Earlier this week, the International Monetary Fund issued its 2017 Article IV Consultation Report on Malta. The Report not only offers a descriptive element with in-depth analysis of the Maltese economy but also a prescriptive element focusing on the reforms needed to respond to Malta’s economic challenges. But let’s start with the basics.
What is an Article IV Consultation?
When a country joins the IMF -Malta joined in September 1968, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance which is an ongoing process that culminates in regular, usually annual, comprehensive consultations with individual member countries, with discussions in between as needed. The consultations are known as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country's economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labour unions, and civil society. The team presents its findings to the Executive Board before publishing its report, which will be analysed in the forthcoming sections.
Malta’s economic performance
The 2017 Article IV Consultation Report scrutinises Malta’s economic performance and structural developments. It lauds current performance as it remains one of the strongest in Europe with growth exceeding the 6% mark in 2017. Data shows that the buoyant economic performance was driven primarily by strong exports. In fact, Malta continued to register fast growth in proceeds from tourism, remote gaming and aviation. These sectors, especially remote gaming and aviation, indeed show Malta’s success in being an innovative jurisdiction in creating new economic niche sectors and the recent announcement of a new regulatory framework for artificial intelligence and blockchain should also usher a new era in Malta’s economic fabric. In addition to the external sector, domestic demand also contributed to the current economic performance on account of higher private consumptionwhich reflected the dynamic job market. In fact, unemployment is at record-lows whilst the increased labour force participation and strong inflows of foreign workers have contained wage pressures.
The robust economic activity has also impinged on the property sector with strong demand having an effect on property prices.The increased demand for property was mainly driven by the continued influx of foreign workers, the IIP scheme, various targeted policy initiatives and also an investment portfolio rebalancing towards property given the low interest rates.
This economic activity has contributed to increased taxation revenues too, supporting the fiscal surplus registered by Government. However, the surplus was primarily driven by buoyant receipts from the Individual Investor Programme and contained capital expenditure.
Looking ahead, the IMF believes that this positive performance is set to continue into the future with growth moderating at the 3% range over the medium-term. Growth is expected to continue being driven by buoyant services exports, however a number of challenges need to be addressed in order to sustain this performance.
The challenges
As a small island state, the challenges relate to Malta’s need to continue building its resilience in the face of an ever-continueddisruptive external environment. From an economic perspective the main challenges identified relate to:
· Sustaining quality and inclusive growth
· Building fiscal buffers
· Safeguarding financial stability
Sustaining quality and inclusive growth
Malta’s buoyant growth offers a challenge to sustain and to avoid overheating. To this end, achieving quality growth is imperative. In order to drive such growth, authorities need to continue upskillinghuman capital and increasing labour force participation, particularly female. The emergence of new economic sectors is also strongly warranted whilst supporting current sectors to further diversify and move-up the value scale.To this end, Government needs to continue investing in reforming the educational sector in order to better prepare the future workforce and imbue them with the skills needed to navigate the future demands of industry. Also, education is the best tool to make growth more inclusive. It is important that economic growth permeates all levels of society and trickles down to the least advantaged. In parallel, Government needs to prioritise investment in innovation and R&D by supporting educational institutions but also our enterprises to invest in innovation. The use of European funding through measures such as Business Enhance is a step in the right direction. However, more effort needs to be made to organically grow the start-up ecosystem and to ensure that innovation and research are thriving. Innovation has the power of driving productivity growth, however closing the infrastructure gap will also contribute immensely. The buoyant growth and continued influx of foreign workers and touristsput more pressure on physical infrastructure exposing several gaps. Government’s announced plans to invest in the road and transport network are welcome yet more investment is warranted. From an economic perspective, investments in infrastructure will further increase Malta’s potential growth going forward. However, care must be given on the effect of such capital investment on Government’s fiscal targets which brings us on to the second main challenge.
Building fiscal buffers
In the past few years, Malta has achieved significant gains in its fiscal position with a surplus being registered for the second year running. However, although the increased economic activity contributed, proceeds from the IIP played a significant role together with subdued capital expenditure. Going forward, the Government must ensure that its revenues need to depend less on the IIP proceeds. Care must also be given to the current high exposure to corporate tax as a percentage of total revenue. Therefore, Government should be active in broadening the tax base and in collecting tax revenues. The recent measures to combat tax evasion such as the Joint Enforcement Unit are all steps in the right direction. In addition, the long-term demographic challenges and resulting stresses on the health and welfare system continue to pose a downside risk to fiscal stability. Further adjustments and initiatives are required to ensure the long-term sustainability of the fiscal budget.
Safeguarding financial stability
The financial services sector has continued to grow at a very fast pace together with remote gaming. Further regulatory strengthening is needed to safeguard the integrity of the financial system. This requires supporting regulatory authorities through more resources as well as legislative strengthening through the effective implementation of the Anti-Money Laundering framework. The strength of the financial systems also depends heavily on the health of the banking sector. This remains high-capitalised and profitable, however challenges such as non-performing loans remain. Finally, the financial system is central to economic growth by channelling funds towards private investment. Access to finance, especially by SMEs, has always been a challenge of the local financial market. Various measures such as increasing options for equity financing under the Malta Stock Exchange have alleviated the problem. In addition, the launch of the Malta Development Bank in the second half of the year will further contribute to easing access to financing.
The road ahead
The Maltese economy remains on a strong growth trajectory. Its exports continue to increase, primarily service-based, and its job market remains dynamic and attractive. However, the challenge is to sustain this growth without causing the economy to overheat. The quality of growth needs to be continuously reassessed as much as its inclusivity. In parallel, investments in infrastructure need to continue happening to enhance our long-term growth potential whilst education needs to remain the most important focus. Safeguarding the integrity of the financial system is also a key concern. The Article IV Consultation has continued to shed light on the mechanics of the Maltese economy and its advice should be taken on board by all stakeholders. After all, it concerns us all.
JP Fabri is the Managing Director of ARQ Economic & Business Intelligence, a specialised unit forming part of ARQ Group (www.arqgroup.com)