Front Matter

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IMF Country Report No. 17/56

MALTA

2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MALTA

February 2017

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2016 Article IV consultation with Malta, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its February 17, 2017 consideration of the staff report that concluded the Article IV consultation with Malta.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 17, 2017, following discussions that ended on December 16, 2016, with the officials of Malta on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 2, 2017.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for Malta.

The documents listed below have been or will be separately released.

Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

E-mail Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2017 International Monetary Fund

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MALTA

STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION

February 2, 2017

Key Issues

Context: Malta has recorded robust growth in recent years. Vibrant domestic demand, favorable external conditions, and further progress with structural reforms supported solid job creation, particularly in services, and reduced unemployment to record-lows. This strong performance, together with fiscal discipline, contributed to continued deficit and public debt reduction while solid profitability and adequate capitalization have kept the banking system stable and resilient.

Outlook and risks: The outlook remains favorable, with medium-term growth estimated at about 3 percent. However, downside risks predominate, reflecting mainly a weaker external environment and rising anti-globalization sentiment. Uncertainties surrounding the Brexit negotiations could weigh on economic activity through direct and indirect exposures, while EU-wide corporate tax reform may impact the economy unfavorably. While current data do not point to a misalignment of housing prices, persistent strength in the property market may lead to imbalances, and—with high exposure of banks to this market—amplify financial stability risks.

Challenges and policy priorities: Malta’s key challenges are to close the income gap with the euro area, ensure equitable distribution of growth dividends, and enhance the economy’s resilience to adverse shocks. Policies should, therefore, focus on building fiscal buffers, safeguarding financial sector stability, and advancing structural reforms to promote inclusiveness and competitiveness. Key priorities are:

  • Fiscal policy. Proceed with consolidation to reduce public debt ratio further and build buffers. The adjustment strategy should rely on containing current spending growth, particularly the wage bill and goods and services, and efforts to enhance tax collection. Long-term spending pressures and risks emanating from fragile state-owned enterprises (SOEs) need to be addressed.

  • Macro-financial policies. Further reduce legacy non-performing loans (NPLs) and increase loan-loss provisions. Close data gaps, adopt targeted macro-prudential measures to enhance the resilience of banks and households to possible property market swings, and ensure that fiscal measures related to the housing market do not amplify the cycle. Increase access to finance to small and medium-sized enterprises (SMEs) and reduce their vulnerabilities to shocks through a faster loan restructuring.

  • Structural reforms. Increase female labor force participation further and reduce skill mismatches through active labor market policies and expansion of technical and vocational training. Enhance SMEs’ innovation activities, including through greater public sector support and provision of nonbank financing options. Improve the efficiency of the judicial system, and streamline the corporate insolvency framework.

Approved By

Mahmood Pradhan (EUR) and Mary Goodman (SPR)

Discussions were held in Valletta during December 6-16, 2016. The team comprised Mr. Klein (head), Ms. Budina, Mr. Ebeke, and Mr. Na (All EUR). Mr. Grinberg, Mr. Cai, Ms. Bezerra de Menezes (All EUR), and Mr. Ugazio (STA) assisted from headquarters. Mr. Bassanetti (OED) participated in the discussions. The team met with Finance Minister Scicluna, Central Bank of Malta Governor Vella, Central Bank of Malta Deputy Governors Mifsud and Demarco, Malta Financial Services Authority Chairman Bannister, and other senior officials, representatives of labor and business organizations, and financial institutions.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS AND POLICY PRIORITIES

  • OUTLOOK AND RISKS

  • POLICY CHALLENGES

  • A. Further Strengthening Public Finances

  • B. Safeguarding Financial Sector Stability

  • C. Sustaining High Growth and Increasing Inclusiveness

  • STAFF APPRAISAL

  • BOXES

  • 1. Malta’s Competitiveness Developments

  • 2. Balance Sheet Analysis (BSA) for Malta

  • 3. The Modalities of the Proposed Malta Development Bank

  • FIGURES

  • 1. Economic Indicators, 2004–2016

  • 2. Short-Term Indicators, 2008–2016

  • 3. Fiscal Developments

  • 4. Financial Soundness Indicators

  • 5. External Sector

  • 6. Labor Market and Income Inequality Developments

  • TABLES

  • 1. Selected Economic Indicators, 2014–2021

  • 2. Fiscal Developments and Projections, 2014–2019

  • 3. Balance of Payments, 2014–2019

  • 4. Financial Soundness Indicators, 2012–2016 H1

  • ANNEXES

  • I. Implementation of IMF Recommendations

  • II. Risk Assessment Matrix

  • III. In-Depth Spending Reviews

  • IV. Debt Sustainability Analysis

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MALTA

STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

February 2, 2017

Prepared By

European Department

(In Consultation with Other Departments)

Contents

  • FUND RELATIONS

  • STATISTICAL ISSUES APPENDIX

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Press Release No. 17/55

FOR IMMEDIATE RELEASE

February 21, 2017

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