An International Monetary Fund report has commended Malta for its “impressive” deficit reduction and weathering of the recent international financial ­crisis.

Malta must forge ahead with its prudent macro-economic financial policies, but should be bolder with challenges

But it has also warned the government that it needs to tackle long-term sustainability issues related to pension and healthcare reform as well as prioritise contingency planning.

Malta ended 2011 with a budget deficit of 2.7 per cent, lower than the three per cent ceiling established by the EU.

Released late on Monday, the largely positive IMF report noted how Malta’s economy was now larger than it was before the recession.

Employment figures, the national trade balance and competitiveness indices were all up.

Finance Minister Tonio Fenech said the report clearly showed Malta was moving in the right direction. The report disproved Labour finance spokesman Karmenu Vella’s characterisation of Malta being “in the throes of a financial crisis”.

“Malta’s economy is now 1.5 per cent bigger than before the recession: most eurozone countries are facing a two per cent contraction,” he said.

Maltese banks received IMF praise for their “robust” profitability, and for being in a position to cope with significant financial stress.

The greatest threat to economic well-being stemmed from the risk of the ongoing eurozone crisis spilling over domestically, the report found. The risk is exacerbated by the economy’s trade openness.

It warned the government that the resilience Malta had shown so far “cannot be taken for granted ” and encouraged the government to make contingency plans for a worsened economic climate.

Malta had to forge ahead with its “prudent” macro-financial policies, but should be bolder in tackling challenges such as the long-term debt of Enemalta.

Pension reform, including the introduction of a mandatory, privately funded second-pillar and voluntary third pillar, had to be addressed.

Malta’s existing pay-as-you-go pension system has been termed “unsustainable” on several occasions, with ageing-related expenditure projected to increase at twice the EU average.

Mr Fenech argued that a degree of reform had already taken place and would soon start to leave ripples in the local economy.

A five-year review of the pensions system concluded late last year was in the consultation phase and would look at issues concerning second- or third-pillar pensions, the minister added.

The IMF had some cautionary words for the financial services sector. The report warned the government not to let the sector grow overly large to the point of it being “too big to save” – although it also noted that Malta had a solid regulatory framework.

In a brief news conference yesterday, Mr Fenech also addressed another IMF concern: the depositor compensation scheme (a rescue fund for depositors of failed banks), which the IMF felt was “inadequately funded”, would soon require banks to increase their contributions.

The increased contributions had been approved by Cabinet this week and would soon come into effect, the minister explained.