Malta: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, July 21, 2021
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- Published: July 21, 2021
COVID-19 impact, near-term outlook, and key risks
- Tourist arrivals fell sharply to below 25 percent of pre-pandemic levels.
- Real GDP contracted by 7¾ percent in 2020.
- Output grew by 1.9 percent (q/q) in the first quarter of 2021.
- Staff expect the economy to grow by around 5¾ percent in 2021 and 6 percent in 2022, assuming further progress in global vaccination, an unleashing of pent-up demand for contact-intensive services, and a gradual recovery in international tourist arrivals.
- Consumer and business confidence have recovered to pre-COVID-19 levels; signs of labor markets tightening are emerging.
- Downside risks (tilted to the downside) include:
- a global resurgence of the COVID-19 pandemic;
- the uncertain long-term impact of the crisis on the economy;
- a labor shortage due to reduced inflows of foreign workers;
- a prolonged placement in the FATF grey-list which could adversely affect correspondent banking relationships (CBR) and foreign direct investment inflows.
- Upside scenario: recovery could be faster than expected if swift global vaccination boosts confidence and economic activity.
A. Shifting policies to support a strong recovery
- Near-term policy imperative: gradually unwind pandemic-related support measures and shift to policies targeted at facilitating resource reallocation to productive and high-growth potential activities.
- Most support measures are set to expire by the end of 2021.
- Recommendations for tapering support:
- prepare a plan for tapering support measures (e.g., the wage supplement scheme), including adjusting their size and eligibility criteria;
- coordinate fiscal and financial sector policy to avoid “cliff effects” that could derail the recovery;
- if health risks reemerge or the recovery falters, consider extending some support measures with refocusing on sectors and people still significantly affected.
- Corporate sector monitoring:
- assess extent of deterioration of corporate balance sheets from the pandemic;
- consider additional support where needed, including investment tax credits, subsidized loans, and solvency support to viable small and medium-sized enterprises;
- ensure public support is transparent, consistent with overall policy goals, time-bound, and has a clear exit strategy to minimize fiscal risks.
B. Ensuring long-term fiscal sustainability
- With recovery, expiration of COVID-19 measures, and containment of spending growth, the fiscal deficit is projected to narrow rapidly from 2022 onward, and debt to fall steadily over the medium term.
- Authorities remain committed to eventually returning to a structural fiscal balance and to reducing the debt-to-GDP ratio to 60 percent over the medium term.
- Mission supports the planned comprehensive review of COVID-19 related spending to proceed efficiently with fiscal consolidation.
- Fiscal consolidation strategy guidance:
- retain space for public investment to underpin growth and address infrastructure gaps;
- regularly update a pipeline of well-defined infrastructure projects;
- proceed with the authorities’ planned review of the infrastructure investment and management framework.
- Addressing long-standing fiscal vulnerabilities:
- risks to fiscal revenues include collection of deferred taxes, relatively low tax revenues, and high reliance on corporate income tax (CIT);
- continue strengthening tax administration, identify loopholes, and exploit digitalization;
- conduct a holistic review of the overall tax system in light of the global minimum CIT proposal;
- adopt strategies to strengthen the financial footing of state-owned enterprises due to rising contingent liabilities;
- promote voluntary occupational pensions and personal pensions, and increase the effective retirement age to help address long-term age-related spending pressures and improve pension system sustainability.
C. Safeguarding financial stability and pursuing AML/CFT reform
- Banks have remained resilient, maintaining adequate capital and liquidity buffers.
- Continued vigilance and risk monitoring are needed given high uncertainty.
- Financial sector risks include:
- a rise in corporate insolvencies;
- real estate market corrections;
- propagation of financial distress through intercompany loans.
- Supervisory recommendations:
- continue close monitoring of banks’ financial positions and risk management;
- ensure banks update assessment of expected losses as economic prospects evolve and provision accordingly;
- enhance data collection and monitoring for intercompany lending.
- The support measures for the real estate market should expire in summer 2021 as planned.
- AML/CFT framework:
- Malta was placed under increased monitoring (“grey list”) by FATF in late June due to concerns about effectiveness of some aspects of the framework;
- in line with the FATF action plan, intensify efforts to demonstrate effectiveness by:
- ensuring the accuracy of beneficial ownership information;
- enhancing the use of financial intelligence to support tax and money laundering cases;
- focusing the Financial Intelligence Unit’s analysis on criminal tax offenses;
- continue efforts to mitigate financial integrity and reputational risks in high-risk activities (e.g., virtual financial assets, gaming, and citizenship by investment program);
- maintain close monitoring of CBR pressures.
D. Advancing structural reforms for higher and sustainable growth
- Reinvigorate structural reforms to raise productivity and achieve strong and sustainable growth.
- Near-term priorities:
- facilitate reallocation of labor and capital;
- advance labor market reforms focused on upskilling and reskilling to narrow skill gaps;
- complete ongoing work on the corporate insolvency framework by mid-next year, as planned.
- Tourism strategy:
- following Malta Tourism Strategy 2021–2030, take actions to make the sector stronger and more sustainable by utilizing new digital technologies, enhancing a greener tourism system, improving tourism infrastructure, and increasing value-added in the sector.
- Digital transformation, innovation, and decarbonization:
- EU funds, including the EU Recovery and Resilience Facility, will support investment in these areas;
- update the National Digital Strategy to take stock of past experience and keep Malta among Europe’s digital frontrunners;
- increase public spending in R&D and strengthen the innovation ecosystem, noting Malta is still trailing EU peers in R&D investment.
- Climate commitment:
- the mission welcomes the authorities’ commitment to reducing greenhouse gas emissions under the EU Effort Sharing Regulation by 19 percent (compared to 2005 levels) by 2030.
- Governance and investor attraction:
- further strengthen the governance framework to attract investors;
- continue efforts to fully meet the recommendations of the Council of Europe’s Venice Commission and the Group of States Against Corruption, including enhancing the efficiency of the judiciary system.
IMF Staff Concluding Statement, July 21, 2021.