Tax revenue projections in this year’s Budget “appear optimistic”, the International Monetary Fund said, urging the Government to cut spending.

Malta showed remarkable resilience in the face of a major crisis in Europe

The IMF urged tighter controls on the growth of health spending, greater use of means-testing for government benefits and containing the wage bill through prudent collective agreements.

In preliminary findings of a monitory mission, out yesterday, the IMF said the additional measures were needed to ensure the deficit would fall below three per cent of GDP this year.

The Government is projecting a deficit of 2.7 per cent after fiscal slippage last year pushed the deficit above the EU limit of three per cent to 3.3 per cent.

The IMF’s assessment of public finances mimicked that of the European Commission’s spring forecast, which also cast doubt on the Government’s target to end the year below three per cent.

The IMF’s observation on the deficit was the only significant black mark in an otherwise positive outlook, with the organisation supporting the Government’s objective to reduce energy costs and diversify energy sources to reduce dependency on oil.

“However, any reduction in electricity tariffs should be contingent on the success of the Government’s strategy to reduce costs and restore Enemalta’s financial health,” the IMF said, adding that budget assistance to the energy company had to be phased out. It also noted progress on the restructuring of Air Malta.

The economy received a clean bill of health, with the IMF saying Malta showed “remarkable resilience” in the face of a major crisis in Europe.

It said average growth was the best in the euro area since the beginning of the crisis and unemployment was one of the lowest.

“This resilience was underpinned by robust export growth and a sound banking system,” the IMF said.

In line with government expectations, the IMF was projecting a moderate acceleration in GDP growth between 2013 and 2015, which means Malta will continue to outperform the euro area average.

With policy uncertainty out of the way, the IMF said economic pick-up will be fuelled by a predicted recovery of private consumption and improved confidence.

Short-term risks to this scenario were largely related to the external environment, especially if Europe’s slower growth persisted or the euro area financial crisis re-emerged.

The IMF said financial risks in the banking system were contained because the large international banking segment had limited exposure to the domestic economy. However, it urged the authorities to continue monitoring closely developments in all banks, including links between foreign parent banks and their Maltese entities.

Although core domestic banks had high levels of liquidity, the IMF noted they were heavily exposed to the property market.

Non-performing loans are on the rise

“Non-performing loans are on the rise, reflecting subdued conditions in the construction and real estate sectors. A significant decline in house prices, although not likely in the short term, could have a sizeable impact on the domestic banking sector,” the IMF cautioned.

Focusing on long-term reforms, the IMF reiterated that the retirement age should be aligned with life expectancy and second and third pension pillars should be introduced.

The Government must also continue its efforts to strengthen female labour participation and educational attainment, the IMF added.

ksansone@timesofmalta.com

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