{ "title": "Malta-2008 Article IV Consultation Concluding Statement of the Mission", "publication": "IMF News, June 5, 2008", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs053008", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs053008", "overlayPath": "/en/news/articles/2015/09/28/04/52/mcs053008/index.md", "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).", "publishDate": "2008-06-05", "sections": [ { "heading": "Mission context and main findings", "content": "- Document contains preliminary conclusions of the IMF mission that visited Malta during May 20-May 30, 2008. \n- Euro adoption: successful adoption of the euro on January 1, 2008, described as a \"crucial landmark\" in a growth-oriented reform agenda aiming at closer integration in European and global economies.\n- Recent macro performance:\n - Growth accelerated to 3.8 percent in 2007.\n - Budget deficit was reduced in 2007 to 1.8 percent of GDP.\n - Public debt fell to 62½ percent of GDP (from 72½ percent in 2004).\n - External current account deficit declined to 5½ percent of GDP.\n- Drivers of recent expansion: foreign direct investment (FDI), export diversification (pharmaceuticals, on-line gaming, financial and business services), arrival of low-cost airlines, and price moderation reviving tourism.\n- Cost pressures and competitiveness: labor costs rose ahead of productivity in 2007 contributing to inflation; euro appreciation and higher unit labor costs caused competitiveness losses relative to trading partners." }, { "heading": "Growth projection and risks", "content": "- Central scenario projection:\n - Growth will decelerate to 2-2½ percent in 2008-09, reflecting unfavorable external developments.\n - Inflation: high through most of 2008 due to high international prices of oil, commodities, and food; expected to ease in 2009.\n - Domestic demand: rising prices and tighter credit conditions will curb domestic demand growth.\n - Investment: ongoing and planned FDI projects expected to continue supporting activity.\n - External sector: growth contribution of net exports forecast to moderate due to weak trading partners' demand and declining traditional exports; high import prices will worsen the current account.\n - Medium term: pace of activity expected to recover swiftly toward trend, sustained by FDI, emerging export activities, and terms-of-trade gains.\n- Primary risk:\n - Onset of complacency over reforms; risk that EMU entry could give rise to complacency and loss of reform momentum, potentially leading to protracted economic stagnation as seen in some euro area countries." }, { "heading": "A. Cementing fiscal consolidation — findings and recommendations", "content": "- Fiscal position and vulnerabilities:\n - Expenditure-based budget retrenchment continued in 2007, but public finances remain fragile.\n - First recorded current surplus in recent years in 2007 (current expenditure covered by current revenue).\n - Underlying deficit (excluding one-off measures such as land sales) remained little changed from 2006.\n - Public enterprise-related guaranteed debt and other contingent liabilities remain high.\n- Authorities' objective: structural budget balance for 2010; IMF recommends targeting a surplus in subsequent years.\n- Three key areas of endemic budgetary strain to tackle:\n - Subsidies and state aid:\n - Subsidies: about twice the EU average.\n - State aid: four times the EU average.\n - Authorities decided to phase out subsidies on bread and review other subsidies.\n - Recommendation: consider restructuring or privatization of loss-making Enemalta, Air Malta, shipyards, and other public enterprises; public sector rationalization to free resources for infrastructure, education, and capacity in public service agencies.\n - Public wage bill:\n - Public wage bill is 13 percent of GDP.\n - Public employment edged up in 2007; public wage increases projected to be relatively high in 2008-10.\n - Recommendation: use attrition complemented by proactive reallocation of employees and appropriate incentives to increase performance and efficiency.\n - Aging-related and other social spending:\n - Social spending is over 13 percent of GDP.\n - Recent pension reform savings will not be felt until some years from now.\n - Recommendation: consider market-based measures to rationalize demand and increase efficiency of supply of public services, particularly in health care, if administrative cost control proves ineffective.\n- Short-term actions and measures:\n - Support for authorities' intention to consider additional measures to meet 2008 budget targets.\n - Given outturn through April and oil prices, allocations for subsidies, wages, and social benefits would be substantially overrun if prevailing policy parameters were maintained.\n - Urgent recommendation: revise subsidized administered prices of electricity to drastically increase cost recovery.\n - Intensify tight spending control and efforts to identify potential savings across all expenditure categories.\n - Reinforce fiscal framework:\n - Initiate comprehensive spending reviews in main ministries (education suggested as a useful pilot).\n - Prior parliamentary agreement on aggregate expenditure limits before the budget process." }, { "heading": "B. Strengthening the growing financial system — findings and recommendations", "content": "- Resilience and structure:\n - Malta's banking system is well-placed to weather global turmoil: healthy liquidity, funding rooted in domestic retail deposits, and no direct exposure to U.S. subprime mortgage-based assets.\n - Some recent profitability softening due to marked-down international securities portfolios and euro conversion effects; these appear temporary.\n - Supervisory framework modernized with EU membership; internationally controlled banks subject to uniform regulatory requirements.\n- Concentration and credit risk:\n - Narrow economic base warrants vigilance, particularly regarding slowing housing and construction sectors.\n - Nonperforming loans in domestically controlled banks: 7.6 percent of total loans at end-2007.\n - Provision coverage ratio (before counting collateral) for domestic banks: below 30 percent at end-2007; described as low by international standards and unevenly distributed.\n - Resident loans exposure: mortgages and corporate lending constitute 57 percent of resident loans.\n - Banks reducing exposure to construction sector; increasing caution on mortgages with high loan-to-value ratios.\n - Recommendation: MFSA to discuss means to increase provision coverage; encourage upgrading of risk management systems in nonsystemically important banks.\n- Regulatory and transparency improvements:\n - Progress in introducing Basel II standards.\n - Recommendation: encourage more frequent (quarterly) public issuance of accounts by main domestic banks.\n - Recommendation: uniformity at the highest standards in definition of nonperforming loans that are publicly reported to increase transparency.\n - Note: most major European jurisdictions allow tax deductibility of specific provisions; adoption of this practice in Malta would remove disincentives to provision and level playing field for Malta-based banks.\n- Crisis management and cross-border cooperation:\n - Domestic Standing Group established within the tripartite Framework for Financial Crisis Management; memoranda of understanding among key domestic agencies and with supervisors in other jurisdictions established.\n - Malta participates in EC and ECB fora, conducts simulation exercises and stress tests.\n - Recommendation: review legal and institutional frameworks to ensure legal authority to act expeditiously and \"fast track\" parliamentary approval for systemic solvency support where necessary." }, { "heading": "C. Fostering the efficient use of resources — findings and recommendations", "content": "- Product and labor market reforms:\n - Improving product market competition and labor market flexibility essential to realize growth potential.\n - Female labor force participation is particularly low in Malta relative to comparable countries; authorities' attention warranted.\n - Recommendation: labor market and benefit system reforms to boost participation, especially female participation.\n - Recommendation: consider eventual removal of across-the-board mandatory inflation adjustment of wages (COLA) as it hinders productivity-based wage increases and contributes to entrench inflation.\n - Recommendation: institutional independence of the competition authority and adoption of a more pro-active stance to enhance market efficiency and contain inflation.\n - Recommendation: determined implementation of the EU services directive to increase competition in services.\n - Recommendation: accelerate upgrading of economic statistics to Eurostat and international standards; priority to fill management vacancies at the NSO and allocate appropriate resources.\n- Public enterprise reform and price-setting:\n - Privatization or outsourcing continued in 2007; unbundling of Enemalta's gas and petroleum divisions underway.\n - Large subsidies remain; restructuring of loss-making shipyards has stalled; periodic price adjustments for electricity and water result in losses at public utility companies.\n - Recommendation: replace current administered price system by a rules-based adjustment mechanism to avoid discretionary government decisions.\n - Recommendation: consider full privatization of Bank of Valletta to a suitable strategic investor to crowd-in FDI and produce positive spillovers within the financial system." }, { "heading": "Key numeric facts and indicators (as reported)", "content": "- Visit dates: May 20-May 30, 2008.\n- Euro adoption date: January 1, 2008.\n- Growth in 2007: 3.8 percent.\n- Projected growth for 2008-09: 2-2½ percent.\n- Budget deficit in 2007: 1.8 percent of GDP.\n- Public debt: 62½ percent of GDP (from 72½ percent in 2004).\n- External current account deficit: 5½ percent of GDP.\n- Public wage bill: 13 percent of GDP.\n- Social spending: over 13 percent of GDP.\n- Subsidies: about twice the EU average.\n- State aid: four times the EU average.\n- Nonperforming loans (domestic banks) at end-2007: 7.6 percent of total loans.\n- Provision coverage ratio (domestic banks, before collateral) at end-2007: below 30 percent.\n- Share of mortgages and corporate lending in resident loans: 57 percent.\n- Expected timing of Executive Board discussion of the staff report: August 2008.\n\nMalta-2008 Article IV Consultation Concluding Statement of the Mission — May 30, 2008.\n\n---\n\n\n References\n\n- Malta and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs053008" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/52/mcs053008/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/52/mcs053008/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/52/mcs053008/bundle-manifest.json)", "Published: June 5, 2008", "Document contains preliminary conclusions of the IMF mission that visited Malta during May 20-May 30, 2008.", "Euro adoption: successful adoption of the euro on January 1, 2008, described as a \"crucial landmark\" in a growth-oriented reform agenda aiming at closer integration in European and global economies.", "Recent macro performance:", "Drivers of recent expansion: foreign direct investment (FDI), export diversification (pharmaceuticals, on-line gaming, financial and business services), arrival of low-cost airlines, and price moderation reviving tourism.", "Cost pressures and competitiveness: labor costs rose ahead of productivity in 2007 contributing to inflation; euro appreciation and higher unit labor costs caused competitiveness losses relative to trading partners.", "Central scenario projection:", "Primary risk:", "Fiscal position and vulnerabilities:", "Authorities' objective: structural budget balance for 2010; IMF recommends targeting a surplus in subsequent years.", "Three key areas of endemic budgetary strain to tackle:", "Short-term actions and measures:", "Resilience and structure:", "Concentration and credit risk:", "Regulatory and transparency improvements:", "Crisis management and cross-border cooperation:", "Product and labor market reforms:", "Public enterprise reform and price-setting:", "Visit dates: May 20-May 30, 2008.", "Euro adoption date: January 1, 2008.", "Growth in 2007: 3.8 percent.", "Projected growth for 2008-09: 2-2½ percent.", "Budget deficit in 2007: 1.8 percent of GDP.", "Public debt: 62½ percent of GDP (from 72½ percent in 2004).", "External current account deficit: 5½ percent of GDP.", "Public wage bill: 13 percent of GDP.", "Social spending: over 13 percent of GDP.", "Subsidies: about twice the EU average.", "State aid: four times the EU average.", "Nonperforming loans (domestic banks) at end-2007: 7.6 percent of total loans.", "Provision coverage ratio (domestic banks, before collateral) at end-2007: below 30 percent.", "Share of mortgages and corporate lending in resident loans: 57 percent.", "Expected timing of Executive Board discussion of the staff report: August 2008.", "[Malta and the IMF](http://www.imf.org/external/country/MLT/index.htm)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/52/mcs053008/index.md", "json": "/en/news/articles/2015/09/28/04/52/mcs053008/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/52/mcs053008/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T23:55:29.170Z" }