Malta’s economic growth continues to be one of the strongest in Europe, resulting in rapid income convergence towards the European Union (EU) average, the International Monetary Fund has said in its annual report on Malta.
"Prudent policies and reform efforts have contributed to the strengthening of private and public-sector balance sheets, while steady job creation has driven unemployment to historically low levels. Growth prospects remain favourable, yet mounting pressure on the infrastructure, rapidly rising housing costs, as well as shortages of labour and skills increasingly pose challenges," it added.
"Improving infrastructure, reducing fiscal risks and enhancing labour supply are key policy priorities to sustain high growth and promote inclusiveness.
"Attention should also be given to safeguarding financial stability and integrity, including against the risks attached to new activities involving virtual financial assets."
Among its recommendations, the IMF calls on the government to safeguard financial integrity "by continuing the reforms and swiftly remedying identified deficiencies in the implementation of the anti-money laundering and countering the financing of terrorism framework."
It also urges the government to "guarantee the long-term independence of the supervisor and increase supervisory capacity, enhance monitoring of the non-bank financial sector and close remaining data gaps."
On the housing sector, the IMF said that it needs to be ensured that fiscal incentives do not amplify house price cycles. It needed to be ensured that measures to make housing more affordable remained targeted on low-income families while more social housing should be provided.
The report speaks in glowing terms about the momentum of economic growth, although it says that it may be approaching its cyclical peak.
Malta, it says, is potentially vulnerable to a deterioration in the external environment, including through a disruptive Brexit, rising global protectionism, a sharp tightening in global financial conditions, or possible changes in international corporate taxation. Slow progress in closing infrastructure gaps could likewise undermine growth prospects. A failure to effectively implement the AML/CFT framework (on money laundering) could affect the business and financial environment and potentially imperil financial stability, as could a sharp correction in housing prices.
Call for independent financial supervision
The IMF said capacity constraints and deficiencies in the regulatory framework undermine the effectiveness of financial supervision and crisis management. The increasing number of financial entities under supervision, the rapid development of new products, the evolving regulatory environment and the tightening of the labour market had put the Malta Financial Services Authority (MFSA) under considerable strain.
"To improve the effectiveness of the supervisory and crisis management frameworks, the authorities need to ensure that the long-term financial and operational independence of the MFSA is guaranteed. Resources must be kept in line with MFSA’s hiring requirements. Moreover, supervisory actions should not be delayed through judicial appeals and an administrative insolvency regime for banks should be adopted."