IMF Executive Board Concludes 2008 Article IV Consultation with Malta

Public Information Notice (PIN) No. 08/104
August 11, 2008

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 2008 Article IV Consultation with Malta is also available.

On August 6, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malta.1


Malta joined the European Monetary Union (EMU) on January 1, 2008 and has implemented broad liberalizing economic reforms since EU accession in 2004. The economy has experienced a three-year-long expansion with average annual growth of over 3½ percent during 2005-07, driven by productivity gains, foreign direct investment, and export diversification into new dynamic sectors. Domestic demand was supported by rising employment and incomes. The external current account deficit fell to 5½ percent of GDP in 2007 due to the revival of tourism, new niche service and pharmaceutical exports, and sustained terms of trade gains. Traditional manufacturing exports, however, continued a prolonged decline in the face of intense competition. Recently, Malta has been adversely affected by the euro appreciation reflecting its predominant export orientation toward non-EMU countries. High dependence on fuel and commodity imports has pushed inflation—subdued until late 2007—above 4 percent.

Expenditure-based fiscal consolidation continued in 2007, with the fiscal deficit falling to 1¾ percent of GDP in 2007. However, subsidies and state aid, the public wage bill, and entitlement spending are comparatively high, exerting significant pressure on the budget. The authorities have recently adopted several expenditure retrenchment measures, including adjustments in the subsidized retail electricity tariff, aiming to keep the 2008 budget on track and continue progress toward their medium-term objective of structural balance.

Financial soundness indicators held up in 2007 despite unfavorable international developments. The banking sector's liquidity and funding profile are healthy, and banks have remained profitable despite markdowns in security portfolios. Nonperforming loans fell further but are still comparatively high and thinly provisioned. Loan portfolios remain concentrated in the real estate sector, which is cooling down.

Privatization and restructuring of public enterprises in key sectors (harbor services, post, energy) continued during 2007. The authorities are unbundling and opening to private participation the fuel and gas operations of the public energy company, and have announced their intention to privatize the shipyards shortly.

Executive Board Assessment

Executive Directors congratulated the authorities for Malta's successful EMU entry on January 1, 2008. The authorities' strategy of boosting growth and external competitiveness through closer regional and global integration, supported by fiscal adjustment and liberalizing reforms, has catalyzed foreign direct investment, the emergence of dynamic new export sectors, and attendant productivity gains. Malta's three-year-long expansion in employment and activity largely reflects economic opening and public sector rationalization. Directors also noted the recent favorable trends in Malta's price and non-price competitiveness, which have contributed to reducing the current account deficit.

Looking ahead, Directors stressed that the economy will face some challenges from a weakening global economy, higher food and fuel prices, and possible risks in the financial sector. Also, the decline in traditional sectors could accelerate and outpace the emergence of new export activities. In the absence of independent monetary and exchange rate policies, Directors underlined the importance of continuing to pursue sound fiscal policies, increasing the flexibility of the economy, bolstering productivity growth, and monitoring developments in the financial sector closely.

Directors praised the authorities' fiscal performance, and welcomed measures to contain public spending in 2008 as necessary for continued progress in reducing the budget deficit. In particular, Directors viewed the increase in retail electricity tariffs as instrumental in limiting expenditure overruns, and encouraged the authorities to follow through with further steps toward full cost recovery while supporting efforts to protect low-income households. The announced elimination of certain subsidies—notably those to public shipyards—in 2009 are also important steps in putting the public finances on a sound footing.

Directors stressed that reinforcing the budget framework with a medium-term orientation would help preserve the benefits of consolidation while better prioritizing spending. They supported the authorities' objective of structural balance by 2010, and reiterated the desirability of targeting a surplus thereafter, given the vulnerabilities inherent in the economy's small size and prospective demographic pressures on spending.

Directors observed that Malta's banking system appears well-positioned to weather the global financial turmoil, as banks have healthy liquidity and a good funding profile. At the same time, Directors noted that the banks' still-high level of nonperforming loans, relatively thin provisioning, and concentrated exposures in the cooling housing sector called for increased supervisory vigilance aimed inter alia at augmenting provisioning buffers. Directors welcomed the upgrading of the supervisory and crisis management frameworks, and recommended more frequent public reporting by the main banks. It would also be useful to review the existing legal authority and institutional mechanisms to act expeditiously in a crisis situation in light of recent international experiences.

Directors stressed the importance of strengthening labor and product market flexibility, and further streamlining the public sector, to realize Malta's growth potential and maintain competitiveness within the EMU. They suggested introducing stable rules-based mechanisms for setting administered prices, aiming at cost recovery over the medium term. Directors recommended implementation of the EU Services Directive to foster competition in sheltered markets, and reinforcing the competition and statistics authorities. They encouraged the authorities to consider means to relax the price indexation of wages, which could entrench inflationary dynamics and hinder alignment between wage and productivity increases. Directors pointed out that that further privatization in the banking sector would help to strengthen economic resiliency and seize new growth opportunities.

Malta: Selected Economic Indicators


2004 2005 2006 2007 2008 1/

Real economy (constant prices)

(Change in percent)

Real GDP

0.6 3.2 3.4 3.8 2.5

Domestic demand

2.2 5.5 2.3 2.9 2.3


2.0 1.4 1.8 1.2 2.3

Private consumption

2.4 1.9 0.7 1.6 2.3

Public consumption

0.6 -0.5 6.0 -0.1 2.6

Fixed investment

-3.2 8.2 3.8 3.8 2.6

Inventory accumulation 2/

1.1 3.1 0.2 1.3 0.0

Foreign balance 2/

-1.7 -2.6 0.9 0.7 0.0

Exports of goods and services

2.2 -0.8 10.0 -0.6 -0.3

Imports of goods and services

3.8 1.8 8.4 -1.3 -0.2

Output gap (percent)

-3.1 -1.7 -0.6 0.4 0.1

CPI (harmonized)

2.7 2.5 2.6 0.7 4.1

Unemployment rate EU stand (percent)

7.4 7.3 7.3 6.4 6.5

Gross national savings (percent of GDP)

10.7 11.7 12.4 16.1 15.3

Gross capital formation (percent of GDP)

16.7 20.4 20.7 21.6 22.0

Public finance

(Percent of GDP)

General government balance

-4.6 -3.0 -2.5 -1.8 -1.7


41.0 42.0 41.3 40.6 40.8


45.6 45.0 43.8 42.4 42.5

General government debt

72.4 70.3 64.1 62.4 60.9

Money and credit

(Change in percent)

International Investment Position (millions of euros)

1,814.9 1,778.9 1,496.7 ... ...

Broad money (M3) growth

2.4 4.2 5.2 11.1 ...

Domestic credit

5.5 1.3 9.2 10.7 ...

o/w private sector

-1.3 9.0 15.3 10.2 ...

Balance of payments

(Percent of GDP)

Current account balance

-5.9 -8.8 -8.2 -5.4 -6.7

Trade balance (goods and services)

-3.8 -5.3 -3.9 -1.9 -3.9

Exports of goods and services

79.2 77.6 87.4 87.4 86.9

Imports of goods and services

83.1 82.9 91.4 89.3 90.8

Goods balance

-15.6 -18.7 -18.9 -17.4 -20.2

Services balance

11.8 13.3 15.0 15.5 16.3

Exchange rate

Exchange rate regime

Joined EMU on January 1, 2008

Nominal effective rate (2000=100)

110.9 109.8 110.2 114.7 ...

Real effective rate, CPI-based (2000=100)

112.9 112.7 113.8 117.3 ...

Real effective rate, ULC-based (2000=100)

122.7 120.2 119.8 120.8 ...

Memorandum item:

Nominal GDP (millions of euros)

4,488.9 4,770.4 5,075.1 5,398.5 5,651.4

Sources: Central Bank of Malta; National Statistics Office; Eurostat; and IMF staff calculations.

1/ IMF staff projections.

2/ Contribution to growth.

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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