schemes that have enabled banks to lend to struggling businesses in the last few years.
Still, one needs to ask whether some high credit risk is being moved out of banks’ balance sheets to other sectors like the local bond market, which is so popular with retail investors.
Education and the efficiency of the justice system are as relevant to future economic prosperity as other more technical factors. The IMF recommendations on focusing on these sectors must be urgently accepted and implemented.