IMF insists on better budget projections, budget discipline
Charlot Zahra
The International Monetary Fund (IMF) has called on the Government to improve the quality of its budget projections through the introduction of independent forecasts.
In its final report on its 2009 visit to Malta, the IMF warned that “despite the relatively good track record until 2007, recent spending slippages underscore the need to strengthen budget execution discipline, expenditure reporting and recording, and accountability.
The authorities concurred with this assessment and pointed to “the initial steps undertaken to increase oversight of spending ministries,” the IMF final report explained.
In view of this, the IMF also recommended “informing fiscal projections with independent forecasts—possibly by expanding the mandate of the National Audit Office—and securing a stronger involvement of parliament, through medium-term targets committed to in the annual budget act and strengthened accountability of the government.”
The IMF proposal came in the view of the controversy that has surrounded the Government’s fiscal deficit and GDP projections made in the 2008 and 2009 budget speeches.
In the 2008 Budget Speech, Finance Minister Tonio Fenech had forecast that the Budget deficit for 2008 would have dropped by 2.0 per cent and to -1.2 per cent in 2009, and with a surplus of 0.2 per cent in 2010.
A year later, in the 2009 Budget Speech, the Finance Minister had revised substantially its Budget deficit forecast, with the Budget deficit for 2008 reaching -3.49 per cent, that for 2009 reaching 1.65 per cent and that for 2010 reaching -0.40 in 2010.
Even those forecasts were too optimistic, as both the European Commission’s Spring Economic Forecasts in May and the IMF’s interim report in July had revealed.
In the Spring Economic Forecasts, Malta’s budget deficit was forecast at 3.6 per cent for year, falling to 3.2 per cent in 2010, just 0.2 per cent short of the threshold set by the EU.
As to the public debt figures, the EC has also forecast a growth beyond the 60 per cent limit set out by the Stability and Growth Pact, with 67.0 per cent for 2009 and 68.9 per cent for next year.
According to the IMF, the fiscal deficit was expected to narrow marginally to 4.5 per cent of GDP in 2009. However, excluding the substantial one-offs of 2008, the balance would deteriorate by over 0.5 percentage point of GDP, the IMF insisted.
The IMF report had a harsher forecast that Malta’s budget deficit would only fall below the 3 per cent threshold set out by the EU’s Stability and Growth Pact only in 2013, with public debt reaching 70 per cent of GDP.
The predicted contraction is a harsher prospect than the one made in the European Commission’s Spring Economic Forecast in May, which was projecting a contraction Malta’s GDP rate of 0.9 per cent in 2009 and a return to positive territory in 2010 with a GDP rate of +0.2 per cent.
IMF confirms GDP contraction forecast for 2009 In its final report, the IMF confirmed its forecast of a negative GDP growth for this year at -2 per cent for 2009. “With recession affecting all main trade partners, growth in Malta was projected to turn negative in 2009. “Staff projects activity to contract by about 2 per cent in 2009, with the output gap turning negative and remaining so until 2014,” the IMF final report added.
As foreshadowed by the most recent confidence indicators, all private components of demand—exports, private investment and households’ consumption— would drive the slowdown in 2009, the IMF report explained.
However, “higher public infrastructure spending and, to some extent, resilient activity in services, are expected to cushion the slowdown,” the report added.
The IMF is forecasting “a modest recovery”, of about 0.5 per cent, for 2010, “as exports pick up in line with trade partners’ growth, prompting a gradual revival in private investment and labour market conditions.
The authorities concurred with the IMF appraisal that, “in the context of the global crisis, potential growth would soften going forward”.
Inflation was projected to moderate while the current account deficit would stabilize, the IMF report explained, “with long-term sustainability risks mitigated by the positive net international investment position.”
“With the output gap turning negative and world commodity prices lower, inflation would fall to 2.75 per cent in 2009 from 4.75 per cent in 2008, and the current account deficit would stabilize at 5.75 per cent of GDP,” the IMF report explained.
The IMF’s external sustainability analysis pointed to “a strengthening in the net external creditor position as net FDI inflows would continue to more than finance the external deficit”.
Nonetheless, gross external liabilities stood at over 550 per cent of GDP at end-2008, “owing to strong growth in recent years in non-resident deposits held by internationally oriented banks.
“While these are backed by matching assets, the associated external vulnerability reinforces the need for fiscal and financial buffers to anchor investors’ confidence in Malta’s small open economy,” the IMF final report on Malta warned.
Moreover, the IMF warned about “clear risks” to the recovery in 2010. First, it was conditional on a gradual improvement in trade partners’ growth, which could fail to materialize.
“Risks also stem from potentially tighter credit conditions, as the economic slowdown inevitably leads to a deterioration in banks’ asset quality,” the IMF report explained.
Finally, in a context of more depressed global demand, “the revival in activity could be further jeopardized if the strategy of export diversification were to falter for lack of foreign investor appetite,” the IMF said.
Risks to inflation were “more balanced – persistent food price increases could continue to spur inflation, at least temporarily; conversely, a more severe slowdown in activity, especially for export-oriented sectors, could put downward pressures on prices”.
“The authorities’ outlook is more benign,” the IMF report added.
“In particular, they saw private consumption remaining more resilient, supported by wage and credit growth, and forecast a stronger pick up in corporate investment going forward,” the final report explained.
However, the Maltese Government “agreed with staff that risks were on the downside and acknowledged that some downward adjustment to their projection could not be excluded as further macroeconomic updates came in”.
Preserving financial stability in a recession The IMF final report explained that “slippages, in particular on utility subsidies, contributed to the fiscal relaxation in 2008.
“The authorities have curtailed them, and the structural consolidation for 2009 is projected to reach 0.75 percentage point of GDP,” the IMF report explained.
Still, the authorities were letting automatic stabilizers play in full, “providing support to domestic demand of about 1.5 percentage points of GDP.”
In addition, the IMF was estimating that EU funding of the stimulus measures would represent 0.5 per cent of GDP of additional support to demand.
“Based on somewhat stronger real growth forecasts, the authorities’ fiscal projections are more optimistic,” the IMF report explained, “with a decline in the deficit of 1 percentage point compared to 2008, underpinned primarily by higher assumption of direct tax collection”.
The IMF agreed with the thrust of the authorities’ fiscal policy for 2009. “The economic downturn called for a fiscal response to support activity, and the focus on public investment in the 2009 stimulus package is apposite, given infrastructure needs and its potentially high multiplier,” the IMF insisted in its final report on Malta.
While letting the automatic stabilizers play fully, the authorities were making fiscal room by cutting inefficiently targeted subsidies on utilities. “In addition, boosting EU fund absorption prevents an excessive deterioration in the public finances and current account, the IMF final report added.
For 2010, the IMF recommended only “moderate structural consolidation, to the tune of 0.5 percentage point of GDP, so as not to jeopardize the modest recovery.”
The IMF warned, however, that measures taken to support enterprises “raise some concerns”. The measures implemented in the spring of 2009 to co-finance investment and training allowed for rapid and targeted support.
