Malta's growth remains strongest in Europe: IMF
IMF staff at the end of an official staff to Malta says the authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Malta's economic growth remains one of the strongest in Europe, reflected by rapid income convergence towards the European Union (EU) average. Prudent policies advanced structural reforms and contributed to the strengthening of private and public-sector balance sheets, while steady job creation drove unemployment to historically low levels.
Growth prospects remain favorable, yet the mounting pressure on infrastructure, rising housing prices, as well as shortages of labor and skills pose a challenge. Reducing the infrastructure gap and improving labor supply remain the key policy priorities to sustain high growth and promote inclusiveness. Attention should also be given to enhancing the economy's resilience to shocks by further reducing fiscal risks and building larger fiscal buffers, safeguarding financial stability, and ensuring that property market imbalances will not emerge.
Malta's robust economic performance is set to continue. Aided by favorable domestic and external conditions, real GDP growth is projected at 5.8 percent in 2017 and 5.1 percent in 2018, and to gradually converge towards a potential rate of about 3 percent over the medium term. Growth will be driven largely by domestic demand in the coming years backed by rising incomes and historically-low unemployment while buoyant services exports will continue to sustain current account surpluses. Inflation is expected to pick up gradually, reflecting an increase in import prices and tighter labor market conditions.
Risks to the outlook are broadly balanced. As a small and highly open economy, Malta is vulnerable to growth fluctuations and policy uncertainty in key trading partners. An increase in inward-looking policies abroad and possible international corporate taxation reforms could adversely affect the economy.
Domestically, wage pressures could boost private consumption above projections while a robust implementation of infrastructure plans and improved SMEs' access to credit-including due to the new Malta Development Bank-could result in higher-than-projected investment growth. Yet, slow progress in addressing the remaining structural weaknesses could undermine growth prospects and erode competitiveness. Strong increases in housing prices may raise financial stability risks and deter the inflow of foreign workers.
Remaining fiscal risks need to be carefully addressed. Possible international corporate taxation reforms may affect Malta's fiscal position unfavorably due to the high share of corporate tax revenues in total revenues, thus calling for broadening the tax base and strengthening revenue collection.
Recent measures to combat tax evasion and increase Value-Added Tax compliance are steps in the right direction. Contingent liabilities from state-owned enterprises (SOEs), although receding, remain high and require close monitoring. Advancing the restructuring of financially weak SOEs would help contain these risks. Lastly, age-related spending pressures remain significant, requiring a better alignment of the contributory period with life expectancy and pensionable income with life-time earnings. Ongoing efforts to delay retirement and encourage voluntary savings will help to ensure socially sustainable pensions. Building larger buffers would add strength to Malta's fiscal position. The government's plan to continue lowering public debt by keeping a medium-term surplus of 0.5 percent of GDP in 2018-20 and comply with the MTO is appropriate given the economy's favorable cyclical position and remaining fiscal risks.