Update 2 | Malta weathers crisis well but pension reforms needed - IMF

Malta continues to weather the global crisis well, the International Monetary Fund said in preliminary findings of IMF staff at the end of an official staff visit, but said priorities for the country is the reduction of public debt, containing spending on pension, healthcare and public corporations, reducing non-performing loans, and other structural reforms.

“The economic outlook is strong. The mission projects continued good real GDP growth in 2015-16, driven by domestic demand. The main drivers are ongoing investment projects and strong private consumption, the latter underpinned by rising wages and employment. Inflation is projected to remain subdued, reflecting the reduction in energy tariffs, lower global oil prices, and persistently low euro area inflation,” the IMF said.

It also said that while risks related to the delays in restructuring of various state owned enterprises remain, there are potential positive spillovers to private investment and consumption from large infrastructure projects.

“In the longer term, Malta’s competitiveness could be eroded because of regulatory and tax reforms at the European level, and if Malta falls behind in implementing structural reforms while many euro area countries continue to reduce their unit labour costs.”

The IMF complained that public debt is still high; non-performing loans are elevated; despite abundant liquidity, the cost of capital is relatively high; and maintaining competitiveness is increasingly challenging.

It advised further spending cuts on wages and further restraint on public sector employment; and apart from introducing private third-pillar pension schemes, it called for an increase in the retirement age and linking pensionable income to a longer period of working years, to curb the projected increase in public pension outlays.

“Accelerating the implementation of planned health care measures, such as increasing the administrative efficiency and strengthening primary care, will help contain spending growth. Authorities should continue to push forward with restructuring of state-owned corporations. Enemalta’s restructuring, once completed, will bolster public finances and help lower energy costs. To ensure a sustainable financial position, tariff reductions should be fully backed by cost containment. More generally, it is important to disclose, analyze, and manage risks to public finances from the state owned enterprises in a consolidated manner,” the IMF said.

Malta’s relatively large financial sector was not exposing itself to excessive risk, thanks to banking liquidity that remains above regulatory requirements.

But remaining financial sector vulnerabilities stem from the high level of non-performing loans and exposures to the property market.

“The NPL ratios of the largest banks were revised upwards under the Asset Quality Review. At the same time, exposure of the core domestic banks to the property market remains substantial, leaving the banking sector vulnerable to developments in the real estate sector, particularly in the case of direct exposure to construction sector,” the IMF said.

“There is a need for a strategy for NPL resolution, as high NPLs are contributing to high lending interest rates, particularly in certain sectors. Such a strategy could include accelerating NPL write-offs, encouraging greater use of the insolvency regime, faster enforcement of creditor rights, and developing options for out-of-court workouts.”

The International Monetary Fund’s conclusions were well received by the government, who said it was a positive sign for the country. 

Experts reiterated the need for the government to take the opportunity to continue its reforms, in particular in addressing national debt that doubled under the previous administration.

Other sectors include health, pensions and public entities.

Government welcomes IMF report

The government welcomed the IMF report attributing forecasted economic growth for 2015 and 2016 to investment projects and increase in private consumption fuelled by increase in wages and places of work.

“This report confirms that Malta is moving in the right direction, particularly in the sectors of work, public finances and the justice system,” it said.  “The government will continue to make positive changes so that families and businesses can reach their potential.

The government said that the IMF’s certificate contrasted with the Opposition’s criticism of the economy: “The IMF is now urging the government to continue implementing reforms and address the country’s national debt which had doubled under the previous administration.”

The government also welcomed the IMF’s approval of its agenda for planned reforms, the governance of public finance and the justice system.

‘Report reflects our concerns at high debt level’ - PN

In a response, the Nationalist Party said that the IMF’s analysis reflects their concerns about the rising public debt level and the sustainability of Malta’s economic growth.

“The public debt increased by over €500 million in the first half of 2014 alone, the highest rate since Malta entered the EU,” the PN said in a statement. “This is of concern to both the sustainability of our country’s finances and to the faith of foreign investors and will therefore have a negative impact on the creation of high-quality jobs.”  

“Just like the PN. the IMF have appealed to the government to cut down its public expenditure, particularly in public sector employment.”

“We appeal to the government to take note of this report and turn its public expenditure around from one focused on increasing the public sector to one focused on incentivising industries and small and medium enterprises to improve their productivity.”