Malta's deficit will only fall below the three per cent mark in 2013, three years after an EU deadline, according to the International Monetary Fund.
It is predicting that by 2013 public debt would reach 70 per cent of GDP. It also forecast that despite Malta no longer having one-off expenses such as the liquidation of the shipyards, it was still only likely to improve marginally on the 2008 deficit, when it stood at €233 million.
The IMF, which published a report at the end of its annual mission in Malta, said the economy was expected to contract by two per cent this year, followed by a modest recovery in 2010. Moreover, the recovery would not be straightforward and conditional on an improvement in economic growth of Malta's trade partners.
It was critical of the way the government supported companies facing difficulties as a result of the financial crisis. "Measures taken to support enterprises raise some concerns. Assistance is provided based on specific criteria related to investment and training plans. While this setting has allowed for rapid and targeted support, such measures could become entrenched and costly if the crisis continues. In addition, in some cases, they may only postpone required restructuring. Therefore, the mission recommends gradually winding down this type of support as the implementation of infrastructure projects gather pace".
It said the government should not tolerate late tax payments from companies with cash flow difficulties. "Even if not widespread, these steps risk undermining tax compliance and contract enforcement. For these taxes in arrears, expeditious negotiation of a repayment schedule will be critical," it said.
The IMF said determined action on expenditure was needed because the spending structure hindered adjustment to shocks and suggested that forthcoming negotiations on the public sector collective agreement should set a conservative benchmark for the private sector.
The government had to tackle the causes of inflation quickly, which at the time the mission was here had reached the four per cent of GDP mark, substantially higher than in the rest of the euro area.
On the new electricity tariff structure, the IMF said the government had to ensure full cost recovery for the state-owned utility enterprises while providing consumers with transparency and predictability in tariff adjustments. The country should go ahead with seeking strategic investors for Bank of Valletta, the IMF said.
It said Malta's financial sector had so far withstood the global financial turmoil relatively well but "vulnerabilities have increased". Profitability would remain under pressure from lower volumes, a narrowing in interest margins and rising non-performing loans as the economy slowed down.
It envisaged that private consumption would weaken as employment prospects deteriorated. Banks had weathered the initial stage of the financial crisis and emerged "relatively unscathed" but the unfavourable external environment was now challenging the economy's resilience, threatening to possibly hold back the country's reform impetus.
The IMF said the Maltese authorities had to act fast "to remove the bottlenecks that have so far held back EU fund absorption", possibly through a high-level inter-ministerial committee.