Updated - Fenech welcomes IMF report on Malta - banks to contribute more to deposit compensation scheme

Updated - Adds Labour reaction -

Finance Minister Tonio Fenech this morning welcomed the IMF's latest country report on Malta, saying it showed that Malta was heading in the right direction and had performed well in the recession.

Speaking at a press conference, he noted that according to the report, the Maltese economy grew by 1.5% during the recession (since 2007) while most other countries had seen their economy contract by 2%.

The report showed that competitiveness is improving while inflation remained below the EU average.

The report, he said, showed that Opposition claims that Malta was in a financial crisis were not true.

Referring to warnings in the report on reliance on the financial sector and on the need to improve the depositors compensation scheme, Mr Fenech said Malta had a diversified economy and the governemnt was careful not to place too much reliance on any sector. On the  Deposit Compensation Scheme, he said the Cabinet in the past few days approved measures for increased contributions by the bank to the scheme.

In a reaction, the Labour Party recalled that the IMF had disagreed with the government's Budget projections, but Mr Fenech initially stood his ground, before making a downward revision of spending.

The party noted that while the governemnt had said it would reduce its debt by 1.7% of GDP, the IMF report says debt would rise by 0.8%.

IMF Executive Board Assessment

The IMF Executive Directors in their country assesssment on Malta said:

"The government’s commitment to prudent macroeconomic policies has helped Malta weather the euro area crisis relatively well. But the fragile external environment has created new risks to growth and financial stability. The main policy challenge now is to maintain growth and employment, while building buffers against a highly uncertain international environment. Malta’s resilience to date cannot be taken for granted. Contingency planning needs to move to the forefront of the policy agenda for the event that growth is substantially worse than expected or there is financial contagion from a potential intensification of the euro area crisis. At the same time, the authorities need to balance concerns over a slowing economy, which calls for accommodative policies, against increased risks that require more prudent economic management.

The government’s commitment to return to fiscal balance over the medium-term remains essential. Further fiscal consolidation is required to ensure sustainable debt dynamics, thus reducing fiscal risks to manageable levels. The pace and composition of adjustment should be attuned to the economic cycle. Following a significant fiscal effort in 2011, a gradual deficit reduction path of structural annual adjustment of ½ percentage points of GDP, while letting automatic stabilizers operate in full, would be appropriate. This will help offset the headwinds facing the economy in the short-term, while achieving debt sustainability over the medium-term. The measures underpinning the fiscal effort beyond 2012 need to be specified for the consolidation to be credible.

Bold policy actions are necessary to reduce contingent liabilities and address Malta’s long-run fiscal challenges. Better governance and restructuring of public corporations will help staunch losses and limit subsidies. With a large projected increase in ageing-related expenditures, it is crucial to build broad public consensus for further pension and health care reform aimed at increasing the adequacy and sustainability of the current schemes.

Given the large external risks, it is important to strengthen the financial sector’s resilience further. The financial sector has continued to perform strongly, but its sheer size and large foreign ownership represent a number of risks to financial stability and fiscal sustainability. These include concerns about too-big-to-save and the adequacy of backstopping resources in case of default or deposit run, the capacity to deal with the impact of a banking shock on the economy, as well as supervisory challenges. Improving the framework for financial crisis management and bank resolution and strengthening the deposit compensation scheme could help limit the impact of contagion. Ongoing efforts to strengthen financial buffers and tighten supervision relating to asset quality are welcome. Commendable progress has also been made to better align the regulatory and supervisory frameworks with international standards.

Financial stability will further benefit from establishing a formal framework for macro-prudential policy. Such a framework should define the tasks, powers, and instruments of the macro-prudential authority; establish clear lines of accountability; and ensure operational independence from political bodies and from the financial industry. It is crucial to improve systemic risk monitoring, particularly of spillover risks posed by international banks, and design contingency plans accordingly.

Longer-term policy challenges remain pressing. Challenges related to population ageing, labor force participation, education, and energy policy underscore the need to broaden the reforms so far, raise productivity growth, and further improve competitiveness. Reforms to secure these objectives include further diversifying the economy into high value-added activities, reducing the economy’s dependence on energy imports, and strengthening female labor force participation and education attainment. These steps should be supported by a cautious settlement of wage negotiations to ensure better alignment of wage and productivity developments."

See the full report by clicking on pdf below