Abstract
This 2005 Article IV Consultation highlights that Malta’s economic growth languished in 2004 for a fourth consecutive year. Slow growth reflected the weakness of, and increasing competition in, Malta’s export markets, as well as domestic factors. The slowdown had begun with shocks to the key sectors, and was reinforced by slow growth in Malta’s trading partners and by recent oil price rises. Although growth was weak, the fiscal balance was improved substantially in 2004, and parastatal reform gathered steam.
October 14, 2005
1. This statement provides an update on recent developments since the staff report for the 2005 Article IV consultation with Malta was issued. The new information does not change the thrust of the staff appraisal.
2. Economic indicators for the second quarter of 2005 point to subdued economic growth. The evolution of output is consistent with growth lingering below 2 percent in 2005. Domestic demand advanced moderately as the weakness in private consumption was offset by a sharp increase in investment (inventory accumulation), which expanded by 8.2 percent (y-o-y) in the second quarter. The summer tourism season finished strong in August—hotel occupancy rates were high although prices were weak. An uptick in manufacturing appears underway, but semi-conductors prices continued to be soft. Inflation was subdued through August, and will likely remain so if the landmark six-year collective agreement is reached. So far, the impact of oil prices has been moderate due to the averaging effect of the quarterly adjustment mechanism for domestic petrol prices.
3. The outturn of general government accounts through August remains broadly consistent with the nominal budget target. Revenue collection has been boosted by the strength in nontax revenue—foreign grants associated with the Italian Protocol and EU funds—that has more than offset the weakness in tax revenue. Expenditures have reflected one-off outlays on medical equipment, which have been countered by lower debt service payments and capital expenditures. In preparation for the 2006 budget, the authorities have issued an innovative White Paper on fiscal policy covering a five-year timeframe (2006–10). The paper envisages the fiscal deficit to decline to less than 1½ percent of GDP by 2007, and proposes a host of measures, including redeploying redundant public sector employees to the private sector, and establishing means testing to determine eligibility for social benefits. On pension reform, the authorities are considering the recommendations of the working group.
4. The current account deficit fell to 9 percent of GDP in the second quarter, a narrowing of 2 percent of GDP from the previous quarter. A weak recovery in exports of goods—primarily semiconductors—was accompanied by robust import growth. Increases in service exports marked the beginning of the high tourism season, but was constrained by near-full capacity operation in the tourist sector. Caution is needed in interpreting developments in service exports, however, as the positive errors and omissions reflect the difficulties in fully capturing this expanding sector.
5. The Central Bank of Malta has kept interest rates unchanged since April noting increases in international reserves since ERM-2 entry and subdued inflationary pressures. The evolution of reserves validates the authorities’ ERM-2 strategy and provides reasonable assurance that markets have judged the interest rate premium on the Maltese lira as being appropriate. Developments in monetary aggregates continue to reflect the reallocation of portfolios toward government securities and longer-term deposits, which are not part of M3. Overall domestic credit growth has been weak, but credit to the private sector continued to growth appreciably—almost 7 percent in the 12 months to August—reflecting a buoyant mortgage market.