IMF attributes strong economic growth to sound policies, urges Malta to protect financial system's integrity

International Monetary Fund attributes Malta’s ‘exceptionally strong’ economic growth to sound policies, but sounds warning on need for ‘ongoing vigilance’ to contain risks to integrity of financial system

The IMF staff have concluded a 10-day mission to Malta
The IMF staff have concluded a 10-day mission to Malta

The International Monetary Fund has completed a 10-day mission to Malta during which it evaluated in depth the economic and fiscal state of the Maltese economy.

In essence, the IMF report highlights Malta’s “exceptionally strong” economic growth: “Sound policies and favorable external and domestic conditions have led to robust employment growth and an improvement in public finances.”

Looking ahead, the IMF argues that the key policy challenge is to sustain the high growth and make it more inclusive in an increasingly uncertain external environment.

“Efforts should therefore focus on further enhancing the economy’s resilience to shocks, and addressing the remaining structural impediments,” the IMF recommended.

At the same time, the IMF also urged the government to continue with close coordination between regulatory institutions and a robust implementation of the Anti-Money Laundering framework.

“In view of the high demand for Malta’s Individual Investor Program and the rapid growth of the remote gaming and financial services, it is important to continue with close coordination between the involved regulatory institutions, provision of adequate resources for inspections and training, and a robust implementation of the Anti-Money Laundering/Combating the Financing of Terrorism framework in line with the 2012 Financial Action Task Force’s standards,” the IMF said.

On the “sound and resilient banking system”, the IMF said domestic banks report adequate capitalization and liquidity, and profitability above levels seen in peers.

However, headwinds from protracted low interest rates, weak credit growth, and legacy non-performing loans (NPLs) in the corporate segment pose challenges. Furthermore, future regulatory changes and uncertain external environment, including from the Brexit decision, may affect banks’ profitability prospects and their capacity to support growth. High and increasing exposure of banks to the property market may increase financial stability risks.

The IMF expects the Maltese economy’s current economic growth to continue in the medium-term. It also expects the strong job creation to continue in the coming years, thus keeping unemployment low.

Furthermore, it expects inflation to increase modestly as import prices recover, while sizable services balances are expected to continue supporting current account surpluses.

The IMF recognised the government’s efforts to reduce the public deficit and debt ratios. It expects the adjustment measures coupled with robust growth to further improve the fiscal consolidation in the near term, such that the deficit is forecasted to decline to 0.6 per cent in 2017 while the debt ratio is expected to fall below the 60 per cent EU debt target rate earlier than expected.

The IMF has also noted the importance of the Malta Development Bank in supporting the Maltese economy, by increasing lending to credit-constrained SMEs and providing co-financing for large development and social projects.

The government endorsed the IMF’s proposal to continue the steady implementation of reforms, in particular with regard to further increasing labour force participation, enhancing SMEs’ innovation, as well as streamlining the legal process in order to support high and inclusive long-term growth.

“The recognition by the IMF of the Government’s economic and financial policies as ‘sound’ and as having led to robust employment growth and an improvement in public finances is the best compliment one can ask for,” Finance Minister Edward Scicluna said.

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