IMF report ‘certification’ of economy’s strong recovery – Tonio Fenech

IMF full report

Finance Minister Tonio Fenech has welcomed the International Monetary Fund's concluding report on its economic review, as another "certificate" of the progress in Malta's economic recovery.

Fenech said the report confirmed the island's strong recovery towards economic growth, despite the ensuring crisis in the eurozone.

But the IMF's growth estimate of 1% somewhat tempered the government's own prediction for 2.5%. "It's not that we are making incorrect forecasts," Fenech said. "The IMF estimate is tempered by the effects of a possible spillover from the euro-area's own crisis," the minister said.

Fenech also said the government, through the Central Bank and the Malta Financial Services Authority had recommended higher payments into the depositors' compensation scheme by the banking sector, which since the 2008 financial crisis and Icelandic crash had remained abysmally low.

The IMF praised the banking sector's lack of exposure to vulnerable countries, pointing out its reliance on the traditional retail deposit-based model. It said that Maltese banks continue to outperform European peers in terms of profits and capital adequacy.

But it said Malta's large financial sector - eight times the size of its gross domestic product - prompted fears of being 'too big to save'. "While spillovers from the euro area crisis have remained contained to date, Malta's large financial sector and highly open economy heighten contagion and financial stability risks," the IMF said in its report.

Tonio Fenech said the government was monitoring the sector closely. "We are keeping our eyes open on the sector and we have take steps to see higher contributions to the scheme from the banks."

One of the IMF's concerns on the Maltese financial sector is that its sheer size and large foreign ownership represent a number of risks to financial stability and fiscal sustainability. Without adequate backstopping resources in case of default or deposit run on the banks, a banking shock to the Maltese economy would be crippling.

The IMF however notes that commendable progress had been made to better align the regulatory and supervisory frameworks with international standards.

Overall, the IMF's concluding report found the Maltese economy performing well amid the eurozone's turbulence, reporting robust consumption and an increase in services exports.

It said that recent gains in competitiveness were underpinned by wage moderation - indicating a slower growth in real wages - and greater diversification into high-value added activities.

Tonio Fenech disputed claims by Labour MEP Edward Scicluna that Malta's corrective €40 million measures to the budgetary deficit had been imposed upon by the European Commission. In its report, the IMF noted that Malta had taken effective action to correct the excessive fiscal deficit, shoring up confidence in the country's public finances.

"The structural fiscal adjustment was one of the largest among advanced countries," it said with respect to the 2.7% of GDP figure. "Following the announcement of the 2012 budget and additional expenditure measures in January, the deficit is expected to fall further this year."

But the IMF pointed out that the deficit reduction was still relying excessively on one-off and revenue measures, and not general cuts in expenditure.

The IMF said Malta's resilience could not be taken for granted, and called for further fiscal consolidate to ensure a sustainable debt. A hint at Enemalta's €600 million in debts did not go amiss, with the IMF suggesting that the restructuring of public corporations would staunch losses and limit subsidies.

Concern over pensions and healthcare was also evident in the IMF report. With a large projected increase in ageing-related expenditures, the IMF said it was crucial to build broad public consensus for further pension and health care reform aimed at increasing the adequacy and sustainability of the current schemes.

The Labour Party has meanwhile said that the IMF report which the finance minister is boasting about is the same report which some weeks ago had shed doubts on the government's economic growth forecasts.

Labour said since then the government has revised its forecasts downwards and the IMF report also predicts that the national debt will increase by 0.8% despite the government's claims that debt will decrease.