Updated - Adds prime minister's comment - The International Monetary Fund Executive Board has praised Malta's economic performance but warned that the government’s deficit target of 2.7 percent of GDP in 2013 appears unattainable in light of expansionary discretionary measures, optimistic revenue targets, and developments so far.
"Malta has shown remarkable resilience in the face of a major crisis in Europe. Since the beginning of the crisis, the average growth of the Maltese economy has been one of the best in the euro area and the unemployment rate remains one of the lowest. This resilience was underpinned by robust service sector export growth and a sound banking sector," the IMF said.
"As a result, the current account balance has improved gradually in recent years, turning into surplus in 2012. However, economic growth slowed in 2012 and remains below potential, reflecting a weak external environment and subdued domestic demand.
"Although activity is expected to pick up moderately going forward, uncertainties abound. A protracted period of slower growth in Europe or re-emergence of euro area financial stress would negatively affect the Maltese economy."
Although activity is expected to pick up moderately going forward, uncertainties abound. A protracted period of slower growth in Europe or re-emergence of euro area financial stress would negatively affect the Maltese economy.
The IMF praised the performance of Maltese banks, despite turbulence in the euro area.
On the fiscal situation, it said that after notable progress in 2011, the fiscal position deteriorated in 2012 amid the election cycle, and the high level of public debt and guaranteed debt constrained the fiscal space in the event of further shocks.
"Against this backdrop, the European Commission has recently decided to initiate the excessive deficit procedure for Malta. The government’s deficit target of 2.7 percent of GDP in 2013 appears unattainable in light of expansionary discretionary measures, optimistic revenue targets, and developments so far."
It noted the government commitment to restructure Enemalta.
Executive Board Assessment
"Executive Directors commended Malta’s resilience through the global and European crises, which has been underpinned by solid macroeconomic and financial fundamentals. Nevertheless, with the growth outlook vulnerable to external and fiscal risks, Directors encouraged the authorities to continue to pursue prudent policies and deepen structural reforms.
Directors noted that the banking system is sound and that risks from its large international bank segment appear contained because of limited balance sheet exposures to the domestic economy. However, they called for stronger efforts to monitor developments in all banks, given the size of the banking sector relative to GDP, some weakening in asset quality, and concentration of loans to the real estate and construction sectors.
They welcomed the progress in strengthening the regulatory framework for banks and the recent establishment of the Joint Financial Stability Board. They encouraged additional steps to shore up the resilience, including by tightening rules on loan loss provisioning and boosting the funding of deposit insurance. The increasing complexity of Malta’s financial sector also warrants further strengthening of the anti-money laundering regime.
steady implementation of structural reforms is essential to achieve a higher growth trajectory and enhance competitiveness.
Directors underscored the importance of reducing the fiscal deficit this year and achieving a balanced budget over the medium term. In this context, they generally emphasized the need for stronger measures to rein in current expenditure, particularly the wage bill, and to advance pension and health care reforms. Restoring the profitability and viability of public corporations would also help reinforce Malta’s fiscal position.
Directors underscored that steady implementation of structural reforms is essential to achieve a higher growth trajectory and enhance competitiveness. Priority should be given to diversifying the economy, improving the business environment, encouraging female participation to the labour force, enhancing education attainment, and strengthening wage-setting mechanisms by better aligning wages with productivity growth. Timely implementation of the energy reform will also be helpful."
PM - MALTA ON TRACK
Prime Minister Joseph Muscat, speaking this morning, said that the government was still on track to reach 2.7 per cent deficit target but as monitoring the situation week by week.
FINANCE MINISTER WELCOMES REPORT
Finance Minister Edward Scicluna welcomed the report, saying it was further confirmation that the new Government's policies are taking the country in the right direction.
"I am especially pleased to note that the IMF's Executive Directors have reconfirmed the resilience of our economy, underpinned by solid macroeconomic and financial fundamentals, and the underlining soundness of our banking system," Prof. Scicluna said.
"It is also encouraging to note that the IMF has recognised the Government's commitment to addressing those key priority issues that the IMF recommended be addressed in their own report," Prof. Scicluna added, mostly notably energy planning, higher female labour participation, enhancing education attainment, and overall economic diversification.
In this regard, he welcomed the IMF's remark that the Government is committed to return Enemalta to profitability, and "has embarked on a major reform programme to reduce utility costs and diversify energy sources."
He also underlined that the Government is already actively working towards addressing labour participation through the free child care centres initiative, addressing early school leaving, and exploring economic diversification through the nurturing of new markets, like the maritime industry.
The minister said that the IMF's medium term recommendations for addressing the deficit, which include a clear rules-based budgetary frame work and an independent fiscal council, are among those measures that have been taken on board by the new Government.
Prof. Scicluna noted the IMF's recommendations regarding the concentration of loans to the real estate and construction sectors.