Charlot Zahra
The International Monetary Fund (IMF) is projecting that the Maltese economy will contract by 2.0% this year, with “a modest recovery” in 2010.
In an unprecedented move until now, the IMF yesterday published its concluding statement at the end of its annual mission to Malta, a sort of an interim report on the local economic situation.
The predicted contraction is a harsher prospect than the one made in the European Commission’s Spring Economic Forecast last May, which was projecting a contraction of Malta’s GDP rate of 0.9% in 2009 and a return to positive territory in 2010 with a GDP rate of +0.2 per cent.
Moreover, the IMF report estimates that Malta’s budget deficit would fall below the 3% threshold set out by the EU’s Stability and Growth Pact only in 2013, with public debt reaching 70% of GDP.
In the Spring Economic Forecasts, Malta’s budget deficit was forecast at 3.6% for this year, falling to 3.2% in 2010: just 0.2% short of the threshold set by the EU.
As for the public debt figures, the EC has also forecast a growth beyond the 60% limit set out by the Stabilty and Growth Pact, with 67.0% for 2009 and 68.9% for next year.
In its report, the IMF warned that Malta’s economy was facing “its first test following successful EU entry and euro adoption.”
The prospect of euro area membership “provided a useful anchor for reforms until 2007, and the common currency has helped Malta navigate troubled waters since then,” the IMF explained in its interim report.
“Yet, the unfavourable external environment is now challenging the economy’s resilience, threatening to unravel past efforts at fiscal consolidation, and possibly holding back the reform impetus, even as the convergence process remains incomplete.”
For Malta to “fully grasp its growth opportunity going forward and close the income gap with the euro area, the country needs to build consensus around a renewed reform strategy.
“The mission projects a growth contraction of around 2% in 2009, followed by a modest recovery in 2010.”
The IMF interim report explained how the global recession “will continue to exert a drag on foreign demand for Malta’s manufacturing goods and on tourism prospects”. Meanwhile, private consumption, “resilient so far, is expected to weaken as employment prospects deteriorate”
Key elements of the structural reform indicated by the IMF included “resuming fiscal consolidation once the recovery is established to build buffers against future external shocks and as the population ages; further strengthening the financial supervisory framework to keep up with the rapidly expanding sector; and completing the labour and product market reforms while continuing to reduce the public sector’s involvement in the economy, so as to further the move towards higher value-added activities”.
The IMF warned that fiscal developments in Malta were being affected by the “cyclical deterioration” in the economy.
The IMF Mission was forecasting that, “notwithstanding the disappearance of substantial spending one-offs related to the liquidation of the Shipyards, the general government deficit in percent of GDP would only marginally improve from the 2008 outcome.”
The IMF was highly critical of the Maltese authorities’ decision to tolerate late tax payments from companies with cash flow difficulties, as well as inviting hotels and banks to work on debt restructuring.
“Even if not widespread, these steps risk undermining tax compliance and contract enforcement,” the IMF interim report warned. For these taxes in arrears, “expeditious negotiation of a repayment schedule will be critical,” the IMF mission to Malta insisted.
The sustainability of the current fiscal loosening hinged on a “well-articulated medium-term consolidation strategy. In its absence, public debt and financing costs risk escalating,” the IMF interim report on Malta warned.
“The government,” the IMF interim report on Malta said, was “committed to consolidation” and had started taking “significant steps with respect to the Shipyards and the utility subsidies”, two areas of traditionally large public outlays.
However, the IMF warned that “these measures alone would fail to achieve the necessary consolidation – the mission estimates that the headline deficit would fall below the 3% mark only in 2013, with public debt reaching 70% of GDP.
To secure a quick reversal in the public debt trend, the IMF mission recommended “a structural consolidation effort of at least 2/3 percentage point of GDP per year over 2011 to 2014—double the current scenario—backed by clearly identified measures”.
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