The International Monetary Fund (IMF) had high praise for Malta, saying its economic growth remained one of the strongest in Europe, but cautioned that sustained efforts are needed to safeguard the financial system’s integrity.
Following the 2017 Article IV consultation, the IMF said that Malta’s favourable economic conditions and sound policies, had advanced structural reforms and supported the strengthening of private and public balance sheets.
“Output is estimated to have expanded by 6.8 per cent in 2017, accompanied by dynamic job creation, which brought unemployment to a record-low. Strong inflows of foreign workers and rising labor force participation kept wage pressures contained in most sectors, thus contributing to low inflation despite a positive output gap.”
The IMF also remarked that the rapid economic expansion and the growing population have put pressure on physical infrastructure and resulted in a continued housing market appreciation.
“The fiscal balance is estimated to have registered a surplus for the second consecutive year in 2017, thanks to buoyant revenues—including from Individual Investor Program proceeds—and contained capital expenditure growth. The 2017 current account is estimated to have remained in surplus, driven largely by a sizable balance of services.”
“The outlook is favourable, with growth decelerating gradually and converging to about 3 percent over the medium term. Growth is expected to be driven largely by domestic demand, backed by rising incomes and historically-low unemployment while buoyant services exports will continue to sustain current account surpluses. Inflation is set to pick up gradually, reflecting an increase in import prices and tighter labor market conditions. Headline fiscal surpluses are forecast to continue and contribute to a further moderation of public debt.”
The IMF commented that efforts were needed to ensure that fiscal policy is geared towards addressing the infrastructure challenges while avoiding unwarranted stimulus, while steps to advance balance sheet repair and strengthen the oversight of nonbank lending would enhance financial sector resilience.
“Sustained efforts are needed to safeguard the financial system’s integrity. Robust implementation and effective enforcement of the Anti-Money Laundering framework is critical given the size of Malta’s financial sector, the fast-growing remote gaming activity, and the high demand for the IIP. Continuing strengthening the collaboration between the competent supervisors and regulators, and finalizing the related National Risk Assessment would support these efforts.”
Policy measures suggested by the IMF included targeted macroprudential limits for mortgages; closing data gaps on borrower characteristics would help to calibrate these measures effectively; aligning the tax rate on rental income with tax rates on other sources of income, and introducing periodic reviews of the scope and parameters of the IIP, including the minimum real estate investment or leasing values, to curb housing demand pressure.
It also suggested that Malta should focus on reducing the severe congestion by improving road quality and increasing the use of alternative means of transport, upskilling and reskilling the labour force to better align education with business needs, increasing female labour force participation further, particularly among older cohorts, strengthen innovation by developing research infrastructure, increasing the financial support for research and innovation, and improve links between academia and the private sector would enhance productivity and boost growth prospects.