IMF Executive Board Concludes 2010 Article IV Consultation with Malta

Public Information Notice (PIN) No. 11/11
January 28, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Malta is also available.

On January 24, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the 2010 Article IV consultation with Malta.1


Malta weathered the global recession relatively well. Output fell less than the euro area average and unemployment rose only modestly, partly reflecting government support. Driven by external demand, a cyclical upswing is now underway and manufacturing and tourism activity, hit hard by the global recession, have recovered with the latter near pre-crisis record levels. However, the recovery is not yet broad based and some sectors, including construction and retail, are lagging. On the back of softer real estate prices, elevated unemployment, and higher uncertainty about job prospects, consumption growth slowed but has been supported by very low interest rates. Investment, especially in construction, decelerated sharply and remains sluggish. Inflation has picked up as the ongoing rebound allows firms to rebuild profit margins and pass on higher energy prices, but underlying inflation is expected to remain contained.

Fiscal performance weakened in 2008‒09, but deficits and debt remained relatively contained. After several years of fiscal consolidation, the fiscal deficit rose to over 4 percent of GDP in 2008 from about 2 percent in 2007, reflecting substantial one-offs as well as slippages in current expenditure. Despite the 2009 recession, however, and helped by the proceeds from a tax amnesty and relatively strong income tax performance by international companies registered in Malta, the overall deficit narrowed somewhat in 2009. Nevertheless, in July 2009 the European Commission concluded that Malta had an excessive deficit and recommended to bring it below 3 percent of GDP by 2011. In 2010, revenue performance was boosted by another tax amnesty and relatively strong corporate profits, which contributed to higher income taxes, also reflecting the economic recovery. Only few and targeted stimulus measures were executed, including some measures to support investment and the tourism sector, some support to households compensating for the sharp rise in utility tariffs, and some increase in childcare benefits.

The Maltese banking sector has weathered the global financial crisis relatively well, but vulnerabilities are rising. Relatively conservative funding models and little exposure to U.S. toxic assets have kept spillovers from the global financial crisis to banks in Malta at bay. However, a long real estate boom contributed to a significant increase in private sector debt and as a result domestic credit risk. Real estate prices and collateral values experienced some correction and appear to have stabilized more recently, but excess supply likely remains in segments of the market. Household debt has grown rapidly but still remains somewhat below the euro area average. Non-financial corporate sector debt has risen to elevated levels, with a significant share of debt incurred by the construction and real estate sectors. Banks have tightened lending policies and bank credit growth has decelerated but remains strong compared to the euro area average. In parts of the banking sector the growing exposure to debt securities, including to euro-area peripherals currently under stress, poses additional risk.

Executive Board Assessment

Executive Directors commended the authorities for their effective policy actions, which helped Malta weather the global crisis relatively well. The economy is now showing signs of a robust cyclical upswing. The challenge ahead will be to achieve strong and sustainable growth. This will require strategic fiscal consolidation and prudent risk management. Continued progress with structural reforms will also be important to establish high value exports and to raise productivity and employment rates.

Directors endorsed the government’s ambitious fiscal consolidation plans in response to the increase of public debt and guarantees and implicit liabilities to relatively high levels. They noted that although fiscal deficits have remained contained, a more rigorous approach that spells out specific measures underpinning priorities for the next budget will raise the credibility of adjustment plans. Directors commended the authorities for the recent efforts to improve expenditure control. Strengthening fiscal institutions, particularly by introducing a strong fiscal rule will improve the long term sustainability of public finances. Further pension reform will help avoid a surge of age-related public spending.

Directors noted that Malta’s financial sector showed resilience during the global crisis. However, high credit risk following a long real estate boom and the large exposure of a few banks to foreign securities, including to euro-area peripherals currently under stress, warrant heightened vigilance and determined supervisory action. This includes encouraging banks to strengthen their capital buffers, preferably through equity injections and retained earnings. Directors also called for enhancing supervisory and regulatory arrangements to better link macro and micro prudential regulation, in line with developments at the European level.

Directors agreed that further structural reforms will be critical for increasing Malta’s competitiveness, productivity and attractiveness to foreign direct investments. Measures to enhance the education system and encourage women and older workers to participate in the labor market will be important to raise employment. Further liberalization of the regulated sectors will boost economic efficiency.

Malta: Selected Economic Indicators, 2006–11
  2006 2007 2008 2009 2010 2011
          Est. Proj.

Real economy (constant prices)

(change in percent)

   Real GDP

3.3 3.9 2.7 -1.9 3.1 2.0

   Domestic demand

3.1 0.5 2.7 -4.1 1.2 1.7

   CPI (harmonized, average)

2.6 0.7 4.7 1.8 1.9 2.1

   Unemployment rate (in percent) 1/

7.1 6.4 6.0 7.0 6.5 6.5

Public finance

(general government; in percent of GDP)

   Overall balance

-2.7 -2.3 -4.7 -3.7 -3.9 -3.0

   Primary balance

0.8 1.0 -1.5 -0.6 -0.8 0.2

   Gross debt

63.2 61.3 62.6 67.7 67.8 68.0

Money and Credit 2/

(change in percent)

   Broad money

5.2 11.1 7.1 0.2 2.7

   Credit to nonbank private sector 3/

14.9 9.4 13.6 7.6 5.8

Interest rates (year average)

(in percent)

   Interest rate for mortgage purposes

4.7 5.3 5.0 3.4 3.4

   Ten-year government bond yield 4/

4.3 4.7 4.8 4.5 4.2

Balance of payments (in percent of GDP)

(in percent of GDP)

   Current account balance

-9.2 -5.5 -5.7 -6.8 -4.4 -4.6

   Trade balance (goods and services)

-4.9 -1.0 -3.0 0.2 1.5 0.9

   Goods balance

-18.8 -17.8 -21.2 -16.6 -18.8 -18.9

   Services balance

13.8 16.8 18.3 16.8 20.3 19.8

Fund position (as of November 30, 2010)


   Holdings of currency (in percent of quota)


   Holdings of SDRs (in percent of allocation)


   Quota (in millions of SDRs)


Exchange rate


   Exchange rate regime

Joined EMU on January 1, 2008

   Nominal effective rate (2000 = 100) 4/

109.5 112.8 116.4 117.0 112.9

   Real effective rate, CPI-based (2000 = 100) 4/

111.6 113.2 116.6 118.9 114.6

   Real effective rate, ULC-based (2000 = 100) 5/

116.0 119.2 123.6 121.9 120.5

Sources: National Statistical Office; Central Bank of Malta; European Central Bank; Eurostat; European Commission; and IMF staff estimates.

1/ EU Labor Force Survey.

2/ Data are from the CBM. For 2010, growth rate over the January-November period.

3/ Loans to nonfinancial corporate sector and households/individuals.

4/ For 2010, January-November average.

5/ For 2010, January-June average.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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