IMF urges Malta to take front-loaded initiatives
The International Monetary Fund has urged the government to take front-loaded initiatives, given it was still at the start of a new legislature. It noted that making progress toward the government's objective of a structural budget balance for 2010,...
The International Monetary Fund has urged the government to take front-loaded initiatives, given it was still at the start of a new legislature.
It noted that making progress toward the government's objective of a structural budget balance for 2010, or indeed forestalling a setback, required determined action.
The state of affairs of the Maltese economy came under the lens of an IMF mission, which was here late last month.
The IMF mission supported the authorities' intention to consider additional measures to meet 2008 budget targets. Given the outturn through April and oil prices, the budget allocations for subsidies, wages and social benefits would be substantially overrun if prevailing policy parameters were maintained. It is encouraging that the authorities have started to identify expenditure cuts.
The IMF advised that a revision of subsidised administered prices of electricity to drastically increase cost recovery was urgent. Also, tight spending control and efforts to identify potential savings should be intensified in all expenditure categories. Meeting budget plans in the first year of EMU membership would enhance Malta's credibility and investors' confidence.
In the IMF's view, further sustainable reductions in the fiscal deficit require tackling three key areas of endemic budgetary strain, namely subsidies, which are about twice the EU average, and state aid (four times the EU average); the public wage bill (13 per cent of GDP); and aging-related and other social spending (over 13 per cent of GDP).
The mission reported that tight current spending control allowed tax cuts and achieved the first recorded current surplus in recent years. That is, current expenditure was covered by current revenue and, thus, borrowing could be fully allocated to investment ‒ an important landmark from the standpoint of growth and fiscal sustainability.
The government was urged to consider the full privatisation of Bank of Valletta. Experience shows that such action would crowd in foreign direct investment and produce positive spill-overs within the financial system.
Similarly, the government was also told that imparting renewed momentum to public enterprise reform was crucial.
Reinforcing the fiscal framework would help preserve the benefits of fiscal consolidation and reorient spending toward priority areas. The authorities, the mission learned, are already introducing measures to improve investment project evaluation and the efficiency of hospitals.
Additional initiatives in this direction are worth considering: initiating comprehensive spending reviews in the main ministries would help improve the quality of current public spending and, possibly, free resources.
Malta's banking system was well placed to weather the global turmoil. Banks have healthy liquidity positions and a good funding profile rooted in domestic retail deposits. They also appear to have no direct exposure to US subprime mortgage-based assets.
Some are now expanding both their domestic and international operations, reflecting niche opportunities in the financial sector as the economy diversifies. As a member of the EU, Malta is actively strengthening its national and cross-border crisis management framework in the light of lessons from the recent international financial turmoil.
Following international best practices, the Domestic Standing Group was established last year within the tripartite Framework for Financial Crisis Management, and began meeting periodically. Memoranda of understanding have been established both among the key domestic agencies and with supervisors in other jurisdictions of systemic importance to Malta's financial system.
Malta is also participating in various EC and ECB fora that examine national and cross-border issues, as well as conducting simulation exercises and stress tests.
Recent international experience regarding preparedness for crisis resolution should be seen as an opportunity to review the existing legal and institutional frameworks to ensure that all potentially necessary means are in place. These may include the legal authority to act expeditiously and a "fast track" parliamentary approval for systemic solvency support.
Cross-border issues involving the rising presence of international banks are assuming increasing importance, although developments to date do not indicate any concerns. The government, or, more precisely, the across-the-board mandatory inflation adjustment of wages (COLA) decided by the government came in for some criticism.
"We advise considering its eventual removal as it hinders productivity-based wage increases and contributes to entrench inflation. In this vein, institutional independence of the competition authority (now part of the Ministry of Finance) and its adoption of a more pro-active stance would enhance market efficiency and help contain inflation while benefiting all consumers.
Finance Minister Tonio Fenech has publicly rejected this criticism, saying the yardstick kept wage increase claims by unions at bay.
In addition, determined implementation of the EU Services Directive will offer an opportunity to increase competition in the services sector. Public and private sector decision-making would benefit from accelerated upgrading of economic statistics to Eurostat and international standards.
Prompt filling of management vacancies at the NSO and allocating appropriate resources should be a priority, the IMF reported. The authorities were commended for the successful adoption of the euro on January 1, which the IMF described as "a crucial landmark in their growth-oriented reform agenda".
It noted that making progress toward the government's objective of a structural budget balance for 2010, or indeed forestalling a setback, required determined action.
The state of affairs of the Maltese economy came under the lens of an IMF mission, which was here late last month.
The IMF mission supported the authorities' intention to consider additional measures to meet 2008 budget targets. Given the outturn through April and oil prices, the budget allocations for subsidies, wages and social benefits would be substantially overrun if prevailing policy parameters were maintained. It is encouraging that the authorities have started to identify expenditure cuts.
The IMF advised that a revision of subsidised administered prices of electricity to drastically increase cost recovery was urgent. Also, tight spending control and efforts to identify potential savings should be intensified in all expenditure categories. Meeting budget plans in the first year of EMU membership would enhance Malta's credibility and investors' confidence.
In the IMF's view, further sustainable reductions in the fiscal deficit require tackling three key areas of endemic budgetary strain, namely subsidies, which are about twice the EU average, and state aid (four times the EU average); the public wage bill (13 per cent of GDP); and aging-related and other social spending (over 13 per cent of GDP).
The mission reported that tight current spending control allowed tax cuts and achieved the first recorded current surplus in recent years. That is, current expenditure was covered by current revenue and, thus, borrowing could be fully allocated to investment ‒ an important landmark from the standpoint of growth and fiscal sustainability.
The government was urged to consider the full privatisation of Bank of Valletta. Experience shows that such action would crowd in foreign direct investment and produce positive spill-overs within the financial system.
Similarly, the government was also told that imparting renewed momentum to public enterprise reform was crucial.
Reinforcing the fiscal framework would help preserve the benefits of fiscal consolidation and reorient spending toward priority areas. The authorities, the mission learned, are already introducing measures to improve investment project evaluation and the efficiency of hospitals.
Additional initiatives in this direction are worth considering: initiating comprehensive spending reviews in the main ministries would help improve the quality of current public spending and, possibly, free resources.
Malta's banking system was well placed to weather the global turmoil. Banks have healthy liquidity positions and a good funding profile rooted in domestic retail deposits. They also appear to have no direct exposure to US subprime mortgage-based assets.
Some are now expanding both their domestic and international operations, reflecting niche opportunities in the financial sector as the economy diversifies. As a member of the EU, Malta is actively strengthening its national and cross-border crisis management framework in the light of lessons from the recent international financial turmoil.
Following international best practices, the Domestic Standing Group was established last year within the tripartite Framework for Financial Crisis Management, and began meeting periodically. Memoranda of understanding have been established both among the key domestic agencies and with supervisors in other jurisdictions of systemic importance to Malta's financial system.
Malta is also participating in various EC and ECB fora that examine national and cross-border issues, as well as conducting simulation exercises and stress tests.
Recent international experience regarding preparedness for crisis resolution should be seen as an opportunity to review the existing legal and institutional frameworks to ensure that all potentially necessary means are in place. These may include the legal authority to act expeditiously and a "fast track" parliamentary approval for systemic solvency support.
Cross-border issues involving the rising presence of international banks are assuming increasing importance, although developments to date do not indicate any concerns. The government, or, more precisely, the across-the-board mandatory inflation adjustment of wages (COLA) decided by the government came in for some criticism.
"We advise considering its eventual removal as it hinders productivity-based wage increases and contributes to entrench inflation. In this vein, institutional independence of the competition authority (now part of the Ministry of Finance) and its adoption of a more pro-active stance would enhance market efficiency and help contain inflation while benefiting all consumers.
Finance Minister Tonio Fenech has publicly rejected this criticism, saying the yardstick kept wage increase claims by unions at bay.
In addition, determined implementation of the EU Services Directive will offer an opportunity to increase competition in the services sector. Public and private sector decision-making would benefit from accelerated upgrading of economic statistics to Eurostat and international standards.
Prompt filling of management vacancies at the NSO and allocating appropriate resources should be a priority, the IMF reported. The authorities were commended for the successful adoption of the euro on January 1, which the IMF described as "a crucial landmark in their growth-oriented reform agenda".