The International Monetary Fund in a report on Malta today said the outlook for the economy is strong and growth is expected to remain solid in 2016-17, driven initially by domestic demand and later by a gradual recovery of external demand.
Inflation is projected to pick up gradually due to the positive output gap and higher imported inflation on account of the weaker the exchange rate.
"Malta has remained resilient in the face of global shocks and the economy is growing strongly, helped by policy initiatives. The reliance on domestic funding and the relatively well diversified economy have helped preserve stability," the Fund said.
"The outlook is strong and risks are balanced. Growth is expected to remain solid in 2016–17, driven initially by domestic demand and later by a gradual recovery in external demand.
The outlook is strong and risks are balanced. Growth is expected to remain solid in 2016–17
Inflation is projected to gradually pick up with the positive output gap and the exchange rate pass-through. The external position remains broadly in line with fundamentals despite high uncertainty driven by volatile components of the current account.
"While, downside risks include slower global growth, delays in implementation of structural reforms, fiscal slippages, and regulatory and tax changes elsewhere, upside risks stem from increased energy efficiency and further increases in labour participation. The future of migration flows, the majority of which coming from other EU countries, remains uncertain."
MIGRATION BENEFITS
The fund said strong migration inflows boost potential output.
"Large inflows since the early 2000, mostly originating from other EU countries, have offset Malta’s declining working age population and raised potential growth."
Large inflows since the early 2000, mostly originating from other EU countries, have offset Malta’s declining working age population and raised potential growth.
"The challenge is to preserve high and stable growth. Given uncertainty regarding the global recovery, volatile migration flows, and ongoing efforts to enhance competitiveness by euro area neighbors, raising potential output in a sustainable manner will depend on i) building fiscal buffers to cope with adverse shocks; ii) maintaining financial sector stability and providing financing for growth; and iii) sustaining structural reforms."
The fund said the authorities’ proposed pace of fiscal consolidation for 2016–18 was appropriate.
"The deficit reduction is continuing, despite rapidly growing current expenditures, supported by revenue measures and stronger-than-expected revenues. The authorities aim to reduce the overall deficit to -0.2 percent of GDP in 2018, but measures beyond 2016 are not well specified at this stage.
Fast growth in current expenditures makes targeted debt reduction challenging, particularly beyond 2016.
"Fast growth in current expenditures makes targeted debt reduction challenging, particularly beyond 2016. With the expected growth moderation towards its long-term trend, the fast growth of sticky current expenditures makes the planned consolidation difficult.
"To ensure meeting the fiscal targets, additional expenditure measures should be considered. In this context, the authorities should ensure that public sector wage negotiations will not result in increases higher than inflation and complete the ongoing and planned spending reviews.".
On pensions, said fund said that given that Malta ranks second worst in the euro area in its age related spending increases, the authorities should ensure that these measures lead to an increase in the effective retirement age and to higher participation in the voluntary third pillar to support disposable income at old age. Efforts to increase the efficiency of health care spending should help support pension reforms.
BANKING
The Fund said the banking system remains resilient. Banks are well capitalized, profitable, and liquid. Solvency and liquidity of core domestic banks and other peer banks remain above the minimum regulatory requirements, and their profitability is above the euro area average.
"But nonperforming loans (NPLs) and the cost of credit remain high. The increase in the coverage ratio and the national authorities’ consideration of using further Pillar II measures to reduce NPLs are welcome, and further increases in coverage ratios as envisaged is appropriate. The completion of the ongoing work on insolvency legislation, aiming to reduce court proceedings time and enhance contract enforcement, should help improve NPL resolution."