26 October 2005

The Web
Business Today

IMF executive board delivers mixed assessment on Maltese economy

In its assessment of the Report, the IMF Executive Board welcomed Malta’s successful accession to the EU and the smooth initial transition to a lira/euro peg in the context of ERM II.
The IMF Staff Report for the 2005 Article IV Consultation with Malta was approved by the Executive Board of the International Monetary Fund (IMF) on 14 October. The Report was prepared by an IMF Consultation Mission following its visit to Malta between 27 April and 9 May. As on previous occasions, the Maltese authorities have given their consent for the report to be published on the IMF’s web site together with a Press Information Notice (PIN) containing the Executive Board’s assessment of the Article IV Consultation with Malta.
The Board noted that commendable progress had also been achieved in strengthening macroeconomic management, including the substantial reduction of the fiscal deficit in 2004 despite weak economic growth, and in reforming the parastatal sector. The Board observed that Malta was well positioned to derive the full benefits of euro adoption, provided continued progress was made in consolidating fiscal accounts and reforming the economy to promote private sector-led growth.
Although short-term growth prospects remained moderate, the Board stressed that continued consolidation of Malta’s public finances remains a key priority in light of the sharp increase in public debt, which - if not addressed - would threaten macroeconomic stability and weaken the credibility of the exchange rate. Achieving the 2005 budget target will thus be essential, and the Board encouraged the Authorities to identify proactively areas where current spending could be contained.
The Board also underscored the importance of high-quality fiscal adjustment to reduce the deficit further, while protecting capital spending in priority areas. While welcoming the Authorities’ commitment under the medium-term fiscal program and ongoing efforts to improve tax administration, they stressed that durable adjustment should entail lowering expenditure by, among others, reducing public sector employment, shifting part of the financial burden of health care to the end user and reforming the welfare system to enhance its effectiveness as a social safety net.
The Board saw the reforms envisaged in the White Paper on the pension system as important steps that would bolster long-run fiscal stability by addressing the fiscal consequences of population aging. In particular, they highlighted the importance of raising the statutory retirement age to secure the pension system’s financial integrity and establishing a compulsory, privately-funded second pillar. The Board also called for prompt implementation of the reforms to ensure that measures can be phased in gradually.
To revitalise economic growth and enhance competitiveness, the Board stressed the need for reforms aimed at developing human capital and raising labour productivity. While acknowledging recent efforts to align student grants and stipends more closely with the needs of the economy, they saw room for further strengthening incentives for education, including through reforms to increase wage dispersion. They also underscored the importance of improving labour utilisation and welcomed efforts to eliminate barriers to female participation in the labour market.
The Board stressed that a business-friendly environment will be key to boosting investment and fostering job creation. They welcomed the Authorities’ commitment to the ambitious privatization plan, and looked forward to its expeditious implementation. They also encouraged further efforts to streamline bureaucracy, eliminate outdated regulations, and, more generally, lower the cost of operating on the island.
The Board welcomed the authorities’ decision to increase domestic interest rates in the run-up to ERM II, and noted that markets have so far judged the interest rate premium on the Maltese lira as being appropriate. Going forward, they considered that Malta is well poised to benefit from euro adoption. They nevertheless emphasised that Malta’s significant current account deficit underscores the need to persevere with fiscal consolidation and step up structural reforms to boost the economy’s competitiveness, including through greater attention to labour market flexibility and wage moderation.
The Board finally noted that Malta’s financial system appears to be sound and well supervised. The highly-capitalised banking system should be able to absorb economic shocks, as well as the new prudential requirements associated with Basel II standards. They cautioned, however, that the increasing bank exposure to the booming housing market calls for close monitoring and urged the authorities to tighten prudential regulations to discourage banks from extending credit with high loan-to-value ratios. They also underscored the need to address the problems affecting the housing market, in particular by reforming the legal framework governing the rental market.

Business Today is published weekly on Wednesdays.
Website is updated weekly on Thursdays
Copyright © MediaToday., Malta
Editor: Kurt Sansone
Business Today, MediaToday, Vjal ir-Rihan, San Gwann
Tel: (356) 2138 2741 | Fax: (356) 2138 5075 | E-mail