The executive directors of the International Monetary Fund have praised progress made by Malta in economic growth and fiscal consolidation but warned that the island will face some challenges from a weakening global economy, higher food and fuel prices, and possible risks in the financial sector.
They also said that the decline in traditional sectors could accelerate and outpace the emergence of new export activities.
“In the absence of independent monetary and exchange rate policies, directors underlined the importance of continuing to pursue sound fiscal policies, increasing the flexibility of the economy, bolstering productivity growth, and monitoring developments in the financial sector closely,” the IMF said in its report.
The fund welcomed measures to contain public spending in 2008, describing them as necessary for continued progress in reducing the budget deficit.
“In particular, directors viewed the increase in retail electricity tariffs as instrumental in limiting expenditure overruns, and encouraged the authorities to follow through with further steps toward full cost recovery while supporting efforts to protect low-income households. The announced elimination of certain subsidies—notably those to public shipyards—in 2009 are also important steps in putting the public finances on a sound footing.”
The directors said Malta's banking system appears well-positioned to weather the global financial turmoil, as banks have healthy liquidity and a good funding profile.
“At the same time, directors noted that the banks' still-high level of non-performing loans, relatively thin provisioning, and concentrated exposures in the cooling housing sector called for increased supervisory vigilance aimed inter alia at augmenting provisioning buffers.”
They said it would also be useful to review the existing legal authority and institutional mechanisms to act expeditiously in a crisis situation in light of recent international experiences.
As in the past, the IMF directors stressed the importance of strengthening labour and product market flexibility, and further streamlining the public sector, to realize Malta's growth potential and maintain competitiveness within the EMU. They suggested introducing stable rules-based mechanisms for setting administered prices, aiming at cost recovery over the medium term.
They also recommended implementation of the EU Services Directive to foster competition in sheltered markets, and reinforcing the competition and statistics authorities.
The authorities were urged to consider means to relax the price indexation of wages, “which could entrench inflationary dynamics and hinder alignment between wage and productivity increases.”
The directors said further privatisation in the banking sector would help to strengthen economic resiliency and seize new growth opportunities.