Source: imf.org

Published: 8 February 2023

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Malta on February 2, 2023 and endorsed the staff appraisal without a meeting.

Malta’s economy has recovered strongly following the worst recession in decades due to the COVID-19 pandemic. With the easing of pandemic containment measures, output grew by 11¾ percent in 2021. The economy has continued to expand for the first three quarters of 2022, driven by strong net exports and private consumption, and staff expect growth of 6½ percent in 2022. Inflation has picked up but has remained among the lowest in the euro area, reflecting the government’s policy to freeze retail electricity and fuel prices for all consumers.

GDP growth is expected to slow to 3¼ percent in 2023 due to lower consumer purchasing power, dampening domestic demand and weakening external demand from Europe. Inflation is expected to gradually decline but remain elevated. Uncertainty is exceptionally high, and risks are tilted to the downside, including a deeper-than-expected recession in Europe, a possible de-anchoring of inflation expectations, and the realization of money laundering and terrorist financing risks. On the upside, lower-than-expected commodity prices would lead to stronger growth than forecast.

Executive Board Assessment [2]

In concluding the 2022 Article IV consultation with Malta, Executive Directors endorsed staff’s appraisal, as follows:

Malta’s economic recovery from the pandemic is remarkable, but the indirect impact of Russia’s war in Ukraine weighs on the outlook. The strong economic recovery continued into 2022, driven by high net exports and consumption. GDP growth is, however, set to slow in 2023 as the confluence of global shocks weighs on the economy. Inflation is expected to gradually decline but remain elevated. Risks to the outlook are tilted to the downside, mainly because the growth slowdown in Europe could be deeper than expected.

The authorities should prepare an exit strategy from the fixed-energy-price policy while protecting vulnerable groups. The exit strategy should aim to contain fiscal costs and introduce market price mechanisms to enhance incentives for energy conservation and help accelerate the green transition while protecting vulnerable groups. The authorities should explore reform options with the aim of gradually rolling them out ahead of winter 2023/24. Ultimately, accelerating the green transition is the best way to strengthen Malta’s resilience to an energy shock.

The fiscal tightening planned for 2023 is appropriate, given the need to slow inflation and improve the public finances, but additional actions are needed to pursue consolidation over the medium term. While public debt is projected to remain just below 60 percent of GDP, it could be forced on an upward path if growth underperforms or contingent liabilities materialize. To protect against this risk, the authorities need additional measures to mobilize revenues and enhance spending efficiency over the medium term. In light of Pillar II of the global corporate tax reform, the authorities need to reform the taxation of multinational firms and consider broader reforms to the tax system and to revenue administration with the aim of simplifying and improving the efficiency of the tax system and reducing administration and compliance costs while protecting revenues. Efforts aimed at identifying the scope for rationalizing recurrent spending should continue, while further steps should be taken to improve the efficiency of public investment, including green investments. Long-term demographic trends should be closely monitored to properly plan pension-related reforms, and efforts should continue to promote voluntary occupational pensions and personal pensions.

The financial system remains sound, but emerging risks warrant continued vigilance and close monitoring of banks. The authorities should closely monitor banks’ risk management to ensure that provisions are continuously updated as economic prospects change. Given the banking sector’s large exposure to the housing market, the consideration of introducing a sectoral systemic capital risk buffer targeting mortgage loans is warranted. In addition, efforts to monitor cyber security risks and strengthen resilience against cyberattacks should continue.

The authorities should continue efforts to strengthen the effectiveness of the AML/CFT framework. The boosted resources for AML/CFT supervisors should remain in place to help the long-term sustainability of reforms. Notwithstanding the progress Malta has made, the authorities need to continue to demonstrate the effectiveness of supervisory outcomes, including through the effective implementation of sanctions. The implementation of the national AML/CFT strategy for 2021–2023, as well as the NRA exercise, is important to enhance coordination and supervision to mitigate existing and emerging risks. The close monitoring of high-risk sectors, especially virtual financial assets, gaming, and sectors associated with Malta’s Citizenship by Investment program, should also continue.Structural reforms are necessary to improve Malta’s long-term growth and address climate challenges. Malta’s Recovery and Resilience Plan will address part of its structural challenges, but more efforts will be needed, especially to address labor skill mismatches, increase STEM graduates, enhance vocational training, promote research and innovation, and advance the digital transformation of SMEs. Labor force participation should also be fostered through incentives for workers to delay retirement and flexible working solutions to address structural labor shortages. On climate change policy, concerted efforts involving all stakeholders should continue to implement the 2021 Low Carbon Development Strategy and seek decarbonization potential by exploiting various sources, including investing in renewable sources.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] Management has determined it meets the established criteria as set out in Board Decision No. 15207 (12/74); (i) there are no acute or significant risks, or general policy issues requiring a Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.