The 2012 IMF report

For the last couple of weeks we had the delegation of the International Monetary Fund in Malta to do its regular report on the state of the Maltese economy.

Their report is as objective as one can get for a number of reasons.

. . . even a small event may have a big negative impact on our economy
- Lawrence Zammit

First, the IMF mission cannot afford to tarnish its reputation for the sake of a country such as ours. Second, given the situation in the eurozone and in the world in general, the IMF mission would need to be very cautious on the comments it makes. Third, the IMF mission is likely to make judgements and recommendations on macro economic data, irrespective of opinions, perceptions and impressions.

The introductory paragraph of the statement released by the IMF at the conclusion of its mission says it all in terms of the challenges facing our economy.

It was explicit about the need to create a balance between the need for maintaining economic growth and employment on the one hand and the need for long-term fiscal sustainability on the other, while having to deal with a very difficult international economic environment. In fact, the external environment was singled out as the largest threat to our economy.

However, the IMF also pointed out to internal issues as representing key challenges, namely sound governance in the financial sector, the sustainability of the welfare system, energy policy and the use of renewable sources of energy, the improvement of outcomes in education, and maintaining the competitiveness of businesses operating in Malta.

These internal issues should be seen as the challenges (and possibly even eye openers) facing our country, which require our collective effort to resolve. This is especially so given our low level of exposure to European sovereign debt risk and the low level of interest on Malta government bonds.

What this implies is that our economy needs more certainty. Investors need more certainty as do consumers. The IMF mission warned that “uncertainty in economic policy could adversely affect growth if investment decisions and structural reforms are put on hold”.

This is because the difficult international situation is likely to dampen export demand, and domestic demand will not be enough to make up for such a shortfall, given the soft real estate market and the fiscal consolidation taking place. Therefore, sustainable economic growth of the type that creates jobs will need to come from investment, which relies on certainty and good governance.

The IMF mission recognises the effort made and the results that have been achieved in ensuring fiscal sustainability. The broad numbers are pointing in the right direction, having achieved a positive primary balance in 2011 and having brought the fiscal deficit to within the Maastricht parameters.

The IMF mission is less happy about the fact that expendi-ture has not been trimmed enough, and as such the government is relying on one-off and revenue measures.

One word of caution was sounded about the local financial system. The IMF mission noted that its resilience needs to be strengthened in spite of the growth of the last years. This is not because of any inherent structural weaknesses, but rather because of the risks posed (once more) by the international economic situation.

The local banking system has already been described as one of the most sound banking systems in the entire world. On the other hand, its size (who would have thought that the financial sector is today eight times our gross domestic product?) and its predominant foreign ownership are such that even a small event may have a big negative impact on our economy.

The IMF mission claims that these risks may be mitigated by improved supervision of the banking system.

The concluding statement of the IMF mission is a positive one. It is indeed a testament to good management of the economy. Obviously one needs to see the full report as there is sure to be some devil in the detail.

In spite of the positive feedback, the eye openers that we have been given must be kept in view. Yesterday’s success is no guarantee for future success. We cannot jeopardise the economic governance of this country as this would mean loss of jobs. Once jobs start being lost, everything else that seems so important today becomes irrelevant.


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