IMF encourages Malta to cut COVID aid spending – report

Assessors from the International Monetary Fund (IMF) have told Malta’s Government it needs to start reducing COVID-related financial support programmes while planning ahead, according to a report in the Times of Malta.

A team from the IMF is said to have met with Government officials and local regulators as part of a scheduled review into the island financial outlook last week.

Topics of discussion are reported to have included Malta’s increased public spending during the pandemic, as well as its need to avoid “cliff effects” of withdrawn support.

This is largely in line with previous calls of the IMF.

In mid-July, the organisation’s Malta Mission concluded that a key fiscal policy priority should be the “unwinding of pandemic-related support measures and a shift to policies targeted at facilitating resource reallocation to productive and high-growth potential activities”.

“As the economic growth gains momentum”, the IMF stated, “the authorities should prepare a plan for tapering support measures… including adjusting their size and eligibility criteria.

“Unwinding of support measures will need to be carefully managed and well-coordinated between fiscal and financial sector policies to avoid “cliff effects” that could derail the recovery”, it added, referring to the effect by which an increase in financial resources for consumers sees them lose access to support, thus making a net loss financially.

The IMF’s calls come after Government spending has spiralled during the pandemic. In mid-April, Finance Minister Clyde Caruana revealed the pandemic has impact Government finances to the tune of €5 million a day – comprised of €3 million more in spending and €2 million in lost revenue.

Reflecting this increased spending and lost earnings, state debt has spiralled since the start of the pandemic.

In the first half of 2021, the Government registered a €848.9 million deficit, and a public debt of €7.8 billion.

The Government has already announced the rolling back of some parts of its COVID support measures, including its wage supplement scheme, with a new multi-phased tapering system coming into effect this month.

This will see the Government gradually phase out its wage supplement throughout the last five months of the year.