## 1. COVID-19 and Tourism Developments

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### Context
- Pre-pandemic growth and engines:
  - GDP growth averaged 6¾ percent in 2014–2019 (EU average 2 percent).
  - Key growth engines: information and communications technology (ICT), professional and scientific activities, and remote gaming.
  - Per capita income gap to EU: halved from 40 percent a decade ago to 14 percent in 2019.
- Macroeconomic buffers (pre-pandemic):
  - Public debt: fell from over 65 percent of GDP in the early 2010s to 42 percent of GDP in 2019.
  - External debt: nearly halved.
  - Banking sector: higher capital ratios and lower NPL ratios.
- AML/CFT development:
  - On June 25, 2021, FATF put Malta under increased monitoring (“grey-list”) citing concerns over transparency on beneficial ownership information and financial intelligence related to money laundering and tax evasion.

### COVID-19 Impact and Policy Response — Epidemiology, Activity, and Labor
- Pandemic evolution and vaccination:
  - Multiple waves with strict containment in Spring 2020, relaxation in Summer 2020, renewed surge after the new year holiday season, tightened containment in early March 2021, accelerated vaccination rollout.
  - By end-April daily cases dropped to low single-digits; entry conditions for tourists relaxed June 1; tightened mid-July for unvaccinated tourists; nearly 70 percent of the population were fully immunized at end-July.
  - As of September 8, daily new cases = 10 (7-day moving average per 100,000 people), down from recent peak of 40 in mid-July.
  - Vaccination: 80 percent of the total population and 91 percent of the adult population fully immunized as of September 7; 90 percent of the population above 12 (80 percent of the total population) fully vaccinated as of September 6.
- Output and sectoral effects:
  - Tourism sector ~16 percent of the economy; tourist arrivals fell to around 25 percent of pre-pandemic levels in 2020.
  - Real GDP contracted by 7¾ percent in 2020.
  - Output grew by 1.9 percent (q/q) in Q1 2021, driven by remote gaming, ICT, public administration, and wholesale and retail trade.
  - Consumer and business confidence recovered to pre-COVID-19 levels.
- Labor market:
  - Employment initially dropped; unemployment rose after outbreak; employment resumed growing after relaxation of measures.
  - Unemployment fell to around 3½ percent by June 2021; unemployment rate (EU harmonized) reported as 3.6 for 2021 in projections.
  - Wage supplement scheme contributed to preventing large-scale layoffs; signs of labor market tightening with tourism reopening, partly due to reduced inflows of foreign workers.

### Fiscal and Financial Policy Responses — Size, Composition, and Effects
- Aggregate fiscal support:
  - COVID-19 related fiscal measures amounted to 5.1 percent of GDP in 2020.
  - Total fiscal support including guarantees: 14.4 percent of GDP.
- Fiscal balances and public debt:
  - Fiscal balance: surplus 0.4 percent of GDP in 2019 to a deficit of 10.2 percent of GDP in 2020.
  - Primary deficit: 2020 = 9 percent of GDP; 2021 expected to widen to 10½ percent of GDP (near-term fiscal stance section).
  - Public debt: 42 percent of GDP in 2019 to 55 percent of GDP in 2020; projected to rise to 64.6 percent of GDP in 2021 and peak at 68 percent of GDP in 2023 (Appendix I).
- Composition of temporary fiscal measures (percent of GDP by year):
  - Wage supplement scheme: 2.9 (2020), 2.1 (2021), 0.0 (2022).
  - Short-term social measures: 0.1 (2020), 0.0 (2021), 0.0 (2022).
  - Grant to business: 0.0 (2020), 1.3 (2021), 1.0 (2022).
  - Medical supplies: 0.6 (2020), 0.4 (2021), 0.0 (2022).
  - Other spending: 0.9 (2020), 0.3 (2021), 0.0 (2022).
  - Revenue measures: 0.5 (2020), 0.4 (2021), 0.0 (2022).
  - Total: 5.1 (2020), 4.5 (2021), 1.0 (2022).
  - Tax deferrals: 1.6 (percent of GDP).
- Guarantees and liquidity measures:
  - Government guarantees: disbursed amount 2.3 (percent of GDP).
  - Guarantee Fund of €350 million (2.7%GDP) allocated for loans up to €780 million (6.1%GDP).
  - By May 2021, guarantee scheme had approved €451 million (3¼ percent of GDP) of new working capital loans; 25 percent of these granted to accommodation and foodservice.
- Financial sector measures and outcomes:
  - Measures: loan moratoria, loan guarantee scheme via Malta Development Bank, interest subsidies, restrictions on dividend distribution, real estate support measures.
  - Loan moratoria take-up fell to 1¼ percent of total loans (equivalent to 1 percent of GDP) by May 2021 from a peak of 17 percent in August 2020.
  - Bank credit grew 8 percent y/y in May 2021; excluding guaranteed loans, corporate credit remained flat.
  - Corporate NPLs rose by 1¼ percentage points to 7 percent in 2020; mortgage NPLs at 3½ percent.
  - Core domestic banks maintained capital and liquidity ratios well above regulatory requirements.
  - Bank asset concentration: banks’ exposures to tourism and contact-intensive sectors about 10 percent of total bank loans.
  - Intercompany lending: domestic intercompany lending represented almost 50 percent of total loans to NFCs.
- Housing and prices:
  - House price growth slowed to 3½ percent in 2020.
  - Inflation decelerated from 1½ percent pre-pandemic to near zero at end-2020.

### Outlook and Risks — Baseline and Scenarios
- Baseline assumptions:
  - Further progress in global vaccination and gradual recovery of international tourist arrivals (assumed to recover only gradually, taking a couple of years to return to 2019 level).
  - Digital-intensive sectors (remote gaming, ICT) expected to continue driving growth.
- Growth projections (staff baseline):
  - 2020: -7¾ percent.
  - 2021: 5¾ percent.
  - 2022: 6 percent.
  - Medium-term growth to decelerate to potential rate of 3¼ percent by 2026.
  - GDP projected to reach its 2019 level by end-2022 but with a large negative output gap of -2½ percent of GDP in 2022.
  - Pandemic could leave a permanent loss of 4½ percent of GDP in 2026 (end of staff’s forecast horizon).
- Key downside risks (tilted to the downside):
  - Global resurgence of the pandemic (vaccine-resistant variants); financial risks from rise in US yields; cyber-attacks; uncertainty around long-term scarring to labor markets and capital formation.
  - Domestic vulnerabilities: prolonged FATF grey-list placement affecting correspondent banking relationships (CBR) and FDI; changes in global corporate taxation reducing Malta’s attractiveness.
- Upside scenario:
  - Faster-than-expected recovery if global vaccination proceeds swiftly, boosting confidence and activity.

### Fiscal and Financial Exit Strategy — Sequencing and Recommendations
- General guidance:
  - Fiscal and financial policies should remain flexible and coordinated to avoid “cliff effects.”
  - Most COVID-19 related support measures set to expire by end-2021; if health risks reemerge, some measures may need targeted extension.
- Near-term fiscal stance and projections:
  - COVID-related temporary fiscal measures sizable at 4½ percent of GDP in 2021 (including incentives, subsidies, and planned financial aid to Air Malta).
  - Public investment rising from 4½ percent of GDP in 2020 to 5 percent of GDP in 2021.
  - Policy guidance: fiscal support should continue and be only gradually reduced as recovery takes hold; authorities began tapering the wage supplement scheme in August 2021 while maintaining full support for hardest-hit firms through end-2021.
  - Tax deferral scheme could expire at end-2021 as planned; consideration to continue support to contact intensive sectors if downside risks materialize.
  - Use existing active labor market policies; prioritize upskilling and reskilling workers.
  - Authorities reviewing social protection scheme to improve coverage via enhanced means testing and increased progressivity of net transfers.
- Exit from financial sector support:
  - New applications for guaranteed loans closed at end-September 2021.
  - Loan moratorium scheme to end by end-2021.
  - Guaranteed loan scheme modified to cover new loans to service debt payments to mitigate cliff effects.
  - Guaranteed loans averaged about 5½ years at origin; runoff will proceed gradually.
- Corporate sector monitoring and support:
  - Assess deterioration of corporate balance sheets; consider investment tax credits, subsidized loans, solvency support to viable SMEs.
  - Ensure public support is transparent, time-bound, consistent with overall policy goals, and has a clear exit strategy.
  - Continue partnerships with commercial banks to leverage expertise in assessing business viability.

### Ensuring Long-Term Fiscal Sustainability and Public Investment Management
- Staff baseline fiscal path (assuming expiration/rationalization of most COVID measures by end-2021):
  - Primary deficit: narrow to 5¼ percent of GDP in 2022 and to 1½ percent of GDP by 2026.
  - Public debt: projected to peak in 2023 at 68 percent of GDP and thereafter start falling.
  - Structural deficit (excluding CBI proceeds): reduced from 10 percent in 2021 to 3¼ percent of potential GDP by 2026.
  - Authorities’ commitment: return eventually to a structural fiscal balance and reduce debt-to-GDP ratio to below 60 percent.
  - Staff’s debt sustainability analysis: Malta’s medium-term debt trajectory resilient to most standard adverse macroeconomic shocks, but stress scenarios highlight vulnerabilities (see Appendix I).
- Public investment management:
  - Public investment doubled to 4½ percent of GDP in 2020; authorities envisage public investment around 4–4½ percent of GDP over medium term.
  - Recommendations: boost capacity to absorb EU funds; regularly update a pipeline of well-defined infrastructure projects; adopt guidelines for project appraisal and selection; launch review of infrastructure investment and management framework using IMF’s Public Investment Management Assessment framework.

### Financial Stability, Bank Resilience, and Supervision
- Bank asset quality and resilience:
  - Staff valuation analysis suggests house prices were overvalued by about 5½ percent at end-2020.
  - Banks’ aggregate CET1 ratio under baseline with COVID-related support measures: would decline by 3¾ percentage points from 18.3 percent to 14.6 percent (still well above regulatory requirements).
  - Banks’ exposures to tourism and contact-intensive sectors about 10 percent of total bank loans.
- Supervisory and data recommendations:
  - Maintain prudential standards; require forward-looking creditworthiness assessments, reclassification of loans, and provisions.
  - Continue close monitoring of banks’ financial positions and risk management; ensure continuous updating of expected loss assessments and provisions.
  - Enhance data collection and monitoring to analyze vulnerabilities from intercompany lending; fully utilize the credit registry system (established in 2016).
  - Real estate market support measures to expire in Summer 2021 as planned; consider refining borrower-based macroprudential measures if warranted.

### AML/CFT Reform — Progress and Priority Actions
- Recent timeline and status:
  - July 2019 Moneyval identified significant deficiencies.
  - Authorities stepped up efforts: improved ML/TF risk understanding, enhanced AML/CFT supervision, creation of an Asset Recovery Bureau.
  - Late April 2021: Moneyval recognized progress in technical compliance.
  - June 2021: FATF placed Malta under increased monitoring (“grey list”) due to remaining concerns over effectiveness.
- Priority actions:
  - Ensure availability of accurate and up to date beneficial ownership information and apply appropriate sanctions for non-compliance.
  - Enhance use of financial intelligence to support tax and money laundering cases.
  - Increase FIU’s focus on criminal tax offenses.
  - Designate third-party agents supporting the CBI Program as reporting entities under Malta’s AML/CFT framework.
  - Monitor CBR pressures and address financial integrity and reputational risks, particularly from VFAs, gaming, and the CBI Program.

### Structural Reform Agenda — Productivity, Labor, Insolvency, and Tourism
- Productivity and resource allocation issues:
  - Pre-pandemic labor productivity growth slowed and turned slightly negative.
  - Employment grew faster in sectors with negative productivity growth (e.g., real estate, arts and entertainment), indicating misallocation.
  - Reinvigorate structural reforms to raise productivity and improve resource allocation efficiency.
- Immediate reform priorities:
  - Labor market: prioritize upskilling and reskilling; continue active labor market policies; address skills gaps.
  - Corporate insolvency framework: complete comprehensive insolvency reform plan (establish early warning system, introduce preventive restructuring procedures, revamp insolvency laws, modify liquidation procedure) — plan to complete reform "by mid-next year."
  - Judicial efficiency: strengthen efficiency of the judicial system to support insolvency reform and faster dispute resolution.
- Tourism sector strategy:
  - Return to business as usual appears highly unlikely due to traveler preferences for safety, hygiene, health, and environmental sustainability.
  - Government published "Malta Tourism Strategy 2021-2030" in June 2021 to guide reforms: utilize new digital technologies, enhance greener tourism, improve infrastructure, strengthen attractiveness, and increase value-added.
  - Next step: operationalize strategies and move to take action.
- Digital transformation and decarbonization:
  - EU Recovery and Resilience Facility: Malta has access to €345 million (2½ percent of GDP) in grants; "70 percent" of which will be allocated to digital and environmental programs.
  - Malta ranked "fifth out of the 27 EU Member States" in the Digital Economy and Society Index.
  - R&D public expenditure: "0.6 percent of GDP in 2019" (below EU average of "2.2 percent of GDP").
  - Climate commitments: reduce greenhouse gas emissions by "19 percent (compared to 2005 levels) by 2030"; share of renewable energy in final energy consumption expected to rise "from 8 percent to 11.5 percent by 2030."
  - Staff recommendations: adopt cost-effective emission reduction strategy, foster renewable energies, improve energy efficiency, and promote modal shift in transport.
  - Recovery and Resilience Plan (RRP) priorities: climate neutrality, decarbonizing transport, digitalization, health resilience, education, and institutional framework.
  - Recovery and Resilience Plan component shares cited: Climate 23%; Carbon-neutrality 32%; Digitalization 16%; Health 14%; Education 12%; Institutional framework 3%.

### Annex and Stress Tests — Debt and External Sustainability
- Public Debt and DSA highlights:
  - Pre-pandemic: gross public debt declined from 69 percent of GDP in 2011 to 42 percent in 2019.
  - Pandemic impact: gross public debt rose to 54¾ percent in 2020; projected to rise to 64½ percent in 2021; projected to peak at 68 percent of GDP in 2023 and start declining in 2024.
  - Gross financing needs (GFNs): approach benchmark of 20 percent of GDP in 2021; projected to fall to 7 percent of GDP by 2026.
  - More than 80 percent of outstanding debt is long-term on a residual maturity basis.
- Stress scenarios (selected results):
  - Growth shock: debt would peak at 84 percent of GDP in 2023, about 16 percentage points higher than baseline, then decline to 81 percent in 2026.
  - Primary balance shock: would raise debt ratio by about 4 percentage points relative to baseline over medium term.
  - Interest rate shock: would increase debt ratio by about 3 percentage points relative to baseline over medium term.
  - Combined macro-fiscal shocks: debt ratio would rise to 85½ percent of GDP in 2024, 17 percentage points higher than baseline, and remain on upward trajectory.
- Contingent liabilities scenarios:
  - Financial contingent liability shock: debt ratio projected to rise sharply to 102 percent of GDP in 2023 and decline to 101 percent at end of projection horizon.
  - Government guarantee shock (SOE liabilities): debt-to-GDP would increase to 84 percent in 2023.
  - CBI proceed shock (exclusion of CBI proceeds): debt ratio projected to increase to 70 percent of GDP at the end of the projection horizon, 3 percentage points higher than baseline.
- External position:
  - Net external debt: minus 168 percent of GDP at end-2020.
  - Gross external debt (memorandum): 2019 = 644.7 percent of GDP; 2020 = 697.3 percent of GDP; projected decline to 482.3 percent of GDP by 2026.
  - Current account balance (Percent of GDP): 2019 = 5.7; 2020 = -3.6; 2021 = -2.5; 2022 = -0.3; 2023 = 0.7; 2024 = 1.8; 2025 = 2.6; 2026 = 3.3.
  - Balance of payments forecast (Millions of euros): current account balance 2019 = 779; 2020 = -457; 2021 = -339; 2022 = -45; 2023 = 105; 2024 = 301; 2025 = 466; 2026 = 622.

### Risk Assessment Matrix — Key Risks and Recommended Policy Responses
- Global risks with relative likelihood and policy response:
  - Global resurgence of Covid-19: Relative Likelihood: Medium; Time horizon: ST; Impact: High. Policy Response: continue fiscal and financial support; maintain structural reform momentum.
  - De-anchoring of inflation expectations / rising core yields: Relative Likelihood: Medium. Policy Response: continue close financial supervision.
  - Cyber-attacks: Relative Likelihood: Medium. Policy Response: strengthen cybersecurity framework.
- Malta-specific risks:
  - Prolonged grey listing and incomplete AML/CFT reform: Relative Likelihood: Medium; Impact: High/Medium. Policy Response: intensify efforts to exit grey-list as early as possible.
  - Sharp correction in housing prices: Relative Likelihood: Medium/Low. Policy Response: close monitoring and readjust macro-prudential measures as necessary.
  - Possible changes in international corporate and personal taxation: Relative Likelihood: Medium. Policy Response: strengthen spending efficiency and revenue administration; conduct holistic review of tax system.

### Staff Appraisal — Summary of Recommendations
- Balance near-term support and long-term stability: coordinate fiscal and financial sector policy when unwinding support; extend targeted measures if recovery falters.
- Fiscal consolidation once recovery entrenched: comprehensive review of COVID-related spending while preserving space for public investment.
- Strengthen tax administration and consider holistic tax system review given global minimum corporate tax discussions.
- Continue strengthening management of contingent liabilities and ensure pension system sustainability; promote voluntary occupational and personal pensions and increase effective retirement age.
- Maintain bank supervision vigilance; enhance data collection (intercompany lending, real estate) and provisioning practices.
- Advance structural reforms: upskilling/reskilling, complete insolvency reform "by mid-next year," operationalize Malta Tourism Strategy 2021-2030, and leverage EU funds (including €345 million RRF grants) for digital and decarbonization investments.
- Intensify AML/CFT reforms and demonstrate effectiveness in line with FATF action plan, with priority on beneficial ownership transparency and use of financial intelligence.

*Source: 1mltea2021001 — IMF staff report (excerpts provided).*

### 1. COVID-19 and Tourism Developments _________________________________________________________ 23

### 1. COVID-19 and Tourism Developments

### Context
- Malta’s economy boomed pre-pandemic, with GDP growth averaging 6¾ percent in 2014–2019 (EU average 2 percent).
- Authorities pursued a pro-growth strategy including labor market and power sector reforms and digitalization.
- Key growth engines: information and communications technology (ICT), professional and scientific activities, and remote gaming.
- Malta’s per capita income grew faster than the EU average, halving the income gap from 40 percent a decade ago to 14 percent in 2019.
- Macroeconomic buffers built after the global financial crisis:
  - Public debt fell from over 65 percent of GDP in the early 2010s to 42 percent of GDP in 2019.
  - External debt nearly halved.
  - Banks strengthened with higher capital ratios and lower nonperforming loan (NPL) ratios.
- On June 25, 2021, the Financial Action Task Force (FATF) put Malta under increased monitoring (“grey-list”) due to remaining concerns over aspects of the AML/CFT framework, especially transparency on beneficial ownership information and financial intelligence related to money laundering and tax evasion.

### COVID-19 Impact and Policy Response
Findings on the pandemic evolution and economic effects:
- COVID-19 surged in several waves; strict containment in Spring 2020, relaxation in Summer 2020, renewed surge after the new year holiday season, tightened containment in early March 2021, accelerated vaccination rollout; by end-April daily cases dropped to low single-digits; entry conditions for tourists relaxed June 1; tightened mid-July for unvaccinated tourists; nearly 70 percent of the population were fully immunized at end-July.
- Tourism sector (~16 percent of the economy) collapsed: tourist arrivals fell sharply to around 25 percent of pre-pandemic levels in 2020.
- Real GDP contracted by 7¾ percent in 2020.
- Inflation decelerated from 1½ percent before the pandemic to near zero at end-2020.
- Output grew by 1.9 percent (q/q) in Q1 2021, driven by remote gaming, ICT, public administration, and wholesale and retail trade.
- Consumer and business confidence recovered to pre-COVID-19 levels.

Fiscal and financial policy responses:
- COVID-19 related fiscal measures amounted to 5.1 percent of GDP in 2020; more than half spent on the wage supplement scheme.
- Fiscal balance: surplus of 0.4 percent of GDP in 2019 to a deficit of 10.2 percent of GDP in 2020.
- Public debt rose from 42 percent of GDP in 2019 to 55 percent of GDP in 2020.
- Fiscal support details (implemented for 2020, and approved for 2021 and 2022):
  - Wage supplement scheme: 2.9 (2020), 2.1 (2021), 0.0 (2022) [percent of GDP by year].
  - Short-term social measures: 0.1 (2020), 0.0 (2021), 0.0 (2022).
  - Grant to business: 0.0 (2020), 1.3 (2021), 1.0 (2022).
  - Medical supplies: 0.6 (2020), 0.4 (2021), 0.0 (2022).
  - Other spending: 0.9 (2020), 0.3 (2021), 0.0 (2022).
  - Revenue measures: 0.5 (2020), 0.4 (2021), 0.0 (2022).
  - Total: 5.1 (2020), 4.5 (2021), 1.0 (2022).
  - Tax deferrals: 1.6 (percent of GDP).
  - Government guarantees: disbursed amount 2.3 (percent of GDP); Guarantee Fund of €350 million (2.7%GDP) allocated for loans up to €780 million (6.1%GDP).
  - Total fiscal support including guarantees: 14.4 (percent of GDP) [aggregate measure].
- Financial sector measures:
  - Loan moratoria on repayments on capital and interest.
  - Loan guarantee scheme via Malta Development Bank.
  - Interest subsidies.
  - Restrictions on dividend distribution.
  - Real estate support measures.
  - Take-up of loan moratoria fell to 1¼ percent of total loans (equivalent to 1 percent of GDP) by May 2021 from a peak of 17 percent in August 2020.
  - By May 2021, guarantee scheme had approved €451 million (3¼ percent of GDP) of new working capital loans; 25 percent of these granted to accommodation and foodservice.
- Labor market:
  - Employment initially dropped and unemployment rose after outbreak; employment resumed growing after relaxation of measures.
  - Unemployment fell to around 3½ percent by June 2021.
  - Wage supplement scheme contributed to preventing large-scale layoffs.
  - Signs of labor market tightening with tourism reopening, partly due to reduced inflows of foreign workers.
- Banking sector:
  - Core domestic banks maintained capital and liquidity ratios well above regulatory requirements.
  - Bank credit grew 8 percent y/y in May 2021; excluding guaranteed loans, corporate credit remained flat.
  - Corporate NPLs rose by 1¼ percentage points to 7 percent in 2020; mortgage NPLs at 3½ percent.
  - Provisioning needs and eroding profitability in low-interest environment are challenges.
  - Authorities strengthened capacity for risk analysis and supervision per 2019 FSAP recommendations.
- Housing market:
  - House price growth slowed to 3½ percent in 2020.
- External sector:
  - Current account turned into a deficit of 3½ percent of GDP in 2020, down from a surplus of 5¾ percent in 2019.
  - Deterioration driven mostly by a large fall in net travel receipts and a decrease in investment income inflows, partially offset by reduced goods imports.
  - Capital account broadly unchanged at ½ percent of GDP in 2020; financial account recorded net borrowing position of 2½ percent of GDP in 2020 (first time in seven years).
  - External Balance Assessment: Malta’s external position weaker than medium-term fundamentals in 2020.

### Outlook and Risks
Baseline projections:
- Staff baseline assumes further progress in global vaccination and unleashing of pent-up demand for contact-intensive services.
- International tourist arrivals assumed to recover only gradually, taking a couple of years to return to their 2019 level.
- Digital-intensive sectors (remote gaming, ICT) expected to continue driving growth.
- Growth projections:
  - 2020: -7¾ percent.
  - 2021: 5¾ percent.
  - 2022: 6 percent.
- GDP projected to reach its 2019 level by end-2022 but with a large negative output gap of -2½ percent of GDP in 2022.
- Inflationary pressures expected to remain largely muted.
- Medium-term growth to decelerate to potential rate of 3¼ percent by 2026.
- Pandemic could leave a permanent loss of 4½ percent of GDP in 2026 (end of staff’s forecast horizon).

Key risks (tilted to the downside):
- Primary downside risk: global resurgence of the pandemic (vaccine-resistant variants), potentially requiring costly containment, persistent behavioral changes, reduced export demand (especially tourism).
- Financial risks: rise in US yields could increase global risk premia, straining financial institutions, leveraged firms, and vulnerable households.
- Cyber-attacks risk.
- Uncertainty around long-term scarring to labor markets and capital formation; COVID-related support measures mask full impact on corporate balance sheets.
- Potential scarring in tourism sector and risks of critical labor shortages if travel restrictions persist, due to reduced inflows of foreign workers.
- Domestic vulnerabilities:
  - Prolonged placement in FATF grey-list could adversely affect correspondent banking relationships (CBR) and foreign direct investment (FDI) inflows.
  - Changes in global corporate taxation could reduce Malta’s attractiveness as a financial and business location, lowering FDI inflows and fiscal revenues.
- Upside scenario: faster than expected recovery if global vaccination proceeds swiftly, boosting confidence and activity.

### Policy Discussions: Supporting Strong and Sustainable Recovery and Strengthening Potential Growth
Key challenges:
- Gradually unwind pandemic-related support measures and shift to policies targeted at facilitating resource reallocation to productive and high-growth potential activities.
- Address deficiencies in the AML/CFT framework.
- Pursue structural reforms to strengthen resilience and sustainability of the economy.

A. Shifting Policies to Support Strong Recovery
- (The source begins policy discussion under this heading; substantive recommendations and sequencing follow in subsequent sections of the original chapter.)

*Source: 1mltea2021001 - 1. COVID-19 and Tourism Developments*

### 16.      Both fiscal and financial policies should remain flexible and coordinated. Most of the

### 16.      Both fiscal and financial policies should remain flexible and coordinated. Most of the

### Fiscal and financial exit strategy
- Most COVID-19 related support measures are set to expire by the end of 2021.
- Unwinding of support measures needs to be carefully managed and well-coordinated between fiscal and financial sector policies to avoid “cliff effects” that could derail the recovery.
- If health risks reemerge and the recovery falters, some measures may need to be extended, refocusing on sectors and people still significantly affected by the pandemic.

### Near-term fiscal stance
- Primary deficit:
  - 2020: 9 percent of GDP.
  - 2021: expected to widen to 10½ percent of GDP.
- Public debt:
  - Projected to rise to 65 percent of GDP in 2021.
- COVID-related temporary fiscal measures:
  - Sizable at 4½ percent of GDP in 2021 (including incentives, subsidies, and planned financial aid to Air Malta).
- Public investment:
  - Rising from 4½ percent of GDP in 2020 to 5 percent of GDP in 2021.
- Policy guidance:
  - Fiscal support should continue and be only gradually reduced as the recovery takes hold.
  - Authorities began tapering the wage supplement scheme in August 2021 while maintaining full support for hardest-hit firms through end-2021.
  - The tax deferral scheme could expire at end-2021 as planned; consideration to continue support to contact intensive sectors if downside risks materialize.
  - Use existing active labor market policies; prioritize upskilling and reskilling workers (see ¶31).
  - Authorities reviewing the social protection scheme to improve coverage via enhanced means testing and increased progressivity of net transfers.

### Exit from financial sector support
- Timing and measures:
  - New applications for guaranteed loans closed at end-September 2021.
  - Loan moratorium scheme to end by end-2021.
  - Guaranteed loan scheme modified to cover new loans to service debt payments to mitigate cliff effects.
- Guaranteed loans maturity:
  - Averaged about 5½ years at origin; runoff will proceed gradually.

### Corporate sector monitoring and support
- Concerns:
  - Support measures prevented large-scale bankruptcies but may have caused lasting damage to firms’ equity positions, undermining investment capacity.
- Recommendations:
  - Assess deterioration of corporate balance sheets.
  - Consider additional measures: investment tax credits, subsidized loans, solvency support to viable SMEs.
  - Ensure public support is transparent, consistent with overall policy goals, time-bound, and has a clear exit strategy.
  - Continue partnerships with commercial banks to leverage expertise in assessing business viability.

### Ensuring long-term fiscal sustainability
- Baseline projections (assuming expiration of most COVID-related fiscal measures by end-2021 and rationalization of spending):
  - Primary deficit: narrow to 5¼ percent of GDP in 2022 and to 1½ percent of GDP by 2026.
  - Public debt: projected to peak in 2023 at 68 percent of GDP and thereafter start falling.
  - Structural deficit (excluding CBI proceeds): reduced from 10 percent in 2021 to 3¼ percent of potential GDP by 2026.
- Authorities’ commitments and plans:
  - Return eventually to a structural fiscal balance and reduce debt-to-GDP ratio to below 60 percent.
  - Plan comprehensive review of COVID-19 related spending once the pandemic ends.
- Staff’s debt sustainability analysis:
  - Suggests Malta’s medium-term debt trajectory is resilient to most standard adverse macroeconomic shocks.

### Public investment management
- Context:
  - Public investment doubled to 4½ percent of GDP in 2020.
  - Rapid population growth continues to strain public infrastructure (air, road, water, electricity).
  - Authorities envisage public investment at around 4–4½ percent of GDP over the medium term.
- Recommendations:
  - Boost capacity to absorb EU funds.
  - Regularly update a pipeline of well-defined infrastructure projects.
  - Adopt guidelines for project appraisal and selection as recommended by the 2018 Fiscal Transparency Evaluation.
  - Launch a review of the infrastructure investment and management framework using IMF’s Public Investment Management Assessment framework.

### Long-standing fiscal vulnerabilities — policy actions
- Strengthen tax revenue:
  - Risks include collecting COVID-related deferred taxes (about 1½ percent of GDP in 2020), relatively low tax revenues, and high reliance on corporate income tax.
  - Potential headwinds from proposed global minimum corporate tax; impact depends on calibration yet to be agreed.
  - Authorities should consider a holistic review of the tax system to improve efficiency, minimize distortions and administration and compliance costs, and generate sufficient revenues.
  - Further strengthen tax administration by identifying loopholes, exploiting digitalization, and completing institutional reorganization.
- Manage contingent liabilities:
  - Size of contingent liabilities increased by two percentage points of GDP, reflecting government loan guarantees and support to financially weak SOEs.
  - Part of contingent liability risk would materialize with capital injection to Air Malta.
  - Authorities started disclosing financial statements of SOEs in 2020; need strategies to strengthen SOE financial footing.
- Continue pension reform:
  - 2020 pension review: improvements in adequacy and long-term balance partly from higher contributions from female labor and migrants and delayed retirements.
  - Sharp rise in age-related spending projected from 2040; pension system will turn to deficits by 2050.
  - Recommendations: promote voluntary occupational and personal pensions; increase effective retirement age; complete public consultation on pension reforms and explore reform options.

### Safeguarding financial stability
- Bank asset quality risks:
  - Possible rise in corporate insolvencies when support measures are withdrawn or if recovery falters.
  - Mortgage lending risks: staff valuation analysis suggests house prices were overvalued by about 5½ percent at end-2020.
  - Continued vigilance warranted given concentration of mortgages in banks’ loan portfolios.
  - Intercompany loans:
    - Domestic intercompany lending remained high, representing almost 50 percent of total loans to NFCs.
    - Concerns due to absence of granular information and possible intragroup propagation of vulnerabilities.
- Bank resilience:
  - Banks’ exposures to tourism and contact-intensive sectors about 10 percent of total bank loans.
  - Staff analysis (nine banks) under baseline scenario with COVID-related support measures:
    - Banks’ aggregate CET1 ratio would decline by 3¾ percentage points from 18.3 percent to 14.6 percent, well above regulatory requirements.
- Supervisory and data recommendations:
  - Bank supervisors to maintain prudential standards, require forward-looking creditworthiness assessments, reclassification of loans, and provisions.
  - Continue close monitoring of banks’ financial positions and risk management; ensure continuous updating of expected loss assessments and provisions.
  - Enhance data collection and monitoring to analyze vulnerabilities from intercompany lending; fully utilize the credit registry system (established in 2016).
  - Maintain vigilance on housing market risks and improve data quality.
  - Real estate market support measures to expire in Summer 2021 as planned; consider refining borrower-based macroprudential measures if warranted.

### Pursuing AML/CFT reform
- Recent developments:
  - July 2019 Moneyval identified significant deficiencies in Malta’s AML/CFT framework.
  - Authorities stepped up efforts: improved ML/TF risk understanding, enhanced AML/CFT supervision with new risk-based tools, sector-specific guidance, institutional changes, and creation of an Asset Recovery Bureau.
  - Late April 2021: Moneyval recognized progress in technical compliance with FATF Standards.
  - June 2021: FATF put Malta under increased monitoring (“grey list”) due to remaining concerns over effectiveness of implementation.
- Priority actions:
  - Ensure availability of accurate and up to date beneficial ownership information and apply appropriate sanctions for non-compliance by companies and gatekeepers.
  - Enhance use of financial intelligence to support tax and money laundering cases.
  - Increase Financial Intelligence Unit’s focus on criminal tax offenses.
  - Ensure AML/CFT reforms are sustainable in the long term.
  - Monitor correspondent banking relationship (CBR) pressures and address financial integrity and reputational risks, particularly from high risk sectors and activities (VFAs, gaming, and the CBI Program).
  - Adopt enhanced transparency and mitigation measures for VFAs, gaming, and CBI Program; maintain close supervision of gaming and VFA sectors; designate third-party agents supporting the CBI Program as reporting entities under Malta’s AML/CFT framework.

### Advancing structural reforms for higher and sustainable growth
- Productivity and resource allocation:
  - Pre-pandemic: labor productivity growth slowed and turned slightly negative.
  - Sectoral analysis indicates inefficiency in labor resource allocation: employment grew faster in sectors with negative productivity growth (e.g., real estate and arts and entertainment).
  - Reinvigorating structural reforms to raise productivity and improve resource allocation efficiency is critical for strong, sustainable, and inclusive growth.
  - Authorities have published strategic papers to solicit nationwide efforts to identify and implement growth strategies.
- Immediate priorities (¶31):
  - Labor market policies:
    - Measures over past decade improved educational achievement, student retention, and lifelong/adult learning participation; some progress made.
    - Supply of skilled workers has not kept pace with demand; availability of skilled workers cited as a bottleneck; skill gaps with other European economies projected to widen.
    - Labor market reforms should prioritize upskilling and reskilling workers.
  - Corporate insolvency framework:
    - Anticipating increase in corporate insolvencies, reforms needed to address lengthy liquidation processes, low recovery rates, weak creditor rights, and an inefficient judicial system.
    - Authorities initiated comprehensive insolvency reform plan in line with European Directive on Restructuring and Second Chance, including:
      - Establishing an early warning system.
      - Introducing new preventive restructuring procedures.
      - Revamping insolvency laws.
      - Modifying the liquidation procedure.
    - Plan to complete reform by mid-next year as planned.
    - Strengthen efficiency of the judicial system.

*Source: IMF staff country report text.*

### 32.      Given the economic significance of the tourism sector, the authorities should take

### 1mltea2021001 - 32.      Given the economic significance of the tourism sector, the authorities should take

### Tourism sector: diagnosis and strategic direction
- Tourist arrivals are expected to increase, but "the return to business as usual appears to be highly unlikely" due to travelers’ increased concern about safety, hygiene, health, and environmental sustainability.
- June 2021: the government published "Malta Tourism Strategy 2021-2030" to guide tourism sector reforms, including strategies to:
  - utilize new digital technologies;
  - enhance a greener tourism system;
  - improve tourism infrastructure;
  - strengthen Malta’s attractiveness as a tourist destination;
  - increase value-added in the tourism sector.
- Next step identified: operationalize the strategies and move to take action.

### Digital transformation and decarbonization: funding and priorities
- EU Recovery and Resilience Facility: Malta has access to €345 million (2½ percent of GDP) in grants, "70 percent of which will be allocated to digital and environmental programs."
- Digital transformation and innovation:
  - Malta ranked "fifth out of the 27 EU Member States in the Digital Economy and Society Index."
  - Staff recommendation: continue efforts to update the medium-term national digital strategy and boost public spending in R&D and the innovation ecosystem (noting Malta’s R&D position relative to EU peers).
- Climate change policy and decarbonization targets:
  - Authorities committed under the EU Effort Sharing Regulation to reduce greenhouse gas emissions by "19 percent (compared to 2005 levels) by 2030."
  - Share of renewable energy in final energy consumption expected to rise "from 8 percent to 11.5 percent by 2030."
  - June 2021: authorities published a public consultation document, the "Malta Low Carbon Development Strategy."
  - Staff recommendations: adopt a cost-effective emission reduction strategy, foster renewable energies, improve energy efficiency, and promote a modal shift in the transport sector.

### Governance, judicial efficiency, and AML/CFT
- Governance reforms: authorities have implemented recommendations from the Venice Commission and the Group of States Against Corruption and introduced a comprehensive legislative package (including appointment processes for government and judicial officials).
- Remaining needs:
  - enhance capacity of the Office of the Attorney General;
  - improve the efficiency of the judiciary system.
- AML/CFT:
  - Authorities committed to urgently resolving remaining AML/CFT deficiencies and to implement the FATF action plan.
  - Immediate priorities: put in place a detailed domestically coordinated implementation plan to improve the accuracy of beneficial ownership information, strengthen supervision of gatekeepers, and enhance investigations and prosecutions related to criminal tax and money laundering cases.
  - Staff recommendation: intensify efforts to demonstrate effectiveness in line with the FATF action plan, especially on transparency of beneficial ownership and financial intelligence related to money laundering and tax evasion; continue efforts to mitigate financial integrity and reputational risks in high-risk activities (e.g., virtual financial assets, gaming, and citizenship by investment program).

### Authorities’ views and priorities (summary of officials’ positions)
- Outlook and recovery:
  - Authorities agreed the economic outlook had improved and highlighted strong recovery in gaming, ICT, and professional services; expected tourism to gradually rebound.
  - They viewed risks as broadly balanced, citing high private savings and limited impacts from FATF grey-listing.
- Fiscal policy:
  - Authorities remain committed to fiscal sustainability and intend to embark on fiscal consolidation efforts once economic conditions allow, guided by EU fiscal rules.
  - Authorities are closely following discussions about the global minimum corporate tax and highlighted ongoing efforts to strengthen tax administration.
  - They acknowledged challenges in raising EU fund absorption and are working to improve absorption.
- Financial sector:
  - Authorities view the pandemic’s impact on the financial sector as "well contained," citing low NPL ratios, rapid decrease in moratoria usage, high provisions, and high capital levels.
  - They plan to improve reporting lag and frequency of nonfinancial corporates’ balance sheet data and extend real estate loan data coverage.
- Employment and corporate sector:
  - Authorities recognized labor and skill shortages as risks to competitiveness and recovery.
  - They did not foresee the need for additional corporate support measures but will monitor corporate balance sheet deterioration in tourism and contact-intensive sectors.

### Staff appraisal: macro-financial assessment and policy recommendations
- Economic impact and outlook:
  - The pandemic caused "the deepest recession in decades" for Malta, but macro-financial buffers and bold policy responses mitigated the impact; with reopening for the summer tourism season, "growth is projected to gain momentum in coming months."
  - Risks to the outlook are "tilted to the downside" because the global COVID-19 crisis is not over.
- Unwinding support measures:
  - The pace of unwinding COVID-19 support should balance near-term support for growth and long-term stability; authorities have appropriately begun tapering support measures but must coordinate fiscal and financial sector policies.
  - If recovery falters, some support measures may need targeted extension; closely monitor corporate sector impacts and consider additional measures if needed.
- Fiscal consolidation and public investment:
  - Once recovery is firmly entrenched, fiscal buffers should be gradually rebuilt.
  - Fiscal consolidation should utilize the planned comprehensive review of COVID-related spending while retaining space for public investment to address infrastructure gaps.
  - Continue strengthening tax administration and consider a holistic review of the overall tax system in light of the global minimum corporate tax proposal.
  - Continue efforts to strengthen management of contingent liabilities and ensure pension system sustainability.
- Banking sector vigilance:
  - Banks have remained resilient, but supervisors should continue close monitoring of financial positions, risk management, and provisioning as economic prospects evolve.
  - Enhanced data collection and monitoring are essential for intercompany lending.
  - Support measures for the real estate market should expire "in summer 2021 as planned."
- Structural reforms:
  - Advance labor market reforms focused on upskilling and reskilling workers and leverage active labor market policies to facilitate resource reallocation.
  - Complete ongoing work on the corporate insolvency framework "by mid-next year."
  - Given tourism’s economic significance, authorities "should move to take actions to make the tourism sector stronger and more sustainable."
  - EU funds, including the EU Recovery and Resilience Facility, will support investment in digital transformation and decarbonization.
  - Strengthen the governance framework further, including by enhancing the efficiency of the judiciary system.
- Climate and decarbonization:
  - Staff welcomes authorities’ commitment to EU emission targets and encourages exploiting various sources for decarbonization: investing in renewable sources, upgrading energy efficiency, and modernizing the transport sector.

### Key numeric and timeline facts (preserved exactly)
- €345 million (2½ percent of GDP) — grants available under the EU Recovery and Resilience Facility for Malta.
- "70 percent" — share of the €345 million allocated to digital and environmental programs.
- Malta ranked "fifth out of the 27 EU Member States" in the Digital Economy and Society Index.
- Malta’s R&D public expenditure: "0.6 percent of GDP in 2019" (below the EU average of "2.2 percent of GDP").
- Greenhouse gas emissions reduction target: "19 percent (compared to 2005 levels) by 2030."
- Renewable energy share target: "from 8 percent to 11.5 percent by 2030."
- Malta Tourism Strategy "2021-2030" published in "June 2021."
- Support measures for the real estate market scheduled to expire "in summer 2021 as planned."
- Corporate insolvency framework completion target: "by mid-next year."
- Recovery and Resilience Plan component shares cited: Climate 23%; Carbon-neutrality 32%; Digitalization 16%; Health 14%; Education 12%; Institutional framework 3%.
- GHG Emissions Projections and 2030 Target indicator: "-29%"

*IMF staff report content (excerpts provided).*

### 49.      It is recommended that the next Article IV consultation be held in the standard 12-

### 49. It is recommended that the next Article IV consultation be held in the standard 12-month cycle.

### COVID-19 and Tourism Developments
- Malta experienced multiple waves in COVID-19 infections, prompting adjustments to containment measures.
- Mobility indicator improved with the rapid vaccination of the population (vaccinations reported in charts as "Per 100 people").
- Foreign tourist arrivals have yet to recover and are only partially offset by domestic tourism.
- Tourism GDP is calculated as value added in transportation, trade, accommodation, and entertainment sectors; non-tourism GDP is value added in the other sectors.
- Baseline days are median value for the 5-week period from Jan 3 to Feb 6, 2020.

### Economic Impact of the Global Pandemic Crisis
- Real GDP (year-on-year percent change): Malta showed a strong pre-pandemic expansion followed by a deep recession in 2020 (charted against Euro area).
- Contributions to growth (percentage points) indicated external demand and private consumption weighed most heavily on growth in 2020.
- Employment: employment continued to grow moderately; sectoral employment charts show agriculture, industry, services, and total.
- Inflation: Headline and core inflation moderated; non-energy goods price inflation remained subdued.
- HICP stands for Harmonized Index of Consumer Prices.

### Short-Term Indicators
- Economic Sentiment Indicator: Overall economic sentiment rebounded strongly (Long-term average = 100).
- Consumer confidence and unemployment expectations improved following pandemic lows.
- Business sector indicators: capacity utilization and new orders recovered; industrial production improved.
- Tourism remains in a deep recession with tourist arrivals showing year-on-year percent changes remaining significantly negative.

### Fiscal Developments
- General government balance (percent of GDP): sharp deterioration in 2020 reflecting COVID-19 related expenditures.
- Government debt (percent of GDP) rose sharply in 2020.
- Primary balance: projected to further widen in 2021, followed by gradual fiscal tightening from 2022 onward in line with closing output gaps.
- Long-term: demographic trends may put significant pressure on age-related spending; Malta's reliance on corporate income tax revenues remains well above the EU average.

Key fiscal figures (from Table 2, Percent of GDP):
- Revenue: 2020 = 36.8; 2021 = 36.6; 2022 = 36.2; 2023 = 35.9; 2024 = 35.7; 2025 = 35.6; 2026 = 35.6
- Expenditure: 2020 = 47.0; 2021 = 48.4; 2022 = 42.7; 2023 = 40.7; 2024 = 39.2; 2025 = 38.7; 2026 = 38.3
- Net lending/borrowing (overall balance): 2019 = 0.4; 2020 = -10.2; 2021 = -11.8; 2022 = -6.5; 2023 = -4.8; 2024 = -3.5; 2025 = -3.2; 2026 = -2.8
- Primary balance: 2019 = -8.9; 2020 = -10.4; 2021 = -5.2; 2022 = -3.6; 2023 = -2.3; 2024 = -1.9; 2025 = -1.5
- Public debt (percent of GDP): 2019 = 42.0; 2020 = 54.8; 2021 = 64.6; 2022 = 64.6; 2023 = 66.9; 2024 = 68.1; 2025 = 67.9; 2026 = 67.3

Memorandum fiscal notes:
- Overall balance excl. CBI proceeds: 2019 = -11.1; 2020 = -12.5; 2021 = -7.1; 2022 = -5.4; 2023 = -4.1; 2024 = -3.6; 2025 = -3.2

### Financial Soundness Indicators
- Banking system remains well capitalized; regulatory capital to risk-weighted assets (core domestic banks) increased from earlier years (charted).
- Profitability fell in 2020: return on assets and return on equity declined (charted).
- Nonperforming loans (NPLs) edged up but stayed at low levels with adequate coverage; net NPL as percent of capital stayed below 20 percent.
- Loan-to-deposit ratio remained around 60 percent.
- Banks' exposure to the real estate market continued to be high (share of total loans to the private sector to construction, real estate, house purchase charted).

Selected FSIs and ratios (Table 3 excerpts, Percent):
- Regulatory capital to risk-weighted assets (Total Banks): 2017 = 17.3; 2018 = 18.1; 2019 = 20.1; 2020 = 21.6
- Return on assets (Total Banks): 2017 = 0.7; 2018 = 0.5; 2019 = 0.6; 2020 = 0.0
- Non-performing loans to total gross loans (Total Banks): 2017 = 3.8; 2018 = 3.4; 2019 = 3.2; 2020 = 3.7
- Coverage ratio (Total Banks): 2017 = 43.7; 2018 = 43.5; 2019 = 42.9; 2020 = 52.5
- Customer loans to customer deposits (Total Banks): 2017 = 58.9; 2018 = 60.9; 2019 = 59.5; 2020 = 58.4
- Assets to GDP (Total Banks): 2017 = 196.0; 2018 = 191.4; 2019 = 181.8; 2020 = 202.7

Notes:
- Banks’ total assets amounted to 467 percent of GDP (about €46 billion) at 2016. Core domestic banks account for 47 percent of the banking sector’s total assets.

### External Sector
- Current account balance turned negative in 2020, reflecting weaker external demand and a sharp deterioration in the service balance.
- Service exports dominate total exports; market shares in services improved as global service exports shrank more than Malta’s service exports.
- CPI-based REER appreciated slightly in 2020.
- Net international investment position continued to improve as assets grew.

Balance of payments highlights (Table 4, Millions of euros and Percent of GDP):
- Current account balance (millions of euros): 2019 = 779; 2020 = -457; 2021 = -339; 2022 = -45; 2023 = 105; 2024 = 301; 2025 = 466; 2026 = 622
- Current account balance (Percent of GDP): 2019 = 5.7; 2020 = -3.6; 2021 = -2.5; 2022 = -0.3; 2023 = 0.7; 2024 = 1.8; 2025 = 2.6; 2026 = 3.3
- Trade balance (Goods and services, Millions of euros): 2019 = 2,065; 2020 = 960; 2021 = 1,057; 2022 = 1,460; 2023 = 1,711; 2024 = 2,010; 2025 = 2,275; 2026 = 2,530
- Services balance (Millions of euros): 2019 = 3,649; 2020 = 2,317; 2021 = 3,110; 2022 = 3,313; 2023 = 3,585; 2024 = 3,897; 2025 = 4,182; 2026 = 4,461
- Gross external debt (Percent of GDP, memorandum): 2019 = 644.7; 2020 = 697.3; 2021 = 648.5; 2022 = 601.0; 2023 = 564.1; 2024 = 531.7; 2025 = 505.0; 2026 = 482.3

### Labor Market and Income Inequality Developments
- Labor participation improved across all age groups; female participation, especially prime age, improved fast even amidst the pandemic.
- Unemployment increased in mid-2020 but has since fallen; job creation was relatively strong, especially in full-time jobs.
- Income inequality (Gini coefficients) was lower than euro area peers before the pandemic.
- Risk of poverty or social exclusion in 2019 was comparable with other European countries.

### Selected Economic Indicators and Projections (Table 1)
- Population (millions): 0.5
- Quota (as of Sep. 30, 2020; millions of SDRs): 168.317.1
- National accounts—Real GDP (year-on-year percent change):
  - 2019 = 5.5
  - 2020 = -7.8
  - 2021 = 5.7
  - 2022 = 6.0
  - 2023 = 5.0
  - 2024 = 4.5
  - 2025 = 3.7
  - 2026 = 3.3
- Domestic demand (year-on-year percent change): 2019 = 7.4; 2020 = -2.5; 2021 = 5.3; 2022 = 3.2; 2023 = 3.5; 2024 = 3.1; 2025 = 2.8; 2026 = 2.6
- HICP (period average): 2019 = 1.5; 2020 = 0.8; 2021 = 0.7; 2022 = 1.8; 2023 = 2.0; 2024 = 2.0; 2025 = 2.0; 2026 = 2.0
- Unemployment rate (EU harmonized): 2019 = 3.6; 2020 = 4.3; 2021 = 3.6; 2022 = 3.5; 2023 = 3.5; 2024 = 3.5; 2025 = 3.5; 2026 = 3.5
- Gross national savings (Percent of GDP): 2019 = 27.8; 2020 = 19.2; 2021 = 19.8; 2022 = 22.4; 2023 = 23.3; 2024 = 24.4; 2025 = 25.0; 2026 = 25.5
- Nominal GDP (millions of euros, memorandum): 2019 = 13,590; 2020 = 12,701; 2021 = 13,605; 2022 = 14,672; 2023 = 15,650; 2024 = 16,660; 2025 = 17,635; 2026 = 18,594
- Nominal GDP growth: 2019 = 7.9; 2020 = -6.5; 2021 = 7.1; 2022 = 7.8; 2023 = 6.7; 2024 = 6.5; 2025 = 5.9; 2026 = 5.4

*Source: IMF staff summary of the Malta Article IV consultation materials contained in the supplied content.*

### Annex I. Implementation of IMF Recommendations

### Annex I. Implementation of IMF Recommendations

### Financial Sector
- Immediately tackle shortcomings in the implementation of AML/CFT framework
  - See the AML/CFT section in Annex III.
- Guarantee long-term financial and operational independence of the financial supervisor and increase supervisory capacity
  - See the Financial Sector Supervisory Resources and Independence section in Annex III.
- Address limitations in the crisis management framework
  - See the Safety Nets and Crisis Management section in Annex III.
- Strengthen the understanding of financial risks outside of the banking sector and close remaining data gaps
  - See the Macroprudential Policy section in Annex III.

### Fiscal Policy
- Address long-term spending pressures related to pensions and healthcare
  - The 2020 Strategic Pension Review is ongoing, assessing the adequacy, sustainability, and solidarity of the pension system.
  - The review finds that the principles in the 2015 review remain valid, including a need for a strong active employment policy and third pillar pensions.
  - Policy initiatives are underway to improve workforce planning and services in the healthcare sector.
- Address infrastructure needs and upgrade public investment efficiency
  - Public investment rose in 2020.
  - The government is committed to additional infrastructure projects and raising the utilization of EU finds.
- Ensure sustainability of tax revenues
  - The government prioritized fiscal stimulus to counter the pandemic impacts.
  - Work has started to increase tax compliance and widen the tax base.

### Structural Reforms
- Improve housing affordability
  - House prices moderated.
  - Rent housing benefit will be provided to pensioners and social welfare beneficiaries facing higher rents due to the Rent Reform bill.
  - Financial assistance will be provided to prospective homeowners and tenants according to the beneficiaries’ age, income, and family needs.
- Foster innovation through stronger public investment in human capital and research and development (R&D)
  - The authorities have launched a new stock-taking exercise to review the progress in labor market reforms, in consultation with key stake holders.
  - Limited progress in boosting R&D spending.
- Improve the governance framework to sustain attractiveness for foreign investment
  - The authorities have continued efforts to address shortcomings in their AML/CFT framework.
  - Following the recommendations of the Council of Europe’s Venice Commission and the Group of States Against Corruption, they have introduced a comprehensive legislative package, including with respect to the appointment process of various government and judicial officials.

*Annex I. Implementation of IMF Recommendations*

### Annex V. Risk Assessment Matrix

### Annex V. Risk Assessment Matrix

### Global Risks — Findings and Policy Responses
- Global resurgence of the Covid-19 pandemic
  - Relative Likelihood: Medium
  - Time horizon: ST
  - Impact if Realized: High — "Protracted containment measures and a slower reactivation of the tourism sector would delay the recovery and produce greater scarring effects."
  - Policy Response: "Continue fiscal and financial support measures. Maintain structural reform momentum to spur investment and promote higher productivity growth."

- Disorderly transformations (reallocation impeded by labor market rigidities, debt overhangs, inadequate bankruptcy resolution)
  - Relative Likelihood: Medium
  - Time horizon: ST/MT
  - Impact if Realized: Medium/Low — "Malta’s labor market and corporates have thus far been relatively reliant to the pandemic shock, However, the long-term impact of the crisis on the economy is uncertain, and Malta’s potential growth would be adversely affected."
  - Policy Response: "Pursue structural reforms, particularly in education, labor market, business climate, infrastructure, and insolvency framework, while safeguarding long-term fiscal sustainability and improving the quality of public finances."

- De-anchoring of inflation expectations in the U.S. → rising core yields and risk premia; Fed tightens earlier
  - Relative Likelihood: Medium
  - Time horizon: ST/MT
  - Impact if Realized: Medium/Low — "Malta would be relatively insulated given the public and private sector’s high reliance on domestic financing. However, it is still vulnerable to weaker external demand, lower FDI inflows, and potential indirect financial contagion."
  - Policy Response: "Continue close financial supervision."

- Cyber-attacks on critical infrastructure, institutions, and financial systems
  - Relative Likelihood: Medium
  - Time horizon: ST/MT
  - Impact if Realized: Medium — "Wide-spread cyber-attacks could disrupt payment and financial systems and remote work arrangements."
  - Policy Response: "Continue efforts to strengthen the cybersecurity framework."

### Malta-Specific Risks — Findings and Policy Responses
- Prolonged grey listing and incomplete AML/CFT reform
  - Relative Likelihood: Medium
  - Time horizon: ST/MT
  - Impact if Realized: High/Medium — "Pressure on correspondent banking relationships will continue, and Malta’s attractiveness as a financial and business location may deteriorate."
  - Policy Response: "Intensify efforts to address remaining shortcomings in the AML/CFT framework and exit from the grey-list as early as possible."

- Sharp correction in housing prices
  - Relative Likelihood: Medium/Low
  - Time horizon: ST, MT
  - Impact if Realized: Medium/Low — "Bank and household balance sheets will weaken, leading to widespread distress through an adverse feedback loop of decreased lending and investment affecting financial stability and growth."
  - Policy Response: "Continue close monitoring or risks and readjust macro-prudential measures, as necessary. Risks are largely mitigated by banks’ strong capital and liquidity positions, households’ high financial wealth, and low default rates."

- Possible changes in international corporate and personal taxation
  - Relative Likelihood: Medium
  - Time horizon: ST/MT
  - Impact if Realized: Medium — "Malta’s attractiveness as a financial and business location may deteriorate, weakening fiscal revenues and foreign investment."
  - Policy Response: "Strengthen spending efficiency and revenue administration. Conduct a holistic review of the overall tax system."

*The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood categories: "low" < 10 percent, "medium" = 10–30 percent, "high" = 30–50 percent. "Short term" = within 1 year; "medium term" = within 3 years.*

---

### Annex VI. Measuring Scarring

### Overview and Key Findings
- Scarring drivers: supply factors (permanent loss in physical and human capital accumulation and productivity), demand factors (loss in external demand including tourism), and deteriorating balance sheets of government, households, and corporates.
- Comparative scorecard based on z-scores for 27 EU economies indicates:
  - "The loss in GDP in Malta was much larger than in many other EU countries."
  - "Labor markets have been relatively intact."
  - "There remains uncertainty about long-term scaring in the tourism sector."

### Sectoral Findings (selected)
- Physical capital
  - "The loss in physical capital investment in Malta is broadly comparable with the EU median."
- Labor markets
  - Unemployment rate in Malta: 3.7 percent (currently), "only 0.6 percentage points higher than that at end-2019."
  - EU average unemployment rate: 7 percent (currently), "about 1.2  percentage point higher than the pre-crisis level."
  - Male employment rate: "fell by about 1 percentage point in Malta, similar to other EU countries."
  - Female employment rate: "increased by 1 percentage points in Malta, compared to decreases in many other European countries."
- Balance sheets
  - Government debt increased by 20 percentage points of GDP; expected to remain at around 65 percent of GDP in 2021.
  - Corporate and household debt growth in Malta is lower than in other countries, but "the full impact of the crisis on corporate and household balance sheets have yet to be seen, as they have been protected by government support measures."
  - Risk: "Damages to their balance sheets could result in debt overhang problem."
- Tourism demand shock
  - "Malta is highly dependent on tourism income. It is highly uncertain how the pandemic crisis would affect the pattern of tourism demand."

### Data Definitions Used in Scorecard
- Real GDP: Percent change between the January 2020 WEO forecast and latest projection of the 2021 real GDP (as a percent of 2019 real GDP).
- Real gross capital formation: Percent change between the January 2020 WEO forecast and latest projection of the 2021 real gross capital formation (as a percent of 2019 real gross capital formation).
- Unemployment rate: Difference between latest (mostly 2021:M5) and 2019:M12 unemployment rate.
- Employment rate: Difference between latest (mostly 2021:Q1) and 2019:Q4 employment rate.
- General government debt: Difference between 60 percent and latest projection of the 2021 general government debt (as percent of fiscal year GDP).
- Nonfinancial corporate sector debt: Difference between 2021:Q1 and 2019:Q4 NFC debt (as percent of GDP).
- Household debt: Difference between 2021:Q1 and 2019:Q4 household debt (as percent of GDP).
- Real exports: Percent change between the January 2020 WEO forecast and latest projection of the 2021 real exports of goods & services (as a percent of 2019 real exports of goods & services).
- Tourist Arrivals: Difference between latest (mostly 2021:M5) and 2019:M12 annualized seasonally adjusted monthly tourist arrivals (as percent of population).

---

### Annex VII. Climate Change Mitigation Policy

### Policy Context and Targets
- Malta contributes to the EU’s Nationally Determined Contribution and is bound by EU targets.
- EU targets: reduce greenhouse gas emissions by at least 55 percent (compared to 1990 levels) by 2030 and achieve climate neutrality by 2050.
- Malta-specific target under Effort Sharing Regulation: "a 19 percent reduction (compared to 2005 levels) in non-ETS emissions by 2030."
- Key national documents: Low Carbon Development Vision (2017), National Energy and Climate Plan (NECP, 2019), Waste Management Plan (2021), Long Term Renovation Strategy (2021).
- Low Carbon Development Strategy (LCDS) published June 2021 — proposes measures to achieve carbon neutrality by 2050, uses marginal abatement cost curve modeling, focuses on energy, transport, buildings, industry, waste, water, and agriculture.

### Rationale for Early Investment
- Economic case for upfront investment in sectors with long-term emission reduction potential but higher decarbonization cost (e.g., power and transport):
  - Takes time to decarbonize these sectors — "investment should start earlier to avoid rushed and much costlier decarbonization in the future."
  - Early investment can encourage technological innovation and lower costs (example: offshore wind potential in Malta per the LCDS).
  - In transport, early investments could accelerate modal shift.

### Options to Strengthen Climate Policies
- Review of environmental taxes, noting existing measures:
  - Transport sector: electric vehicle exemption from registration taxes and road circulation fees, registration tax based on a "polluter pays" principle, cash grants for cleaner corporate vehicle fleets, and scrappage grants for inefficient vehicles.
  - Residential housing: corporate tax credits for high-efficiency combined heat and power units.
- "The EU’s 'Fit for 55' package would provide an opportunity for Malta to review its environmental taxes."
- Additional policy instruments for renewables: auctions/tenders, quotas, feebates, and investment grants.

### Decarbonization Priorities and Sector Shares
- Power
  - "34 percent of greenhouse gas emissions in Malta" attributable to power.
  - Malta: relatively high greenhouse gas emission intensity of power generation and one of the lowest shares of renewables in final energy production and consumption in the EU.
  - Malta’s target for renewables: "11.5 percent by 2025" — "remains lower than many EU countries’ targets."
- Transport
  - "30 percent of emissions" attributable to transport.
  - Malta has a low rate of zero and low emission vehicle adoption, and "one of the highest levels of life-cycle CO2 emissions for electric vehicles in the EU."
  - Authorities expect to announce phasing out combustion engine vehicles in line with EU “Fit for 55.”
  - Policy options: promote modal shift to walking and cycling embedded in urban mobility design.

---

### Appendix I. Debt Sustainability Analysis

### Public Debt — Baseline and Near-Term Projections
- Pre-pandemic: gross public debt declined from 69 percent of GDP in 2011 to 42 percent in 2019.
- Pandemic impact:
  - Gross public debt rose to 54¾ percent in 2020.
  - Projected to rise to 64½ percent of GDP in 2021.
  - Public debt projected to peak at 68 percent of GDP in 2023 and start declining in 2024.
- Gross financing needs (GFNs)
  - GFNs approach the benchmark of 20 percent of GDP in 2021.
  - GFNs projected to fall to 7 percent of GDP by 2026.
  - More than 80 percent of outstanding debt is long-term on a residual maturity basis.
- Mitigants: ECB accommodative policy, Pandemic Emergency Purchase Program, EU SURE instrument medium- and long-term loans.

### Contingent Liabilities
- Government guarantees increased to 9 percent of GDP due to COVID guarantee schemes.
- Liabilities of non-financial state-owned enterprises (SOEs): 19 percent of GDP in 2019.
- Public-private partnership contingent liabilities: about 1 percent of GDP.

### Stress Scenarios and Impacts (selected)
- Growth shock
  - Assumptions: reduction of real GDP growth by 5 percentage points per year over 2022–23; 1.2 percentage-point drop in inflation relative to baseline; nominal interest rate increases by 65 and 127 basis points in 2022 and 2023.
  - Impact: "Debt would peak at 84 percent of GDP in 2023, about 16 percentage points higher than in the baseline and close to the high-risk threshold of 85 percent. It would then decline to 81 percent of GDP in 2026."
- Primary balance shock
  - Assumptions: cumulative reduction of 4.4 percent of GDP in the primary balance in 2022–23; 25 basis point increase in the interest rate.
  - Impact: "Would raise the debt ratio by about 4 percentage points relative to the baseline over the medium term."
- Interest rate shock
  - Assumption: sustained increase of 337 basis points in spread throughout the projection period.
  - Impact: "Would increase the debt ratio by about 3 percentage points relative to the baseline over the medium term, and the debt ratio is projected to remain in an upward trajectory."
- Real exchange rate shock
  - Assumption: 13 percent real exchange rate depreciation with pass-through to inflation in 2022.
  - Impact: "Negligibly small impacts on the debt ratio" because public debt is almost entirely denominated in local currency.
- Combined macro-fiscal shocks
  - Combined effect of the four shocks above.
  - Impact: "Debt ratio would rise to 85½ percent of GDP in 2024, 17 percentage points higher than the baseline, and remain on an upward trajectory in the medium term."

### Fiscal Vulnerability Scenarios (contingent liabilities)
- Financial contingent liability shock
  - Assumptions: one-time increase in non-interest expenditures equivalent to 10 percent of the size of the banking sector’s assets; slower real GDP growth (one standard deviation reduction over 2022–23); inflation decreasing by 0.25 percentage points for every one percentage point reduction in growth; interest rate spread rising by 0.25 basis points for every one percent of GDP deterioration in the primary balance.
  - Impact: "Primary balance to minus 29 percent of GDP in 2022" and "debt ratio is projected to rise sharply to 102 percent of GDP in 2023. It would then decline to 101 percent of GDP at the end of the projection horizon."
- Government guarantee shock (SOE liabilities)
  - Assumptions: one-time increase in expenditures equivalent to 50 percent of SOE liabilities; additional shocks follow the financial contingent liability assumptions.
  - Impact: "Debt-to-GDP ratio would increase to 84 percent in 2023, about 16 percentage points higher than the baseline. The debt ratio would then resume a declining trend afterwards, reaching 82 percent of GDP at the end of the projection period."
- CBI proceed shock (exclusion of citizenship-by-investment proceeds)
  - Assumption: completely excluding such proceeds from non-interest revenues and modest increases in interest rate spreads.
  - Impact: "Debt ratio is projected to increase to 70 percent of GDP at the end of the projection horizon, 3 percentage points higher compared to the baseline."

### External Debt Sustainability
- Malta’s external position: "large holdings of external assets" and large gross assets and liabilities (22–23 times GDP).
- External debt composition: "primarily represents stable intercompany lending and liabilities of offshore financial institutions that have limited links to the domestic economy."
- Net external debt: minus 168 percent of GDP at end-2020.
- Projection: net external debt projected to stay broadly stable at around minus 165 percent of GDP over the medium term.
- Drivers: improvement in current account balance (excluding interest payments) offset by a decline in net FDI inflows and slower increase in gross assets.
- Conclusion: "Standard tests suggest that Malta’s external position would be robust to most adverse shocks."

*Source: Annexes V–VII and Appendix I of the IMF staff report for Malta.*

### Appendix Figure I.1. Malta: Public DSA—Risk Assessment

### Appendix Figure I.1. Malta: Public DSA—Risk Assessment

### Debt Profile Vulnerabilities and Heat Map
- Bond spread (long-term bond spread over German bonds, average 13-Feb-21 through 14-May-21): 89 bp
- Bond spread stress-test benchmarks shown: 400 and 600 basis points
- External financing requirement benchmarks shown: 17 and 25 percent of GDP
- Change in the share of short-term debt benchmarks shown: 1 and 1.5 percent
- Public debt held by non-residents benchmarks shown: 30 and 45 percent of total
- External financing requirement definition: sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period
- Heat map cell logic:
  - Green: benchmark not exceeded under specific shock or baseline
  - Yellow: exceeded under specific shock but not baseline
  - Red: benchmark exceeded under baseline
  - White: stress test not relevant or data unavailable
- Debt burden benchmark for highlighting: 85 percent (green if not exceeded, yellow if exceeded under shock but not baseline, red if exceeded under baseline)

### Evolution of Predictive Densities of Gross Nominal Public Debt (in percent of GDP)
- Percentile bands plotted for 2019–2026: 10th-25th, 25th-75th, 75th-90th
- Two distribution types shown: Symmetric Distribution and Restricted (Asymmetric) Distribution
- Restrictions on upside shocks listed:
  - No restriction on the growth rate shock
  - No restriction on the interest rate shock
  - "0 is the max positive pb shock (percent GDP)"
  - No restriction on the exchange rate shock
  - Restrictions on upside shocks: 30, 45, 17%
- Public Debt Held by Non-Residents example values shown: 12, 17, 25, 254 (percent/values as presented in figure context)

### Baseline Scenario — Key Indicators (As of May 14, 2021)
- Sovereign spreads: EMBIG (bp) 72; 5Y CDS (bp) N/A
- Nominal gross public debt (percent of GDP) by year: 2019: 59.0; 2020: 42.0; 2021: 54.8; 2022: 64.6; 2023: 66.9; 2024: 68.1; 2025: 67.9; 2026: 67.3; 2027: 66.7 (note: years shown through 2026 in table)
- Public gross financing needs (in percent of GDP): 2019: 16.3; 2020: 5.0; 2021: 16.2; 2022: 20.0; 2023: 15.1; 2024: 12.4; 2025: 10.7; 2026: 10.1; 2027: 7.1
- Real GDP growth (in percent): 2019: 5.6; 2020: 5.5; 2021: -7.8; 2022: 5.7; 2023: 6.0; 2024: 5.0; 2025: 4.5; 2026: 3.7; 2027: 3.3
- Inflation (GDP deflator, in percent): 2019: 2.4; 2020: 2.3; 2021: 1.4; 2022: 1.3; 2023: 1.7; 2024: 1.6; 2025: 1.9; 2026: 2.1; 2027: 2.1
- Nominal GDP growth (in percent): 2019: 8.1; 2020: 7.9; 2021: -6.5; 2022: 7.1; 2023: 7.8; 2024: 6.7; 2025: 6.5; 2026: 5.9; 2027: 5.4
- Effective interest rate (in percent, defined as interest payments divided by debt stock at end of previous year): 2019: 4.3; 2020: 3.2; 2021: 3.0; 2022: 2.8; 2023: 2.1; 2024: 2.0; 2025: 1.9; 2026: 2.0; 2027: 2.0
- Ratings (Foreign / Local): Moody's A2 / A2; S&P's A- / A-; Fitch A+ / A+

### Contribution to Changes in Public Debt (2019–2026, in percent of GDP)
- Change in gross public sector debt (annual): 2019: -2.4; 2020: -2.8; 2021: 12.8; 2022: 9.8; 2023: 2.3; 2024: 1.2; 2025: -0.2; 2026: -0.6; 2027: -0.6; cumulative: 12.0
- Identified debt-creating flows (annual): 2019: -3.7; 2020: -3.6; 2021: 14.1; 2022: 10.4; 2023: 1.8; 2024: 0.6; 2025: -0.6; 2026: -0.6; 2027: -0.7; cumulative: 10.9
- Primary deficit (annual): 2019: -1.7; 2020: -1.7; 2021: 8.9; 2022: 10.4; 2023: 5.2; 2024: 3.6; 2025: 2.3; 2026: 1.9; 2027: 1.5; cumulative: 24.9
- Primary (noninterest) revenue and grants (percent of GDP): 2019: 37.8; 2020: 37.2; 2021: 36.8; 2022: 36.6; 2023: 36.2; 2024: 35.9; 2025: 35.7; 2026: 35.6; 2027: 35.6; cumulative: 215.6
- Primary (noninterest) expenditure (percent of GDP): 2019: 36.2; 2020: 35.5; 2021: 45.7; 2022: 47.0; 2023: 41.5; 2024: 39.5; 2025: 38.0; 2026: 37.5; 2027: 37.1; cumulative: 240.5
- Automatic debt dynamics (annual contribution): 2019: -2.1; 2020: -1.9; 2021: 4.3; 2022: -2.2; 2023: -3.4; 2024: -3.0; 2025: -2.9; 2026: -2.5; 2027: -2.2; cumulative: -16.2
  - Interest rate/growth differential (annual): -2.1, -1.9, 4.3, -2.2, -3.4, -3.0, -2.9, -2.5, -2.2, cumulative -16.2
    - Real interest rate contribution examples: 1.0, 0.3, 0.8, 0.7, 0.2, 0.2, 0.0, -0.1, -0.1, cumulative 0.8
    - Real GDP growth contribution examples: -3.1, -2.3, 3.5, -2.9, -3.6, -3.1, -2.9, -2.4, -2.1, cumulative -17.0
  - Exchange rate depreciation contribution shown as 0.0 in displayed years
- Other identified debt-creating flows (annual): 0.0; 0.0; 0.9; 2.2; 0.0; 0.0; 0.0; 0.0; 0.0; cumulative 2.2
  - ESM and euro area loans entry: 0.0; 0.0; 0.9; 2.2; 0.0; 0.0; 0.0; 0.0; 0.0; cumulative 2.2
- Residual, including asset changes (annual): 1.4; 0.8; -1.3; -0.6; 0.5; 0.6; 0.4; 0.0; 0.1; cumulative 1.0

### Composition of Public Debt and Alternative Scenarios
- Underlying assumptions (Baseline, Historical, Constant Primary Balance scenarios shown)
  - Baseline Real GDP growth (percent): 2021: 5.7; 2022: 6.0; 2023: 5.0; 2024: 4.5; 2025: 3.7; 2026: 3.3
  - Baseline Inflation (percent): 2021: 1.3; 2022: 1.7; 2023: 1.6; 2024: 1.9; 2025: 2.1; 2026: 2.1
  - Baseline Primary Balance (percent of GDP): 2021: -10.4; 2022: -5.2; 2023: -3.6; 2024: -2.3; 2025: -1.9; 2026: -1.5
  - Baseline Effective interest rate (percent): 2021: 2.8; 2022: 2.1; 2023: 2.1; 2024: 2.0; 2025: 2.1; 2026: 2.1
  - Historical Scenario Primary Balance (percent of GDP): 2021: -10.4; 2022: 0.7; 2023: 0.7; 2024: 0.7; 2025: 0.7; 2026: 0.7
  - Constant Primary Balance Scenario Primary Balance (percent of GDP): -10.4 each year 2021–2026
  - Constant Primary Balance Scenario Effective interest rate examples: 2021: 2.8; 2022: 2.1; 2023: 1.9; 2024: 1.8; 2025: 1.8; 2026: 1.8
- Composition charts shown for:
  - Net debt (percent of GDP) 2019–2026
  - Gross Nominal Public Debt (percent of GDP) 2019–2026
  - Public Gross Financing Needs (percent of GDP) 2019–2026
  - By maturity: Medium and long-term vs Short-term (percent of GDP) 2010–2026
  - By currency: Local currency-denominated vs Foreign currency-denominated (percent of GDP) 2010–2026

### Stress Tests — Scenarios and Results (2021–2026)
- Stress test scenarios and key underlying assumption highlights:
  - Primary Balance Shock scenario: Real GDP growth sequence 5.7, 6.0, 5.0, 4.5, 3.7, 3.3; Inflation sequence 1.3, 1.7, 1.6, 1.9, 2.1, 2.1; Primary balance sequence -10.4, -7.8, -4.4, -2.9, -2.1, -1.7; Effective interest rate sequence 2.8, 2.1, 2.1, 2.0, 2.1, 2.1
  - Real GDP Growth Shock scenario: Real GDP growth sequence 5.7, 1.1, 0.0, 4.5, 3.7, 3.3; Inflation sequence 1.3, 0.5, 0.4, 1.9, 2.1, 2.1; Primary balance sequence -10.4, -7.8, -8.7, -2.3, -1.9, -1.5; Effective interest rate sequence 2.8, 2.1, 2.1, 2.2, 2.2, 2.2
  - Real Interest Rate Shock scenario: Effective interest rate rises to 2.6, 2.9, 3.3, 3.6 in later years; other sequences similar to baseline
  - Real Exchange Rate Shock scenario: Inflation and other variables largely similar to baseline; effective interest rate remains similar to baseline
  - Combined Shock scenario: Real GDP growth sequence 5.7, 1.1, 0.0, 4.5, 3.7, 3.3; Inflation sequence 1.3, 0.5, 0.4, 1.9, 2.1, 2.1; Primary balance sequence -10.4, -7.8, -8.7, -2.9, -2.1, -1.7; Effective interest rate sequence 2.8, 2.1, 2.7, 3.0, 3.4, 3.7
  - Contingent Liability Shock scenarios highlighted:
    - Contingent Liability Shock (example government guarantee shock / CBI revenue shock): Primary balance 2021: -10.4; 2022: -28.9; subsequent years move toward baseline; Effective interest rate sequences show increases (e.g., 2.8, 2.3, 3.8, 3.3, 3.3, 3.2)
- Stress-test outputs plotted include:
  - Gross Nominal Public Debt (percent of GDP) 2021–2026 under baseline and each shock
  - Gross Nominal Public Debt (percent of Revenue) 2021–2026 under baseline and each shock
  - Public Gross Financing Needs (percent of GDP) 2021–2026 under baseline and each shock

### External Debt Sustainability — Bound Tests and Scenario Boxes
- Bound tests and scenarios cover: Baseline, Historical, Interest-rate shock, Growth shock, Current account shock, Combined shock, Real depreciation shock (one-time real depreciation of 30 percent in 2010)
- Notes on shocks:
  - Individual shocks are permanent one-half standard deviation shocks
  - Combined shock applies permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance
- Boxed average projections (figures in boxes) present average projections for the baseline and scenarios alongside ten-year historical averages (exact box values shown graphically in source)
- Example labeled values shown in figure context:
  - Historical: -355
  - Baseline: -166
  - Interest rate shock example box: -167, -166
  - Growth shock example box: -188, -166
  - CA shock example box: -152, -166
  - Combined shock example box: -170, -166
  - Real depreciation shock example box (30% depreciation): -246, -166

*Source: IMF staff.*

### Appendix Table I.1 Malta: External Debt Sustainability Framework, 2016–2026

### Appendix Table I.1 Malta: External Debt Sustainability Framework, 2016–2026

### Baseline: Net external debt (Net external debt, in percent of GDP unless otherwise indicated)
- Line 1 — Baseline: Net external debt (2016–2026): -209.4, -203.2, -179.8, -164.1, -168.4, -167.1, -166.3, -165.7, -165.5, -165.6, -165.9, -8.2 (debt-stabilizing non-interest current account)  
- Line 2 — Change in external debt (2016–2026): 18.9, 6.2, 23.4, 15.8, -4.3, 1.3, 0.8, 0.6, 0.2, -0.1, -0.3

### Identified external debt-creating flows (Lines 3–12)
- Line 3 — Identified external debt-creating flows (4+8+9) (2016–2026): -30.6, 27.4, 6.0, -20.8, -20.3, -2.9, -0.6, -4.0, -5.5, -6.8, -7.5
- Line 4 — Current account deficit, excluding interest payments (2016–2026): 5.5, -0.5, -1.3, -1.1, 9.2, 9.9, 7.6, 6.7, 5.5, 4.7, 4.0
- Line 5 — Deficit in balance of goods and services (2016–2026): -11.1, -16.7, -15.6, -15.2, -6.3, -5.9, -8.1, -9.1, -10.2, -11.1, -11.8
- Line 6 — Exports (2016–2026): 143.1, 141.8, 135.9, 136.5, 130.1, 129.7, 128.2, 125.5, 123.2, 121.1, 119.4
- Line 7 — Imports (2016–2026): 132.0, 125.0, 120.3, 121.3, 123.8, 123.7, 120.1, 116.4, 112.9, 110.0, 107.5
- Line 8 — Net non-debt creating capital inflows (negative) (2016–2026): -43.0, 8.2, -10.4, -19.1, -17.8, -14.6, -13.9, -13.5, -13.2, -12.4, -11.8
- Line 9 — Automatic debt dynamics 1/ (2016–2026): 6.9, 19.7, 17.7, -0.6, -11.7, 1.8, 5.6, 2.9, 2.1, 1.0, 0.3
- Line 10 — Contribution from nominal interest rate (2016–2026): -5.0, -4.4, -4.9, -4.7, -5.2, -4.9, -4.8, -4.8, -4.8, -4.8, -4.9
- Line 11 — Contribution from real GDP growth (2016–2026): 8.8, 15.1, 9.4, 9.7, -11.9, 6.7, 10.4, 7.7, 7.0, 5.8, 5.2
- Line 12 — Contribution from price and exchange rate changes 2/ (2016–2026): 3.0, 9.0, 13.3, -5.6, 5.4, ... (projection line includes the impact of price and exchange rate changes)

### Residuals and financing needs
- Line 13 — Residual, incl. change in gross foreign assets (2-3) (2016–2026): 49.5, -21.2, 17.4, 36.5, 16.0, 4.2, 1.4, 4.5, 5.8, 6.7, 7.2
- External debt-to-exports ratio (in percent) (2016–2026): -146.4, -143.4, -132.3, -120.2, -129.5, -128.9, -129.7, -132.0, -134.4, -136.7, -139.0
- Gross external financing need (in billions of US dollars) (2016–2026): 15.5, 6.1, -3.2, -5.0, -18.0, -1.7, -3.0, -3.6, -4.2, -4.8, -5.3
- Gross external financing need (in percent of GDP) (2016–2026): 132.4, 46.5, -21.4, -32.9, -123.2, 10-Year, 10-Year, -10.2, -16.6, -18.6, -20.3, -21.8, -23.0

### Scenario with key variables at their historical averages
- Scenario series (selected projection years): -167.1, -211.8, -250.2, -286.7, -321.5, -355.0, -42.1

### Key macroeconomic assumptions underlying baseline
- Real GDP growth (in percent) (historical / average / deviation / projections): 4.1, 8.1, 5.2, 5.5, -7.0, 4.3, 4.7, 4.5, 6.8, 5.0, 4.5, 3.7, 3.3
- GDP deflator in US dollars (change in percent): 1.3, 4.5, 7.0, -3.0, 3.4, 0.9, 6.3, 8.4, 2.8, 1.7, 1.9, 2.0, 2.0
- Nominal external interest rate (in percent): 2.3, 2.3, 2.7, 2.7, 3.1, 2.7, 0.4, 3.3, 3.1, 3.1, 3.1, 3.1
- Growth of exports (US dollar terms, in percent): 1.6, 12.0, 7.9, 2.8, -8.4, 3.7, 6.5, 12.9, 8.6, 4.5, 4.5, 4.0, 3.9
- Growth of imports (US dollar terms, in percent): 0.0, 7.0, 8.3, 3.2, -1.8, 3.1, 4.5, 13.2, 6.6, 3.5, 3.3, 3.1, 3.0
- Current account balance, excluding interest payments (percent of GDP): -5.5, 0.5, 1.3, 1.1, -9.2, -5.2, 5.9, -9.9, -7.6, -6.7, -5.5, -4.7, -4.0
- Net non-debt creating capital inflows (percent of GDP): 43.0, -8.2, 10.4, 19.1, 17.8, 50.7, 42.8, 14.6, 13.9, 13.5, 13.2, 12.4, 11.8

### Bound tests (B. Bound Tests)
- B1. Nominal interest rate is at historical average plus one standard deviation (selected years): -167.1, -166.6, -166.3, -166.3, -166.6, -167.2, -8.4
- B2. Real GDP growth is at historical average minus one standard deviations (selected years): -167.1, -170.2, -173.8, -178.0, -182.6, -187.7, -13.4
- B3. Non-interest current account is at historical average minus one standard deviations (selected years): -167.1, -163.4, -160.0, -157.0, -154.4, -152.0, -8.5
- B4. Combination of B1-B3 using 1/2 standard deviation shocks (selected years): -167.1, -166.9, -167.1, -167.7, -168.7, -170.0, -10.8
- B5. One time 30 percent real depreciation in 2006 (selected years): -167.1, -246.2, -245.4, -245.0, -245.1, -245.6, -12.1

### Definitions and methodological notes (selected)
- 1/ Automatic debt dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- 2/ Contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- 3/ For projection, line includes the impact of price and exchange rate changes.
- 4/ Gross external financing need is defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- 5/ Key variables for the historical-averages scenario include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- 6/ Debt-stabilizing non-interest current account: long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year.

*Source: Appendix Table I.1 Malta: External Debt Sustainability Framework, 2016–2026 (from the provided IMF staff report content).*

### 3.      New COVID-19 cases fell from the recent peak, with further progress in vaccine

### 3.      New COVID-19 cases fell from the recent peak, with further progress in vaccine

### COVID-19 epidemiological situation and vaccination
- As of September 8, daily new COVID-19 cases stood at 10 (7-day moving average per 100,000 people), down from the recent peak of 40 in mid-July.
- The authorities have further advanced vaccination, with 80 percent of the total population and 91 percent of the adult population fully immunized as of September 7.
- Thanks to an aggressive vaccination strategy, 90 percent of the population above 12 (80 percent of the total population) was fully vaccinated as of September 6 – one of the world’s highest vaccination rates.

### Macroeconomic outlook and risks
- Prior to the pandemic, Malta was one of the fastest growing economies in Europe, with a GDP growth significantly above the EU average.
- Sectors supporting resilience and recovery:
  - Remote gaming and ICT continued strong performance and limited the pandemic impact.
  - Rebound in tourism is driving a strong recovery.
- Central Bank of Malta projection:
  - Growth at 5.1 percent in 2021, following an 8.3 percent drop last year.
- Authorities’ view on risks:
  - Main downside risk: global resurgence of the pandemic.
  - Authorities see risks broadly balanced and, if anything, somewhat tilted to the upside.
  - Labor shortages may affect recovery pace but are likely temporary due to worldwide travel restrictions and low vaccination rates among home countries.

### Response to the pandemic and recovery strategy
- Immediate priorities: save lives and livelihoods, limit the pandemic’s immediate social and economic impact, and develop plans for a sustainable and transformative post-pandemic recovery.
- Fiscal stimulus and support:
  - Government stimulus measures (including the 2020 Budget measures) amounted to 5.8 percent of GDP in 2020.
  - Main support measures expected to be tapered off during H2 2021 as recovery becomes more established.
  - Authorities note policy response has been effective in supporting firms’ liquidity and equity positions and do not see, so far, the need for additional corporate support measures, while remaining ready to provide further measures if needed.
- Recovery and Resilience Plan (RRP) submitted to the EU in July 2021 with priorities:
  - (a) Address climate neutrality through enhanced energy efficiency, clean energy, and a circular economy.
  - (b) Address carbon neutrality by decarbonizing transport.
  - (c) Foster a digital, smart, and resilient economy.
  - (d) Strengthen the resilience of the health system.
  - (e) Enhance quality education and foster socio-economic sustainability.
  - (f) Strengthen the institutional framework.
- EU funds and institutional changes:
  - Authorities committed to improving EU fund absorption and boosting public spending in research and development.
  - Government has recently set up a new Ministry dedicated to promoting research and innovation and coordinating post-Covid policy strategy.

### Fiscal policy
- Authorities’ assessment:
  - Resolute fiscal response mitigated the economic impact and helped avoid a deeper contraction.
  - Malta used large policy buffers built from years of prudent fiscal management and strong growth.
- Policy stance and future intent:
  - Authorities agree with staff to keep an expansionary fiscal stance in the near term and to carefully prepare gradual unwinding of support measures given ongoing uncertainty.
  - Intend to resume fiscal consolidation efforts once the recovery is fully established.
  - Size of consolidation objectives will consider the pandemic path, possible need for additional targeted support, and likely changes in the EU fiscal rules.
- Corporate tax discussions:
  - Malta does not have a classical corporate tax; any global minimum corporate tax change would require major efforts to tailor the proposed minimum tax to Malta’s peculiar taxation on corporate income.
  - Authorities will follow international discussions and remain committed to strengthening tax revenue and tax compliance.

### Financial sector and AML/CFT framework
- Financial sector performance:
  - Sector has weathered the crisis well due to pre-crisis resilience and pandemic measures.
  - Banking sector remained stable and sound, with banks entering the pandemic with healthy capital levels.
  - No significant rise in NPLs observed so far; rapid decrease in usage of moratoria.
  - Authorities will continue monitoring and evaluate the need for additional actions to ensure financial stability.
- AML/CFT progress and challenges:
  - Significant progress since the July 2019 Moneyval assessment; progress recognized by both staff and Moneyval.
  - Despite progress, FATF placed Malta under increased monitoring.
  - Authorities committed to further enhancing AML/CFT framework and to closely monitor high-risk sectors, including the gaming sector.
  - Actions for gaming sector: ensure higher-risk gaming entities remain subject to periodic supervision in line with AML/CFT compliance standards.
  - Authorities have started working on an action plan to address FATF action points with the aim of quick exit from the FATF grey list.
  - Authorities do not see, in the short term, downside risks to correspondent banking relationships (CBR) and foreign direct investment (FDI) inflows emerging from inclusion in the FATF grey list.

### Structural reforms and labor market
- Authorities broadly agree on the need to advance structural reforms to raise productivity growth and have published strategic papers identifying growth strategies.
- Labor market:
  - Adverse effects have been relatively limited.
  - Wage Supplement Scheme and other measures supported employment.
  - Unemployment rate currently at 3.3 percent, somewhat lower than at end-2019.
  - Female labor participation has recently increased due to initiatives, working arrangements, and tax incentives.
- Skills and education reforms:
  - Reforms to address skills gap include: reducing early-school leaving, Framework for the Education Strategy for Malta 2014-2024, life-long learning strategy, closer collaboration between higher education and industry, vocational education and training (VET), adult learning, and higher priority to mathematics, ICT, and science subjects.
- Digital and tourism strategies:
  - Committed to green and digital transformation; updating the National Digital Strategy to drive digital technologies and reduce the digital divide.
  - Successful vaccination rollout enabled reopening for the summer tourism season.
  - Malta Tourism Strategy 2021-2030 expected to be launched in the coming weeks to strengthen attractiveness and support ambitious changes in the tourism sector.

### Climate change policy
- Context and commitments:
  - Malta’s per-capita emissions levels and per-capita energy consumption are among the lowest in the EU.
  - Authorities committed to reducing greenhouse gas emissions under the EU Effort Sharing Regulation by 19 percent (compared to 2005 levels) by 2030.
- Low Carbon Development Strategy (LCDS):
  - Launched for public consultation; includes measures to reduce emissions in the next 30 years to move towards climate-neutrality.
  - Focus on cost-effective measures given island constraints.
- Specific measures:
  - Working to make public transport more efficient.
  - Launched a draft national strategy for building charging stations for electric cars.
  - Note constraints on land space for renewable energy due to small country size; exploring offshore technology.

*Statement by Domenico Fanizza, Executive Director for Malta, and Annalisa Korinthios, Advisor to Executive Director — September 15, 2021*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mltea2021001.pdf_