Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Malta

September 7, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with Malta is also available.

Public Information Notice (PIN) No. 07/109
September 7, 2007

On August 24, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malta.1


The Council of the European Union decided on July 10 to allow Malta to join the European Monetary Union (EMU) on January 1, 2008. Malta's economic recovery is gaining traction, owing in large part to cyclical strength and some structural change. A public investment boom, financed largely by grants from the EU, reignited growth in 2005. A modest recovery in exports and robust consumption growth, supported by rising employment and household borrowing, helped sustain the upswing in 2006. Rising energy prices boosted headline inflation in 2005-06, but their unwinding caused a decisive decline in consumer price inflation in late 2006 to below the Maastricht convergence criterion. While social expenditure and subsidies to the public-enterprise sector remain high, the general government deficit declined to 2½ percent of GDP in 2006, largely on account of a substantial boost to capital revenues from EU grants and land sales combined with a decline in the wage bill. Notwithstanding last year's improvement, the current account remains in a protracted deficit. The trade balance, the service account, and the factor income balance have all deteriorated so far this decade. These developments reflect weak competitiveness, in large part owing to the legacy of high wage growth in the late 1990s and a still inefficient public enterprise sector. The latter continues to stifle economy-wide labor productivity, notwithstanding structural reform.

While financial stability has continued to improve, the concentration of loan portfolios in real estate has continued to rise. Although nonperforming loans (NPLs) declined further, levels remain high and provisioning uneven.

Executive Board Assessment

Executive Directors congratulated the Maltese authorities for the decision of the Council of the European Union to accept Malta as a member of the European Monetary Union (EMU) on January 1, 2008. They commended the authorities for the substantial fiscal consolidation that has been achieved and their implementation of broad-based structural reforms, which were central to Malta's entry into the EMU. They observed that structural change is supporting the cyclical upswing, and expected the expansion to continue this year.

At the same time, Directors noted that growth so far this decade has trailed that of most other EU members, notwithstanding the recovery that began in 2005. They therefore recommended that decisive policy actions be taken to enable Malta to reap the full benefits of economic integration with the EU.

Directors agreed that the determined implementation of productivity-enhancing structural reforms and a commitment to rein in labor costs will be essential to strengthen Malta's competitiveness, export base, and growth within the monetary union. In this context, several Directors noted the loss of market share by the main export sectors and the protracted current account deficit—driven by a number of factors, including large wage increases in the past and low labor productivity—suggesting competitiveness pressures. At the same time, Directors pointed to the emergence of new export sectors as a promising sign of diversification which could mitigate vulnerabilities.

Against this background, Directors recommended that the moderation of public sector wages should continue in 2007-10, also to avoid igniting demands for private sector wage increases. Welcoming the considerable privatization efforts, Directors encouraged the authorities to press on with the restructuring of public enterprises and the shifting of resources to the private sector to enhance productivity. They took note of the progress made in improving the operations of the public ports, and recommended that focus be placed next on improving the efficiency of the energy networks to enhance the competitiveness of the economy.

Directors welcomed the prospect of further deficit reduction in 2007-08, and the objective of reducing reliance on one-off revenue measures in 2008. Structural improvements in tax enforcement and the economic recovery have raised revenue growth. Directors stressed that, in the medium term, structural expenditure pressures, notably pension and health care costs and public enterprise losses, will need to be reduced to safeguard and advance the progress made in fiscal consolidation. Further fiscal adjustment needs to be expenditure based, with emphasis on a reduction in subsidies and public consumption, which are large by international standards. Directors advised that the budget aim for a surplus over the medium term given the high volatility of output and demographic pressures.

Directors welcomed the continued improvement in financial sector stability, with strengthened banking sector performance, comfortable levels of regulatory capital, and declines in nonperforming loans. At the same time, as loan concentration is rising with increasing exposure to the real estate market, Directors recommended that consideration be given to raising the risk weight for new residential mortgages to maintain mortgage lending soundness. Directors also noted the scope for strengthening provisioning by allowing tax deductibility of specific provisions and introducing collateral discounting as a regulatory requirement.

Malta: Selected Economic Indicators
  2003 2004 2005 2006 2007 1/

Real economy (percentage change; constant prices)

Real GDP

-0.3 0.1 3.3 3.3 3.2

Private consumption

3.9 2.2 2.4 2.6 3.1

Public consumption

3.3 0.8 0.4 3.3 1.7

Fixed capital formation

23.1 0.5 6.5 0.3 4.1

Exports of goods and services

-0.6 2.0 -3.1 7.1 4.4

Imports of goods and services

5.9 3.7 1.1 6.0 4.0

HICP inflation

1.9 2.7 2.5 2.6 0.9

Unemployment rate (percent of labor force)

7.6 7.4 7.3 7.3 7.5

Public finances (percent of GDP)


Government budget balance

-9.8 -4.9 -3.0 -2.4 -1.9


38.0 41.2 41.6 41.0 41.5


47.8 46.1 44.6 43.4 43.4

General government debt

69.3 72.7 70.1 64.0 63.0

Money and credit (end period; percentage change)

Base money

0.9 4.6 0.6 3.9 ...


2.4 2.4 4.2 5.2 ...

Domestic credit

10.1 -1.7 1.3 9.2 ...

Net foreign assets of the central bank

4.3 -5.3 7.2 2.0 ...

(Percent of the monetary base)

147.5 133.5 142.3 139.6 ...

Interest rates (percent; end period)


Central bank intervention rate

3.00 3.00 3.25 3.75 ...

Three-month treasury bill

2.94 2.96 3.22 3.90 ...

Government bonds (10-year)

5.01 4.69 4.56 4.32 ...

Balance of payments (percent of GDP)


Trade balance

-12.9 -15.8 -19.0 -19.0 -18.9

Services balance

9.7 9.6 7.7 6.0 6.5

Current account balance

-2.8 -6.3 -8.0 -6.1 -9.2

Official reserves (end period)


(Millions of euro)

2,154 2,031 2,165 2,221 ...

(Months of imports of goods and services)

7.1 6.5 6.7 6.0 ...

Exchange rate


Nominal effective exchange rate (2000=100)

107.2 110.9 109.8 110.2 ...

Real effective exchange rate (2000=100)

108.5 112.9 112.7 114.0 ...

Regime (Pegged to the euro since ERM2 entry on May 2, 2005)

Current rate (July 5, 2007) 0.4293 Maltese liri per euro

Memorandum items:


Nominal GDP (millions of Maltese liri)

1,884 1,918 2,056 2,188 2,292

Sources: National Statistics Office; Central Bank of Malta; Ministry of Finance; IMF International Financial Statistics; and IMF staff estimates.

1/ IMF staff projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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