IMF Yearly Economic Report on Malta
News    ·   01-05-2012

AUTHOR: Donald Vella

On the 7th May 2012 the International Monetary Fund (“IMF”) released its yearly economic report on Malta on the basis of the Article IV Consultation concluded by the Executive Board of the IMF on the 21st March 2012.

Fundamentally, the report praises Malta’s results in addressing the deleterious effects of the euro zone wide financial and sovereign crisis which marked 2011. In doing so, the report singles out a number of factors which have contributed to Malta’s positive results in 2011 including, the narrowing of government deficit to an estimated 3 percent of GDP, continued diversification into high-value added activities and wage moderation. The report goes on to say how Government’s prudent macroeconomic policies have induced growth and improvement in a number of economic areas such as competition, consumption, service exports, employment and national trade balance and competitiveness indices.

The IMF also positively reported on the banking sector’s ability to withstand economic shocks. This was mainly attributed to the fact that government debt is predominantly held domestically as well as domestic banks’ reliance on a traditional retail deposit-based banking model. The progress made to better align the regulatory and supervisory frameworks with international standards was also pointed out by the IMF. Despite the positive results, an improvement in the framework for financial crisis management and bank resolution and the strengthening of the deposit compensation scheme are still deemed to be necessary so as to limit the impact of contagion from a potential intensification of the euro area crisis.

The financial sector’s strong performance throughout 2011 was also praised by the IMF. The IMF however pointed out in its report that this sector is to be further strengthened since its size (reported to be above eight times GDP) and large foreign ownership represent a risk to financial stability and fiscal sustainability of the country. In endorsing the staff’s appraisal of Malta, the Executive Board Assessment mentioned other hurdles which Malta may face throughout 2012, mentioning continued growth and employment (in this regard it is relevant to note that the International Labour Organisation reported on the 1st of May that Malta is one of six countries amongst the world’s advanced economies that has improved its employment figures) as the main challenges. The report also emphasises the need for Malta to continue enhancing its competitiveness and in so doing, to balance concerns over a slowing economy with prudent fiscal management.

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