IMF Executive Board Concludes 2013 Article IV Consultation with Malta

Press Release No. 13/254
July 12, 2013

On June 19, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malta.1

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. 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.

The performance of Maltese banks has been satisfactory, despite turbulence in the euro area. All banks report adequate capitalization, liquidity, and profitability and are well positioned to transition to the Basel III regime. In contrast to many European countries, domestic banks’ deposits and credit to the private sector continued to increase in 2012, albeit at a slower pace than in 2010-11. However, these banks are heavily exposed to the local property market and loan loss provisions are low. The large international banking segment and smaller group of non-core domestic banks have limited balance sheet exposures to the Maltese economy, but recent events in Europe have heightened perceptions about risks of hosting a large banking segment in a small country. In response, the authorities have strengthened supervision and monitoring of banks’ liquidity positions.

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 constrains 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. The new government is committed to restructure Enemalta, the loss making and highly indebted public utilities corporation, and has embarked on a major energy reform program to reduce energy costs and diversify energy sources.

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. Directors 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. Looking ahead, Directors encouraged the authorities to participate in Fund’s Financial Sector Assessment Program.

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.

More broadly, Directors agreed that fiscal governance would benefit from a clear rules-based multi-year policy framework that would reinforce the linkage between annual budget laws and the medium-term target. An independent fiscal council would also support the credibility of the government’s consolidation plans.

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 labor 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.

Malta: Selected Economic Indicators, 2009-2014

Per Capita GDP (thousands): €16.2


Population (thousands): 416.7

Quota: 102 million SDR, 67.5% of total


Tertiary education rate: 21%

Economy based on services: Agriculture (2%); industry and construction (18%); trade and communication (22%); financial and real estate (14%); other services (44%).

Main trade partners: Germany, France, Italy and United Kingdom.

  2009 2010 2011 2012 2013 2014




    Proj. Proj.

Real economy (constant prices)

(Percent change year on year)

Real GDP

-2.6 2.9 1.7 0.8 1.3 1.8

Domestic demand

-2.6 -1.4 -0.9 0.0 1.1 1.5

CPI (harmonized, average)

1.8 2.0 2.5 3.2 2.4 2.0

Unemployment rate (percent)

6.9 6.9 6.5 6.3 6.4 6.3

Public finance

(General government, percent of GDP)

Overall balance

-3.7 -3.6 -2.8 -3.3 -3.5 -3.5

Primary balance

-0.6 -0.6 0.3 -0.2 -0.3 -0.3

Gross debt

66.4 67.4 70.3 72.1 73.7 74.2

Money and credit

(Percent change year on year)

Broad money

0.2 5.5 3.3 8.7

Credit to nonbank private sector 1/

7.6 3.2 4.2 1.8

Interest rates (year average)


Interest rate for mortgage purposes

3.5 3.6 3.6 3.6

Ten-year government bond yield

4.5 4.2 4.5 4.0 3.9 3.8

Balance of payments

(Percent of GDP)

Current account balance

-8.6 -4.7 -0.2 0.4 0.5 0.8

Trade balance (goods and services)

-2.2 1.4 5.1 6.3 6.5 6.8

Exchange rate


Exchange rate regime

Joined EMU on January 1, 2008.

Nominal effective rate (2005=100)

107.1 102.6 103.2 99.4

Real effective rate, CPI-based (2005=100)

107.1 101.6 101.5 97.4

Sources: National Statistical Office of Malta; Central Bank of Malta; European Central Bank; Eurostat; European Commission; and IMF staff estimates.

1/ Loans to nonfinancial corporate sector and households/individuals.

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. An explanation of any qualifiers used in summings up can be found here:


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