## Malta-2008 Article IV Consultation Concluding Statement of the Mission

_IMF News, June 5, 2008_

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## Bibliographic details
- Published: June 5, 2008

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### Mission context and main findings
- 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:
  - Growth accelerated to 3.8 percent in 2007.
  - Budget deficit was reduced in 2007 to 1.8 percent of GDP.
  - Public debt fell to 62½ percent of GDP (from 72½ percent in 2004).
  - External current account deficit declined to 5½ percent of GDP.
- 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.

### Growth projection and risks
- Central scenario projection:
  - Growth will decelerate to 2-2½ percent in 2008-09, reflecting unfavorable external developments.
  - Inflation: high through most of 2008 due to high international prices of oil, commodities, and food; expected to ease in 2009.
  - Domestic demand: rising prices and tighter credit conditions will curb domestic demand growth.
  - Investment: ongoing and planned FDI projects expected to continue supporting activity.
  - 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.
  - Medium term: pace of activity expected to recover swiftly toward trend, sustained by FDI, emerging export activities, and terms-of-trade gains.
- Primary risk:
  - 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.

### A. Cementing fiscal consolidation — findings and recommendations
- Fiscal position and vulnerabilities:
  - Expenditure-based budget retrenchment continued in 2007, but public finances remain fragile.
  - First recorded current surplus in recent years in 2007 (current expenditure covered by current revenue).
  - Underlying deficit (excluding one-off measures such as land sales) remained little changed from 2006.
  - Public enterprise-related guaranteed debt and other contingent liabilities remain high.
- Authorities' objective: structural budget balance for 2010; IMF recommends targeting a surplus in subsequent years.
- Three key areas of endemic budgetary strain to tackle:
  - Subsidies and state aid:
    - Subsidies: about twice the EU average.
    - State aid: four times the EU average.
    - Authorities decided to phase out subsidies on bread and review other subsidies.
    - 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.
  - Public wage bill:
    - Public wage bill is 13 percent of GDP.
    - Public employment edged up in 2007; public wage increases projected to be relatively high in 2008-10.
    - Recommendation: use attrition complemented by proactive reallocation of employees and appropriate incentives to increase performance and efficiency.
  - Aging-related and other social spending:
    - Social spending is over 13 percent of GDP.
    - Recent pension reform savings will not be felt until some years from now.
    - 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.
- Short-term actions and measures:
  - Support for authorities' intention to consider additional measures to meet 2008 budget targets.
  - Given outturn through April and oil prices, allocations for subsidies, wages, and social benefits would be substantially overrun if prevailing policy parameters were maintained.
  - Urgent recommendation: revise subsidized administered prices of electricity to drastically increase cost recovery.
  - Intensify tight spending control and efforts to identify potential savings across all expenditure categories.
  - Reinforce fiscal framework:
    - Initiate comprehensive spending reviews in main ministries (education suggested as a useful pilot).
    - Prior parliamentary agreement on aggregate expenditure limits before the budget process.

### B. Strengthening the growing financial system — findings and recommendations
- Resilience and structure:
  - 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.
  - Some recent profitability softening due to marked-down international securities portfolios and euro conversion effects; these appear temporary.
  - Supervisory framework modernized with EU membership; internationally controlled banks subject to uniform regulatory requirements.
- Concentration and credit risk:
  - Narrow economic base warrants vigilance, particularly regarding slowing housing and construction sectors.
  - Nonperforming loans in domestically controlled banks: 7.6 percent of total loans at end-2007.
  - Provision coverage ratio (before counting collateral) for domestic banks: below 30 percent at end-2007; described as low by international standards and unevenly distributed.
  - Resident loans exposure: mortgages and corporate lending constitute 57 percent of resident loans.
  - Banks reducing exposure to construction sector; increasing caution on mortgages with high loan-to-value ratios.
  - Recommendation: MFSA to discuss means to increase provision coverage; encourage upgrading of risk management systems in nonsystemically important banks.
- Regulatory and transparency improvements:
  - Progress in introducing Basel II standards.
  - Recommendation: encourage more frequent (quarterly) public issuance of accounts by main domestic banks.
  - Recommendation: uniformity at the highest standards in definition of nonperforming loans that are publicly reported to increase transparency.
  - 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.
- Crisis management and cross-border cooperation:
  - 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.
  - Malta participates in EC and ECB fora, conducts simulation exercises and stress tests.
  - Recommendation: review legal and institutional frameworks to ensure legal authority to act expeditiously and "fast track" parliamentary approval for systemic solvency support where necessary.

### C. Fostering the efficient use of resources — findings and recommendations
- Product and labor market reforms:
  - Improving product market competition and labor market flexibility essential to realize growth potential.
  - Female labor force participation is particularly low in Malta relative to comparable countries; authorities' attention warranted.
  - Recommendation: labor market and benefit system reforms to boost participation, especially female participation.
  - 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.
  - Recommendation: institutional independence of the competition authority and adoption of a more pro-active stance to enhance market efficiency and contain inflation.
  - Recommendation: determined implementation of the EU services directive to increase competition in services.
  - Recommendation: accelerate upgrading of economic statistics to Eurostat and international standards; priority to fill management vacancies at the NSO and allocate appropriate resources.
- Public enterprise reform and price-setting:
  - Privatization or outsourcing continued in 2007; unbundling of Enemalta's gas and petroleum divisions underway.
  - Large subsidies remain; restructuring of loss-making shipyards has stalled; periodic price adjustments for electricity and water result in losses at public utility companies.
  - Recommendation: replace current administered price system by a rules-based adjustment mechanism to avoid discretionary government decisions.
  - 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.

### Key numeric facts and indicators (as reported)
- 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-2008 Article IV Consultation Concluding Statement of the Mission — May 30, 2008.*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs053008_