At first glance The International Monetary Fund Article 4 report about Malta, released on Monday, is an elegant regurgitation of all that has been said in recent months. The economy has done well. The financial sector has borne up. Malta has ridden out the recent storms and stayed afloat. That sort of thing. Closer reading of the careful warnings, however, indicate that there is a wide area that has to be monitored and addressed.
The single most worrisome macro projection concerns growth- Lino Spiteri
The single most worrisome macro projection concerns growth. The IMF team is at considerable variance with Malta’s budget team in this area. It forecasts that real growth will be clipped to no more than one per cent. That will be due to weak eternal environment, which cannot be compensated for by internal economic activity.
This scenario is not new. It was there to be seen by all before the estimates of income and expenditure for 2012 were presented on November 14. Yet the Finance Minister persisted with his earlier forecasts of growth exceeding two per cent. This reluctance to face overriding reality was also evident in the planned government expenditure for this year. Within seven weeks of Parliament having approved the minister’s estimates the European Commission made the government undertake to slash expenditure by close to €40 million.
I very much fear that is not the end of the story. The Commission did not challenge the Finance Minister on the revenue side, which I and others have warned that might be considerably overstated.
That mistake was not repeated by the IMF team. They did not elaborate, but they were clear enough. They observed that “confidence in Malta’s public finances had been shored up by the European Commission’s assessment that Malta has taken effective action to correct its excessive deficit”.
Bringing its own assessment to bear the IMF team added, “Nevertheless, the composition of adjustment remains suboptimal, relying excessively on one-off revenue measures.” That is a reiteration of my and others’ observations that the revenue side of the government’s estimates was not sustainable. In recent years it has included revenue from income tax concessions. These cannot go on and on. This year VAT revenue too will be boosted by an unsustainable amnesty scheme. Furthermore there are heads of revenue which relate to an expected growth in GDP of over two per cent. They can only be reached if inflation accelerates. Lastly, but my no means least, the Finance Minister included substantial estimates of revenue under the “miscellaneous” head. That includes a forecast substantial payment by the company to be awarded the new public lotto contract. Such revenue will be another one off.
I find it surprising, in fact, that the European Commission did not comment on this aspect of the 2012 Budget, the revenue side, especially in view of plans to oversee member-country budgets with more focus in the coming years. The IMF team, in fact, had this to say in that regard: “Proposed EU directives on budgetary frameworks and governance should help the government achieve its fiscal objective, by adding credibility to the consolidation of effort and enforcing stronger and more effective fiscal discipline and transparency.”
In my reading of IMF reports I have rarely come across such a fine example of IMF-diplomatic-speak. The words are as carefully chosen to soften their impact in terms consolidation, discipline and transparency. But the meaning is abundantly clear – where the government of the day is lax, the European Commission will crack the whip.
Once examined in more detail the IMF report will give rise to several controversies about the adequacy of our fiscal, financial and economic policies. Probably the most acerbic will flow out of the reference to pensions. The team says: “Building on progress already made, further pensions reform will contribute to resolving anticipated long-term fiscal imbalances and support medium-term growth.”
What further pensions reform, people will ask. The IMF team gives a clue. It supports the recommendations of the Pensions Working Group, notably “indexing the retirement age to longevity”. Were that to come about the retirement age will have to rise above 65-year limit already agreed upon and to be implemented gradually.
One hopes that any resulting controversy will not obscure the forest for the trees. Shrinking population and rising longevity cannot be brushed aside as if they will not have effect on the sustainability of our pension arrangement, even as revised.
The IMF team’s recommendations for a sound financial safety net will also need to be taken to heart by this government and whoever follows it. Their emphasis on contingency planning for crisis preparedness, which – the IMF team says – should move to the forefront of the policy agenda. Its next observation is quite chilling. The target size of the Deposit Compensation Scheme, it says “is unsatisfactory”. As a small economy with a large financial sector and “idiosyncratic” features, the authorities should give due recognition to the potentially high risks to financial stability, by erring on the conservative side and imposing buffers above the suggested minima.
I am not even sure that the “suggested minima” are in place. It will be interesting to see what our monetary authorities have to say about this.
The final point made by the IMF team summarises all their concerns. The immediate challenges, it says, underscore the need to raise productivity growth, which remains below the average in the euro area, and further improve competitiveness. An old point, as Prof. J. Falzon will remind us. But, who’s listening?