Malta one of fastest-growing economies in Europe – IMF assessment

Malta is one of fastest-growing economies in Europe, a report by the International Monetary Fund’s executive board has declared in a conclusion of its Article IV consultations.

The board said Malta had shown sound macroeconomic policies that had contributed to strong economic performance, robust job creation, low unemployment, and improved public finances.

But the small and open economy means that policies should continue to focus on enhancing the economy’s resilience to shocks and strengthening competitiveness.

Malta had to improve the efficiency of tax collection and contain a fast-growing wage bill and spending on goods and services. Further improving the financial health of State-owned enterprises and containing the long-term spending pressures would reduce fiscal risks.

Malta’s banking system remains well capitalized and liquid, with profitability well above levels seen in peers. But protracted low interest rates, weak credit growth, legacy corporate non-performing loans (NPLs), and an uncertain external environment pose challenges. “In addition, banks’ high and increasing exposure to the property market alongside persistent house price appreciation could also lead to imbalances,” the IMF said, calling for tools that could enhance the resilience of banks and households to property market swings.

“While there has been progress in reducing non-financial corporate sector’s legacy NPLs, a faster resolution of remaining distressed loans would help unlock resources for growth.”

Following an average growth of nearly 8% in 2014-15, output is estimated to have expanded by 4.1% in 2016, supported by strong domestic demand. Robust job creation drove unemployment to record lows, despite rising labour supply, while subdued wage pressures contributed to low inflation.

Owing to buoyant revenues and consolidation measures, the 2016 fiscal deficit narrowed to an estimated level of 0.7% of GDP, well below the budget target of 1.1% of GDP, while public debt declined further to about 60% of GDP.

The outlook is favourable, though growth is set to moderate to 3.4% in 2017 and converge to its potential of about 3% over the medium term as the impetus from domestic demand is projected to weaken. As a result, the output gap is expected to close, while the current account surplus is set to increase modestly. Strong job creation is likely to continue, keeping unemployment low, while inflation is expected to pick up as import prices recover.

Favourable macroeconomic conditions, the low interest rate environment, and persistent primary fiscal surpluses are expected to bring down public debt as a proportion of GDP in the coming years.