Overspending in election cycle ruined deficit reduction, IMF claims 3.5% by 2013

Malta maintains stability in its economic fundamentals in the face of the major European financial crisis, thanks to its low external debt and a sound banking system. But government debts remains "uncomfortably high" at 90% of its gross domestic product, the International Monetary Fund has warned. 

The IMF's staff report for its Article IV consultation meetings today said that Malta has enjoyed the best average economic growth in the eurozone since 2008, staving off job losses or bailouts for banks and financial institutions.

But with a fiscal deficit at 3.3% of GDP and high government and guarantee debt, the IMF says the island must cut spending, reform pension and health spending, introduce more women to the job market, and reform its COLA (cost of living allowance) by aligning it to productivity gains, not inflation.

In a back-handed comment, the IMF said that the Maltese authorities "were more optimistic than [IMF] staff regarding the fiscal outlook" when it comes to their intention to reduce the deficit from 3.3% to 2.7% of GDP by the end of 2013.

"In the absence of additional measures, staff projects the deficit to widen further to 3.5 percent points of GDP in 2013, and to remain above 3 percent of GDP in the near to medium term. As a result, the government debt-to-GDP ratio is expected to continue to rise over the next three years."

Malta's burgeoning debt gets special mention in the IMF report: since 2008 public debt has been rising continuously, at a debt-to-GDP ratio of 11.4% every year, reaching 72.1% at the end of 2012.

The reason for the growing debt is down to continuous deficits, which in turn keep increasing due to the debt repayments. Past governments relied on one-off measures to reduce the deficit, such as privatisation sales. When in 2012 Malta had to contribute to the European Financial Stability Fund, the cash to finance the deficit fell.

The guaranteed debt for Enemalta, which the government backs, adds up to the overall country debt.

"Restoring the profitability and viability of large public corporations is crucial to alleviate fiscal pressures. The high level of government-guaranteed debt and delicate financial position of Enemalta and Air Malta heighten concerns about Malta's fiscal sustainability," the IMF said.

While the Fund supports future cuts in energy bills, it warns the government that this should complement the repayment of Enemalta debt, as well as increased transparency through progress reports on the state utility's financial health.

The IMF also warned that the Malta Financial Services Authorty's inspections and on-site visits to financial services firms "remains low and not commensurate" with the size of Malta's financial sector.

Malta has become an active destination for small international banks and non-bank financial intermediaries, such as re-insurance companies and various investment funds, but this means that Malta must ensure better anti-money laundering monitoring.

The IMF found that the 2013 elections "reversed" the previous effort for fiscal consolidation in 2011, when the deficit widened to 3.3% of GDP in 2012, putting Malta into the excessive deficit procedure due to over-spending, fast growth in pension and health spending, new collective wage agreements and settlement of arrears which resulted in a large wage bill.

The new government's expansionary measures and its tax revenue projects however "appear optimistic in light of the moderate growth outlook and developments so far."