## cr18284 ## Source details **Canonical URL:** [cr18284](https://www.imf.org/-/media/files/publications/cr/2018/cr18284.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18284.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18284.pdf.json) --- ### Mission, scope, and methodology - IMF technical assistance mission visited Valletta, Malta, from April 30 to May 14, 2018 to conduct a Fiscal Transparency Evaluation based on the first three pillars of the IMF’s Fiscal Transparency Code. - Preliminary visit on February 8, 2018. - Mission composition: Torben Hansen (head), Yugo Koshima, Stephen Farrington, Natalia Salazar; support by Rohini Ray. - Evaluation based on information available at time of visit in May 2018; data in the report are IMF mission estimates unless otherwise specified. ### Executive summary — overall assessment - Malta meets good or advanced practice on 21 out of 35 principles in the Fiscal Transparency Code; one principle (natural resources) not assessed; meets basic practice on a further 12 principles. - Relative strengths: - Fiscal reporting, fiscal forecasting, and budgeting stronger due to compliance with EU reporting framework. - Relative weaknesses: - Fiscal risk analysis and management weaker, notably oversight of public corporations. ### Executive summary — key fiscal reporting findings (Chapter I) - Strengths: - Fiscal reports cover all general government entities and include financial assets and liabilities, cash-based and accrued revenue, expenditures, and financing. - Reports are timely and comparable; NSO prepares fiscal statistics independently under the European Statistics Code of Practices and Eurostat monitoring. - Government financial statements audited by the independent National Audit Office (NAO). - Gaps and enhancements needed: - No fiscal report provides a consolidated view of the public corporation sector. - Nonfinancial assets and employment-related pension entitlements not fully reported in general government balance sheet. - Other economic flows (sizable due to public corporation restructuring) are not reported. - Tax expenditures not comprehensively reported and may be sizable. ### Executive summary — fiscal forecasting and budgeting (Chapter II) - Strengths: - Budget documentation includes medium-term macroeconomic forecasts with explanations of components and assumptions. - Fiscal policy objectives embedded in a medium-term budget framework; macro/fiscal forecasts evaluated by an independent fiscal council (MFAC). - Fiscal legislation comprehensive; budget documents published timely. - Gaps: - Revenue and total expenditures of extrabudgetary units (EBUs) not detailed in budget documentation. - Limited disclosure on multi-annual public investment projects; cost-benefit analysis for major projects not consistently undertaken and published. - Scope to enhance performance information and consistency across reports. ### Executive summary — fiscal risk analysis and management (Chapter III) - Strengths: - Fiscal strategy documents include scenario analysis and probabilistic fan charts for macroeconomic and fiscal outcomes. - Comprehensive framework for analyzing and reporting risks to government debt portfolio. - Financial sector risks well monitored and reported by CBM and others. - Gaps: - No reporting on overall financial performance of public corporations despite potential risks. - No common framework for exercising ownership functions and monitoring public corporations. - No summary report on specific risks to fiscal forecast (including long-term sustainability, guarantees, PPPs). ### Executive summary — seven main recommendations (summary) - Gradually expand fiscal report coverage to the public sector: - Produce a statement of other economic flows of general government. - Consolidate public corporations into the statement of operations of general government. - Produce balance sheets of subsectors of general government and public corporations. - Prepare accrual-based financial statements of the central government to produce a public sector balance sheet. - Better report and control tax expenditures: - Publish regular report with estimated revenue loss of all existing and new tax expenditures. - Set budgetary targets to control tax expenditures. - Improve comprehensiveness of budget documentation: - Present comprehensive information on EBUs. - Gradually introduce performance information. - Improve consistency of reports: - Harmonize macroeconomic and fiscal forecast presentations and explain changes between reports. - Strengthen public investment management: - Disclose total obligations under each multi-annual project and publish cost-benefit analysis for major projects. - Undertake a Public Investment Management Assessment (PIMA). - Publish an annual fiscal risk statement produced by the government. - Strengthen Ministry for Finance institutional framework for fiscal risk management: - Assign unit responsibility for fiscal risk statement compilation. - Establish unit to oversee financial operations of public corporations with a common ownership policy and performance monitoring cycle. ### Public sector financial overview, 2016 (percent of GDP and selected aggregates) - Consolidated public sector revenue and expenditures: 47 and 45 percent of GDP, respectively. - Public sector asset holdings and liabilities: around 126 and 157 percent of GDP, respectively. - Public sector net worth: -31 percent of GDP. - Selected detailed figures (percent of GDP unless otherwise stated): - General Government (Consolidated): - Revenue: 38.2 - Expenditure: 37.2 - Net lending/borrowing: 1.0 - Assets: 68.5 (Nonfinancial: 34.7; Financial: 33.8) - Liabilities (total): 99.3 (Liabilities (financial?): 77.9) - Public service pension entitlements: 21.3 - Equity: 0.1 - Net worth: -30.8 - Net financial worth: -65.5 - Public Corporations (Consolidated): - Revenue: 11.0 - Expenditure: 10.2 - Net lending/borrowing: 0.8 - Assets: 27.4 (Nonfinancial 19.6; Financial 7.8) - Liabilities: 27.4 (Liabilities 16.6; other 49.5 figures shown in table) - Equity: 10.8 - Net financial worth: -8.9 (memorandum items) - Public sector (Consolidated across subsectors): - Revenue: 46.9 - Expenditure: 45.1 - Net lending/borrowing: 1.8 - Assets: 125.9 (Nonfinancial: 54.8; Financial: 71.0) - Liabilities: 156.7 (Liabilities: 135.3) - Equity: 0.1 - Net worth: -30.8 - Net financial worth: -85.6 - Notes: - Inclusion of public corporations (including CBM) does not change general government net worth, but financial net worth decreases by 20 percent of GDP to -86 percent of GDP. - Net lending increases from reported 1.0 percent of GDP for general government to 1.8 percent of GDP due to profitability of public corporation sector in 2016. - Source data: Eurostat, NSO, Treasury, Directorate for Local Governments, and staff estimates. ### Chapter I — Fiscal reporting: coverage, timeliness, quality, integrity - Coverage of institutions (Good): - 2016 public sector: 389 institutional units (Central government 203 budgetary central government units and 62 EBUs; Local government 68 local councils; Public nonfinancial corporations 53; Public financial corporations 3; Central Bank 1). - NSO determines institutional composition per ESA 2010 twice a year. - No fiscal report consolidates public financial and nonfinancial corporations (except annual NSO data on public corporation liabilities). - Malta Development Bank (MDB) established late 2017 with EUR 30 million paid-in capital; MDB Act authorizes government guarantees up to 100 percent on MDB assets and borrowing — potential reclassification risk. - Institutional-size and fiscal shares (selected findings, percent of GDP unless otherwise stated): - Public Sector (k): Number of entities 389; Revenue 46.9; Expenditures 45.1; Net lending(+)/borrowing(-) 1.8. - General Government (g): Number of entities 333; Revenue 38.2; Expenditures 37.2; Net lending 1.0. - Central Government (d): Number of entities 265; Revenue 38.1; Expenditures 37.1; Net lending 1.0. - Budgetary Central Government (a): Number of entities 203; Revenue 37.4; Expenditures 38.1; Net lending -0.7. - EBUs (b): Number of entities 62; Revenue 7.4; Expenditures 5.6; Net lending 1.8. - Local Government (e): Number of entities 68; Revenue 0.4; Expenditures 0.4; Net lending 0.0. - Nonfinancial public corporations (h): Number of entities 53; Revenue 11.0; Expenditures 10.2; Net lending 0.8. - Financial public corporations (i): Number of entities 3; Revenue 0.8; Expenditures 0.9; Net lending -0.1. - Central Bank: Number of entities 1; Revenue 0.5; Expenditures 0.5; Net lending 0.0. - Others: Number of entities 2; Revenue 0.3; Expenditures 0.4; Net lending -0.1. - Inter-Public-Sector Transfers (j): Revenue -3.2; Expenditures -3.2. - Notable entity turnovers (EUR): - Enemalta turnover EUR 327 million in 2016. - Enemed turnover EUR 231million in 2016. - Air Malta turnover EUR 192million in 2016. - Gaps and implications — institution coverage: - No single financial statement consolidates all government-controlled entities per international standards. - Expanding coverage to include public corporations and CBM would have improved overall fiscal balance by 0.8 percent of GDP in 2016. - Expenditures of public corporations not reported in fiscal statistics comprised 20 percent of gross public expenditures in 2016. ### Stocks coverage (Good) and key stock-level findings - Fiscal reports cover financial assets and liabilities (ESA 2010) but exclude nonfinancial assets and net worth. - Absence of nonfinancial assets data for general government: stock of general government fixed assets in national accounts around 35 percent of GDP in 2016 (excludes non-produced assets like land). - Total nonfinancial assets reported by local governments: 0.7 percent of GDP in 2017. - Accrued-to-date pension entitlements of 21 percent of GDP for general government employees not yet included in fiscal reports at time of mission (NSO published pension entitlements on June 14, 2018, after evaluation). - General social security pensions obligations estimated at 235 percent of GDP in 2015. - Aggregate public-sector balance-sheet if fully reported: - Assets (gross): 154 percent of GDP; Liabilities and equity (gross): 184 percent of GDP. - After consolidation: assets 126 percent of GDP; liabilities 157 percent of GDP. - Fiscal reports include only 22 percent of public sector assets and 53 percent of public sector liabilities on a gross basis. - Main composition (gross basis): Nonfinancial assets 55 percent of GDP (general government 35; public nonfinancial corporations 20); Financial assets 99 percent of GDP (CBM 54; general government 34; public corporations 11); Liabilities 168 percent of GDP (general government 99; CBM 49; public corporations 20); Equity of public corporations 16 percent of GDP; Net worth –31 percent of GDP. - Financial net worth notation in source text: “–8 6 percent of GDP.” (textual discrepancy preserved) ### Flows coverage, other economic flows, and tax expenditures - Fiscal reports cover cash flows, accrued revenue, expenditures, and financing; other economic flows excluded and can be derived only as residuals. - Other economic flows sizable due to public corporation restructuring: - Capital injection in kind to Enemalta in 2012: 3 percent of GDP. - Revaluation losses at conversion of Enemalta’s legal form in 2014: 2 percent of GDP. - Tax expenditures: - No comprehensive publication estimating revenue loss from tax expenditures. - Stability Program Updates include medium-term estimates of revenue loss from new tax expenditures (example: investment aid tax credits revenue loss around 0.4 percent of GDP). - Comparator countries’ estimated revenue loss from tax expenditures averaged 3.2 percent of GDP. ### Frequency, timeliness, and quality of reporting - In-year reporting: - Treasury monthly Comparative Statements published last Friday of following month (December on last working day of March). - NSO publishes monthly Government Finance Data and quarterly general government accounts within four months of quarter end. - Local Government Division publishes aggregate accrual-based data on local councils quarterly. - Timeliness of annual financial statements: - “Section 65 Annual Financial Statements” published within three months after year-end, certified by Auditor-General. - “Financial Report” published within six months after year-end. - Classification and consistency: - Fiscal statistics use ESA 2010 and COFOG classifications; NSO bridges budget classifications to COFOG. - Reconciliations required under the Code are published; statistical discrepancies averaged EUR 2million between 2010 and 2016. - Stock-flow adjustments average 1.5 percent of GDP between 2013 and 2016 (EU average -0.3 percent of GDP). - Difference between Consolidated Fund surplus (Financial Report) and central government net lending (October 2017 EDP): 1 percent of GDP (EU average 0.8 percent of GDP). - Adjustments first brought budgetary central government balance down to -0.7 percent of GDP; net lending of EBUs increased central government net lending to 1.1 percent of GDP, mainly due to NDSF surplus funded by IIP contributions. - Historical revisions: - Revisions to annual data made twice a year via EDP notifications; 2012 deficit revised down by 0.5 percent of GDP; deficits for 2013–2015 revised up by average 0.2 percent of GDP. ### Integrity: statistical and audit frameworks - NSO compiles fiscal statistics independently under Malta Statistics Authority Act and SDDS; coordinated by Government Finance Statistics Committee chaired by NSO. - NAO audits budgetary central government financial statements; audit reports published within 12 months of start of each fiscal year; NAO audits in accordance with ISSAI. - Local councils and EBUs frequently receive qualified audit opinions or disclaimers (2016: 48 of 68 local governments qualified; two disclaimers). - Introduction of accrual accounting at central government may raise risk of qualified audit opinions if not fully operationalized. ### Priority recommendations for fiscal reporting (Chapter I) - Recommendation 1.1: Expand coverage in stages: - Produce statement of other economic flows and publish pension entitlements (NSO). - Produce statement of operations of public corporations and consolidate with general government (NSO). - Produce balance sheets of subsectors and public corporations (NSO). - Prepare accrual-based financial statements of central government for public sector balance sheet (Treasury). - Recommendation 1.2: Better report and control tax expenditures: - Decide on definition and methodology for tax expenditures (EPD). - Publish regular report including estimated revenue loss of all tax expenditures (EPD). - Set budgetary targets to control tax expenditures (EPD). ### Chapter II — Fiscal forecasting and budgeting: coverage, process, credibility - Assessment framework covers comprehensiveness, orderliness/timeliness, policy orientation, and credibility of forecasts. - Inventory of principal documents and timing: - National Reform Program — April. - Stability Program Update — Late April. - Annual Report — June. - Half-Yearly Report — July. - Pre-Budget Document — August. - Draft Budgetary Plan — Mid-October. - Financial Estimates — Mid-October. - Budget Speech, Economic Survey — Mid-October. - Comprehensiveness: - Budget unity: basic — includes all budgetary central government revenue/expenditures but limited EBU detail. - EBUs significant: accounted for 13 percent of gross expenditures in 2016; IIP receipts rose from 0.2 percent of GDP in 2014 to 2.5 percent of GDP in 2017; only 30 percent of IIP revenue (after fees) transferred to Consolidated Fund; 70 percent to NDSF which has discretionary allocation by Board of Governors appointed by PM. - Original forecasts for 2016 and 2017 IIP revenue less than half actual receipts, indicating upside risk; revenue projected to moderate in 2018. - Macroeconomic forecasts (Advanced): - Four-year forecasts with explanations; medium-term real GDP forecasts have exhibited a large pessimistic bias (large 2 percent of GDP on average pessimism bias). - One-year ahead fiscal balance forecasts highly accurate (average absolute forecast error 0.1 percent of GDP); one-year revenue and expenditure forecast errors exceeded 3 percent of GDP on average. - Medium-term nominal expenditure forecasts tended to be revised upwards in recent years. - Investment projects (Basic): - Major investment projects subject to open tender; value of multi-annual projects not disclosed; limited publication of cost-benefit analyses for non-EU co-financed projects. - Public investment averaged around 3 percent of GDP over last decade, dropping to 2.2 percent of GDP in 2017; around a quarter financed through EU structural funds. - Government plans to scale up public investment and use PPPs more. - Orderliness and timeliness: - Fiscal legal framework includes Constitution, 2014 FRA, 2017 GFR, Standing Orders of HoR. - Budget submission and approval typically mid-October presentation and December approval. - Recent budget submission and approval dates provided for 2014–2018. - Policy orientation: - Fiscal policy objectives clearly set in FRA and budget documents; fiscal rules include deficit rule (below 3 percent of GDP), debt rule (below 60 percent of GDP), MTO, debt reduction rule, and expenditure benchmark. - Standing Orders prohibit parliamentary amendments that increase taxes or expenditures; budget proposal not amended in practice. - Recommendations for budgeting (Chapter II): - Recommendation 2.1: - Present EBU revenue and total expenditure details in annex to Financial Estimates. - Gradually introduce performance information (Budget Office). - Recommendation 2.2: - Harmonize and consolidate macroeconomic/fiscal forecast presentations across reports. - Provide detailed explanations of changes to forecasts, distinguishing new policies, macro determinants, and accounting adjustments (EPD). - Recommendation 2.3: - Disclose total obligations under multi-annual projects in annex to Financial Estimates with breakdown of annual outlays. - Publish results of cost-benefit analysis for major projects. - Strengthen public investment management via a PIMA. ### Chapter III — Fiscal risk analysis, disclosure, and management - Some fiscal risks disclosed across reports (Stability Program Update, DMD Annual Report on Central Government Debt, CBM Financial Stability Report, NAO reports, NSO aggregate summaries). - No consolidated government-published statement of specific fiscal risks; quarterly NSO reporting provides aggregate summaries without detailed analysis; MFAC, NAO, and others publish related material. - Amendment to FRA requires MFAC to produce annual fiscal risk statement, but staffing and framework not guaranteed by amendment. - Estimated maximum gross exposure to specific fiscal risks: around 40 percent of GDP (excludes implicit financial sector risk). - Table 3.2 selected gross exposures (as reported): - General government guarantees (2016)*: 1,399 Millions (EUR); 14 Percent of GDP. - Public Private Partnerships (2016)**: 7 Millions (EUR); 0 Percent of GDP. - Liabilities of Public Corporations***: 2,053 Millions (EUR); 17 Percent of GDP. - Liabilities of units involved in financial activities***: 317 Millions (EUR); 3 Percent of GDP. - Liabilities of units involved in other activities: 1,736 Millions (EUR); 17 Percent of GDP. - Explicit exposure to the financial sector: 0 Millions (EUR); 0 Percent of GDP. - NPV of pension spending change (2015-50): 655 Millions (EUR); 6 Percent of GDP. - Source: IMF staff estimates. - Notes: *Excludes guarantees by MIGA and IBRD and on foreign loans taken by CBM on behalf of government. **Amortized contractual value. ***Excludes CBM. - Macroeconomic risk analysis (Stability Program Update): - Presents baseline, optimistic, pessimistic scenarios; sensitivity analyses and probabilistic fan charts for GDP growth and budget balance. - Volatility and long-term risks: - GDP volatility relatively low compared to small European countries (2000–17); revenue growth volatility among lowest in Europe (2000–17). - Long-term demographic projections: - Old-age dependency ratio expected to almost double to 55.8 percent in 2070 from 29.1 percent in 2016. - Working-age people per person aged >65: from 3.5 in 2016 to less than 2 in 2070. - Expenditures for pensions, health, education, long-term care, unemployment expected to increase by 6.8 percent of GDP between 2013 and 2060 (one of highest increases among EU members). - Budgetary contingencies: - FRA requires contingency reserve between 0.1 percent and 0.5 percent of GDP and earmarked funds of same size; first transfer EUR 9.8 million (around 0.1 percent of GDP) in 2017. - Contingency reserve represents less than 0.3 percent of total budgeted expenditures. - Management of assets and liabilities: - Financial assets ~30 percent of GDP; liabilities mainly debt securities (82 percent of total liabilities; 55 percent of GDP in 2017). - Average maturity of government debt end-2017: 9 years. - 90 percent of debt held by domestic residents. - DMD established in Treasury; PDMA adopted in 2017; medium-term debt management strategy being prepared. - Guarantees: - Stock during 2012–16 around 14–16 percent of GDP; reduced below 10 percent of GDP in 2017 after withdrawal of Electrogas guarantee. - 2016 concentration: eight entities absorbed 98 percent of guarantees; 68 percent concentrated in energy sector. - Table 3.3 (selected): - Total outstanding guarantees: 1,399,259 Thousand € (2016); 1,069,299 Thousand € (2017). - Electrogas Ltd.: 360,000 Thousand € (25.7%) in 2016; 0 Thousand € (0.0%) in 2017. - Vault Malta Ltd.: 282,026 Thousand € (20.2%) in 2016; 273,167 Thousand € (25.5%) in 2017. - Enemalta p.l.c.: 251,792 Thousand € (18.0%) in 2016; 236,205 Thousand € (22.1%) in 2017. - Malta Freeport Ltd.: 200,755 Thousand € (14.3%) in 2016; 200,831 Thousand € (18.8%) in 2017. - PDMA provisions to be implemented: ministerial approval of new guarantees on advice of Treasury (DMD); obligation to set limit on total guarantees; DMD to assess risks and periodical reporting. - PPPs and contingent liabilities: - Very limited PPP use; only one PPP contract (home for the elderly, approved 2007) reported in 2016 Fiscal Statistics. - Contractual arrangements by public corporations (e.g., power purchase agreements) may be implicit contingent liabilities (example: Electrogas/Enemalta Delimara 4 project, EUR 462 million total investment). - No general government policies or guidelines on PPP selection, management, or reporting; no legal limit on accumulated PPP obligations. - Financial sector and deposit protection: - Total financial sector assets: 431.6 percent of GDP in 2017. - Core domestic deposit-taking banking sector assets: 206.4 percent of GDP in 2017. - Loan to deposit ratio below 60 percent. - Depositor Compensation Scheme covers maximum EUR100,000 per depositor per credit institution; scheme funded by compulsory levies and considered an EBU, not an explicit government obligation; required annual contributions noted (text truncated in source). - CBM Financial Stability Report and stress tests show sector well capitalized with ample liquidity buffers. - Public corporations — scale, reporting gaps, fiscal risks: - Public nonfinancial corporation sector: 53 commercially-oriented entities; total liabilities excluding equity around 17 percent of GDP in 2016; five largest corporations account for 80 percent of sector liabilities. - Sector generally profitable in 2016; history of government intervention to support/restructure corporations. - Direct transfers and injections (EUR millions, 2012–2016): - Subsidies: 32.3; 35.5; 70.2; 49.6; 55.9 - Capital injections: 22.5; 41.3; 16.3; 45.2; 23.6 - No published ownership policy, consolidated reporting on financial performance, or single oversight entity for ownership/performance monitoring. - Oversight and governance: - 19 corporations controlled through six holding companies; significant holding company: Malta Government Investments (MGI). - Ministry for Finance has deep involvement in key corporations (Enemalta, Air Malta, Malta Freeport) and monitors their performance. - Priority recommendations for fiscal risk transparency (3.1 and 3.2): - Recommendation 3.1: Produce and publish an annual fiscal risk statement covering: - Exposures to guarantees, on-lending, indemnities (comprehensive list of outstanding amounts, beneficiaries, likelihood). - Financial position of public corporations at individual and aggregate levels, including expected government support and quasi-fiscal costs. - PPPs and long-term contractual arrangements (rights, obligations, exposures). - Other relevant fiscal risks. - Recommendation 3.2: Strengthen Ministry for Finance institutional framework: - Assign unit responsibility for compiling/drafting the fiscal risk statement. - Establish centralized oversight for all public corporations with a common ownership policy and performance monitoring cycle. ### Selected numeric highlights (preserved) - Public sector: 389 entities (2016). - Public sector revenue/expenditure: 46.9 and 45.1 percent of GDP. - General government net lending/borrowing: 1.0 percent of GDP (2016). - Public sector assets/liabilities after consolidation: 126 and 157 percent of GDP. - General government fixed assets in national accounts: around 35 percent of GDP (2016). - Employment-related pension entitlements: 21 percent of GDP (text); table notes 22 percent of GDP not yet included in fiscal reports. - General social security pensions obligations: 235 percent of GDP (2015). - Other economic flows: Enemalta capital injection in kind 2012: 3 percent of GDP; revaluation losses 2014: 2 percent of GDP. - IIP receipts: 0.2 percent of GDP (2014) to 2.5 percent of GDP (2017). - Financial sector assets: 431.6 percent of GDP (2017); core domestic banking assets 206.4 percent of GDP (2017). - Average stock-flow adjustments 2013–2016: 1.5 percent of GDP (EU average -0.3 percent). - Statistical discrepancies averaged EUR 2million between 2010 and 2016. - Central government debt instruments account for 99 percent of central government debt. - Average absolute one-year ahead fiscal balance forecast error: 0.1 percent of GDP. - One-year ahead revenue and expenditure forecast errors exceeded 3 percent of GDP on average. - Old-age dependency ratio projections: 29.1 percent (2016) to 55.8 percent (2070). - Long-term projected increase in expenditures for pensions, health, education, long-term care, unemployment: 6.8 percent of GDP between 2013 and 2060. - Guarantees stock (2016): 1,399,259 Thousand € (14 Percent of GDP); reduced to 1,069,299 Thousand € (2017). - Electrogas guarantee: 360,000 Thousand € (25.7%) in 2016; 0 Thousand € in 2017. - Public corporations liabilities (2016): 2,053 Millions (EUR); 17 Percent of GDP. - NPV of pension spending change (2015-50): 655 Millions (EUR); 6 Percent of GDP. - Direct transfers and capital injections to public corporations (EUR millions, 2012–2016) — Subsidies: 32.3; 35.5; 70.2; 49.6; 55.9. Capital injections: 22.5; 41.3; 16.3; 45.2; 23.6. - Contingency reserve transfer: EUR 9.8 million (around 0.1 percent of GDP) in 2017. - Average maturity of government debt end-2017: 9 years. - 90 percent of government debt held by domestic residents. - Loan to deposit ratio: below 60 percent. - Public investment: averaged around 3 percent of GDP over last decade; 2.2 percent of GDP in 2017. _International Monetary Fund — Fiscal Affairs Department, cr18284 (IMF mission and report materials as presented in the PREFACE and EXECUTIVE SUMMARY)._ ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE ### Mission and mandate - At the request of the Minister for Finance, Mr. Edward Scicluna, an IMF technical assistance mission visited Valletta, Malta, from April 30 to May 14, 2018 to conduct a Fiscal Transparency Evaluation based on the first three pillars of the IMF’s Fiscal Transparency Code. - A preliminary visit by Torben Hansen took place on February 8, 2018 to discuss the fiscal transparency framework and data requirements. ### Mission composition - IMF Fiscal Affairs Department: Torben Hansen (head) and Yugo Koshima. - FAD experts: Stephen Farrington and Natalia Salazar. - Support: Rohini Ray (FAD Research Assistant) for data compilation and cross-country comparisons. ### Authorities and stakeholders met - Ministry for Finance: Mr. Edward Scicluna; Mr. Alfred Camilleri (Permanent Secretary); Mr. Joseph Caruana (Permanent Secretary); Mr. Paul Debattista (Chief of Staff); Mr. Mark Borg (Director General); Mr. Godwin Mifsud (Director General); Mr. Kevin Vella (Director); Mr. Keith Borg (Director); Mr. Carmelo Muscat (Director); Ms. Lorraine Mangion Duca (Director); Ms. Jacqueline Gili (Director); Mr. Stefano Manicolo (Director); Mr. Michael Zammit Munro (Director); and their staff. - Commissioner for Revenue: Mr. Marvin Gaerty. - National Statistics Office (NSO): Acting Director General Mr. Etienne Caruana; Head of Unit Public Finance Mr. Mark Galea; and their staff. - Other government contacts: Ms. Joyce Dimech (Permanent Secretary, Prime Minister’s Office); Mr. Christopher Cutajar (Permanent Secretary, Ministry for Transport, Infrastructure and Capital Projects); Mr. John Agius (Director, Ministry for Home Affairs and Security); Mr. Adrian Mifsud and Ms. Svetlana Curmi (Directors, Local Government Division); and their staff. - External stakeholders: Mr. Charles Deguara (Auditor General); Mr. Oliver Bonello (Deputy Governor, Central Bank of Malta); Mr. Ray Scicluna (Clerk to the House of Representatives); Mr. Rene Saliba (Chairman, Malta Fiscal Advisory Council); Mr. John Bencini (Chairman, Malta Council for Economic and Social Development); Mr. Aaron Farrugia (Parliamentary Secretary); Mr. Josef Bonnici (CEO, Malta Development Bank); Mr. David Curmi (CEO, National Development and Social Fund); Mr. Stanley Mifsud (CEO, MIMCOL); Mr. Camenzuli James (Chairman, Projects Malta); and their staff. ### Basis, scope and caveats - The evaluation is based on information available at the time of the visit in May 2018. - The findings and recommendations represent the views and advice of the IMF mission team and do not necessarily reflect those of the authorities. - Unless otherwise specified, the data presented in text, figures, and tables in the report are estimates made by the IMF mission team and not official estimates of the government of Malta. ### Acknowledgements - The mission thanks the Maltese authorities and officials for their collaboration and candid exchanges. - Particular thanks to Ms. Angela Buttigieg and Ms. Alessia Galea for support before and during the mission. ### Executive summary — key findings - Malta meets a large number of the principles of the Fiscal Transparency Code at good or advanced level: - Malta meets the good or advanced practice on 21 out of 35 principles in the Code. - One principle, related to natural resources, was not relevant to Malta and therefore not assessed. - Malta meets the basic practice on a further 12 principles. - Relative strengths: - Fiscal reporting and fiscal forecasting and budgeting are generally stronger, reflecting compliance with the EU reporting framework. - Relative weaknesses: - Fiscal risk analysis and management is generally weaker, notably oversight of public corporations. ### Executive summary — fiscal reporting (Chapter I) - Strengths: - Fiscal reports cover all general government entities and include all financial assets and liabilities, as well as both cash-based and accrued revenue, expenditures, and financing. - Reports are published in a timely manner and are comparable to each other. - Fiscal statistics are prepared by the professionally independent National Statistics Office in accordance with the European Statistics Code of Practices and Eurostat monitoring. - Government financial statements are audited by the independent National Audit Office. - Gaps and areas for enhancement: - No fiscal report provides a consolidated view of the public corporation sector. - Lack of reporting of nonfinancial assets and—until now—employment related pension entitlements creates gaps in the general government balance sheet. - Other economic flows (sizable due to restructuring of public corporations) are not reported. - Tax expenditures may be sizable and could be more comprehensively reported. ### Executive summary — fiscal forecasting and budgeting (Chapter II) - Strengths: - Budget documentation includes medium-term macroeconomic forecasts with explanations of components and underlying assumptions. - Fiscal policy objectives are embedded in a medium-term budget framework. - Macroeconomic and fiscal forecasts are evaluated by an independent fiscal council. - Fiscal legislation is comprehensive; budget documents are published in a timely manner. - Gaps and areas for enhancement: - Revenue and total expenditures of extrabudgetary units, which have been growing in significance, are not reported in the budget documentation. - Limited information on multi-annual public investment projects; cost-benefit analysis for major projects is not consistently undertaken and published. - Scope to enhance performance information in budget documentation and to achieve greater consistency across different reports. ### Executive summary — fiscal risk analysis and management (Chapter III) - Strengths: - Fiscal strategy documents include scenario analysis of macroeconomic risks and probabilistic fan charts for macroeconomic and fiscal outcomes. - Framework for analyzing and reporting on risks to the government’s debt portfolio is comprehensive. - Potential risks from the financial sector are well monitored and reported. - Gaps and areas for enhancement: - Absence of reporting on the overall financial performance of public corporations, despite potential risks from that sector. - Absence of a common framework for exercising ownership functions and monitoring public corporations’ performance. - Lack of a summary report on specific risks to the fiscal forecast (including long-term fiscal sustainability, government guarantees, and public-private partnerships). ### Recommendations (summary of seven main recommendations) - Gradually expand the coverage of fiscal reports to the public sector by: - Producing a statement of other economic flows of the general government. - Consolidating public corporations into the statement of operations of the general government. - Producing balance sheets of subsectors of general government and public corporations. - Preparing accrual-based financial statements of the central government to produce a public sector balance sheet. - Better report and control tax expenditures by: - Publishing a regular report that includes estimated revenue loss of all existing and new tax expenditures. - Setting budgetary targets to control the level of tax expenditures. - Improve the comprehensiveness of budget documentation by: - Presenting more comprehensive information on extrabudgetary units. - Gradually introducing performance information in the budget documentation. - Improve the consistency of different reports by: - Harmonizing and consolidating presentations of macroeconomic and fiscal forecasts in different reports. - Providing a detailed explanation of changes to the forecasts published in previous reports. - Strengthen the framework for public investment management by: - Disclosing the value of total obligations under each multi-annual project. - Publishing results of cost-benefit analysis conducted for major projects. - Undertaking a Public Investment Management Assessment (PIMA). - Publish an annual fiscal risk statement, produced by the government, that discusses the size and nature of specific fiscal risks, and measures to mitigate these risks. - Strengthen the institutional framework in the Ministry for Finance for managing fiscal risks, including by: - Assigning responsibility to a unit for compiling information for and drafting the fiscal risk statement. - Establishing a unit to oversee the financial operations of public corporations, based on a common ownership policy and performance monitoring cycle. ### Action plan and financial overview - A suggested Action Plan for implementing these recommendations is set out in Annex I. - The Fiscal Transparency Evaluation provides estimates of Malta’s public sector financial position for 2016 to give a more comprehensive view of public finances. ### Public sector financial overview, 2016 (percent of GDP) - Consolidated public sector revenue and expenditures: 47 and 45 percent of GDP, respectively. - Public sector asset holdings and liabilities: around 126 and 157 percent of GDP, respectively. - Public sector net worth: -31 percent of GDP. - Additional details (from Table 0.2): - General Government (Consolidated): - Revenue: 38.2 - Expenditure: 37.2 - Net lending/borrowing: 1.0 - Assets: 68.5 - Nonfinancial: 34.7 - Financial: 33.8 - Liabilities (total): 99.3 - Liabilities (financial?): 77.9 - Public service pension entitlements: 21.3 - Equity: 0.1 - Net worth: -30.8 - Net financial worth: -65.5 - Public Corporations (Consolidated): - Revenue: 11.0 - Expenditure: 10.2 - Net lending/borrowing: 0.8 - Assets: 27.4 (Nonfinancial 19.6; Financial 7.8) - Liabilities: 27.4 (Liabilities 16.6; other 49.5 figures shown in table) - Equity: 10.8 - Net financial worth: -8.9 (memorandum items) - Public sector (Consolidated across subsectors): - Revenue: 46.9 - Expenditure: 45.1 - Net lending/borrowing: 1.8 - Assets: 125.9 - Nonfinancial: 54.8 - Financial: 71.0 - Liabilities: 156.7 - Liabilities: 135.3 - Equity: 0.1 - Net worth: -30.8 - Net financial worth: -85.6 - Additional notes from table: - While inclusion of public corporations, including the Central Bank of Malta, do not change the general government figure for net worth, financial net worth decreases by 20 percent of GDP to -86 percent of GDP. - Net lending (the fiscal surplus) increases from the reported 1.0 percent of GDP for the general government sector to 1.8 percent of GDP, due to the profitability of the public corporation sector in 2016. - Source data: Eurostat, NSO, Treasury, Directorate for Local Governments, and staff estimates. - Notes: Data on social security and public service pension entitlements are for 2015 and data on nonfinancial assets of local governments are for 2017. The “Consolidation” columns show the amount of inter-public sector transactions and cross-holding of assets and liabilities held and owed by one public sector unit to another. The “Consolidated” column are calculated by summing up the flows and stocks of each subsector on a gross basis and eliminating the amount of consolidation. *Source: IMF mission and report materials as presented in the PREFACE and EXECUTIVE SUMMARY.* ### 1. This chapter assesses the quality of fiscal reporting in Malta against the principles ### cr18284 - 1. This chapter assesses the quality of fiscal reporting in Malta against the principles ### Overview of assessment - The chapter assesses Malta’s fiscal reporting against the Fiscal Transparency Code by examining: - coverage of institutions, stocks, and flows; - frequency and timeliness of reporting; - quality of fiscal reports; and - integrity of reported fiscal data. - Fiscal reports should: - cover all institutional units in the public sector classified according to international standards; - record all assets, liabilities, revenue, expenditures, financing, and other economic flows; - be published in a frequent and timely manner; - reconcile the different balances calculated and have comparable data across reports; - be prepared by an independent agency in the case of fiscal statistics, and scrutinized by an independent audit institution in the case of financial statements. - Malta publishes a large volume of fiscal reports that are somewhat fragmented and based on different standards; there is no single report providing a comprehensive, consolidated view of the public sector. ### Main summary fiscal reports (authors, coverage, and purpose) - Quarterly Accounts for General Government (NSO): ESA 2010-based; include financial assets and liabilities, accrued revenue, expenditures, financing, debt and guarantees. - Excessive Deficit Procedure (EDP) notifications (NSO): EDP framework; include reconciliations between budget accounts and ESA 2010-based net borrowing/lending and stock-flow adjustments, inventory of Extra Budgetary Units (EBUs), and explanation of historical revisions. - Monthly “Comparative Statements” of the Consolidated Fund (Treasury): budget execution data compared with budget estimates using administrative and economic classifications. - Monthly and quarterly “Fiscal Data” (NSO): per EU Directive 2011/85/EU requirements; present monthly revenue and expenditures of the Consolidated Fund and EBUs by economic classification. - Annual Financial Statements and Financial Reports (Treasury; certified and audited by NAO): receipts and payments of the budgetary central government together with statements of debt and some financial assets (Financial Reports); do not cover EBUs. - Half Yearly and Annual Reports under the Fiscal Responsibility Act (EPD): budget execution data compared with estimates of general government revenue, expenditures, financing, debt, and some financial assets (revenue arrears) and liabilities (payables to suppliers). ### 1.1 Coverage of Fiscal Reports — Institutions (Good) - In 2016, Malta’s public sector comprised 389 institutional units, distributed as: - Central government: 203 budgetary central government units and 62 EBUs. Budgetary central government includes 14 ministries, the Offices of the President and Prime Minister, the House of Representatives (HoR), the Judiciary, other non-ministerial departments, and various cost centers (including 33 embassies and 21 customer service units of the Ministry for Gozo). Social security schemes are integrated into the Ministry for the Family, Children’s Rights and Social Solidarity (no separate social security fund). EBUs include agencies mainly funded by budget transfers or own source revenue treated as taxes. - Local government: 68 local councils. - Public nonfinancial corporations: 53 commercially-oriented entities controlled by central government or other public corporations; 19 corporations are controlled through six holding companies. - Public financial corporations: Central Bank of Malta (CBM), Malta Financial Services Authority, and Vault Finance (special purpose entity for the Enemalta restructuring). - The NSO determines institutional composition and assesses classification in accordance with ESA 2010 twice a year prior to each EDP notification. - The NSO publishes quarterly general government accounts that consolidate revenue, expenditures, financing, financial assets and liabilities of each subsector of general government. - There is no fiscal report that consolidates public financial and nonfinancial corporations, except annual NSO data on public corporation liabilities. - Financial Reports produced annually by the Treasury provide cash-based financial statements of the budgetary central government under national General Financial Regulations; individual financial statements of local governments, EBUs, and public corporations are prepared on a full accrual basis under IFRS. - Malta Development Bank (MDB), established in late 2017 with EUR 30 million paid-in capital from the budget, is classified as a public financial corporation under ESA 2010; MDB Act authorizes the government to guarantee up to 100 percent on MDB’s assets and borrowing — an increase in government guarantees beyond current plans could lead to reclassification into general government. ### 1.1 Coverage of Fiscal Reports — Institutional-size and fiscal shares (selected findings) - Malta’s public sector expenditures were estimated at 45 percent of GDP in 2016. - Key distributions (Table 1.2, percent of GDP unless otherwise stated): - Public Sector (k) = (g)+(h)+(i)+(j): Number of entities 389; Revenue 46.9; Expenditures 45.1; Net lending(+)/borrowing(-) 1.8. - General Government (g) = (d)+(e)+(f): Number of entities 333; Revenue 38.2; Expenditures 37.2; Net lending 1.0. - Central Government (d) = (a)+(b)+(c): Number of entities 265; Revenue 38.1; Expenditures 37.1; Net lending 1.0. - Budgetary Central Government (a): Number of entities 203; Revenue 37.4; Expenditures 38.1; Net lending -0.7. - EBUs (b): Number of entities 62; Revenue 7.4; Expenditures 5.6; Net lending 1.8. - Local Government (e): Number of entities 68; Revenue 0.4; Expenditures 0.4; Net lending 0.0. - Nonfinancial public corporations (h): Number of entities 53; Revenue 11.0; Expenditures 10.2; Net lending 0.8. - Financial public corporations (i): Number of entities 3; Revenue 0.8; Expenditures 0.9; Net lending -0.1. - Central Bank: Number of entities 1; Revenue 0.5; Expenditures 0.5; Net lending 0.0. - Others: Number of entities 2; Revenue 0.3; Expenditures 0.4; Net lending -0.1. - Inter-Public-Sector Transfers (j): Revenue -3.2; Expenditures -3.2. - Expenditures of EBUs comprised around 13 percent of gross general government expenditures. - Public corporations accounted for 11 percent of GDP, with more than 90 percent of that spent by public nonfinancial corporations; the three largest enterprises comprised around two-thirds of total expenditures of public nonfinancial corporations (Enemalta turnover EUR 327 million in 2016; Enemed turnover EUR 231million in 2016; Air Malta turnover EUR 192million in 2016). ### 1.1.1 Gaps and implications — Institution coverage - No single financial statement consolidates all government-controlled entities in accordance with international standards. - Expanding fiscal report coverage to include public financial and nonfinancial corporations, including the CBM, would have improved the overall fiscal balance by 0.8 percent of GDP in 2016; much of this impact reflects operating profits made by Enemalta (around half of total operating profits of public nonfinancial corporations in 2016). - Expenditures of public corporations not reported in fiscal statistics comprised 20 percent of gross public expenditures in 2016. ### 1.1.2 Coverage of Stocks (Good) - Fiscal reports cover all financial assets and liabilities recognized under ESA 2010, but exclude nonfinancial assets and net worth. - Quarterly general government accounts (NSO) include all financial assets and recognized liabilities but exclude nonfinancial assets and pension entitlements. - Financial Reports (Treasury) include debt and some financial assets (cash, loans, equity shares). - Public corporation data (NSO) include liabilities but exclude assets and equity. - No report presents net worth of the public sector. ### 1.1.2 Key stock-level findings and gaps - The absence of nonfinancial assets data for general government is a significant gap: the stock of general government fixed assets captured in the national accounts amounted to around 35 percent of GDP in 2016 (does not include non-produced assets e.g. land; breakdown by asset type or level of government is not published). - Total nonfinancial assets reported in financial statements of individual local governments were 0.7 percent of GDP in 2017. - Accrued to date pension entitlements of 21 percent of GDP for general government employees are not yet included in fiscal reports. The NSO is preparing a supplementary table on pension schemes expected to be published shortly (NSO published pension entitlements on June 14, 2018, after the evaluation). - General social security pensions obligations were estimated to be 235 percent of GDP in 2015. ### 1.1.2 Aggregate public-sector balance-sheet figures (if fully reported) - If reported in full, Malta’s public sector would have: - asset holding of 154 percent of GDP (gross basis); - liabilities and equity of 184 percent of GDP (gross basis). - After consolidating cross-holdings within the public sector: - public sector assets 126 percent of GDP; - public sector liabilities 157 percent of GDP. - Fiscal reports include only 22 percent of public sector assets and 53 percent of public sector liabilities on a gross basis. - Main composition of the public-sector balance sheet (gross basis): - Nonfinancial assets: 55 percent of GDP; general government held 35 percent of GDP; public nonfinancial corporations held 20 percent of GDP. - Financial assets: 99 percent of GDP; CBM 54 percent of GDP; general government 34 percent of GDP; public corporations 11 percent of GDP. General government held cash in CBM bank accounts of around 6 percent of GDP. - Liabilities: 168 percent of GDP; general government 99 percent of GDP; CBM 49 percent of GDP; public corporations 20 percent of GDP. General government liabilities were mostly debt securities (64 percent of GDP) and employment-related pension entitlements (21 percent of GDP). - Equity of public corporations: 16 percent of GDP (added to gross public sector liabilities). - Net worth: –31 percent of GDP. - Financial net worth: –8 6 percent of GDP. - (Note: a difference in notation appears in source text: “–8 6 percent of GDP.”) ### 1.1.2 Comparative context - Malta’s net worth is relatively low compared with a sample of other countries, driven by lower general government assets relative to other European countries and sizable public-sector liabilities from general government borrowing, employment-related pension entitlements, and public nonfinancial corporations. - Malta’s general government debt in 2016 was the seventeenth highest out of the 28 EU member countries. ### 1.1.3 Coverage of Flows (Good) - (Section heading present; detailed content for flows coverage begins beyond the provided excerpt.) *Source: IMF staff assessment as presented in the chapter text.* ### 15. Fiscal reports cover cash flows, accrued revenue, expenditures, and financing, but ### 15. Fiscal reports cover cash flows, accrued revenue, expenditures, and financing, but ### Other economic flows - Other economic flows are excluded from fiscal reports and can be derived only as a residual of the financial and nonfinancial accounts of the general government. - Other economic flows in Malta have been sizable due to restructuring of public corporations: - Capital injection in kind to Enemalta in 2012: 3 percent of GDP. - Revaluation losses at conversion of Enemalta’s legal form in 2014: 2 percent of GDP. - Other economic flows comprise holding gains and losses (changes in value from price changes and revaluation) and other changes in the volume of assets (appearance/disappearance of assets, reclassification of institutions). ### Coverage of tax expenditures (Not Met) - Malta does not publish a comprehensive estimate of revenue loss from tax expenditures. - Stability Program Updates include medium-term estimates of revenue loss from new tax expenditures; example: - Annual revenue loss from investment aid tax credits: around 0.4 percent of GDP. - No report includes estimates of revenue loss from several existing and new tax expenditures. - Comparator: estimated revenue loss from tax expenditures in selected European countries averaged 3.2 percent of GDP in recent years. ### Frequency and timeliness of fiscal reporting - In-year reporting: - Monthly in-year fiscal reports for the budgetary central government are published. - Treasury publishes monthly cash-based budget execution reports (“Comparative Statements”) on the last Friday of the following month, except December (published on the last working day of March). - NSO publishes monthly cash-based “Government Finance Data” in conjunction with the Treasury’s Comparative Statements. - NSO publishes quarterly general government accounts (ESA 2010 classifications) within four months after the end of each quarter. - Local Government Division publishes aggregate accrual-based data on local councils quarterly. - Timeliness of annual financial statements: - Within three months after year-end, Treasury publishes “Section 65 Annual Financial Statements,” certified by the Auditor-General as “found to agree with Treasury Books,” before publication. - Within six months after year-end, Treasury publishes the “Financial Report” including comparisons of outturn and budget by line item and data on some financial assets and debt. ### Quality of fiscal reports - Classification: - Fiscal statistics include economic and functional classifications in accordance with international standards (ESA 2010, COFOG). - Monthly NSO budgetary central government data include bridging of budget classifications to COFOG. - NSO publishes annual general government expenditures by COFOG to the second level. - Quarterly local councils data use classifications broadly based on IFRS. - Financial Reports use administrative and economic classifications, but not a program classification. - “Programs and initiatives” covered 51 percent of total budget expenditures in 2016; within these: - Social benefits, subsidies, and transfers: 74 percent. - Remainder: wages and capital expenditures. - Internal consistency: - Fiscal reports include all three reconciliations required under the Code. - Treasury publishes an annual reconciliation between debt issued and debt holding by issue for Malta Government Stocks, Treasury Bills, and foreign loans (account for 99 percent of central government debt). - NSO semiannually publishes a reconciliation between net borrowing, financing (net financial transactions), and change in the debt stock as part of EDP notifications. - Reconciliations generally show limited statistical discrepancies: - Statistical discrepancies between net borrowing, financing, and changes in debt stock averaged EUR 2million between 2010 and 2016. - Stock-flow adjustments were large recently due to acquisition of financial assets: - Average stock-flow adjustments between 2013 and 2016: 1.5 percent of GDP. - EU average for same period: -0.3 percent of GDP. - General government in surplus in 2016 but debt increased slightly, resulting in a large increase in cash balances. - Historical revisions: - Revisions to annual data are made twice a year as part of EDP notifications; NSO explains major revisions in news releases but does not publish bridge tables. - Revisions to general government deficit have been high recently: - EDP notifications (April 2013–April 2018): deficit for 2012 revised down by 0.5 percent of GDP; deficits for 2013–2015 revised up by an average of 0.2 percent of GDP. - Revisions to estimates of debt were minimal over the same period. - Comparability: - Treasury’s monthly “Comparative Statements” compare budget outturns with estimates using the same administrative and economic classifications; December Comparative Statements are reconciled with annual financial statements and published in March. - Cash-based Consolidated Fund deficit/surplus in Financial Reports is reconciled with accrual-based net lending/borrowing under EDP, but published EDP notifications do not include a detailed reconciliation at each revenue and expenditure item level. - NSO publishes reconciliation table with explanation of major adjustments. - Size of adjustments between budget surplus and central government net lending in 2016: - Difference between Consolidated Fund surplus (Financial Report) and central government net lending (October 2017 EDP notification): 1 percent of GDP. - EU average difference: 0.8 percent of GDP. - Adjustments first brought budgetary central government balance down to -0.7 percent of GDP (largely from reclassifying capital injections to public corporations as expenditures rather than financial transactions). - Net lending of EBUs increased central government net lending to 1.1 percent of GDP, mainly due to large surplus of the National Development and Social Fund (NDSF) funded by Individual Investor Program (IIP) contributions. ### Integrity of fiscal reports - Statistical integrity: - Fiscal statistics are compiled by the professionally independent NSO established by the Malta Statistics Authority Act, 2001; NSO subject to principles including reliability, objectivity, relevance, statistical confidentiality, transparency, specificity, and proportionality. - Compilation coordinated through a Government Finance Statistics Committee chaired by the NSO; ultimate responsibility for compilation, including entity classification, vested in NSO. - Fiscal statistics disseminated in accordance with the Special Data Dissemination Standards (SDDS). - Eurostat provides periodic monitoring and advice; NSO bound by European Statistics Code of Practices and EU regulations. - External audit: - Financial statements of the budgetary central government are audited by the independent NAO in accordance with international standards; audit reports published within 12 months of the start of each fiscal year. - Auditor General reports to the Speaker of the House; appointed by two-thirds majority of HoR and removable only in exceptional circumstances. - NAO audits in accordance with ISSAI; audit opinions in recent years state financial statements are fairly presented without major qualifications. - Local councils and EBUs often receive qualified opinions or disclaimers related to nonfinancial assets and revenue recognition: - For 2016 financial statements: 48 out of 68 local governments received qualified opinions and two received disclaimers; among EBUs, Housing Authority and Identity Malta received qualified opinions. - Introduction of accrual accounting at central government may increase risk of qualified audit opinions when implemented after ERP system operationalization. ### Key findings and statistics - Public sector coverage and gaps: - No fiscal report provides a consolidated view of the public corporation sector, which comprises 20 percent of gross public expenditures and 17 percent of gross public sector liabilities (excluding CBM). - Nonfinancial assets not reported in fiscal reports: 35 percent of GDP. - Employment-related pension entitlements reported as 21 percent of GDP in text; table entry notes employment-related pension entitlements of 22 percent of GDP are not yet included in fiscal reports (pension entitlements have now been published; Footnotes 10 and 12). - Tax expenditures: - No comprehensive report on tax expenditures; tax expenditure loss in comparator countries averaged 3.2 percent of GDP. - Reconciliations and adjustments: - Central government debt instruments (Malta Government Stocks, Treasury Bills, foreign loans) account for 99 percent of central government debt. - Statistical discrepancies averaged EUR 2million between 2010 and 2016. - Stock-flow adjustments average between 2013 and 2016: 1.5 percent of GDP (EU average -0.3 percent of GDP). - 2016 reconciliation differences: 1 percent of GDP vs EU average 0.8 percent of GDP; net lending of EBUs raised central government net lending to 1.1 percent of GDP. ### Recommendations (Priorities for improving transparency of fiscal reporting) - Recommendation 1.1: Expand coverage of fiscal reports to the public sector in stages: - Produce a statement of other economic flows of the general government and publish data on general government pension entitlements (NSO). - Produce a statement of operations of public corporations, to be consolidated with general government to produce an operating statement for the public sector (NSO). - Produce balance sheets of subsectors of general government and public corporations (NSO). - Prepare accrual-based financial statements of the central government to produce the public sector balance sheet (Treasury). - Recommendation 1.2: Better report and control tax expenditures by: - Deciding on the definition of tax expenditures and the methodology for estimating them (EPD). - Publishing a regular report that includes estimated revenue loss of all existing and new tax expenditures (EPD). - Setting budgetary targets to control the level of tax expenditures (EPD). *Source: cr18284 - 15. Fiscal reports cover cash flows, accrued revenue, expenditures, and financing, but* ### 37. Fiscal forecasts and budgets should provide a clear statement of the government’s ### Fiscal forecasts and budgets should provide a clear statement of the government’s budgetary objectives and policy intentions, and comprehensive, timely, and credible projections of the evolution of the public finances ### Assessment framework and documentation - The chapter assesses Malta’s fiscal forecasting and budgeting practices against the four dimensions of the Fiscal Transparency Code: - The comprehensiveness of the budget and associated documentation; - The orderliness and timeliness of the budget process; - The policy orientation of budget documentation; and - The credibility of the fiscal forecasts and budget proposals. - The Ministry for Finance produces a large amount of reports related to fiscal forecasting and budgeting, including reports required under the EU fiscal framework and national legislation (examples: Stability Program Update, Draft Budgetary Plan, Half-Yearly and Annual Reports, Financial Estimates). - While the set of reports provides an abundance of fiscal information, presentations are somewhat inconsistent (for example, of multi-year forecasts), often requiring consultation of several documents to obtain a full picture. ### Inventory of principal documents (timing and purpose) - National Reform Program — April: Assessment of economic and distributional impact of structural reform measures; reports on implementation of EU country-specific recommendations and policies to reach Europe 2020 targets. - Stability Program Update — Late April: Updates medium-term economic and fiscal forecasts; sets out fiscal objectives; incorporates long-term fiscal sustainability analysis. - Annual Report — June: Information on execution of previous year’s budget and compliance with fiscal rules. - Half-Yearly Report — July: Review of macroeconomic and fiscal developments during first half of the year; corrective measures; debt developments. - Pre-Budget Document — August: Update on economic and fiscal conditions (but no new forecasts); sets out priority areas for the forthcoming budget. - Draft Budgetary Plan — Mid-October: Abridged update of Stability Program; incorporates updated economic and fiscal forecasts for the current year and the year ahead, and distributional analyses of major budget measures. - Financial Estimates — Mid-October: Three-year ahead revenue and expenditure projections by line ministry; detailed one-year ahead expenditure estimates by ministry (vote) and line item. - Budget Speech — Mid-October: Presentation of budget priorities and measures; summary and explanation of revisions to current budget’s revenue and expenditure estimates by ministry. - Economic Survey — Mid-October: Detailed discussion of latest macroeconomic and financial developments. ### Comprehensiveness of budget documentation - Budget unity (Basic) - Budget documentation includes all budgetary central government revenue and expenditures on a gross basis but provides limited information on EBUs. - Local government revenues account for less than 1 percent of total general government revenue and are reported in budget documents. - Malta does not have a social security fund; expenditures of social programs are financed through budget appropriations. - Estimated revenue and expenditures by EBUs are consolidated into fiscal aggregates, but budget documentation only details transfers from the budget to EBUs, with no detailed information on EBUs’ own-source revenue and total expenditures. - EBUs and the Individual Investor Program (IIP) - EBUs account for a large and rising share of central government revenue and expenditures. - Revenue of EBUs has been steadily increasing, mainly due to proceeds to the NDSF emanating from the IIP, and accounted for 13 percent of gross expenditures in 2016. - IIP receipts rose from 0.2 per cent of GDP in 2014 to 2.5 percent of GDP in 2017. - Only 30 percent of IIP revenue (after fees) is transferred to the Consolidated Fund; the remaining 70 percent is transferred to the National Development and Social Fund (NDSF). - The NDSF Board of Governors is appointed by the Prime Minister and has discretion in allocating the Fund’s resources without the approval of the government or Parliament. - Budget documentation records IIP revenue received by the Consolidated Fund but there is no reporting on NDSF operations and disbursements. - The original forecasts for 2016 and 2017 IIP revenue were less than half the actual revenue received, indicating potentially significant upside risk to government projections; revenue is projected to moderate in 2018. - Macroeconomic forecasts (Advanced) - Budget documentation presents four-year forecasts for main macroeconomic variables, their components, and underlying assumptions, with the most detailed forecasts in the Stability Program Update. - Near-term (one-year ahead) forecasts are updated in the Draft Budgetary Plan (October). - Over the past decade, medium-term real GDP forecast errors have been substantial and exhibited a large pessimistic bias: a large (2 percent of GDP on average) pessimism bias in the medium-term forecasts. - GDP forecast errors in Malta remained slightly larger than for other EU countries even after volatility adjustment. - Medium-term budget framework (Good) - Malta has a medium-term budget framework in line with EU requirements, but presentation is fragmented and inconsistent across documents. - Stability Program Update (April) presents four-year ahead forecasts by economic classification for general government and baseline projections at an aggregate level. - Draft Budgetary Plan (October) updates fiscal forecasts but only one-year ahead. - Financial Estimates (October) present three-year ahead revenue and expenditure estimates by line ministry but only distinguish between recurrent and capital expenditures (no full economic classification). - Four-year projections for financing are presented only in the Budget Speech. - Fragmentation and inconsistency make it difficult to capture a full and updated picture of medium-term revenue, expenditure, and financing projections. - Forecast accuracy and biases - One-year ahead forecasts of the fiscal balance have been highly accurate, with average absolute forecast error of 0.1 percent of GDP. - One-year ahead revenue and expenditure forecast errors exceeded 3 percent of GDP on average. - Two-year and three-year ahead forecast errors show offsetting overestimation of revenue and expenditures, producing a more accurate forecast for the overall balance. - Medium-term nominal expenditure forecasts have tended to be revised upwards in recent years, in line with upward revisions to revenue forecasts. - There is potential to strengthen the medium-term budget framework so that expenditure ceilings become a more binding constraint on line ministry budgets to mitigate expenditure creep. - Investment projects (Basic) - Major investment projects are subject to open and competitive tender in line with EU regulations. - The value of multi-annual investment projects is not disclosed, and information on cost-benefit analysis for major projects is not uniformly published. - A summary of major infrastructure projects is available on the Ministry for Transport, Infrastructure and Capital Projects website, but no published information on total value or multi-annual obligations. - The Financial Estimates include three-year ahead estimates of capital expenditures by ministry and more detailed one-year ahead estimates, but only limited information on individual projects is published. - Cost-benefit analysis is conducted for EU co-financed investment projects (submitted to the EC) but is not mandatory for other projects and is not routinely made public. - There are no general guidelines for project appraisal and project selection beyond those for EU co-financed projects. - Overall levels of public investment have averaged around 3 percent of GDP over the last decade, dropping to 2.2 percent of GDP in 2017. - Around a quarter of public investment is financed through EU structural funds. - The government plans to scale up public investment over the next few years, including increased use of public-private partnerships (PPPs). ### Orderliness of the budget process - Fiscal legislation (Good) - The fiscal legal framework comprises the Constitution; the 2014 FRA (transposing SGP and Fiscal Compact requirements into national law); the 2017 General Financial Regulations (GFR); and the Standing Orders of the House of Representatives (HoR). - The FRA and GFR set out key content requirements for fiscal plans and budget proposals; Standing Orders regulate HoR’s access to amend the budget proposal. - The FRA sets detailed timelines for production and submission of EU-related documents and their endorsement by the MFAC, but the legal framework does not provide an effective timetable for submission of the budget proposal to the HoR. - Timeliness of budget documents (Good) - For the past three years the budget has been presented to Parliament in mid-October and approved in December before the beginning of the budget year. - The Constitution (Article 103(1)) provides that the Financial Estimates be submitted to the HoR before or within 30 days of the commencement of the fiscal year; this has not been a constraint in recent years. - In practice the timetable is driven by the EU requirement to submit a Draft Budgetary Plan to the EC by October 15 each year. - Dates of recent budget submissions and approvals (as reported) - Budget Year 2014: Submitted to parliament Nov. 4; Approved by parliament Nov. 21. - Budget Year 2015: Submitted to parliament Nov. 17; Approved by parliament Dec. 4. - Budget Year 2016: Submitted to parliament Oct. 12; Approved by parliament Dec. 9. - Budget Year 2017: Submitted to parliament Oct. 17; Approved by parliament Dec. 7. - Budget Year 2018: Submitted to parliament Oct. 9; Approved by parliament Dec. 12. ### Policy orientation of budget documentation - Fiscal policy objectives (Advanced) - Fiscal policy objectives are clearly set out in the FRA and reported in budget documentation; fiscal policy is conducted with reference to a precise and time-bound set of fiscal rules transposing the SGP and Fiscal Compact. - The fiscal rules reported include: - Deficit rule: general government deficit below 3 percent of GDP (since 2003); - Debt rule: general government gross debt below 60 percent of GDP (since 2003); - Medium-term objective (MTO): a country-specific objective of structural general government budget balance or surplus as a percentage of GDP in the medium term (since 2013); - Debt reduction rule: when general government debt exceeds 60 percent of GDP, the annual pace of debt reduction must be no less than 1/20th of the distance between the actual debt ratio and the 60 percent limit (since 2013); - Expenditure benchmark: limits annual growth in general government expenditures to potential GDP growth, unless financed by discretionary measures. - Parliamentary amendment framework - While neither the Constitution nor the FRA limits Parliament’s power to amend the budget proposal, the Standing Orders of the House of Representatives prohibit amendments to increase either taxes or expenditures; only reductions can be proposed by parliamentary members. In practice, the budget proposal is not amended by Parliament. *Source: cr18284 - 37. Fiscal forecasts and budgets should provide a clear statement of the government’s budgetary objectives and policy intentions, and comprehensive, timely, and credible projections of the evolution of the public finances.* ### 52. Malta has been fully compliant with its fiscal rules since 2016 and is forecast to ### Malta has been fully compliant with its fiscal rules since 2016 and is forecast to ### Fiscal compliance and fiscal outcomes - Malta has been fully compliant with its fiscal rules since 2016 and is forecast to remain so (Table 2.3). - The deficit and debt requirements of the SGP have been met since 2015, and debt has been on a declining path since 2013, meeting the debt reduction requirement of the FC. - The structural fiscal balance moved into surplus in 2016; Malta achieved its medium-term objective three years early. - The 2018 budget targets: - a surplus of 0.5 percent of GDP; - a structural budget balance; - the government committed to achieve the MTO net of IIP revenues and expenditures (achieved in 2017) and to aim for an increasing fiscal surplus. - MFAC regularly reports on compliance against the fiscal rules, including a qualitative assessment of the credibility of underpinning economic and fiscal forecasts. - Key fiscal metrics (General Government, Percent of GDP) from Table 2.3: - Deficit: 2012 -3.7; 2013 -2.6; 2014 -2.0; 2015 -1.3; 2016 1.0; 2017 3.9; 2018 1.1; 2019 0.9; 2020 0.9; 2021 1.6. - Debt: 2012 68; 2013 68; 2014 64; 2015 59; 2016 56; 2017 51; 2018 46; 2019 43; 2020 39; 2021 36. - Debt reduction: 2013 0.6; 2014 -4.6; 2015 -5.1; subsequent years n.a. - Structural balance: 2015 0.7; 2016 3.6; 2017 0.6; 2018 0.7; 2019 0.9; 2020 1.8 (notes: 1) Projection; 2) Revised historical estimates are not reported). ### Performance information and M&E - Budget documentation includes information on financial resources and staffing by administrative entity, but not outputs or outcomes. - Government monitoring and evaluation steps: - Prime Minister’s Office regularly monitors implementation and performance of around 2,000 government measures (initiatives), setting targets and key performance indicators. - Comprehensive Spending Review program initiated in 2014 covering health care and education sectors among others. - Ministries submit multi-year business plans to the Ministry for Finance; framework being enhanced to provide some information on expected outputs for “programs and initiatives.” - National Reform Program anticipates widening scope and coverage of the Comprehensive Spending Review program. - A new directorate is being established in the Ministry for Finance to strengthen performance monitoring and evaluation. ### Public participation in the budget process - Malta has a longstanding tradition of consultation and public participation. - Pre-Budget Document published in August provides accessible description of priorities. - Two public presentations (one in Gozo) follow the Pre-Budget Document. - Formal consultations held with social partners facilitated by Malta Council for Economic and Social Development and Malta-EU Steering Action Committee. - Citizens can submit proposals via the Ministry for Finance website. - Budget Speech includes overview of major policy measures against macroeconomic and fiscal backdrop. - Draft Budgetary Plan discusses distributional implications of major measures and includes indicators for poverty, social exclusion and inequality by demographic group. - National Reform Program sets out distributional impact of selected measures by income decile. - Political engagement indicators: - Voter turnout at the last general election was 93 percent, placing Malta 9th out of 196 countries. - Malta is at the 88th percentile of the World Bank’s Voice and Accountability Indicator. ### Credibility and independent evaluation - MFAC (Malta Fiscal Advisory Council): - Evaluates credibility of government economic and fiscal forecasts and reports on compliance against fiscal rules. - Established with the FRA and began operating in January 2015. - Funding provided for in the FRA; directly accountable to parliamentary Accounts Committee. - Mandated to validate government forecasts; assess performance against fiscal rules; and assess whether fiscal stance is conducive to prudent management. - Recent amendments to the FRA entrust MFAC to carry out independent ex post assessment of macroeconomic and fiscal projections and fiscal risk assessment. - MFAC publishes several reports during the year, including assessments of macroeconomic forecasts, fiscal forecasts, and overall assessments for both the Update of Stability Program and the Draft Budgetary Plan, plus assessments tied to Ministry for Finance reports and an Annual Report and Statement of Accounts. ### Supplementary budgets and budget execution - Supplementary budget regularizes expenditures exceeding the approved budget (Article 103 of the Constitution). - Amendment to Financial Administration and Audit Act in 1965 authorized Minister for Finance to approve expenditures up to 10 percent above approved total budget, with subsequent reporting to HoR. - In practice, a supplementary budget is tabled once a year (each December) to regularize in-year amendments within the 10 percent limit; HoR routinely approves supplementary budget without debate. - Supplementary budgets are relatively large: - On average, supplementary budgets increased total expenditure appropriations by 6.6 percent of total expenditures between 2008 and 2016. - Average underspends offset increases by 6.5 percent of expenditures in budget execution. ### Forecast reconciliation and forecast accuracy - Budget documentation provides limited explanation of changes between successive forecasts or medium-term plans. - Half-Yearly Report (published in July) compares autumn and spring forecasts for the budget year, and reports revenue and expenditure performance for first six months versus prior year; includes qualitative discussion of revised macroeconomic forecasts’ impact on fiscal outlook. - Annual Stability Program Update includes a table comparing multi-annual forecasts (real GDP growth, general government net lending, general government gross debt) with previous year’s Update but does not break down causes for changes into macro determinants, new policies, and accounting adjustments. - Draft Budgetary Plan includes table explaining quantitative impact of new policy measures on fiscal balance but limited to current year and one-year-ahead forecasts. - Historical forecast pattern: - Since 2003, medium-term fiscal deficit forecasts show no systematic tendency to be revised up or down overall, but with a clear change in revision patterns over time. - Medium-term fiscal forecasts were too optimistic following the 2008 global financial crisis; subsequent period of fiscal consolidation saw revisions that were significantly smaller and closer to outturns. ### Recommendations (priorities for improving transparency) - Recommendation 2.1: Improve comprehensiveness of budget documentation by: - Presenting information at an appropriate level of detail on outturns and estimates of the revenue and total expenditure of each EBU in an annex to the Financial Estimates. - Gradually introducing performance information in the budget documentation (Budget Office). - Recommendation 2.2: Improve consistency of fiscal reports by: - Harmonizing and consolidating presentations of macroeconomic and fiscal forecasts across reports to make them more consistent. - Providing a detailed explanation of changes to forecasts between successive reports, distinguishing impacts of new policies, macroeconomic determinants, and other changes (EPD). - Recommendation 2.3: Strengthen framework for public investment management by: - Disclosing total obligations under each multi-annual project in an annex to the Financial Estimates, with a breakdown of annual outlays (Budget Office). - Publishing results of cost-benefit analysis conducted for major projects (Ministry for Finance). - Strengthening public investment management framework, including project appraisal and selection, based on a Public Investment Management Assessment (PIMA) (Ministry for Finance). ### Fiscal risk analysis and disclosure - Some fiscal risks are regularly disclosed in various reports, though level of detail varies: - EPD discusses macroeconomic risks in the Stability Program Update. - Treasury - DMD discloses and assesses risks to public debt portfolio in its Annual Report on the Management of Central Government Debt. - CBM performs comprehensive risk assessments related to financial sector stability in the Financial Stability Report. - NAO discloses the total stock of government guarantees with breakdowns and reports on local councils. - NSO discloses aggregate summary information on PPPs, guarantees, and liabilities of public corporations and provides Council Directive 85/2011 reporting. - Table 3.1 lists reports related to fiscal risks and their coverage (Stability Program Update, Annual Report on the Management of Central Government Debt, Annual Audit Report of Public Accounts, Report by the Auditor General on the Workings of Local Governments, LGD website, Financial Stability Report, NSO website). ### Macroeconomic risk analysis (Stability Program Update) - The Stability Program Update provides advanced and comprehensive macroeconomic risk analysis: - Chapter 4 presents alternative scenario analyses: baseline, optimistic, and pessimistic global economic growth scenarios. - Sensitivity analyses incorporate alternative assumptions for real GDP growth, exchange rates, world commodity prices, private investment, trade, and interest rates. - Projections are based on a mix of forecasting techniques combining macro-econometric model-based analysis with judgment informed by consultations with private and public sector stakeholders. - The Update includes probabilistic fan chart forecasts for GDP growth and the budget balance, derived from scenarios and analysis of past forecast error variance. - The Pre-Budget Document includes a summary of macroeconomic risks based on the Stability Program Update. *Source: National Budget documents; Stability Program Update; MF – EPD, Medium-Term Fiscal Strategy for Malta – Update of Stability Program 2018–21.* ### 68. The volatility of GDP and government revenue in Malta has been relatively low ### 68. The volatility of GDP and government revenue in Malta has been relatively low ### Volatility of GDP and government revenue (2000–17) - The volatility of GDP in Malta has been relatively low compared to other smaller European countries such as Cyprus, Latvia, Lithuania, Estonia, and Slovenia (Figure 3.2). - The volatility in revenue growth has been amongst the lowest in Europe during the period 2000–17 (Figure 3.3). - Volatility is calculated using the standard deviation of growth. - Sources: WEO (October 2017) and IMF Staff Estimates. ### Specific fiscal risks — disclosure and institutional arrangements - The government does not publish a consolidated statement of specific fiscal risks; information on some fiscal risks is available but not comprehensive (Table 3.1 referenced). - Quarterly NSO reports disclose stock and composition of assets and liabilities, total outstanding guarantees, non-performing loans granted by the government, and PPP contractual obligations — but only in the aggregate without detail or analysis. - NAO annual report provides a full list of government guarantees by sector and beneficiary and describes letters of comfort issued by entity. - MFAC 2016 Annual Report included a chapter on contingent liabilities. - Financial situation of local councils is assessed by the NAO in a dedicated annual report; LGD publishes quarterly consolidated and individual financial data on local councils, including a Financial Situation Indicator (FSI) for each council. - Fiscal risks associated with public corporations are not reported (see Section 3.3.2). - A recent amendment to the FRA requires MFAC, rather than the Ministry for Finance, to produce an annual fiscal risk statement, to include an assessment of relevant contingent liabilities and an independent analysis of the government's macroeconomic and fiscal forecasts. - The amendment does not guarantee development of a well-staffed risk management framework integrating analysis, reporting, and management of fiscal risks. ### Estimated gross exposure to specific fiscal risks - The maximum gross exposure is estimated at around 40 percent of GDP (Table 3.2). This excludes any potential implicit fiscal risk related to the financial sector. - Government exposures include relatively large exposures related to government guarantees and public corporations, and sizeable long-term pressures from population ageing. - Other Malta-specific potential fiscal risks: changes to international taxation and developments in the Individual Investment Program (IIP). - Some common fiscal risks are insignificant in Malta (e.g., risks from local governments, natural disasters). ### Table 3.2 — Selected Specific Fiscal Risks, Gross Exposure (as reported) - Public Sector - General government guarantees (2016)*: 1,399 Millions (EUR); 14 Percent of GDP. Reporting: NSO, Council Directive 85/2011. - Public Private Partnerships (2016)**: 7 Millions (EUR); 0 Percent of GDP. Reporting: NSO, Council Directive 85/2011. - Liabilities of Public Corporations***: 2,053 Millions (EUR); 17 Percent of GDP. Reporting: NSO, Council Directive 85/2011. - Liabilities of units involved in financial activities***: 317 Millions (EUR); 3 Percent of GDP. - Liabilities of units involved in other activities: 1,736 Millions (EUR); 17 Percent of GDP. - Financial Sector - Explicit exposure to the financial sector: 0 Millions (EUR); 0 Percent of GDP. Reporting: CBM - Financial Stability Report. - Natural disasters - Natural disasters: 0 Millions (EUR); 0 Percent of GDP. Reporting: Not reported. - Long-term Risks - NPV of pension spending change (2015-50): 655 Millions (EUR); 6 Percent of GDP. Reporting: IMF - Fiscal Monitor. - Source: IMF staff estimates. - Notes: *Excludes guarantees provided by MIGA and IBRD and on foreign loans taken by the Central Bank of Malta on behalf of government. Government guarantees include guarantees granted by the EBUs but exclude government guarantees provided to EBUs. **Amortized contractual value. ***Excludes CBM. ### Long-term sustainability of public finances - The government publishes long-term projections for main expenditure items but does not present scenarios assessing alternative economic assumptions. - The annual Stability Program Update provides long-term (50+ years) projections of pension, health, long-term care, education, and unemployment expenditures, but does not include long-term estimates of total government revenue, expenditures or debt, nor multiple scenarios for main fiscal aggregates. - Scenario analysis reflecting a range of demographic and macroeconomic assumptions is included in the EC’s Ageing Reports. - Demographic and fiscal pressures: - Old-age dependency ratio in Malta expected to almost double over the next 50 years to 55.8 percent in 2070, up from 29.1 percent in 2016 (Figure 3.4). - Implication: Malta would move from 3.5 working-age people per person aged more than 65 in 2016 to less than 2 in 2070. - Expenditures for pensions, health, education, long-term care, and unemployment benefits expected to increase by 6.8 percent of GDP between 2013 and 2060 (Figure 3.5) — one of the highest increases among EU member countries. - Sources: European Commission - The 2018 Ageing Report. ### Fiscal risk management — budgetary contingencies - FRA requires establishment of a contingency reserve of between 0.1 percent and 0.5 percent of GDP in any particular year, together with earmarked funds of the same size. - Reserve to be built up over five years starting the first year following entry into force of the FRA (i.e., 2015). - Provisions to the contingency reserve must be made as soon as the budget is in surplus; drawdowns must be replenished over three years until reserve is within FRA range. - Funds earmarked for the reserve to be invested in top rated short-term liquid assets; drawdowns allowed only in ‘urgent, temporary and unforeseen circumstances’ following proposal from the Minister for Finance and approval of the Prime Minister. - In line with the FRA, a transfer of EUR 9.8 million (around 0.1 percent of GDP) was made to the contingency reserve for the first time in 2017. - The contingency reserve represents less than 0.3 percent of total budgeted expenditures (Figure 3.6) — small compared to other countries. - Note: Drawdowns impact reported ESA 2014 net lending/borrowing for the full amount; transfers to the reserve are not regarded as expenditures and do not impact net lending/borrowing. ### Management of assets and liabilities - Government balance sheet holds significant financial assets and liabilities; some are subject to fiscal risks. - Financial assets mainly: deposits with the CBM and investments in public corporations. - Overall financial assets relatively stable at around 30 percent of GDP in recent years, with composition shifting toward a larger share of deposits. - Liabilities mainly: debt securities, which represented 82 percent of total liabilities (55 percent of GDP) in 2017 (Figure 3.7). - Amount of liabilities reduced significantly in recent years to below 70 percent of GDP, explained primarily by decreasing trend in public debt. - Debt management: - DMD (front, middle, back office) established in the Treasury. - “Government Borrowing and Management of Public Debt Act” (PDMA) adopted in 2017: only the Minister for Finance authorized to borrow on behalf of government. - Annual “Budget Measures Implementations Act” authorizes and sets limit on total central government borrowing; maximum amount of outstanding Treasury Bills established by Parliamentary Resolution. - DMD’s Annual Report reports compliance with legal limits and discloses detailed info on level, cost, composition of government debt by holder, maturity, currency; discusses market, interest rate, refinancing, settlement, operational, liquidity, and fraud risks. - A medium-term debt management strategy being prepared for the first time but not yet published. - Risk indicators: - Debt held exclusively in Euro — mitigates exchange rate risks. - Share of assets with short-term maturities in general government debt relatively low — reduces refinancing risk (Figure 3.8). - Average maturity of government debt by end 2017: 9 years. - 90 percent of the debt held by domestic residents — reduces vulnerability to external financing shocks but implies higher exposure to domestic financial sector performance. - Risks to financial assets: - Mainly emanate from public corporations: government investments in public corporations accounted for 39 percent of total financial assets on average during 2011–17, though share has been decreasing in terms of GDP. - Currency and deposits: 23 percent of total financial assets on average; held with CBM (64 percent) and commercial banks (36 percent) of total currency and deposits of general government in 2016. - Deposits at CBM and commercial banks accounted for 10 percent of GDP in 2016, due largely to cash inflows of IIP. - Around 18 percent of these deposits associated with IIP contributions that are still refundable and matched by payables. ### Guarantees - Government guarantees are reported, but there are no legal limits on issuance of new guarantees or the total stock of guarantees (implementation of PDMA will change this). - NAO Annual Report includes total stock of guarantees and detailed information by sector, beneficiary, and gross exposure; NSO publishes total stock on a quarterly basis in Quarterly Accounts for General Government without detail. - Stock of guarantees: - During 2012–16: around 14–16 percent of GDP (Figure 3.9) — high by international comparison (Figure 3.10). - Reduced to below 10 percent of GDP in 2017 following withdrawal of a temporary guarantee related to the energy sector (Electrogas). - Concentration: in 2016, eight entities absorbed 98 percent of total outstanding guarantees; 68 percent concentrated in the energy sector (Table 3.3). - Table 3.3 (selected entries, 2016 vs 2017) - Total outstanding guarantees: 1,399,259 Thousand € (2016) — 100.0% of total; 1,069,299 Thousand € (2017) — 100.0% of total. - Electrogas Ltd.: 360,000 Thousand € (25.7%) in 2016; 0 Thousand € (0.0%) in 2017. - Vault Malta Ltd.: 282,026 Thousand € (20.2%) in 2016; 273,167 Thousand € (25.5%) in 2017. - Enemalta p.l.c.: 251,792 Thousand € (18.0%) in 2016; 236,205 Thousand € (22.1%) in 2017. - Malta Freeport Ltd.: 200,755 Thousand € (14.3%) in 2016; 200,831 Thousand € (18.8%) in 2017. - PDMA provisions (to be implemented within about a year from reporting): - New guarantees require approval by the Minister for Finance on advice of the Treasury (DMD). - Obligation to set a limit on total guarantees consistent with the medium-term fiscal framework. - Requirement for the DMD to make regular assessments of risks surrounding guarantees. - Requirements on periodical reporting. ### Public-private partnerships (PPPs) - Malta has made very limited use of PPPs; only one PPP contract (a home for the elderly approved in 2007) reported in Fiscal Statistics for 2016. - Contractual arrangements by public corporations with PPP-like features (e.g., power purchase agreements) could constitute implicit contingent liabilities. - Example: Enemalta entered into a power purchase agreement with the Electrogas project company for Delimara 4 power plant — total investment EUR 462 million (around 5 percent of GDP). Enemalta will purchase electricity for an 18-year contract period, and the government is obliged to take over the power purchase agreement if Enemalta fails to implement it. - Projects Malta (created 2015 as an EBU) to coordinate and facilitate PPPs; serves as government resource center for PPPs and has been involved in preparing PPPs (e.g., Institute for Tourism Studies site) and several concessions. - No general government policies or guidelines on consideration, selection, management, reporting on PPPs (including fiscal risk management). - No legal limit to accumulated stock of PPP obligations. ### Financial sector (explicit support and deposit protection) - Government does not extend explicit support to the financial sector. - A Depositor Compensation Scheme exists, complying with EU Directive 2014/49/EU; considered an EBU funded by compulsory levies from deposit-taking financial institutions and does not involve any explicit government obligation. - The Depositor Compensation Scheme covers a maximum of EUR100,000 per depositor per credit institution. - Each credit institution is required to contribute to the scheme annually at least (text truncated in source). *Source: IMF staff report (cr18284).* ### 1.3 percent of its covered deposits, and the size of contributions can change, depending on risk ### cr18284 - 1.3 percent of its covered deposits, and the size of contributions can change, depending on risk ### Financial stability framework and stress testing - The CBM regularly undertakes an assessment of financial sector stability based on a range of macroeconomic and financial market scenarios. - The annual Financial Stability Report includes scenarios to stress test resilience to extreme events, including: - (i) a credit quality deterioration in the securities portfolio; - (ii) persistent deposit withdrawals; - (iii) a sharp decrease in property prices; and - (iv) materialization of interest rate risks. - A macroeconomic risk scenario is also considered, but has not been published so far. - The 2016 Financial Stability report concluded that the financial sector is well capitalized, provisioned, and has ample liquidity buffers. ### Size and structure of the financial sector - Total assets of the financial sector amounted to 431.6 percent of GDP in 2017. - The core domestic deposit-taking banking sector had assets of around 206.4 percent of GDP in 2017, which is below the EU average of the total banking sector assets. - International banks are not linked with the domestic economy. ### Banking sector soundness and challenges - The core domestic banking system is well capitalized and profitable. - The ratio of non-performing loans has been declining, albeit partly due to write-offs. - The loan to deposit ratio is below 60 percent and well below the EU average, indicating the sector is highly liquid. - Profitability headwinds and risks include: - subdued lending to non-financial corporations; - possible prolongation of the European Central Bank’s accommodative monetary policy stance; - upcoming regulatory changes that may lead to higher funding costs. ### Natural resources and environmental risk exposure - Malta does not have noticeable natural resources; there were no rents generated from natural resources during 2007–16. - The government does not publish an assessment of fiscal exposures to natural disasters and other major environmental risks. - The Critical Infrastructure Protection Directorate prepared a comprehensive national risk assessment report in 2015, which considered earthquake, floods, droughts, severe weather, and oil spill risks; these risks were generally assessed to be low to medium. The report has not been published. ### Subnational government fiscal position and oversight - Local governments are an insignificant source of fiscal risks: - Local government sector represents only 1 percent of general government expenditures. - Own revenue of local councils amounted to 0.1 percent of gross general government revenue in 2016. - Local councils’ debt represented 0.1 percent of general government debt in 2016. - Financial condition and performance of sub-national governments is published quarterly by the LGD for 68 local councils. - The FSI is compiled for each council as the ratio of net current liabilities (excluding loans approved by central government) to allocations from central government. - Local councils are prohibited from borrowing except with joint approval of the Minister of Justice, Culture and Local Governments and the Minister for Finance. ### Public corporations: scale, reporting gaps, and fiscal risks - The public corporation sector comprises 53 commercially-oriented nonfinancial entities with total liabilities excluding equity of around 17 percent of GDP in 2016. - Around 0.4 percent of these liabilities were loans owed to the general government. - Liabilities are concentrated in the five largest corporations, which account for 80 percent of total liabilities of the sector. - The sector was generally profitable in 2016, but Malta has a history of government intervention to support and restructure public corporations when economic conditions are dire. - Direct transfers to public corporations are regularly disclosed in the budget and Financial Reports, but: - There is no published ownership policy outlining purpose and objectives of state ownership or dividend policy. - There is no consolidated reporting on the financial performance of the public corporation sector. - Recent direct subsidies and capital injections included (EUR millions): - Subsidies: 2012: 32.3; 2013: 35.5; 2014: 70.2; 2015: 49.6; 2016: 55.9 - Capital injections: 2012: 22.5; 2013: 41.3; 2014: 16.3; 2015: 45.2; 2016: 23.6 - Total direct subsidy and capital injection included in general government expenditures has been below 1 percent of GDP in each year. ### Oversight and governance of public corporations - Oversight and monitoring arrangements are fragmented: - 19 corporations are controlled through six holding companies; the most significant is Malta Government Investments (MGI). - Others are controlled by relevant line ministries or the Ministry for Finance. - No single entity is responsible for developing ownership policies across government or for monitoring and reporting on performance of the entire public corporation sector. - The Ministry for Finance has deep and ongoing involvement in key public corporations (Enemalta, Air Malta, Malta Freeport) and regularly monitors their performance. ### Main findings from Fiscal Transparency assessment - Areas meeting advanced practice: - Fiscal strategy documents include scenario analysis of macroeconomic risks and probabilistic fan charts. - Framework for analyzing and reporting on risks to government’s debt portfolio is comprehensive. - Potential risks from the financial sector are well monitored and reported. - Key gaps and areas at basic or not met practice: - Absence of reporting on overall financial performance of public corporations and absence of a common ownership framework. - No summary report on specific risks to the fiscal forecast, including long-term fiscal sustainability, government guarantees, and PPPs. - The budget’s contingency reserve access criteria are not clearly defined. - Guarantees are disclosed, but the maximum value of new guarantees or their stock is not authorized by law. ### Priority recommendations for improving fiscal risk transparency (3.1 and 3.2) - Recommendation 3.1: Produce and publish an annual fiscal risk statement discussing size and nature of macroeconomic and specific fiscal risks, including: - Exposures to guarantees, on-lending, and indemnities, with comprehensive list of outstanding amounts, beneficiaries, and likelihood of risk materialization. - Financial position of public corporations at individual and aggregate levels, including comprehensive information on actual and expected financial government support and costs of quasi-fiscal activities (for example, public service obligations). - PPPs and other long-term contractual arrangements, including government’s rights, obligations, and exposures under each project. - Other relevant sources of fiscal risks. - Recommendation 3.2: Strengthen institutional framework in the Ministry for Finance for analyzing and managing fiscal risks: - Assign responsibility to a unit for compiling information for and drafting the fiscal risk statement, drawing on information and analysis from other units as well as its own analysis. - Establish a centralized oversight arrangement for all public corporations based on a common ownership policy and performance monitoring cycle. ### Summary evaluation highlights (selected numeric points preserved) - Natural resource rents: no rents generated during 2007–16. - Financial sector assets: 431.6 percent of GDP in 2017 (financial sector); 206.4 percent of GDP in 2017 (core domestic deposit-taking banking sector). - Loan to deposit ratio: below 60 percent. - Public corporation liabilities: around 17 percent of GDP in 2016; liabilities concentrated with five largest corporations accounting for 80 percent of total liabilities. - Direct transfers (Subsidies and Capital injections, EUR millions): - Subsidies: 32.3; 35.5; 70.2; 49.6; 55.9 (2012–2016) - Capital injections: 22.5; 41.3; 16.3; 45.2; 23.6 (2012–2016) - Local government sector: 1 percent of general government expenditures; own revenue 0.1 percent of gross general government revenue in 2016; local councils’ debt 0.1 percent of general government debt in 2016. - Public corporations’ liabilities represent 17.5% of GDP (Summary Evaluation table). *Fiscal Affairs Department, International Monetary Fund* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18284.pdf_