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IMF Concludes Article IV Consultation With Malta

by Ulrika Lomas, for, Brussels

11 September 2007

The International Monetary Fund (IMF) on Monday published the conclusions of its most recent Article IV Consultation with Malta, which ended on August 24.

The IMF Executive Directors congratulated the Maltese authorities with regard to the decision by the Council of the European Union to accept Malta as a member of the European Monetary Union (EMU) on January 1, 2008.

They commended the authorities for the substantial fiscal consolidation that has been achieved and for their implementation of broad-based structural reforms, which were central to Malta's entry into the EMU. They observed that structural change is supporting the cyclical upswing, and expected the expansion to continue this year.

At the same time, the Directors noted that growth so far this decade has trailed that of most other EU members, notwithstanding the recovery that began in 2005. They therefore recommended that decisive policy actions be taken to enable Malta to reap the full benefits of economic integration with the EU.

In a statement, the IMF officials announced that:

"Directors agreed that the determined implementation of productivity-enhancing structural reforms and a commitment to rein in labor costs will be essential to strengthen Malta's competitiveness, export base, and growth within the monetary union. In this context, several Directors noted the loss of market share by the main export sectors and the protracted current account deficit—driven by a number of factors, including large wage increases in the past and low labor productivity—suggesting competitiveness pressures. At the same time, Directors pointed to the emergence of new export sectors as a promising sign of diversification which could mitigate vulnerabilities."

"Against this background, Directors recommended that the moderation of public sector wages should continue in 2007-10, also to avoid igniting demands for private sector wage increases. Welcoming the considerable privatization efforts, Directors encouraged the authorities to press on with the restructuring of public enterprises and the shifting of resources to the private sector to enhance productivity. They took note of the progress made in improving the operations of the public ports, and recommended that focus be placed next on improving the efficiency of the energy networks to enhance the competitiveness of the economy."

They continued:

"Directors welcomed the prospect of further deficit reduction in 2007-08, and the objective of reducing reliance on one-off revenue measures in 2008. Structural improvements in tax enforcement and the economic recovery have raised revenue growth. Directors stressed that, in the medium term, structural expenditure pressures, notably pension and health care costs and public enterprise losses, will need to be reduced to safeguard and advance the progress made in fiscal consolidation. Further fiscal adjustment needs to be expenditure based, with emphasis on a reduction in subsidies and public consumption, which are large by international standards. Directors advised that the budget aim for a surplus over the medium term given the high volatility of output and demographic pressures."

The IMF Directors also welcomed a continued improvement in financial sector stability, with strengthened banking sector performance, comfortable levels of regulatory capital, and declines in nonperforming loans.

At the same time, as loan concentration is rising with increasing exposure to the real estate market, Directors recommended that consideration be given to raising the risk weight for new residential mortgages to maintain mortgage lending soundness. Directors also noted the scope for strengthening provisioning by allowing tax deductibility of specific provisions and introducing collateral discounting as a regulatory requirement.

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