IMF Ex­ec­u­tive Board con­cludes 2016 Ar­ti­cle IV Con­sul­ta­tion with Malta

The Malta Business Weekly - - FRONT PAGE -

On Fe­bru­ary 17, 2016, the Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund con­cluded the Ar­ti­cle IV con­sul­ta­tion with Malta.

Malta is one of fastest-growing economies in Europe. Fol­low­ing an av­er­age growth of nearly 8 per­cent in 2014-15, out­put is es­ti­mated to have ex­panded by 4.1 per­cent in 2016, sup­ported by strong do­mes­tic de­mand.

Ro­bust job cre­ation drove un­em­ploy­ment to record lows, de­spite ris­ing labor sup­ply, while sub­dued wage pres­sures con­trib­uted to low in­fla­tion. The ex­ter­nal po­si­tion re­mains strong, with siz­able ex­ports of ser­vices keep­ing the cur­rent ac­count in sur­plus.

Owing to buoy­ant rev­enues and con­sol­i­da­tion measures, the 2016 fis­cal deficit nar­rowed to an es­ti­mated level of 0.7 per­cent of GDP, well be­low the bud­get tar­get of 1.1 per­cent of GDP, while pub­lic debt de­clined fur­ther to about 60 per­cent of GDP.

Do­mes­tic banks re­main well-cap­i­tal­ized and liq­uid, with prof­itabil­ity well above the lev­els seen in Euro­pean peers. Banks’ as­set qual­ity con­tin­ues to im­prove, while measures have been taken to re­duce legacy non-per­form­ing loans. Credit growth to the pri­vate sec­tor was sub­dued as credit to the non-fi­nan­cial cor­po­rate sec­tor con­tracted, but mort­gage lend­ing re­mained buoy­ant, re­sult­ing in higher house­hold debt and fur­ther in­crease in banks’ ex­po­sure to prop­erty-re­lated loans. Res­i­den­tial prop­erty prices showed a pos­i­tive mo­men­tum in the face of ris­ing de­mand and slug­gish sup­ply re­sponse.

The outlook is fa­vor­able, though growth is set to mod­er­ate to 3.4 per­cent in 2017 and con­verge to its po­ten­tial of about 3 per­cent over the medium term as the impetus from do­mes­tic de­mand is pro­jected to weaken. As a re­sult, the out­put gap is ex­pected to close, while the cur­rent ac­count sur­plus is set to in­crease modestly.

Strong job cre­ation is likely to con­tinue, keep­ing un­em­ploy­ment low, while in­fla­tion is ex­pected to pick up as im­port prices re­cover. Fa­vor­able macroe­co­nomic con­di­tions, the low in­ter­est rate en­vi­ron­ment, and per­sis­tent pri­mary fis­cal sur­pluses are ex­pected to bring down pub­lic debt as a pro­por­tion of GDP in the com­ing years. Ex­ec­u­tive Board As­sess­ment The ex­ec­u­tive Di­rec­tors agreed with the thrust of the staff ap­praisal. They com­mended the au­thor­i­ties for im­ple­ment­ing sound macroe­co­nomic poli­cies, which have con­trib­uted to strong eco­nomic per­for­mance, ro­bust job cre­ation, low un­em­ploy­ment, and im­proved pub­lic fi­nances.

While not­ing that Malta’s medium-term outlook re­mains strong, Di­rec­tors agreed that as a small and open econ­omy, poli­cies ahead should con­tinue to fo­cus on fur­ther en­hanc­ing the econ­omy’s re­silience to shocks and strength­en­ing com­pet­i­tive­ness. They wel­comed the au­thor­i­ties’ com­mit­ment to build­ing fis­cal buf­fers, pre­serv­ing fi­nan­cial sec­tor sta­bil­ity, and im­ple­ment­ing struc­tural re­forms to ad­dress the re­main­ing im­ped­i­ments in the labor market, boost pro­duc­tiv­ity, and en­sure in­clu­sive growth.

Di­rec­tors com­mended the au­thor­i­ties’ medium-term fis­cal con­sol­i­da­tion plan, which strikes an ap­pro­pri­ate bal­ance be­tween fur­ther low­er­ing pub­lic debt and sus­tain­ing the growth mo­men­tum. To achieve the fis­cal tar­gets, they high­lighted the need to en­hance the ef­fi­ciency of tax col­lec­tion and con­tain the fast growing wage bill and spend­ing on goods and ser­vices, in­clud­ing by build­ing on the rec­om­men­da­tions of the re­cent in­depth spend­ing re­views.

Di­rec­tors agreed that fur­ther im­prov­ing the fi­nan­cial health of SOEs and con­tain­ing the long-term spend­ing pres­sures would re­duce fis­cal risks.

Di­rec­tors noted that the bank­ing sys­tem is well cap­i­tal­ized and liq­uid, with prof­itabil­ity well above lev­els seen in peers. How­ever, they ob­served that pro­tracted low in­ter­est rates, weak credit growth, legacy cor­po­rate non-per­form­ing loans, and an uncer­tain ex­ter­nal en­vi­ron­ment pose chal­lenges.

In ad­di­tion, banks’ high and in­creas­ing ex­po­sure to the prop­erty market along­side per­sis­tent house price ap­pre­ci­a­tion could also lead to im­bal­ances. They en­cour­aged the au­thor­i­ties to de­ploy tar­geted macro-pru­den­tial tools to en­hance the re­silience of banks and house­holds to prop­erty market swings, close data gaps, and re­view the fis­cal in­cen­tives re­lated to the prop­erty market.

While there has been progress in re­duc­ing non-fi­nan­cial cor­po­rate sec­tor’s legacy NPLs, Di­rec­tors noted that a faster res­o­lu­tion of re­main­ing dis­tressed loans would help un­lock re­sources for growth. They wel­comed the au­thor­i­ties’ plans in this area, in­clud­ing their in­tent to stream­line the in­sol­vency and bank­ruptcy frame­works. Di­rec­tors un­der­scored that main­tain­ing a ro­bust im­ple­men­ta­tion of the AML/CFT frame­work in line with in­ter­na­tional stan­dards would also help con­tinue safe­guard­ing the in­tegrity of the fi­nan­cial sys­tem.

Di­rec­tors con­curred that the planned Malta De­vel­op­ment Bank could sup­port the econ­omy by al­le­vi­at­ing fi­nanc­ing con­straints faced by small and medium-sized en­ter­prises and by fostering higher de­vel­op­ment in­vest­ment. How­ever, they un­der­scored the need to en­sure that the De­vel­op­ment Bank’s op­er­a­tions sup­port the orig­i­na­tion of new credit to vi­able firms, and en­cour­aged the au­thor­i­ties to adopt well-de­signed orig­i­na­tion rules. Di­rec­tors also noted that a ro­bust gov­er­nance struc­ture, pru­dent risk as­sess­ment, and ad­e­quate su­per­vi­sion will help mit­i­gate con­tin­gent li­a­bil­ity risks to pub­lic fi­nances.

Di­rec­tors high­lighted that con- tin­ued struc­tural re­form mo­men­tum is needed to sup­port high and in­clu­sive long-term growth. They called for sus­tained ef­forts to fur­ther in­crease fe­male labor force par­tic­i­pa­tion and re­duce skill mis- matches in the face of chang­ing labor market de­mand.

Di­rec­tors also un­der­scored the need for fur­ther im­prove­ments in re­search and in­no­va­tion and the ef­fi­ciency of the ju­di­cial sys­tem.

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