IMF Executive Board Concludes 2020 Article IV Consultation with Malta
IMF News, April 9, 2020
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Bibliographic details
- Published: April 9, 2020
Context and scope
- Press Release No. 20/141; document dated April 9, 2020.
- The Staff Report was prepared for the Executive Board’s consideration on April 8, 2020 and reflects discussions with the Maltese authorities in February 2020; it is based on the information available as of February 28, 2020.
- The report was prepared before COVID-19 became a global pandemic and therefore does not reflect the implications of the pandemic and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook; staff is closely monitoring the situation.
Executive Board assessment — headline findings
- The Executive Board concluded the Article IV consultation with Malta and endorsed the staff appraisal on a lapse-of-time basis on April 8, 2020.
- The Maltese economy has continued to overperform European peers.
- Prudent fiscal policy and timely structural reforms have helped boost employment and build fiscal buffers while promoting social inclusion.
- Growth remained strong in 2019, even though it weakened from 2018.
- Domestic demand is expected to remain the main engine of growth as the economy gradually reaches cruising speed and the large current account surplus declines.
- The risks to the outlook are skewed to the downside and depend on how pervasive and long-lasting disruptions related to the Coronavirus epidemic will be.
COVID-19 impact and near-term priorities
- Malta is facing significant challenges owing to the recent COVID-19 outbreak.
- Entire sections of the Maltese economy, especially in the services sector, are forced to operate well below normal capacity due to reduced labor supply and administrative closures.
- Sectors related to tourism and transportation, which provide major sources of income, are especially affected.
- The authorities’ near-term efforts are focused on limiting and containing the adverse social and economic effects of the COVID-19 outbreak.
Financial integrity and stability — findings and recommendations
- Main medium-term challenge: mitigate financial integrity risks by continuing to address deficiencies identified in the anti-money laundering and combating the financing of terrorism (AML/CFT) framework.
- The focus should be on improving and demonstrating the effectiveness of the AML/CFT regime.
- Strengthen understanding of risks and monitoring and supervision of banks and other higher-risk sectors and programs—such as remote gaming, VFAs, and the IIP.
- Enhance AML/CFT enforcement actions, including through timely and adequate sanctions in case of breaches.
- Supervisory capacity should be further enhanced and remaining deficiencies in the crisis management framework addressed.
- Ensure the operational and financial independence of the financial supervisor.
- The 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.
- Update and streamline the legal framework for bank insolvency; introduce an administrative regime for the orderly closure and liquidation of a failing bank to avoid supervisory actions being unduly delayed through judicial appeal.
- Improve analysis of potential risks developing outside of the banking sector: inter-company lending is gradually displacing bank lending as the main source of corporate funding, posing new challenges to supervision.
- Avoid over-exposure to large, indebted and interconnected corporates and monitor developments on the housing market; stand ready to tighten the recently introduced borrower-based macroprudential measures in due course.
Fiscal policy and public investment — findings and recommendations
- Prudent fiscal policy needs to be maintained.
- Maintain gradual consolidation excluding the proceeds from the IIP due to fiscal vulnerabilities from contingent liabilities, age-related spending pressures, and heavy reliance on corporate income tax revenues.
- Current-expenditure needs to be kept in check to ensure enough space within the budget limits for necessary public investment in transport, health, education, the environment and additional expenses targeted at improving social inclusion.
- Further enhance public investment management as public investment rises:
- Adopt general guidelines for project appraisal and selection.
- Implement cost-benefit analysis for major projects.
- Address weaknesses in the public procurement system.
- Continue efforts to reduce fiscal risks:
- Implement the new legal framework for managing government guarantees.
- Complete ongoing work to release statements on financial performance of public corporations.
- Adopt sound strategies to put financially vulnerable public corporations on a stronger footing.
- To address long-term age-related spending pressures:
- Prioritize measures that increase the effective retirement age and further encourage enrollment in voluntary savings schemes.
- Complete the institutionalization of the CSRs.
- To diminish Malta’s potential vulnerability to international taxation regime changes, explore options to strengthen and diversify revenues outside of CIT.
Structural reforms and social inclusion
- Pursue structural reforms to sustain growth while promoting social inclusion.
- Continue focus on encouraging female and elderly participation in the labor market, upskilling the labor force and stimulating innovation.
- Safeguard the business climate by addressing remaining governance shortcomings without delay:
- Step up the fight against corruption.
- Increase the efficiency of the judicial system while ensuring its independence.
- Improving access to affordable housing remains a key priority in support of greater inclusion.
IMF, "IMF Executive Board Concludes 2020 Article IV Consultation with Malta", April 9, 2020.
