Malta: Selected Issues

This Selected Issues paper uses a multivariate filter approach to reassess potential output for Malta, given national account data revisions and the ongoing labor market changes. The analysis reveals that the impact of the global financial crisis on potential growth has been short-lived. The analysis of the sources of potential growth reveals that weak total factor productivity growth performance and sizeable investment declines post-global financial crisis have been more than compensated by significant gains in potential employment. Potential employment growth has been the key driver of potential growth in recent years, reflecting growing working age population, and rising labor force participation, particularly among women, albeit starting from low levels.

Abstract

This Selected Issues paper uses a multivariate filter approach to reassess potential output for Malta, given national account data revisions and the ongoing labor market changes. The analysis reveals that the impact of the global financial crisis on potential growth has been short-lived. The analysis of the sources of potential growth reveals that weak total factor productivity growth performance and sizeable investment declines post-global financial crisis have been more than compensated by significant gains in potential employment. Potential employment growth has been the key driver of potential growth in recent years, reflecting growing working age population, and rising labor force participation, particularly among women, albeit starting from low levels.

Potential Output in Malta: A Re-Assessment1

This note reassesses potential output and its components for Malta by applying a new multivariate filter approach. Potential growth has held up well since the global financial crisis and is expected to increase further as reforms of labor and energy markets are beginning to pay-off. However, raising potential growth further to bring Malta’s income level closer to EU levels would require additional reforms.

A. Background

1. Potential output is a critical input to the economic policy. Estimates of potential output can help gauge future growth and inflation prospects, and assess fiscal policy stance. Understanding its drivers—labor, capital accumulation, and TFP—can help inform discussions on policies needed to raise it.

2. This note reassesses Malta’s potential output given national account data revisions and the ongoing labor market changes. Potential output is re-estimated using a multivariate filter approach (MVF) that incorporates empirical relationships between actual and potential GDP, unemployment, and inflation (Blagrave et al, 2015). The MVF estimates are then compared to other standard approaches (Benes and Pérez Ruiz, 2013).

3. Estimates of potential growth have been frequently revised, suggesting considerable uncertainty around them (IMF, 2015). Uncertainty could relate to measurement errors or difficulty in identifying temporary demand factors even in the absence of structural breaks. Quantifying the impact of the crisis on each component of potential growth―labor, capital, and the total factor productivity (TFP)—is also difficult. Given this uncertainty, the MVF results are also compared to a range of estimates based on other standard approaches.

4. The analysis addresses the following questions: (i) How has potential output evolved during the last decade and a half?; (ii) What have been the main sources of potential growth and how has global financial crisis (GFC) affected them?; (iii) What is the likely trajectory of potential growth in the medium term (2015–20) and what is the scope for policies to enhance potential growth?

5. The note is organized as follows. Section B summarizes the MVF and other commonly used methodologies. Section C presents the results and benchmarks them against those obtained from other standard methodologies. Section D analyzes the evolution of potential growth drivers. Section E presents estimates potential growth in the medium term. The last section concludes.

B. Methodology

6. This note uses an MVF method, developed by the IMF’s Research Department.2 The MVF filter uses Bayesian techniques to estimate the relationship between cyclical unemployment—the deviation of the unemployment rate from the non-accelerating inflation rate of unemployment (NAIRU)—and inflation (Phillips curve), and the relationship between cyclical unemployment and the output gap (Okun’s law). The Research Department’s model uses first an MVF filter to estimate potential output and NAIRU, and then at the second stage production function approach to compute potential growth drivers—factor inputs, and total factor productivity (TFP), obtained as a residual. Estimated TFP developments can then be used to determine whether the filter yields reasonable outcomes.

7. The MVF estimates are then compared with results from the Hodrick-Prescott (HP) univariate filter and the European Commission’s production function (ECPF) approach.3

  • The HP univariate filter (Hodrick and Prescott, 1997) minimizes a loss function that increases in the distance between trend and actual GDP and the curvature of the trend function. The relative weight of the cyclical versus the structural component is determined by a smoothing parameter, encapsulating the judgment fed into the exercise.

  • The ECPF approach uses a production function approach to estimate potential output. Specifically, it uses Cobb-Douglas production technology to compute potential factor inputs (capital and labor) and trend TFP. Capital stock is estimated by the perpetuity inventory method. Potential labor input, defined in terms of hours worked, is estimated as follows: (i) trend labor force is estimated using the HP-filtered participation rate as a share of working age population; (ii) trend employment is estimated by applying the non-accelerating wage rate of unemployment (NAWRU) to the trend labor force,4 and (iii) trend hours worked is estimated as the product of HP-filtered average hours worked and trend employment. Trend TFP - reflecting a normal level of efficiency of factor inputs – is estimated by bivariate Kalman Filter and a Bayesian approach to account for the link between the TFP cycle and capacity utilization.

C. Estimation Results

8. Malta’s potential growth has been estimated at around 2 ¼ percent over 2001–2014, lower than the estimates for 1996–2000 (above 3 percent). (Figure 1). Staff’s MVF method estimates potential growth at about 2 ¼ percent, in line with the CBM’s estimate and slightly below the EC method estimate of close to 2 ½ percent. For the pre-crisis period (2001-07), the CBM and the EC method tend to produce slightly higher potential growth estimates compared to staff MVF and HP estimates. For the post-crisis period, staff’s MVF estimates in line with the HP and the CBM estimates, while the EC estimates are only slightly higher. Nevertheless, the range around these estimates is rather narrow, suggesting a potential output of around 2 ¼ percent (Table 1).

Figure 1.
Figure 1.

Malta: Potential Growth and Output Gap Estimates, 1996–2014

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Ameco; World Economic Outlook; and IMF Staff Calculations.
Table 1.

Malta: Potential GDP Growth, 1996–2014

article image
Sources: Country authorities; and IMF Staff Calculations.

9. The scars left by the global financial crisis on potential growth appear limited. Breaking down the past 15 years into pre- and post-crisis episodes reveals that at 2 ¼ percent, Malta’s potential growth has held up well in the post-crisis period (2008–2014), with growth remaining about the same in the post-crisis. After the brief decline in 2009, when the output gap turned negative, potential growth has been gradually increasing, suggesting that the GFC impact has been short-lived. In 2014, potential growth is estimated at 3 percent, implying a small positive output gap (0.1 percent). Malta’s estimated post-crisis potential growth seems relatively high by international comparisons, e.g. considering available estimates for large euro zone economies, using the same methodology (Budina, Lin, Pérez Ruiz, Vandenbussche, and Weber, 2015).

D. Drivers of Potential Growth

10. The resilience of potential growth to GFC has been driven mainly by the strong labor market performance. The slowdown in capital accumulation was compensated by steady increases in labor contribution – initially led by growing working age population, followed by strong gains in labor force participation in post-crisis years. Steady immigration flows since the beginning of the last decade have contributed strongly to growing working age population in the precrisis years and countered the effect of aging on working-age population in post-crisis years.

A01ufig1

Potential Growth and Its Components

(In percent)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Eurostat, Haver, Staff calculations

Potential Employment

11. While growth in employment contributed close to ½ of total potential growth in pre-crisis years, it has become a key driver of potential growth in post-crisis period (Figure 2). During 2001–07, employment has contributed close to 1 percentage point to potential growth. This was a result of significant immigration flows that have contributed positively to trends in working age population. Post crisis, strong growth in potential employment was a result of a higher participation of women in the labor force. Of this, the bulk is explained by the contribution of working age population, which expanded by 1 percent, on average during the same period. Net migration contributed about 2/3 of total population growth (0.9 percent) over the same period, while the contribution of net migration to working age population is likely to have been even higher.

Figure 2.
Figure 2.

Trends in Malta’s Labor Market, 2000–2014

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Eurostat; and IMF Staff Calculations.
A01ufig2

Growth in female labor market participation rate

(in percentage)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: Eurostat

12. Strong increases in labor force participation continued to contribute strongly to potential employment after the crisis. Malta’s participation increased by around 7 percent over 2008–2014, one of the highest in Europe, though starting from relatively low level. A part of this increase can be linked to policy reforms aiming at increasing female labor force participation that have been implemented during this period (CBM, 2015).

13. The remarkable increase in the contribution of potential employment is a result of increasing female participation. Over the past ten years, Malta registered the largest increase among EU Member States in the female participation rate (52.1 percent in 2014 from 36 percent in 2004). To put this into context, if female participation rates had remained constant in their 2000 level, by 2014 total labor supply would have been 13 percent lower and potential output level 9 percent lower. Together with the fall in female unemployment rate, better opportunities in the labor market have likely encouraged more women to leave inactivity.

Capital accumulation

14. The contribution of capital has slowed since the crisis. Capital accumulation has been the most important driver of potential growth in the pre- crisis years, contributing 1.1 percent on average over 2001–07. However, capital accumulation has slowed markedly, contributing only 0.9 percent to potential growth over 2008–14. The decline in private sector investment was more pronounced, falling considerably below the euro area average. However, investment has picked up in 2014, reflecting a large scale energy project to improve grid connectivity with Italy.

A01ufig3

Investment

(in percent of GDP)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Eurostat

15. Investment dynamics reflects in part a structural shift towards less capital-intensive services. Malta has gone through significant structural changes, diversifying into new growth sectors, such as aviation services, pharmaceuticals and internet related services, leading to an increase of the share of services in value added by 10 percentage points since 2001. As a result, the capital intensity of the Maltese economy remains among the lowest in the EU.

A01ufig4

Share of Value Added, Selected Sectors

(in percent)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: Eurostat

16. Structural weaknesses, related to access to credit and high leverage, likely hinder in particular the SME investment (2014 AIV Staff Report). Access to credit remains constrained for a large fraction of SMEs. Malta is ranked at the bottom of high income countries (rank of 55) by the ease of getting credit according to WB Doing Business 2015. This likely hinders overall investment, particularly given the dominance of SMEs (more than 2/3 of total value added and about 4/5 of total employment). A significant fraction of SMEs use retained earnings or relatively more expensive funding instruments (e.g. bank overdrafts or credit lines) to fund investment (CBM 2014 Annual report, Box 1). Moreover, about 95 percent of SMEs are micro-enterprises that face significant difficulties in access to credit, related to lack of collateral and limited financial literacy (EC Malta Country report, 2015). Various initiatives to improve access to finance have recently been undertaken, including the introduction of a credit register that will be administered by the Central Bank of Malta. A credit register will reduce informational asymmetries between lenders and borrowers improve SMEs’ access to finance and alleviate investment constraints.5 Moreover, this would also improve risk management and contribute to a better performing loan portfolio and lower the cost of capital.

A01ufig5

Getting credit ranking

(lower better)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source World Bsik

17. The cost of credit, in particular to SMEs, remains relatively high, despite the recent monetary policy easing by the ECB. In 2014, about a quarter of survey respondents reported an increase in interest rates and only about a fifth reported a decline in interest rates, with the remaining reporting unchanged interest rates (the 2014 SAFE survey and Box 1). This suggests that a weak transmission of changes in policy rates to the retail rates charged by banks has weakened even further after the crisis in Malta (Micallef and Gauci, 2014; 2014 AIV Staff report).

A01ufig6

Lending Rates on Loans to NFCs1/

(Percent)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

1/ Outstanding amounts; EA16, excluding Estonia, Latvia, and Lithuania.Source: Haver Analytics.

18. The high share of NPLs contributes to the high lending rates. Following the global financial crisis, the share of non-performing loans in total gross loans have been on a rising trend, peaking at about 9 percent in 2014, but has declined slightly since then. Moreover, lengthy and inefficient insolvency procedures (estimated to take up to three years by the World Bank’s Doing Business report) discourage the NPL resolution.

Total Factor Productivity

19. The strong contribution of labor has compensated for weaker productivity performance. While Malta’s labor productivity growth has been comparable to that of the EU average in pre-crisis years, the level of labor productivity in Malta was still around 70 percent of the average for Western Europe in 2014. Nevertheless, the estimated TFP growth has turned positive and quite robust during the last four years.

A01ufig7

Labor Productivity per Hour Worked, 2014

(In constant USD)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: Total Economy Database

20. Dominance of micro firms may in part explain lower productivity. For manufacturing sector, there is some evidence of a positive relationship between firm size and TFP, where scale effects are important (Brandt, 2004). In addition, larger companies invest more in R&D and benefit more from ICT investments (Kumar et al., 1999, Pagano et al., 2003, Pilat, 2004). In particular, López-García and Sánchez (2010) found that microenterprises in Europe are, on average, 20 percent less productive than larger companies. At the same time, a structural shift to higher value added services sector in Malta may distort TFP estimates. Indeed, SMEs in Malta are more likely to innovate compared with the average for the EU (Box 1, 2014 CBM Annual Report).

21. Structural factors, such as inefficient public administration and judicial system can also constrain firm growth. Malta seems to rank poorly in terms of the quality of government bureaucracy, contract enforcement, access to finance and innovation capacity (World Economic Forum 2014–15 and EC Country Report, 2015). There are also severe shortcomings in the efficiency of the justice system—Malta ranks poorly in terms of the time needed to resolve civil, commercial and administrative court cases in the EU (The 2015 EU Justice Scoreboard). This suggests that reforms aiming to enhance efficiency of public administration and judicial system would be particularly important to improve conditions for firm growth.

A01ufig8

Enforcement of contracts ranking

(lower better)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: Worid Sank

22. Human capital could be another limiting factor. Despite some recent catch up, with higher upper secondary attainment rates among the younger cohorts, Malta’s education outcomes for total population are still below the EU average. Moreover, tertiary education enrollment rates are still low and drop-out rates are among the highest in the EU. Measures to boost tertiary education enrollment need to continue to reduce skills mismatches and improve the quality of labor (2014 Article IV).

Figure 3.
Figure 3.

Tasks in Employment, 2000–2014

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Eurostat; and Authorities’ data.

23. Skilled net migration inflows may have contributed to some in crease in the quality of labor. Net migration flows have been an important factor behind working age population growth, with their participation in total employment rising from about 2 to more than 10 percent between 2004 and 2014 (See Grech 2015). These foreign workers—and EU nationals in particular—tend to concentrate in service sectors and perform more complex, “non-routine cognitive” tasks, compared to those performed by the total workforce (See Jaimovich and Siu, 2012).6

A01ufig9

Getting Electricity ranking

(lower:better)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: World Bank
A01ufig10

Price of electricity for Industrial use

(Ejros per Mwh excluding taxes and levies)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources: Eurostat

24. Another factor that impacts negatively “the cost of doing business” is inefficiencies in energy provision. Malta’s high dependence on oil, combined with earlier inefficiencies in electricity generation and distribution resulted in relatively high cost of electricity. To address this bottleneck, efforts focused on the restructuring of the energy sector, including building an interconnector with Italy, a new gas-fired power plant and a conversion to gas of an existing power plan. Timely completion of these projects is essential for the expected benefits to materialize.

E. What is Malta’s Growth Potential?

25. Under current policies, potential growth is set to increase slightly in the medium term. Potential growth rate in the medium-term is estimated at around 3 percent, above the long-run historical average of about 2 ½ percent. The current energy investments are likely to lead to a small jump in the level of potential output over 15–16, and the completion of these projects likely enhance TFP somewhat. The recent trend in female participation is expected to continue, leading to an increase in labor force participation rate by about 6 percentage points by 2020, from its 2014 level of around 66 percent. Population dynamics is expected to worsen, with population growth slightly positive (0.1 percent on average), compared to an annual average growth of 1.3 percent over 2000–2007 and 0.3 percent over 2008–2014. Projections assume that higher net migration flows, observed over the last four years will continue, therefore offsetting the impact of aging population.7

A01ufig11

Malta: Potential Growth

(in percent)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Source: IMF Staff calculations.

26. Potential growth estimates are subject to uncertainty. Despite the impressive increase, female participation in Malta remains low compared to euro area average. However, if efforts to encourage participation of women and old-age workers were to increase participation rates to levels, comparable to EU average (75 percent of working age population) in 2020, the average annual potential growth would be higher by about 1/3 of a percentage point over 2015–2020 compared to the baseline.8 However, these projections are also subject to downside risks – for example, if net migration is to remain at its long term average (1600 migrants per year) and the additional increase in female participation does not materialize, the potential growth will be lower by about ½ of a percentage point.

A01ufig12

Malta: Contributions to Potential Growth

(Percent)

Citation: IMF Staff Country Reports 2016, 021; 10.5089/9781498367578.002.A001

Sources:IMF Staff’s calculations

F. Conclusions

27. This paper uses a multivariate filter approach to reassess potential output for Malta, given national account data revisions and the ongoing labor market changes. The analysis reveals that the impact of the global financial crisis on potential growth has been short-lived. Unlike in many other euro area economies, Malta’s post-crisis (2008–2014) potential growth is estimated to have increased slightly from pre-crisis years (2001–07).

28. What have been the key drivers behind these developments? The analysis of the sources of potential growth reveals that weak TFP growth performance and sizeable investment declines post-global financial crisis have been more than compensated by significant gains in potential employment.

  • Potential employment growth has been the key driver of potential growth in recent years, reflecting growing working age population (in part due to large migration inflows), and rising labor force participation, particularly among women, albeit starting from low levels.

  • Capital accumulation has been the most important factor in the pre-crisis years, but its contribution has declined since the crisis. While this may reflect in part a structural shift towards less capital-intensive services, structural weaknesses, related to access to credit, also hinder SME investment.

  • Post-crisis, total factor productivity growth have been weaker compared to the average for Western Europe though this weakness has been masked by the strong labor market performance. Structural factors – e.g. inefficient public administration and judicial system, and high cost of energy might have constrained firm growth.

29. Ongoing structural reforms in labor and energy markets would likely provide a significant boost to potential growth over 15–20. Following through with current policy efforts would be instrumental to support potential growth in the medium term:

  • While aging is projected to exert pressure on potential growth in the longer term, efforts to encourage labor force participation, particularly for women and older workers, and to reduce structural unemployment, likely enhance potential employment growth in the medium term.

  • Total factor productivity is expected to pick up slightly, reflecting increased energy efficiency likely result from new energy investments.

30. Closing the income gap with the rest of the Euro Area would require faster potential growth in the future. Reforms that could boost future potential output include:

  • Enhancing labor productivity growth requires better upgrading and utilization of skills. Measures to boost tertiary education enrollment and quality of education outcomes need to continue in order to reduce skills mismatches and improve the quality of labor.

  • Further improvements in business environment and enhancing the efficiency of public administration and the judiciary system would be needed to pave the way for future investment and to ensure larger gains in productivity in the medium term.

  • Measures aiming to improve SMEs’ access to finance and lowering the cost of credit, including making the credit register fully operation will reduce informational asymmetries between lenders and borrowers, and in turn alleviating investment constraints.

31. Future research could usefully deepen the analysis of key drivers of productivity in Malta. Specifically, future work can focus on adjusting the labor input for the quality of human capital and on assessing the impact of structural changes on aggregate productivity.

References

  • Benes, J., K. Clinton, R. Garcia-Saltos, M. Johnson, D. Laxton, P. Manchev and T. Matheson, 2010, “Estimating Potential Output with a Multivariate Filter,IMF Working Paper 10/285 (Washington: International Monetary Fund).

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  • Berger, H., T. Dowling, S. Lanau, W. Lian, M. Mrkaic, M. T. Sanjani, and P. Rabanal, forthcoming, “Steady As She Goes—Estimating Potential during Financial ‘Booms and Busts,’IMF Working Paper (Washington: International Monetary Fund).

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  • Blagarve, P., R. Garcia Saltos, D. Laxton, and F. Zhang, 2015, “A Simple Multivariate Filter for Estimating Potential Output,IMF Working Paper, 17/79 (Washington: International Monetary Fund).

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  • Budina, N., Huidan Lin, Esther Pérez Ruiz, Jérôme Vandenbussche, and Anke Weber, 2015, “Potential Output in France, Germany, and Spain: A Re-Assessment”, Chapter 3 of Spain 2015, Selected Issues Paper No. [15/233], International Monetary Fund, 2015.

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  • European Commission, 2015, “Country Report Malta 2015”, Brussels, 26.2.2015, SWD (2015) 37.

  • Central Bank of Malta, 2015, “Assessing the Supply Side of the Maltese Economy using a Production Function Approach”, Report published in the Quarterly Review 2013:4.

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  • Central Bank of Malta, 2014, Forty-seventh Annual Report and Statement of Accounts 2014.

  • Grech, Aaron G. (2015), “Understanding the Macroeconomic Impact of Migration in Malta”, Working Paper, Central Bank of Malta, http://www.centralbankmalta.org/file.aspx?f=11222

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  • International Monetary Fund. 2015a. “Where Are We Headed? Perspectives on Potential Output.

  • Jaimovich, Nir, and Henry E. Siu.The Trend is the Cycle: Job Polarization and Jobless Recoveries”. No. w18334. National Bureau of Economic Research, 2012.

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  • World Economic Outlook, Chapter 3, April 2015.

  • Micallef and Gauci, 2014Interest rate pass-through in Malta”, Quarterly Review 2014:1, Central Bank of Malta.

  • Micallef (2015), “Estimating the Impact of Structural Reforms to Increase the Female Participation Rate on Potential Output”, Policy Note, Central Bank of Malta.

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  • Ministry of Finance, 2015, “Malta: Update of Stability Programme 2015–2018

  • Ministry of Finance, 2015, “Malta: National Reform Programme”, April 2015.

1

Prepared by N. Budina and F. Grinberg. We thank participants at the seminar during the mission in Malta for useful comments and suggestions.

2

For more information see Blagrave and others, 2015 and Chapter 2 of the 2015 World Economic Outlook.

3

If wide swings in output tend to occur alongside wide swings in credit, an MVF filter with financial variables (MVF_FV) maybe more appropriate to use (Berger et al, 2015). In these cases, the filter will ignore wide credit swings when determining the level of potential output.

4

The NAWRU is calculated using a Kalman filter, based on a dynamic system of labor supply and demand equations, up to the second year of the forecasting horizon. Thereafter, the NAWRU is determined by a mechanical rule (it takes the value of the second year plus half of the annual change in the second year).

5

For empirical estimates and a discussion of the importance of informational asymmetries in constraining firms’ investment performance in the Euro Area see Chapter 2 of Italy, 2015 Selected Issue Paper and Chapter 2 of Spain, 2015 Selected Issue Paper.

6

To the extent that our estimates do not account for the changes in the quality of human capital, the increase in measured tfp growth, in particularly during the last four years, could in part be explained by the sharp increase in highly skilled foreign workers from the EU.

7

Projections use population growth and labor force participation rates for ages 15 till 64, based on the EC Aging Report, but adjusted with the additional migrant flows observed in the last four years and adding the impact of additional labor market reforms on female labor force participation. See the 2015 Aging Group report, European Commission, Working group on Aging Populations and Sustainability.

8

This scenario is consistent with the CBM’s estimate of the impact of labor market reforms on potential growth over 2008–2014.

References

  • European Commission (2015), The 2015 Aging Report.

  • IMF (2014). Equitable and Sustainable Pensions: Challenges and Experience, International Monetary Fund.

  • OECD (2013), Pensions at a Glance 2013: OECD and G20 Indicators, OECD Publishing.

  • OECD (2014), OECD Pensions Outlook 2014, OECD Publishing.

  • OECD (2012), Putting Pensions on Auto-pilot, OECD Pensions Outlook 2012, OECD Publishing.

  • Pension Strategy Group (2015), Strengthening the Pension System, Ministry of the Family and Social Solidarity, Malta.

1

Prepared by Christian Ebeke and Jubum Na (all EUR). We are indebted to Mauricio Soto (FAD) for insightful comments and practical suggestions on an earlier draft. We also thank participants at the seminar at the Ministry for Finance in Malta for useful comments and suggestions.

2

This partially reflects the declining contribution rate over time, as the maximum income on which contributions are paid is growing by much less than the average wage growth.

3

Actions were already taken by the authorities to address risks to the sustainability of the pension system. These include the measure to gradually increase the retirement age currently standing at 62 years to 65 years by 2027.

4

More details on the Pension Strategy Group proposals can be found at: http://mfss.gov.mt/en/public-consultations/pensions/Documents/Pensions%20Report.pdf

5

The budget 2016 is already raising the contributory period from 40 to 41 years for persons born after 1968.

6

The Pensions Strategy Group is proposing to calculate the pensionable income on the best 3 years in last 15 years only with regards to those born 1952 to 1961 (who are currently on best 3 years in last 11, 12 or 13 years for employed persons and best 10 years in last 11,12 or 13 years for self-employed persons). As already legislated, those born from 1962 onwards would have their pensionable income calculated on best 10 years in 40 years for both employed and self-employed persons.

7

Increases in contribution rates are very often unpopular, prompting most countries to rule out increases in contribution rates explicitly or implicitly. However, some countries do have mechanisms in place to increase contribution (e.g. Canada, Germany, and Japan). There may be adverse economic effects coming from lowering incentives to work.

8

In Australia there has been an abolition of age limit (70 years) on compulsory contributions to private pension schemes in 2013.

9

At present in Malta, for a significant number of pensioners, pension benefits are aligned to an annual assessment of existing collective agreements whilst the pension income of all other pensioners is increased by the COLA. The PSG is of the view that this is socially unjust, as it provides no protection to workers who are not covered by the collective agreement.

10

The Pension Expenditure Template developed by Expenditure Policy staff, Fiscal Affairs Department, at the International Monetary Fund has been used. This version includes the latest Aging Report baseline projections.

11

The template is suitable for mature systems in terms of coverage and benefits and is more appropriate for long-term- than short-term projections.

12

It is worth nothing that the baseline scenario includes the expected gradual increase in the retirement age to 65 years by 2027, and then remains unchanged thereafter.

13

This scenario assumes that the retirement age for both men and women is increasing by a given level over an extended period from 2030 to 2040.

14

The labor market participation rate (of people aged 20–64) in Malta (69.0 percent) was below the EU-28 average in 2013 (76.5 percent), but it is projected to equal the EU-28 average in 2053 (79.9 percent). The participation rate of older workers (aged 55–64) in 2013 was lower (38.7 percent) than the EU-28 average (54.4 percent). Over the period 2013 to 2053, the participation rate of older workers is projected to increase by 26.4 p.p. to 65.0 percent in 2053. The percentage increase is higher than in the EU-28 (15.3 p.p.: from 54.4 percent in 2013 to 69.7 percent in 2053). According to the 2015 Ageing Report, employment rate (of people aged 20-64) is projected to increase from 65.0 percent in 2013 (EU-28: 68.4 percent) to 75.1 percent in 2053 (EU-28: 74.9 percent). Employment rate of older people (aged 55–64) is projected to change from 36.5 percent in 2013 to 61.0 percent in 2053 (EU-28: from 50.3 percent to 66.6 percent).

15

Under this scenario, the old age dependency ratio is lowered by 2 percentage points per year compared to the 2015 Aging Report’s baseline.

Malta: Selected Issues
Author: International Monetary Fund. European Dept.