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The Central Bank of Malta’s Annual Report 2019

The Central Bank of Malta has just released its Annual Report for 2019, including its detailed financial statements. An opening statement by the Governor is followed by an analysis of economic and financial developments in Malta, and abroad, and a review of the Bank's policies and operations. The Report also carries articles on the financing conditions affecting firms in Malta, public debt sustainability and the balance sheet of different institutional sectors.

The Report notes that last year the Maltese economy continued to register a healthy rate of expansion. Even though gross domestic product (GDP) growth moderated to 4.4% in 2019 from 7.3% in 2018, it remained above its long-term average. The expansion was driven by domestic demand.

The annual average rate of inflation in Malta based on the Harmonised Index of Consumer Prices eased to 1.5% in 2019 from 1.7% in 2018, reflecting slower growth in the prices of services and non-energy industrial goods. In contrast, inflation based on the Retail Price Index rose from 1.2% to 1.6%. The different dynamic in the two indices partly reflects the different treatment of tourist expenditure in the two indices.

The fiscal surplus narrowed somewhat compared with 2018, while the debt-to-GDP decreased further. Malta continued to run a healthy current account surplus.

The Bank points out that in the near term, GDP will be impacted significantly by the negative effects of COVID-19 on confidence, disruptions in global supply chains and lower demand for a number of services sectors, most notably those related to tourism. However, growth should recover as from 2021. The fiscal balance will also inevitably be negatively impacted. The use of the fiscal space created in recent years and the expansionary monetary policy measures announced by the European Central Bank (ECB) in March 2020, should help mitigate some of the negative impact of COVID-19 on economic activity in Malta. However, projections of economic activity, both for Malta and globally, critically hinge on the duration of the pandemic, as well as the size of the local and global fiscal response.

During the year, the Bank continued to implement the Eurosystem's monetary policy decisions in Malta, through standing facilities, liquidity-providing operations and the Public Sector Purchase Programme (PSPP). As liquidity remained ample, domestic credit institutions continued to place excess funds with the Eurosystem through the overnight deposit facility and made no use of the marginal lending facility. Amounts borrowed through other facilities were either minimal or well below repayments from earlier operations, reflecting ample local liquidity.

The Bank's balance sheet continued to expand, reaching €9,288.2 million at the end of 2019. Operating profit before transfer to provisions increased to €49.5 million from €38.3 million in 2018, mainly due to higher capital gains from the sale of securities and realised gains due to the partial liquidation of externally managed funds. Lower price revaluation losses on securities also contributed positively. Following the transfer of €18.0 million to provisions, the amount of €31.5 million is payable to the Government of Malta.

The Bank continued to advise Government on legislative and regulatory developments specific to financial stability. It carried out regular assessments of financial sector conditions, while enhancing its macro-prudential framework and crisis management policies. On the basis of assessments of potential risks related to excessive credit growth, the Bank kept the countercyclical capital buffer rate unchanged at 0%. The capital conservation buffer was fully phased in, with banks required to hold an additional capital of 2.5% of risk-weighted assets. The domestic significant institutions formed part of the Single Supervisory Mechanism (SSM)/ECB Banking Supervision's 2019 sensitivity analysis on liquidity stress.

Following a public consultation, Central Bank of Malta Directive No. 16 on the Regulation on borrower-based measures (BBMs) came into force in July 2019. Another public consultation focused on the revised methodology for the identification of other systemically important institutions and the related capital buffer calibration, which aligns the domestic framework with the Guidelines of the European Banking Authority.

During the year, the Bank continued to offer public lectures in a broad range of subjects related to its interests. It also published the results of the third wave of the Household Finance and Consumption Survey and initiated preparations for the fourth wave with the National Statistics Office. Staff also began to analyse information collected through the Payment Habits Survey.

Central Bank of Malta Directive No. 5 was modified to empower the Bank to collect statistical information from pension funds. The Bank extended access to the Central Credit Register to the Malta Development Bank and progressed with the AnaCredit project of the European System of Central Banks. While taking further steps to improve data quality, the Bank continued to migrate more datasets onto its main statistical platform. Moreover, a Joint Coordination Group was set up with the Malta Financial Services Authority, to co-ordinate financial data reporting.

The Bank collaborated with other national central banks on the consolidation of the technical and functional aspects related to the infrastructure that is used to settle payments and modified the regulatory standards which support the Payment Services Directive. Work also began on the establishment of a payments hub. A cybersecurity office was set up to gather intelligence on cyber threats, while an internal task force met regularly to discuss developments related to the exit of the United Kingdom from the European Union.

The Central Bank of Malta Foundation was set up to support projects in the fields of education, culture, scientific research, national heritage and social causes. The Bank also joined the Network for Greening the Financial System, which brings together several of the global systemically-important banks and insurers.

Looking ahead, the Bank will continue to fulfil its several functions. In 2020, it will be participating in Eurosystem discussions on the review of the monetary policy strategy. Other priorities include the provision of agency services to local institutions for the settlement of euro payments and the development of projects in the area of big data and machine learning through collaboration with academia. The Bank is also actively participating in the process of supporting the Maltese economy to counter the effects of COVID-19 and to plan ahead for the post-pandemic recovery.

The Annual Report 2019 is available on the Central Bank of Malta's website.

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