The Government’s target to end the year with a 2.7 per cent deficit appears unattainable in light of expansionary discretionary measures, optimistic revenue targets and developments so far, according to the International Monetary Fund’s latest report on Malta.
The IMF estimates this year’s deficit will reach 3.5 per cent of GDP and remain at that level in 2014, in excess of the EU’s three per cent threshold.
While the report praises the Maltese economy’s performance and resilience to face a major crisis in Europe, it says the fiscal position deteriorated last year over 2011 “when notable progress had been registered”.
This deterioration in public finance coincided with the “election cycle”, it noted.
The IMF said that reducing the fiscal deficit this year and achieving a balanced budget over the medium term is of crucial importance.
It reiterated calls for stronger measures to rein in current expenditure, particularly the wage bill, and to advance pension and healthcare reforms.
On a positive note, the report commends the Government’s plans to restructure Enemalta, which it describes as “the loss-making and highly indebted public utilities corporation”.
It also praises the energy reform programme to reduce costs and diversify sources of power.
The IMF is projecting 1.3 per cent economic growth this year and 1.8 per cent growth in 2014, which remains below potential, reflecting a weak external environment and subdued domestic demand.
The economy’s resilience was underpinned by robust service sector export growth and a sound banking sector. The report gives a positive evaluation of the performance of Maltese banks despite turbulence in the eurozone.
However, it warned that local banks are heavily exposed to the local property market and loan loss provisions are low.
All indications so far are that we will reach this target- Muscat
Asked for his reaction to the report, Prime Minister Joseph Muscat told The Sunday Times of Malta that the Government was still on track to reduce the deficit below three per cent by the end of the year.
“All indications so far from the Finance Ministry are that we will reach this target, but we will keep monitoring the situation week by week,” Dr Muscat said.
Finance Minister Edward Scicluna welcomed the IMF’s conclusions, saying it confirmed the Government’s policies were taking the country in the right direction.
He added that the Government had taken onboard the IMF’s recommendation to set up of a fiscal council as a measure to address the deficit on a medium term basis.
Prof. Scicluna said that plans were also at an advanced stage to have all financial activity on the island monitored by the Central Bank, the Financial Services Authority and the Financial Intelligence Analysis Unit, on the same lines as the IMF’s recommendation.
The Nationalist Party, meanwhile, described the report as an endorsement by the IMF for the economic policies adopted by the previous government.
It also said the IMF had expressed its concern about the Government’s lack of vision to create jobs while casting doubts on its ability to meet its targets.