The International Monetary Fund’s executive board yesterday published its conclusions after the periodic consultations held over the past months with Malta.

In its report, the board urged further efforts to reach the Maastricht deficit target by 2010 and welcomed progress in utility tariff reform.

The following are the main conclusions of the executive board.

The executive directors noted that past efforts at fiscal consolidation and export diversification toward high-value-added services activities in the run-up to euro adoption had increased the resilience of the Maltese economy.

Nevertheless, the global crisis had started to affect the manufacturing and tourism sectors, weakening growth prospects and jeopardising the hard-won gains. The main challenges facing policymakers in the current environment are to remain supportive in the short run without compromising the fragile fiscal position, and to preserve competitiveness as a foundation for medium-term growth.

The directors considered that the fiscal stance for 2009 is appropriately accommodative. The full play of automatic stabilisers, combined with a limited stimulus package focusing on infrastructure investment, should provide an adequate counter-cyclical response to the slowdown.

The directors encouraged the authorities to improve the composition of the fiscal stimulus by winding down measures to support enterprises as the implementation of planned investment projects gathers pace.

While recognising the need to avoid premature withdrawal of fiscal support, the directors considered it important that consolidation efforts start as soon as feasible, with a number of them suggesting frontloaded measures in order to reach the Maastricht deficit target by 2010.

The directors called for a well-articulated medium-term consolidated strategy, supported by a strengthened institutional framework and budget execution discipline. This would require targeted action on the expenditure side, particularly with regard to the wage bill, social transfers, and pension and health care spending.

The directors welcomed recent steps to privatise the shipyards industry and eliminate utility subsidies, and observed that the banking sector has weathered the global crisis relatively well and capital ratios remain adequate. However, rising non-performing loans and credit concentration in the context of the downward correction in property prices and the economic slowdown have increased vulnerabilities. The directors recommended that banks should build additional capital buffers and set provisioning more proactively. The directors looked forward to the early finalisation of legislation on a bank resolution regime and deposit insurance coverage.

The directors saw merit in reassessing the costs and benefits of Malta’s banking business model, in view of the risks brought to light by the global financial crisis. Noting the rapid expansion of internationally oriented banks and their increasing linkages with the domestic economy, they welcomed ongoing efforts to conduct stress tests and risk assessments, and to gradually incorporate these institutions into the exercise. Containing these risks would require supervisors to further enhance capacities and to better incorporate systemic considerations into prudential standards.

The directors noted that euro area membership provides a clear opportunity for Malta in terms of trade and financial integration. At the same time, it highlights the urgency of improving internal flexibility to remain competitive, especially given persistent inflation in Malta.

A concerted effort would be necessary to complete the difficult reform agenda focusing on cost adjustments and productivity improvements, in particular a move toward productivity-linked wage increases and a restructuring of public enterprises. The directors welcomed progress in utility tariff reform, and recommended that the new price-setting formula be applied fully and transparently.

The full text of the report can be found on http://www.imf.org/external/np/sec/pn/2009/pn09116.htm