Foreign workers ‘boost Malta’s output’, IMF says in clean bill of health

The International Monetary Fund’s executive board has given the Maltese economy a clean bill of health in its Article IV consultation round.

The IMF said vibrant domestic demand, large infrastructure projects and stable banking was supporting one of the highest economic growth rates in the eurozone, and predicted solid growth in 2017 with suggestions that exports will pick up later on in time.

“The authorities have taken action on multiple fronts… reducing the fiscal deficit and debt, making progress on the restructuring of state owned enterprises. Regulatory and supervisory frameworks have been strengthened in several areas. On structural policies, they took steps to increase labour participation, improve the judicial system and reform the energy sector,” the IMF said in a statement.

It said Malta had remained resilient in the face of global shocks with a 5.1% growth in the first half of 2015 and unemployment at historic lows.

The IMF pointed out that strong migration inflows had boosted potential output. “Large inflows since the early 2000, mostly originating from other EU countries, have offset Malta’s declining working age population and raised potential growth. Refugee inflows have also been significant, but have declined since 2013. The planned agency for refugees should help enhance coordination between institutions to ensure their smooth integration into the labour market and society.”

However the IMF warned that fast-growing government spending would make targeted debt reduction challenging, particularly beyond 2016. “The growth of sticky current expenditures makes the planned consolidation difficult. To ensure meeting the fiscal targets, additional expenditure measures should be considered. In this context, the authorities should ensure that public sector wage negotiations will not result in increases higher than inflation and complete the ongoing and planned spending reviews.”

The IMF also said that pension measures introduced in the 2016 budget were steps in the right direction. Malta ranks second worst in the euro area in its age-related spending increase.

“The authorities should ensure that these measures lead to an increase in the effective retirement age and to higher participation in the voluntary third pillar to support disposable income at old age. Efforts to increase the efficiency of health care spending should help support pension reforms.”

While Malta’s banking system was said it be well capitalized, profitable, and liquid, the IMF said the cost of credit and non-performing loans (NPLs) remained remain high. “The completion of the ongoing work on insolvency legislation, aiming to reduce court proceedings time and enhance contract enforcement, should help improve NPL resolution.”