{
  "title": "Malta: Staff Concluding Statement of the 2016 Article IV Mission",
  "publication": "IMF News, December 16, 2016",
  "sourceUrl": "https://www.imf.org/en/news/articles/2016/12/16/ms121616-malta-concluding-statement-of-the-2016-article-iv-mission",
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  "summary": "Domestic demand-led GDP growth is projected to reach about 4 percent in 2016 and stabilize at a potential rate of 3 percent over the medium term.",
  "publishDate": "2016-12-16",
  "sections": [
    {
      "heading": "Growth outlook and macroeconomic projections",
      "content": "- Domestic demand-led GDP growth is projected to reach about 4 percent in 2016 and stabilize at a potential rate of 3 percent over the medium term.\n- Strong job creation is expected to continue, keeping unemployment low.\n- Inflation is set to increase modestly as import prices recover.\n- Sizable services balances will continue to support current account surpluses."
    },
    {
      "heading": "External and domestic risks",
      "content": "- External downside risks predominate due to Malta’s high openness and global developments:\n  - Vulnerability to a weaker external environment and rising anti-globalization sentiment in large economies.\n  - Uncertainties surrounding the Brexit negotiations could weigh on economic activity through direct and indirect exposures.\n  - EU-wide corporate tax reform may impact unfavorably Malta’s economy.\n- Domestic risks:\n  - Persistence of upward trends in mortgage lending and the housing market may lead to imbalances, amplifying risks to the financial system and the broader economy.\n  - Recent structural reforms could have a stronger-than-expected positive effect on growth."
    },
    {
      "heading": "Fiscal outlook and recommendations",
      "content": "- Near-term fiscal consolidation:\n  - The 2016 fiscal deficit is expected to be 0.7 percent of GDP, well below the budget target.\n  - The 2017 deficit is projected to decline modestly to 0.6 percent of GDP.\n  - The 2017 projection results in a structural adjustment of 0.4 percentage point of GDP.\n  - Public debt is expected to be reduced to below 60 percent of GDP.\n- Policy priorities for medium-term consolidation:\n  - Better specification of policy measures supporting achievement of a structural fiscal balance.\n  - Priority to contain the fast-growing wage bill and intermediate consumption.\n  - Build on recommendations of recent in-depth spending reviews and conduct similar reviews for the broader public sector.\n  - Enhance tax collection efficiency to support fiscal adjustment and create space for growth-enhancing policies.\n- State-owned enterprises and fiscal risks:\n  - Enemalta’s restructuring has led to efficiency gains and supported a return to profitability; however, Enemalta’s elevated government guaranteed debt calls for continued close monitoring.\n  - Air Malta’s recovery is lagging; the company continues to generate losses and needs faster restructuring to contain fiscal risks.\n- Long-term spending pressures:\n  - Recent pension system reforms are commendable given long-term demographic pressures.\n  - Additional measures recommended: align effective retirement age with life expectancy, better link pensionable income to life-time earnings, and lengthen the contributory period.\n  - Continue efforts to incentivize voluntary long-term savings to ensure socially sustainable pensions."
    },
    {
      "heading": "Financial stability and access to finance",
      "content": "- Banking sector condition and challenges:\n  - Domestic banks report adequate capitalization and liquidity, and profitability above levels seen in peers.\n  - Challenges: protracted low interest rates, weak credit growth, legacy non-performing loans (NPLs) in the corporate segment.\n  - High and increasing exposure of banks to the property market may increase financial stability risks.\n  - Future regulatory changes and an uncertain external environment, including Brexit, may affect banks’ profitability and capacity to support growth.\n- Strengthening resilience:\n  - Deploy targeted macro-prudential tools linked to mortgage lending to enhance banks’ and households’ resilience to property market swings.\n  - Close data gaps to calibrate macro-prudential measures.\n  - Review fiscal incentives related to the property market and address housing supply bottlenecks to avoid imbalances.\n  - Faster resolution of legacy NPLs would strengthen private sector balance sheets and unlock resources for growth.\n  - Recent regulatory changes require banks to submit time-bound plans to reduce their NPL ratios; efforts to streamline legal proceedings would foster resolution of distressed loans.\n  - Ensure adequate supervisory resources given the growing size of the financial sector.\n- Malta Development Bank (MDB):\n  - MDB’s strategy aims to increase banks’ lending to credit-constrained SMEs and provide co-financing for large development and social projects.\n  - Critical safeguards: ensure MDB’s operations lead to new credit origination to viable firms rather than evergreening existing exposures; implement robust governance, prudent risk assessment, adequate supervision, and well-designed origination rules to mitigate contingent liability risk to public finances.\n- Integrity risks:\n  - Ongoing vigilance needed given high demand for Malta’s Individual Investor Program and rapid growth of remote gaming and financial services.\n  - Continue close coordination between regulatory institutions, provide adequate resources for inspections and training, and robustly implement the Anti-Money Laundering/Combating the Financing of Terrorism framework in line with the 2012 Financial Action Task Force’s standards."
    },
    {
      "heading": "Structural reforms to boost productivity and inclusiveness",
      "content": "- Continued reform momentum aligned with the government’s national strategy would help address remaining structural impediments, close the income gap, and make growth more equitable.\n- Priority reform areas:\n  - Increase labor force participation:\n    - Further integrate the inactive population, particularly women, into the labor market.\n    - Expand labor activation policies.\n    - Enhance education quality in line with the recently completed in-depth review to reduce skill mismatch.\n    - Further incentivize delayed retirement to boost labor force participation among the elderly.\n  - Enhance SMEs’ innovation:\n    - Higher R&D activity to boost productivity growth and competitiveness.\n    - Strengthen firms’ balance sheets and broaden SMEs’ non-bank and equity financing to alleviate financing constraints, including for innovative projects.\n    - Increase public R&D spending as a share of GDP towards the EU average.\n    - Promote close partnerships with education institutions and improved access to foreign markets.\n  - Streamline the legal process:\n    - Measures to speed up settlement of civil and commercial cases will strengthen the business environment.\n    - Complete ongoing work to address shortcomings of insolvency and bankruptcy frameworks to improve contract enforcement and allow faster resolution of balance sheet problems.\n\nSource: Malta: Staff Concluding Statement of the 2016 Article IV Mission (December 16, 2016).\n\n---\n\n\n References\n\n- Malta and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/12/16/ms121616-malta-concluding-statement-of-the-2016-article-iv-mission"
    }
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    "Published: December 16, 2016",
    "Domestic demand-led GDP growth is projected to reach about 4 percent in 2016 and stabilize at a potential rate of 3 percent over the medium term.",
    "Strong job creation is expected to continue, keeping unemployment low.",
    "Inflation is set to increase modestly as import prices recover.",
    "Sizable services balances will continue to support current account surpluses.",
    "External downside risks predominate due to Malta’s high openness and global developments:",
    "Domestic risks:",
    "Near-term fiscal consolidation:",
    "Policy priorities for medium-term consolidation:",
    "State-owned enterprises and fiscal risks:",
    "Long-term spending pressures:",
    "Banking sector condition and challenges:",
    "Strengthening resilience:",
    "Malta Development Bank (MDB):",
    "Integrity risks:",
    "Continued reform momentum aligned with the government’s national strategy would help address remaining structural impediments, close the income gap, and make growth more equitable.",
    "Priority reform areas:",
    "[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/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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