FRANKFURT, April 9 (Reuters) - Malta's economy is on course to grow faster this year and next, boosted by consumer demand, the country's central bank said on Tuesday, but it acknowledged risks in the island's banking sector.
At around eight times the size of the Mediterranean country's 6.5 billion euro ($8.5 billion) gross domestic product, Malta's financial sector is one of the largest in the euro zone - second only to Luxembourg's - relative to economic size.
Malta's central bank governor, Josef Bonnici, wrote in an annual report that the country's banks have so far weathered the financial crisis well.
But "while financial conditions in Malta have averted the tensions evident in many other countries, credit exposure remains a source of risk for the core domestic banks," he said.
Bonnici has rejected comparisons with Cyprus, whose banking sector problems forced the country to seek a bailout, saying Malta's banks were far less active internationally and had a strong base of local depositors.
However, he wrote: "To strengthen resilience, provisioning levels must be increased in the short run. In the longer term, a greater degree of diversification in the lending portfolio of banks is warranted."
The central bank forecast Malta's GDP would grow 1.4 percent this year and 1.8 percent in 2014. GDP grew just 0.8 percent in 2012.
"Growth in the second half of the year (2012) was better than in the first half, suggesting an incipient recovery," the annual report said.
"The Bank expects growth in 2013 and 2014 to be driven by domestic demand, particularly private consumption, which should recover in the first year of the projection horizon and accelerate further in the second."
Inflation in the euro zone's smallest member state is seen at 2.2 percent this year and 1.7 percent next. ($1 = 0.7682 euros) (Reporting by Sakari Suoninen; Editing by Ruth Pitchford)