Malta: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, February 14, 2020
Source details
- Canonical URL
- Malta: Staff Concluding Statement of the 2020 Article IV Mission
Other formats
Bibliographic details
- Published: February 14, 2020
Overview
- Malta has experienced very rapid economic growth in recent years as the economy rebalanced towards high value-added services.
- Prudent fiscal policy and timely structural reforms have helped boost employment and build fiscal buffers while promoting social cohesion.
- Key challenges identified:
- Deficiencies in Malta’s anti-money laundering and countering the financing of terrorism (AML/CFT) framework that could pressure correspondent banking relationships (CBRs), damage investment attractiveness, and threaten financial stability.
- Large inflows of foreign labor exacerbating pressures on housing, infrastructure and natural resource management.
- Fiscal risks associated with contingent liabilities and long-term age-related spending pressures despite a marked decrease in public debt.
Key policy recommendations
- Financial sector
- Prioritize efforts to address identified shortcomings in the implementation of the AML/CFT framework.
- Guarantee the long-term financial independence of the supervisor and further enhance its capacity.
- Address limitations in the crisis management framework.
- Further strengthen the analysis of financial risks outside of the banking sector and close remaining data gaps.
- Fiscal policy
- Maintain gradual structural consolidation excluding proceeds from the Individual Investor Program (IIP).
- Continue to address infrastructure needs while improving public investment efficiency and contain current expenditures.
- Diminish fiscal risks by enhancing risk management related to government guarantees and state-owned enterprises, and by addressing long-term age-related spending pressures.
- Continue to strengthen tax revenues and explore ways to diversify beyond corporate income tax (CIT) proceeds.
- Structural reforms
- Further encourage labor force participation of elderly workers and women, close skills-gaps, foster innovation and improve access to affordable housing.
- Improve governance to safeguard Malta’s business climate and attractiveness for foreign investment.
Growth and outlook
- 1. Economic activity is moderating but remains above its long-term average and is increasingly dependent on domestic demand.
- Real GDP growth is expected to have dropped to about 5 percent in 2019, from 7 percent in 2018.
- Real GDP is projected to moderate further to around 4 percent in 2020 as business investment is affected by global uncertainty and as private consumption moderates.
- Domestic demand is expected to remain the main engine of growth, with a gradual decline of the large current account surplus.
- 2. Risks to the outlook are skewed to the downside.
- External risks: Malta’s high degree of openness increases vulnerability to a further deterioration in the external environment, including rising protectionism, a limited deal Brexit, and possible changes in international corporate taxation.
- Domestic risks: Slow progress in addressing structural weaknesses, including in the AML/CFT framework, may undermine long-term growth prospects and potentially threaten financial stability.
- Upside potential: Malta could attract more firms from the U.K. seeking to serve the European Union market.
Tackle financial integrity risks and upgrade risk analysis and supervision
- 3. Urgent need to continue reforming the AML/CFT system and ensure effective implementation.
- Failure to address shortcomings identified by the Council of Europe’s AML body (MONEYVAL) [1] could expose Malta’s financial system to financial integrity and reputational risks, threaten financial stability and magnify pressures on CBRs.
- Focus on improving and demonstrating effectiveness of the AML/CFT framework, strengthening risk understanding, monitoring and supervision of banks and other high-risk sectors and programs (including remote gaming, virtual financial assets, and the IIP), and enhancing AML/CFT enforcement actions.
- 4. Enhance supervisory capacity and improve the crisis management framework.
- The Malta Financial Services Authority (MFSA) remains under strain due to the large number of financial institutions under supervision, the evolving regulatory environment and challenges associated with new and complex products.
- Improve data management, align MFSA resources with hiring requirements given scarcity of seasoned specialists, and assure the MFSA’s long-term financial independence.
- Address gaps in the crisis management framework: update and streamline the legal framework for bank insolvency and introduce an administrative regime for orderly closure and liquidation of a failing bank.
- 5. Banking system status and policy tools.
- The banking system remains well-capitalized and liquid but faces challenges: profitability has suffered from the low interest rate environment, heightened compliance costs and provisioning, and greater competition from non-banks.
- Recent introduction of borrower-based macroprudential measures was appropriate to address vulnerabilities in the real estate market; consider refining these measures by reducing exemptions in the most speculative parts of the market once sufficient evidence on their effect is collected.
- 6. Monitor risks outside the banking sector.
- Inter-company lending is gradually displacing bank lending as the main source of corporate funding, posing new supervisory challenges.
- Need better understanding of flow of funds between corporates and of corporate risk-management practices to identify potential emerging financial risks and contagion channels.
- Avoid over-exposure to large, indebted and interconnected corporates.
Maintain prudent fiscal policy, enhance public investment management and address fiscal risks
- 7. Fiscal stance and vulnerabilities.
- A fourth consecutive year of fiscal surplus is expected for 2019.
- The structural balance is estimated to continue exceeding the government’s medium-term objective of a balanced budget in structural terms.
- Public debt is projected to drop below 45 percent of GDP.
- Maintain gradual consolidation excluding proceeds from the IIP due to fiscal vulnerabilities from contingent liabilities, age-related spending pressures, and heavy reliance on CIT revenues.
- Contain current-expenditure growth while supporting social inclusion through well-targeted measures.
- 8. Public investment management priorities.
- Increased public investment to fill infrastructure gaps in transport, health and education; continued focus on waste and natural resource management, renewable energy, and public transportation to upgrade environmental outcomes.
- Enhance public investment management: adopt general guidelines for project appraisal and selection, implement cost-benefit analysis for major projects, and address weaknesses in the public procurement system.
- 9. Reduce fiscal risks and address long-term spending pressures.
- Government guarantees and liabilities of nonfinancial public corporations have declined but contingent liability risks remain substantial.
- Improve transparency of fiscal risk analysis and management, implement the new legal framework for managing government guarantees, complete statements on financial performance of public corporations, and adopt strategies to strengthen financially vulnerable public corporations.
- To address long-term age-related spending pressures, the periodic review of the pension system should include measures to increase the effective retirement age and further encourage enrollment in voluntary savings schemes.
- Institutionalize comprehensive spending reviews (CSRs) and adopt the planned system to monitor implementation of CSRs’ recommendations to identify saving opportunities in healthcare spending.
- 10. Revenue strategy.
- High reliance on CIT proceeds makes Malta vulnerable to potential international regime changes.
- Explore options to diversify revenues beyond CIT proceeds and estimate foregone revenues from tax expenditures.
- Pursue revenue administration reforms to improve tax collection and compliance.
Growth-enhancing structural reforms
- 11. Priority structural measures to sustain growth and inclusion:
- Sustain commitments to increase labor force participation, upskill workers, and invest in innovation.
- Labor shortages and lack of skilled workers remain pressing problems.
- Continue measures that boost female and elderly labor force participation.
- Recent initiatives to update and broaden the learning curriculum and increase participation in apprenticeship and vocational training have potential to improve educational outcomes and reduce early school leaving.
- Monitor Malta Development Bank partnerships with commercial banks supporting entrepreneurship and innovation to ensure strong risk management and governance.
- Address governance shortcomings to safeguard the business climate.
- Stepped up fight against corruption and increased efficiency and independence of the judicial system, as stressed by the Council of Europe (MONEYVAL, Venice Commission and the Group of States Against Corruption), are necessary to protect business climate and attractiveness for foreign investment.
- Improve access to affordable housing.
- Continue housing benefits and transfers complemented by policies to expand the supply of affordable and social housing.
Closing remarks
- The mission thanks the authorities, private sector participants, and other interlocutors for the open and productive discussions and their hospitality.
- [1] Committee of Experts on the Evaluation of AML Measures and the Financing of Terrorism
Malta: Staff Concluding Statement of the 2020 Article IV Mission — Mission Concluding Statement, February 14, 2020.