## 1. Exit Options from the Fixed Retail Energy Price Policy

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### Context and main drivers
- Output rebound after the pandemic: "12½ percent" in 2021 and "8¼ percent" in 2022; level of output returned to and exceeded pre-pandemic trajectory.
- Recovery drivers: fiscal support, reopening rebound in tourism, momentum in domestic private demand, large inflows of foreign workers, and limited pass-through from monetary policy interest rates to domestic retail lending rates.
- Pre-2022 energy arrangement: long-term fixed price contract for LNG imports maintained retail energy prices at 2014 levels; contract expired in March 2022 leading to a substantial price increase and a government freeze of retail energy prices by fully compensating energy company losses.
- Key domestic challenge: wide-ranging energy subsidies have deteriorated public finance positions; capacity constraints and skills shortages in the workforce are growing concerns.

### Recent macroeconomic developments
- Growth and sectoral dynamics:
  - Output growth: "6½ percent y/y" for the first three quarters of 2023 (vs "8¼ percent" in 2022).
  - Net exports driven by strong service exports were the key driver in 2023.
  - Sectoral: ICT, trade and tourism, and construction recovery moderated; remote gaming and professional services continued robust growth.
  - Gross capital formation contracted after nearly "30 percent" growth in 2022 due to large aircraft investments.
- Labor market:
  - Employment grew by "5 percent y/y" in 2023:Q2, with significant contributions from immigrant workers.
  - Unemployment was "2.5 percent" in October 2023.
- Inflation:
  - Headline HICP inflation: "4.2 percent y/y" in October 2023.
  - Core inflation (HICP excluding energy and processed food): "4.5 percent y/y" in October 2023.
  - Peak headline inflation in 2022:Q4: "7½ percent".
  - Fixed energy price policy helped contain headline inflation relative to the euro area during the peak of global energy inflation.
- Fiscal:
  - Overall fiscal deficit in 2022: "5.6 percent of GDP" (slightly above budget forecast of "5.4 percent of GDP").
  - First nine months of 2023: revenue collections were up "16 percent y/y".
  - Staff project fiscal deficit to narrow to "4¾ percent of GDP" in 2023.
  - Selected table highlights (Percent of GDP where shown):
    - Revenue series: "37.3 35.7 35.5 38.1 33.7 35.7 35.0".
    - Expenditure series: "35.4 45.3 42.9 43.6 39.3 40.7 39.9".
    - Overall balance series: "1.9 -9.6 -7.4 -5.4 -5.6 -5.0 -4.8".
    - Primary balance series: "3.4 -8.3 -6.3 -4.4 -4.7 -3.8 -3.7".
    - Structural balance series: "0.4 -5.7 -6.6 -4.9 -5.9 -4.9 -5.4".
    - Public debt series: "43.7 52.2 53.9 58.6 51.6 54.5 52.2".
  - Memorandum items: COVID-19 related fiscal measures "...4.9 4.6 1.6 1.9 0.3 0.1"; Energy subsidies "....1.4 2.6 1.7 1.4"; Air Malta restructuring ".........0.9 0.5 0.5"; Total "...4.9 4.6 3.0 5.4 2.5 2.0".
- Financial sector:
  - Bank credit growth remained robust; limited pass-through from ECB policy to Maltese retail rates.
  - Core banks’ return on equity: "11 percent" in 2023:Q2.
  - Common equity Tier 1 capital ratio: "about 20 percent".
  - Leverage ratio: "7 percent".
  - Liquidity coverage ratio: "nearly 400 percent".
  - Non-performing loans fell to "2.6 percent" in 2023:Q2.
- Real estate:
  - Residential property price growth decelerated to "4½ percent y/y" in 2023:Q2 (from an average of "6¾ percent" in 2022).
  - Staff estimate house prices broadly in line with fundamentals.
- External sector:
  - Current account moved from a surplus of "1¼ percent of GDP" in 2021 to a deficit of "3 percent" in 2022 due to widened goods deficit (higher energy prices, aircraft imports) partially offset by a services surplus.
  - Preliminary 2023:H1 estimates suggest improvement due to robust services exports.
  - Malta’s external position in 2023 expected to be broadly in line with medium-term fundamentals.

### Outlook and projections
- Short-term projections:
  - Growth: "6¼ percent" in 2023 and "5 percent" in 2024.
  - Output gap: positive "1 percent of potential GDP" in 2024.
  - Inflation: expected to remain persistent and above "2 percent" until late 2025.
- Medium-term:
  - Staff estimate of medium-term potential growth: "3½ percent", versus pre-pandemic "2012–19 average of 7 percent".
  - Per capita income gap relative to the euro area expected to narrow from "19 percent" in 2022 to "11 percent by 2030".
- Risks (tilted to the downside; Annex IV reference):
  - External: escalation of Russia’s war in Ukraine or the Israel-Gaza conflict affecting commodity prices; deeper-than-expected downturn in Europe; monetary policy miscalibration triggering wage-price spiral; cyberattack risk.
  - Domestic: stronger and more persistent wages and inflationary pressures; money laundering/terrorist financing risks affecting correspondent banking relations and FDI inflows; uncertainties from EU Minimum Tax Directive (Pillar II).
  - Upside: easing global commodity price pressures; green transition opportunities lowering energy costs and enhancing energy security.

### Analysis of the fixed energy price policy and fiscal implications
- Fixed retail energy price policy (freezing retail electricity and fuel prices by fully compensating state-owned energy companies for losses):
  - Helped contain headline inflation relative to the euro area during the peak of global energy inflation.
  - Imposed a significant fiscal cost, contributing to higher deficits and public spending pressures in 2022 and 2023.
- Fiscal pressures in 2022 included increased energy subsidies and early retirement compensation for Air Malta employees; first nine months of 2023 saw reduced Air Malta support and energy subsidies as market prices fell.

### Policy recommendations and priorities (high level)
- Fiscal sustainability:
  - Accelerate fiscal consolidation plans to support disinflationary efforts.
  - Gradually exit from the current fixed energy price policy while protecting vulnerable groups.
- Monetary and financial stability:
  - Maintain financial stability given high bank capitalization, strong liquidity, and low NPLs.
  - Monitor pass-through risks from ECB policy and vulnerabilities in mortgage and NFC lending.
- Structural reforms:
  - Address capacity constraints and skills shortages in the workforce.
  - Boost productivity-enhancing reforms to raise the "3½ percent" medium-term potential growth estimate.
  - Leverage the green transition to lower energy input costs and enhance energy security.
- Risk mitigation:
  - Strengthen anti–money laundering and counter-terrorist financing frameworks to safeguard correspondent banking relations and FDI inflows.
  - Prepare contingency measures for external shock scenarios (commodity price spikes, regional conflicts, cyber risks).

### Fiscal outlook, deficits, and debt projections
- 2024 Budget envisages reduction in overall deficit from "5 percent of GDP" in 2023 to "4½ percent of GDP" in 2024.
- Energy subsidies will remain large at "1¾ percent of GDP", accounting for about "40 percent of the overall deficit".
- Structural balance expected at a deficit of "4¼ percent of GDP" in 2024 (compared to a surplus of "½ percent of GDP" pre-pandemic "2017–19 average").
- Authorities plan to gradually reduce the overall deficit to "3 percent of GDP by 2027", assuming sustained strong growth and a substantial reduction in energy prices.
- Financing risk appears limited due to a strong domestic investor base and high appetite for government securities.
- Staff and authorities’ fiscal projections (Percent of GDP; selected series by year labels implied):
  - Revenue: "37.3 (2020), 35.7 (2021), 35.5 (2022), 33.7 (2023), 35.0 (2024 Staff), 35.0 (2024 DBP), 34.0 (2025 Staff), 34.0 (2025 DBP)".
  - Expenditure: "35.4 (2020), 45.3 (2021), 42.9 (2022), 39.3 (2023), 39.9 (2024 Staff), 40.0 (2024 DBP), 38.5 (2025 Staff), 38.5 (2025 DBP)".
  - Overall balance: "1.9 (2020), -9.6 (2021), -7.4 (2022), -5.6 (2023), -4.8 (2024 Staff), -5.0 (2024 DBP), -4.4 (2025 Staff), -4.5 (2025 DBP)".
  - Primary balance, Structural balance, Primary structural balance, Public debt: see series in full text.
- Debt trajectory and risks:
  - Public debt projected to rise from "52 percent of GDP" in 2022 to about "57 percent" in 2026 before stabilizing (compared with "40 percent of GDP" in 2019).
  - If energy prices stay at currently high levels, public debt would continue to rise and reach "60 percent" over time.
  - Contingent liabilities (~"7 percent of GDP"), mostly government guarantees for SOEs, add further risk.

### Suggested fiscal adjustment and measures
- Staff view: an additional adjustment totaling "1½ percent of GDP" over 2024–25 aimed at reducing the deficit to "3 percent of GDP by 2026".
  - Assumption: fiscal multiplier of "0.5" for spending and "0.1" for revenue administration; additional tightening of "1½ percent of GDP" would reduce GDP by around "½ percent".
- Suggested measures (Percent of GDP; table totals):
  - Reducing energy subsidies by two-thirds: "0.4 (2024), 0.6 (2025), Total 1.0".
  - Strengthening revenue administration: "0.2 (2024), 0.2 (2025), Total 0.4".
  - Improving spending efficiency: (no split provided).
  - Total: "0.6 (2024), 0.8 (2025), Total 1.4".
- Staff recommendation (Box 1): partial adjustment over next two years by cutting subsidies by two-thirds; estimated inflationary impact: "around 1 percent" over the next two years (noting sensitivity to market prices).

### Exit options from the fixed retail energy price policy (operational guidance)
- Fiscal priority: substantially rationalize energy subsidies while exploring broader revenue and spending measures.
- Problems with fixed price policy:
  - Distorts price signaling, disincentivizes energy savings and green investment.
  - Impedes progress toward environmentally-sustainable economic growth.
  - Limits fiscal space for reallocating resources to productivity-enhancing reforms.
- Staff exit strategy guidance:
  - Prepare a predictable and gradual exit mindful of consumer impacts; balance easing short-term pressures and timely fiscal benefits.
  - Box 1 recommended approach:
    - Begin with adjusting fuel prices to better reflect import costs in line with pre-crisis practices.
    - Allow greater pass-through of prices with targeted cash transfers to low-income households and, to a lesser extent, middle-income households, and with temporary financial support for energy-intensive firms conditional on energy efficiency efforts.
    - Alternatively, make the electricity tariff structure more progressive by subsidizing a “minimum household consumption level” and below while applying cost-recovery pricing above this level.

### Increasing expenditure efficiency and revenue administration
- Spending efficiency priorities:
  - Launch a spending review to assess durability of departmental budget cut measures and identify scope for rationalizing recurrent spending.
  - Sustain efforts to improve efficiency of public investment, including green investment, drawing on IMF PIMA and Climate-PIMA.
  - Strengthen public procurement by streamlining vetting, accelerating digitalization, and implementing a risk-based approach.
- Revenue administration reform (MTCA modernization; IMF TA ongoing):
  - Strengthen operational autonomy and governance of MTCA.
  - Develop strategies to mitigate compliance and enterprise risks.
  - Institute a large taxpayer office.
  - Introduce an integrated tax administration IT system.
  - Advance the merger of customs and tax administration.
  - Continued IMF TA required for transformation.

### Corporate Income Tax (CIT) reform priorities
- Context:
  - Statutory CIT rate for domestic enterprises: "35 percent" (flat rate); refund system allows shareholders of Maltese MNEs to claim refund of "6/7th" of tax paid, reducing ETR to "5 percent".
  - EU Minimum Tax Directive (Pillar II) will reduce Malta’s tax advantage for large MNEs over time.
- Key reform recommendations:
  - Develop a well-structured roadmap for phased CIT reform implementation that includes PIT reform because of CIT–PIT interactions.
  - Sequence reforms to mitigate distortion given three tax groups created by EU directive: (i) MNEs within Pillar II (subject to "15 percent ETR"); (ii) MNEs outside Pillar II (subject to "5 percent ETR"); (iii) domestic enterprises (subject to "35 percent ETR").
  - For in-scope MNEs, consider introducing a Qualifying Domestic Minimum Top-up Tax (QDMTT).
  - Consider phasing out the tax refund system over time (example: reduce "6/7th to 5/7th" in a first step) and reduce statutory rate from "35 percent".
  - Review tax expenditures and introduce Qualified Refundable Tax Credits for externalities (R&D, green transition).
- Illustrative revenue impact (TA note; assumptions stated):
  - Assuming new statutory tax rate of "25 percent" (down from "35 percent"), refund rate of "5/7th" (down from "6/7th"), and semi-elasticity of "4", the revenue impact is estimated at around "2¼ percent of GDP".

### Contingent liabilities, demographics, and SOE governance
- Government guarantees for SOEs decreased from "about 9 percent of GDP" in 2020 to "7 percent of GDP" in 2022.
- Air Malta restructuring: anticipated to conclude in 2024; government will invest "€2–15 million (1.1 percent of GDP)" in the new national airline.
- Demographics:
  - EC 2021 Aging Report projects aging costs broadly flat until 2040 at "around 18 percent of GDP" but accelerating to "26 percent by 2070".
  - Projections sensitive to immigration patterns and retired migrants.

### Safeguarding financial stability and macroprudential measures
- Financial system features:
  - Banks dominate with total bank assets around "2.4 times GDP".
  - Household indebtedness: "57 percent of GDP"; household assets above "200 percent of GDP".
  - Mortgage loans exceed half of resident bank loans; variable-rate mortgages: "80 percent" of total.
  - NFC debt around "140 percent of GDP" (unconsolidated); NFC consolidated debt about "63 percent of GDP"; NFC financial asset holdings around "230 percent of GDP".
- CBM stress-test results:
  - Under stress scenarios, all core banks can absorb losses and meet capital requirements with ample buffers.
  - LCR: all core banks and most non-core banks maintain LCR above "100 percent" even under bank-run type deposit withdrawal scenarios; some small non-core banks may fall below "100 percent" LCR depending on scenario severity.
- Macroprudential measures:
  - Sectoral systemic risk buffer (SSyRB) targeting residential mortgage exposures: "1 percent from end-September 2023", increasing to "1.5 percent from end-March 2024".
  - Countercyclical capital buffer (CCyB): staff consider current zero setting appropriate.
  - Borrower-based measures (BBMs) including LTV, stressed debt-service-to-income, and maturity limits remain largely unchanged since 2019; a review of effectiveness and appropriateness is recommended.
- Policy guidance:
  - Ensure banks closely assess how inflation and financial conditions affect vulnerable borrowers and update credit risk provisions.
  - Monitor price developments in residential and commercial real estate.
  - Increase resources towards cyber security to achieve compliance with the EU’s Digital Operational Resilience Act (effective in 2025).

### AML/CFT, anti‑corruption, and governance
- AML/CFT developments:
  - 2023 AML/CFT National Risk Assessment finds a decline in residual risk across most sectors, including gaming and company service providers.
  - Resources for AML/CFT supervisors and regulators have been significantly bolstered; collaboration mechanisms enhanced.
  - Malta joined the EU Beneficial Ownership Registers Interconnection System.
  - Suspension of general public access to the beneficial ownership registry following the 2022 EU Court of Justice ruling; implications should be assessed and mitigations developed if warranted.
- Anti‑corruption progress and gaps:
  - Adoption of a National Anti-Fraud and Corruption Strategy; justice reforms and steps to strengthen judicial independence.
  - Remaining needs: reform Chief Justice appointment process; strengthen Permanent Commission Against Corruption; reduce length of proceedings/investigations of high-level corruption cases; prevent conflicts of interest; strengthen asset declaration supervision (including publication for Members of Parliament and coverage for spouses and children).

### Structural reforms, productivity, skills, and climate
- Structural concerns:
  - Past growth driven more by increased labor inputs than productivity growth.
  - High immigration; population density increased by nearly "25 percent" over the past decade.
  - Infrastructure and public services provision has not kept up with population growth.
- Recovery and Resilience Plan (RRP):
  - RRP supports green and digital transition and reforms in judiciary, governance, early school leaver problems, and healthcare.
  - As of early October (year in text): "€93 million out of a total of €328 million (1¾ percent of GDP, all grants) have been disbursed", with "19 out of 138 milestones and targets achieved".
- Innovation and R&D:
  - Strengths: digitalization, ICT use, intellectual assets; gaps: government support for business R&D, venture capital, product and business process innovation, R&D expenditures.
  - Government adopted Smart Specialization Strategy for 2021–27; 2024 Budget includes measures to support venture capital and start-ups.
- Skills and education:
  - Chronic shortages in financial services, ICT, and gaming; weak education outcomes; high turnover of foreign skilled labor.
  - Recommendations: upskilling/reskilling, strengthen education quality, address decline in graduates in science and engineering, improve adult learning uptake for low-skilled, and enhance outcomes for students with immigrant backgrounds.
- Climate and energy:
  - Malta among lowest GHG emitters per capita in EU but faces challenge meeting "19 percent" effort-sharing reduction by 2030 as emissions in effort-sharing sectors expected to rise by "about 50 percent".
  - Electricity consumption (per capita) increased in past two years in part due to fixed energy price policy.
  - Major infrastructure: second interconnector with Italy to be completed by "2025"; potential large-scale offshore wind farms.
  - Staff recommend allowing greater pass-through of market energy prices to consumers and, in medium term, consider raising excises on fuels to prepare for EU ETS II (effective in "2027") and revision of EU Energy Tax Directive.
  - Staff estimate climate mitigation investment requirement of approximately "4 percent of GDP annually" (noting significant portion may be private sector).

### Social outcomes and poverty
- Income inequality increased to above the EU average (after social transfers) in 2022.
- Share at risk of poverty steady at "around 17 percent", similar to EU average, but worsened for elderly populations.
- Recommendation: closely monitor inequality and poverty risk, with focus on pensioners; assess effectiveness of social protection.

### Authorities’ views (summarized)
- Economic outlook: expect steady expansion in 2023 and 2024 at more moderate pace; project inflation to remain persistently high, above "2 percent", until late 2025; wage inflation to pick up somewhat; house prices expected to decelerate broadly in line with fundamentals.
- Fiscal: committed to keeping public debt below "60 percent of GDP"; MFE plans to reduce overall deficit by "0.5 percentage points of GDP a year" to reach "3 percent of GDP by 2027".
- Energy policy: authorities consider fixed energy price policy imperative to economic and social stability and plan to maintain it; planned renewable investments expected to reduce energy prices and fiscal costs over the medium term.
- Tax policy: working on strategy for implementing EU’s Directive on OECD Pillar II; tax reform should be revenue-neutral, maintain competitiveness, and comply with EU state aid rules.
- Financial system: view that system remains robust with capital and liquidity buffers; cyber security is a key risk.
- Governance and AML/CFT: authorities report boosted judiciary capacity and a robust AML/CFT framework; 2023 NRA found lower ML/TF risks in gaming and virtual financial asset operators.

### Staff appraisal and recommended next steps
- Macroeconomic appraisal:
  - Recovery impressive; strong output and employment growth contributed to demand pressures and capacity constraints.
  - Growth expected to moderate but remain solid in 2024 amid weaker external demand and waning pent-up demand.
  - Risks tilted to the downside from geopolitical conflict escalation.
- Fiscal policy recommendations:
  - Consider accelerating fiscal consolidation to support disinflation and rebuild buffers.
  - Substantially rationalize and phase out energy subsidies with a prepared exit strategy to mitigate economic and social impacts.
  - Continue modernizing revenue administration; rationalize recurrent spending; enhance public investment efficiency (particularly green); strengthen public procurement.
- Tax reform:
  - CIT reform increasingly urgent given EU Pillar II directive.
  - Authorities should develop a well-structured roadmap for phased CIT reform in consultation with stakeholders and announce it by late 2024; roadmap should include PIT reform.
- Structural reforms:
  - Strengthen judiciary, AML/CFT, anti-corruption measures, R&D and innovation support, and skills/upskilling policies to boost productivity and achieve sustainable, inclusive growth.

*International Monetary Fund — Malta: 1. Exit Options from the Fixed Retail Energy Price Policy (chapter content).*

### 1. Exit Options from the Fixed Retail Energy Price Policy _________________________________________ 15

### 1. Exit Options from the Fixed Retail Energy Price Policy

### Context and main drivers
- Malta experienced a rebound after the pandemic with output growth of 12½ percent in 2021 and 8¼ percent in 2022; the level of output has returned to and exceeded its pre-pandemic trajectory.
- Recovery drivers: fiscal support, reopening rebound in tourism, momentum in domestic private demand, large inflows of foreign workers, and limited pass-through from monetary policy interest rates to domestic retail lending rates.
- Prior to the energy crisis in 2022, a long-term fixed price contract for LNG imports maintained retail energy prices at 2014 levels. The contract expired in March 2022, resulting in a substantial increase in prices; the government froze retail energy prices (including fuels and electricity) by fully compensating energy company losses.
- Key domestic challenge: wide-ranging energy subsidies have deteriorated public finance positions; capacity constraints and skills shortages in the workforce are a growing concern.

### Recent developments and macroeconomic performance
- Output growth remained strong at 6½ percent y/y for the first three quarters of 2023, compared to 8¼ percent in 2022. Net exports, driven by strong service exports, were the key driver.
- Sectoral dynamics: ICT, trade and tourism, and construction recovery moderated; remote gaming and professional services continued robust growth. Gross capital formation contracted after nearly 30 percent growth in 2022 due to large aircraft investments.
- Labor market: employment grew by 5 percent y/y in 2023:Q2, with significant contributions from immigrant workers. Unemployment was 2.5 percent in October 2023. Broader labor market slack indicators point to a continued reduction in the underutilized labor force.
- Inflation: headline HICP inflation was 4.2 percent y/y in October 2023; core inflation (HICP excluding energy and processed food) was 4.5 percent y/y in October 2023. At its peak in 2022:Q4, Malta’s headline inflation was 7½ percent, below 10 percent in the euro area. The fixed energy price policy helped contain headline inflation relative to the euro area over the past year, though the negative gap has recently faded as euro area energy inflation receded.
- Fiscal: overall fiscal deficit in 2022 was 5.6 percent of GDP (slightly above the budget forecast of 5.4 percent of GDP). For the first nine months of 2023, revenue collections were up 16 percent y/y. Staff project the fiscal deficit to narrow to 4¾ percent of GDP in 2023.
  - Table highlights (selected): Revenue 37.3 35.7 35.5 38.1 33.7 35.7 35.0; Expenditure 35.4 45.3 42.9 43.6 39.3 40.7 39.9; Overall balance 1.9 -9.6 -7.4 -5.4 -5.6 -5.0 -4.8; Primary balance 3.4 -8.3 -6.3 -4.4 -4.7 -3.8 -3.7; Structural balance 0.4 -5.7 -6.6 -4.9 -5.9 -4.9 -5.4; Public debt 43.7 52.2 53.9 58.6 51.6 54.5 52.2.
  - Memorandum items: COVID-19 related fiscal measures ...4.9 4.6 1.6 1.9 0.3 0.1; Energy subsidies .........1.4 2.6 1.7 1.4; Air Malta restructuring .........0.9 0.5 0.5; Total...4.9 4.6 3.0 5.4 2.5 2.0.
- Financial sector: bank credit growth remained robust; pass-through from ECB policy to Maltese retail rates limited. Bank interest rates on NFC loans rose but less than other euro area countries; mortgage rates broadly flat. Core banks’ return on equity reached 11 percent in 2023:Q2; common equity Tier 1 capital ratio about 20 percent; leverage ratio 7 percent; liquidity coverage ratio nearly 400 percent. Non-performing loans fell to 2.6 percent in 2023:Q2.
- Real estate: residential property price growth decelerated to 4½ percent y/y in 2023:Q2, down from an average of 6¾ percent in 2022; price-to-income ratio declined. Staff estimate house prices broadly in line with fundamentals.
- External sector: current account turned from a surplus of 1¼ percent of GDP in 2021 to a deficit of 3 percent in 2022 due to a widened goods deficit (higher energy prices, aircraft imports) partially offset by a services surplus. Preliminary 2023:H1 estimates suggest improvement due to robust services exports. Malta’s external position in 2023 expected to be broadly in line with medium-term fundamentals.

### Outlook and projections
- Short-term projections:
  - Growth projected at 6¼ percent in 2023 and 5 percent in 2024.
  - Economy expected to remain above capacity with a positive output gap of 1 percent of potential GDP in 2024.
  - Inflation expected to remain persistent and above 2 percent until late 2025.
- Medium-term:
  - Staff estimate of Malta’s medium-term potential growth is 3½ percent, compared with a pre-pandemic 2012–19 average of 7 percent.
  - Per capita income gap relative to the euro area expected to narrow from 19 percent in 2022 to 11 percent by 2030.
- Risks: outlook tilted to the downside (Annex IV).
  - External downside risks: escalation of Russia’s war in Ukraine or the Israel-Gaza conflict affecting global commodity prices; deeper-than-expected downturn in Europe; monetary policy miscalibration among major central banks triggering a wage-price spiral and financial market spillovers; cyberattack risk.
  - Domestic risks: stronger and more persistent wages and inflationary pressures; money laundering/terrorist financing risks affecting correspondent banking relations and FDI inflows; uncertainties from the EU’s Minimum Tax Directive (Pillar II).
  - Upside possibility: easing global commodity price pressures; green transition opportunities lowering energy costs and enhancing energy security.

### Analysis of the fixed energy price policy and fiscal implications
- The fixed retail energy price policy (freezing retail electricity and fuel prices by fully compensating state-owned energy companies for losses) has:
  - Helped contain headline inflation relative to the euro area during the peak of global energy inflation.
  - Imposed a significant fiscal cost, contributing to higher deficits and public spending pressures in 2022 and 2023.
- Fiscal pressures in 2022 included increased energy subsidies and early retirement compensation for Air Malta employees; first nine months of 2023 saw reduced Air Malta support and energy subsidies as market prices fell.

### Policy recommendations and priorities
- Fiscal sustainability:
  - Accelerate fiscal consolidation plans to support disinflationary efforts.
  - Gradually exit from the current fixed energy price policy while protecting vulnerable groups.
- Monetary and financial stability:
  - Maintain financial stability given high bank capitalization, strong liquidity, and low NPLs.
  - Monitor pass-through risks from ECB policy and vulnerabilities in mortgage and NFC lending.
- Structural reforms to support medium-term growth and inclusiveness:
  - Address capacity constraints and skills shortages in the workforce.
  - Boost productivity-enhancing reforms to raise the 3½ percent medium-term potential growth estimate.
  - Leverage the green transition to lower energy input costs and enhance energy security.
- Risk mitigation:
  - Strengthen anti–money laundering and counter-terrorist financing frameworks to safeguard correspondent banking relations and FDI inflows.
  - Prepare contingency measures for external shock scenarios (commodity price spikes, regional conflicts, cyber risks).

*International Monetary Fund — Malta: 1. Exit Options from the Fixed Retail Energy Price Policy (chapter content).*

### 15.      Fiscal deficits remain large. The 2024 Budget envisages   a   small reduction in the overall

### 15. Fiscal deficits remain large. The 2024 Budget envisages a small reduction in the overall deficit

### Fiscal outlook and projections
- The 2024 Budget envisages a small reduction in the overall deficit from 5 percent of GDP in 2023 to 4½ percent of GDP in 2024.
- New discretionary spending measures, including to support pensioners and low-income earners, are more than offset by:
  - the phasing out of costs related to Air Malta’s restructuring and of remaining COVID-19-related support measures, and
  - reduced capital spending (as several large projects were completed in the previous year).
- Energy subsidies will remain large at 1¾ percent of GDP, accounting for about 40 percent of the overall deficit.
- The structural balance will remain at a deficit of 4¼ percent of GDP in 2024, compared to a surplus of ½ percent of GDP before the pandemic (the 2017–19 average).
- Beyond 2024, authorities plan to gradually reduce the overall deficit to 3 percent of GDP by 2027, assuming sustained strong growth and a substantial reduction in energy prices.
- Despite large deficits, financing risk appears limited because of a strong domestic investor base, high appetite for government securities, and ample liquidity.

- Malta: Staff and Authorities’ Fiscal Estimates and Projections (Percent of GDP)
  - Revenue: 37.3 (2020), 35.7 (2021), 35.5 (2022), 33.7 (2023), 35.0 (2024 Staff), 35.0 (2024 DBP), 34.0 (2025 Staff), 34.0 (2025 DBP)
  - Expenditure: 35.4 (2020), 45.3 (2021), 42.9 (2022), 39.3 (2023), 39.9 (2024 Staff), 40.0 (2024 DBP), 38.5 (2025 Staff), 38.5 (2025 DBP)
  - Overall balance: 1.9 (2020), -9.6 (2021), -7.4 (2022), -5.6 (2023), -4.8 (2024 Staff), -5.0 (2024 DBP), -4.4 (2025 Staff), -4.5 (2025 DBP)
  - Primary balance: 3.4 (2020), -8.3 (2021), -6.3 (2022), -4.7 (2023), -3.7 (2024 Staff), -3.8 (2024 DBP), -3.0 (2025 Staff), -3.2 (2025 DBP)
  - Structural balance: 0.4 (2020), -5.7 (2021), -6.6 (2022), -5.9 (2023), -5.4 (2024 Staff), -4.8 (2024 DBP), -5.0 (2025 Staff), -4.3 (2025 DBP)
  - Primary structural balance: 2.0 (2020), -4.5 (2021), -5.5 (2022), -5.0 (2023), -4.3 (2024 Staff), -3.7 (2024 DBP), -3.6 (2025 Staff), -3.0 (2025 DBP)
  - Public debt: 40.0 (2019), 52.2 (2020), 53.9 (2021), 51.6 (2022), 52.2 (2023), 52.8 (2024 Staff), 54.5 (2024 DBP), 55.3 (2025 DBP)
- Source: Ministry of Finance, and IMF staff calculations.

### Risks and debt sustainability
- Authorities remain committed to keeping the debt-to-GDP ratio below 60 percent (the EU’s current debt ceiling), but public debt trajectory is exposed to downside risks.
- IMF SRDSF suggests a low overall sovereign stress (Annex V).
- With sustained large deficits, public debt is projected to continue to rise from 52 percent of GDP in 2022 to about 57 percent in 2026 before stabilizing, compared with 40 percent of GDP in 2019.
- If energy prices stay at currently high levels, public debt would continue to rise and reach 60 percent over time.
- Contingent liabilities (about 7 percent of GDP), mostly related to government guarantees for state-owned enterprises (SOEs), add further risk to debt sustainability.

### Policy recommendations for fiscal adjustment
- Because of strong demand pressures (economy above full potential, tight labor market, strong consumption, elevated inflation), consider accelerating planned fiscal adjustment to:
  - support disinflationary efforts,
  - rebuild fiscal buffers faster, and
  - strengthen resilience given external shock exposure and growing climate and infrastructure spending needs.
- Staff view: an additional adjustment totaling 1½ percent of GDP over 2024–25, aimed at reducing the deficit to 3 percent of GDP by 2026, would help narrow the positive output gap faster without undue burden, given the current strong cyclical position.
  - Under these assumptions, public debt would be placed on a clear downward path, even if energy prices remain high at current levels.
- Assumption note: fiscal multiplier of 0.5 for spending and 0.1 for revenue administration; additional fiscal tightening of 1½ percent of GDP over the next two years would reduce GDP by around ½ percent, bringing the output gap closer to zero in 2025.

- Suggested measures for an accelerated fiscal adjustment (Percent of GDP)
  - Reducing energy subsidies by two-thirds: 0.4 (2024), 0.6 (2025), Total 1.0
  - Strengthening revenue administration: 0.2 (2024), 0.2 (2025), Total 0.4
  - Improving spending efficiency: (no split provided)
  - Total: 0.6 (2024), 0.8 (2025), Total 1.4
- Source: IMF staff calculations.

### Energy subsidies and exit options
- Fiscal priority: substantially rationalize energy subsidies while exploring broader revenue and spending measures.
- Problems with current fixed retail energy price policy:
  - Distorts price signaling, disincentivizes energy savings and green investment,
  - Impedes progress toward environmentally-sustainable economic growth,
  - Limits fiscal space for reallocating resources to productivity-enhancing reforms.
- Staff recommendation: prepare an exit strategy from the fixed price policy to:
  - contain fiscal costs,
  - strengthen market price mechanisms to enhance conservation,
  - protect low-income and, to a lesser extent, middle-income households.
- Implementation guidance: predictable and gradual, mindful of consumer impacts; a gradual approach eases pressures but delays benefits and leaves public finances vulnerable to further energy price increases.
- Staff recommendation (Box 1): partial adjustment over next two years by cutting subsidies by two-thirds. Estimated inflationary impact: around 1 percent over the next two years (note: highly sensitive to market prices).

- Box 1: Exit Options from the Fixed Retail Energy Price Policy
  - Begin with adjusting fuel prices to better reflect import costs in line with pre-crisis practices.
  - Allow greater pass-through of prices with targeted cash transfers to low-income households and, to a lesser extent, middle-income households, and with temporary financial support for energy-intensive firms conditional on efforts to increase energy efficiency.
  - Alternatively, for household consumers, make the electricity tariff structure more progressive by subsidizing a “minimum household consumption level” and below while applying cost-recovery pricing above this level.

### Increasing expenditure efficiency and revenue administration
- Increasing expenditure efficiency — priorities:
  - Launch a spending review to assess the durability of departmental budget cut measures and identify scope for rationalizing recurrent spending.
  - Sustain efforts to improve efficiency of public investment, including green investment, drawing on the IMF public investment management assessment (PIMA) and Climate-PIMA.
  - Strengthen public procurement by streamlining vetting, accelerating digitalization, and implementing a risk-based approach.
- Strengthening revenue administration — ongoing modernization of the Office of the Commissioner for Revenue (now the Malta Tax and Customs Administration, MTCA) with IMF technical assistance; reform priorities:
  - Strengthen operational autonomy of the MTCA and its governance structure.
  - Develop strategies to mitigate compliance and enterprise risks.
  - Institute a large taxpayer office.
  - Introduce an integrated tax administration IT system.
  - Advance the merger of customs and tax administration (Annex VI).
- Continued IMF TA will be needed for the transformation.

### Corporate income tax (CIT) reform
- Urgency: statutory tax rate for domestic enterprises is 35 percent (flat rate); Malta adopts a refund system allowing shareholders of Maltese MNEs to claim a refund of 6/7th of tax paid, reducing the effective tax rate (ETR) to 5 percent.
- With the EU Minimum Tax Directive (Pillar II), Malta’s tax advantage for large MNEs will be reduced over time; this creates an opportunity to modernize the corporate tax system.
- Key reform recommendations:
  - Develop a well-structured roadmap for phased CIT reform implementation that includes PIT reform because of interactions between PIT and CIT.
  - Carefully calibrate sequencing to mitigate distortion in investor incentives given three distinct tax groups created by the EU directive: (i) MNEs within Pillar II (subject to 15 percent ETR); (ii) MNEs outside Pillar II (subject to 5 percent ETR, status quo); and (iii) domestic enterprises (subject to 35 percent ETR).
  - For in-scope MNEs, consider introducing a Qualifying Domestic Minimum Top-up Tax to minimize foregone tax revenues that would be collected by other jurisdictions.
  - Consider phasing out the tax refund system over time (example: reduce 6/7th to 5/7th in a first step) to raise ETR for out-of-scope MNEs, while reducing the statutory rate from 35 percent to lower burden on domestic enterprises.
  - Review cost-effectiveness of current tax expenditure system and introduce Qualified Refundable Tax Credits for externalities (including R&D and green transition), designed to minimize revenue risks.

### Contingent liabilities and demographic risks
- Government guarantees for SOEs decreased from about 9 percent of GDP in 2020 to 7 percent of GDP in 2022.
- Ongoing restructuring of state-owned Air Malta could add to contingent liabilities.
  - Restructuring of Air Malta is anticipated to conclude in 2024. The government will invest €2–15 million (1.1 percent of GDP) in the new national airline.
- Recommendation: develop strategies to strengthen SOE governance and oversight with IMF technical assistance.
- Demographics: EC 2021 Aging Report projects aging costs in Malta broadly flat until 2040 at around 18 percent of GDP but accelerating to 26 percent by 2070. Projections are sensitive to immigration patterns and retired migrants; close monitoring of migration patterns is crucial.

### Safeguarding financial stability
- Financial system appears resilient but requires continued monitoring given macro uncertainty, high inflation, and gradually rising interest rates for corporate borrowers.
- Malta’s financial system is dominated by banks, with total bank assets around 2.4 times GDP.
- Household and corporate vulnerabilities:
  - Mortgage loans exceed half of resident bank loans; variable-rate mortgages account for 80 percent of the total.
  - Households’ indebtedness at 57 percent of GDP; household assets above 200 percent of GDP.
  - NFC debt around 140 percent of GDP on an unconsolidated basis; NFC consolidated debt about 63 percent of GDP. NFC financial asset holdings around 230 percent of GDP.
- CBM stress tests suggest banks have sufficient capital and liquidity buffers to cope with severe but plausible stress scenarios:
  - Under the stress scenario, all core banks can absorb losses and meet capital requirements with ample buffers.
  - On liquidity, all core banks and most non-core banks maintain LCR above 100 percent even under a bank-run type deposit withdrawal scenario; some small non-core banks may fall below 100 percent LCR depending on scenario severity.
- Policy guidance:
  - Ensure banks closely assess how inflation and financial conditions affect vulnerable borrowers and update credit risk provisions.
  - Monitor price developments in residential and commercial real estate.
  - Continue vigilance given varied effects of limited pass-through from monetary policy to retail lending and deposit rates across banks.
  - Increase allocation of resources towards cyber security to achieve compliance with the EU’s Digital Operational Resilience Act (effective in 2025).
- Macroprudential measures:
  - Sectoral systemic risk buffer (SSyRB) targeting residential mortgage exposures: 1 percent from end-September 2023, increasing to 1.5 percent from end-March 2024.
  - Staff consider current zero setting of the countercyclical capital buffer (CCyB) appropriate given tightening financial conditions and limited signs of excessive credit.
  - Borrower-based measures (BBMs) including LTV, stressed debt-service-to-income, and maturity limits remain largely unchanged since 2019; their effectiveness and appropriateness, especially speed limits, should be reviewed.

*Source: IMF staff calculations and Ministry of Finance as presented in the provided content.*

### 25.      The authorities remain committed to further improving their AML/CFT framework. The

### 1mltea2024001 - 25.      The authorities remain committed to further improving their AML/CFT framework. The

### AML/CFT and Anti‑Corruption: recent progress and remaining gaps
- 2023 AML/CFT National Risk Assessment finds a decline in the residual risk across most sectors, including gaming and company service providers, due to more stringent mitigation measures.
- Resources for AML/CFT supervisors and regulators have been significantly bolstered, with a plan to further increase them, and collaboration mechanisms among supervisors and regulators have been enhanced.
- Malta joined the EU Beneficial Ownership Registers Interconnection System, improving identification and verification of beneficial ownership information.
- In light of the 2022 EU Court of Justice’s ruling on public accessibility of beneficial ownership (BO) information, Malta has suspended general public access to the BO registry; implications for the robustness of the AML/CFT framework should be assessed and, if warranted, risk mitigation measures developed.
- Progress on anti‑corruption:
  - Adoption of a National Anti-Fraud and Corruption Strategy.
  - Reforms in the justice system and steps to strengthen judicial independence (see footnote summarizing changes).
- Remaining anti‑corruption needs:
  - Reform the appointment process of the Chief Justice and enhance judicial accountability and efficiency.
  - Strengthen the capacity of the Permanent Commission Against Corruption.
  - Reduce length of proceedings and investigations of high‑level corruption cases.
  - Prevent conflicts of interest and enhance codes of ethics for public officials.
  - Strengthen supervision and enforcement of the asset declaration system, including requiring publication of Members of Parliament’s asset declarations and covering assets of spouses and children.

### Structural reforms and productivity
- Context and concern:
  - Strong growth of the past decade driven more by increased labor inputs than by productivity growth.
  - Sharp influx of foreign immigrants (European immigrants account for two-thirds of the total).
  - Population density increased by nearly 25 percent over the past decade.
  - Indications that provision of physical infrastructure and public services has not kept up with population growth.
- Recovery and resilience plan (RRP):
  - RRP supports green and digital transition and reforms in judiciary, governance, early school leaver problems, and healthcare.
  - In July 2023, plan expanded to incorporate a new REPowerEU plan and additional green-transition investments.
  - As of early October, €93 million out of a total of €328 million (1¾ percent of GDP, all grants) have been disbursed, with 19 out of 138 milestones and targets achieved.
- Innovation and R&D:
  - Malta has strengths in digitalization, use of ICT, and intellectual assets but trails EU peers in government support for business R&D, venture capital, product and business process innovation, and R&D expenditures.
  - Government adopted a Smart Specialization Strategy for 2021–27; 2024 Budget includes measures to support venture capital and start-ups.
  - Suggested actions: review effectiveness and efficiency of current R&D financial incentives; ease administrative burdens for SMEs to access incentives.
- Skills and education:
  - Chronic shortages of skilled workers in financial services, ICT, and gaming; relatively weak education outcomes; high turnover of foreign skilled labor.
  - Recommended approaches:
    - Upskilling and reskilling: monitor progress of the 2021 national employment policy and use the National Skills Council for technical advice.
    - Strengthen education system: continue efforts to ensure high teaching quality; address decrease in new graduates in science and engineering (per population) and low take-up of adult learning for the low-skilled.
    - Enhance education outcomes for students with immigrant backgrounds: closely monitor PISA and early-leaver gaps and address performance gaps.
- Economic development strategy review recommended to cover:
  - (i) gaps in needed labor force and skills for sustainable long-term growth;
  - (ii) immigration policies to ensure right skill supply;
  - (iii) needs in physical and social infrastructure, including housing, education, and health services;
  - policy options to shift investment incentives away from labor-intensive projects toward higher value-added and innovative projects.
- Update the existing Strategic Plan for Environment and Development 2015 expeditiously to reflect capacity constraints and latest demographic projections and align sectoral policies (e.g., tourism).

### Climate policy, energy, and resilience
- Malta among the lowest greenhouse gas emitters per capita in the EU, but faces challenge meeting the 19 percent effort-sharing regulation reduction target by 2030 as emissions in effort-sharing sectors are expected to rise by about 50 percent.
- Electricity consumption (per capita) increased in the past two years in part due to fixed energy price policy.
- Major infrastructure and policy items:
  - Construction of a second interconnector with Italy to be completed by 2025.
  - Large-scale offshore wind farms would support renewables targets.
  - Critical to make steady progress implementing the 2021 Low Carbon Development Strategy, especially in transportation, waste management, and building.
  - Allow greater pass-through of market energy prices to consumers to enhance incentives for saving energy and investing in energy efficiency; in the medium term, consider raising excises on fuels in building and transport sectors to prepare for EU ETS II (effective in 2027) and revision of the EU Energy Tax Directive.
  - Complete vulnerability risk assessment and update adaptation plan; continue efforts to understand banks’ exposure to transition and physical climate risks.

### Poverty, inequality, and social protection
- Income inequality increased to above the EU average (after social transfers) in 2022.
- Share of people at risk of poverty has remained steady at around 17 percent, similar to the EU average, but has worsened for elderly populations.
- Recommendation: closely monitor income inequality and poverty risk, with specific focus on pensioners; assess effectiveness of social protection system in preventing widening inequality.

### Authorities’ views (summarized)
- Economic outlook: expect steady expansion in 2023 and 2024 at a more moderate pace; project inflation to remain persistently high, above 2 percent, until late 2025; wage inflation to pick up somewhat; house prices expected to decelerate broadly in line with fundamentals.
- Risks: balanced—downsides from lower foreign demand due to geopolitical tensions and tighter financial conditions offset by stronger domestic demand.
- Current account: assessed to have turned to a deficit in 2022 due to large one-off equipment imports and expected to recover to a surplus in 2023.
- Fiscal: reiterated commitment to keeping public debt below 60 percent of GDP; MFE plans to reduce the overall deficit by 0.5 percentage points of GDP a year to reach 3 percent of GDP by 2027.
- Energy policy: stressed fixed energy price policy is imperative to economic and social stability and will be maintained; planned renewable investments expected to reduce energy prices and fiscal costs over the medium term.
- Tax policy: working on strategy for implementing EU’s Directive on OECD Pillar II; tax reform should be in accordance with the EU’s Directive and EU state aid rules and revenue-neutral while maintaining competitiveness.
- Financial system: view that the financial system remains robust with significant capital and liquidity buffers, improved asset quality and profitability; core banks profitable; recent increase in sectoral systemic risk buffer to address real estate exposure; cyber security remains a key risk.
- Governance and AML/CFT: authorities note boosted capacity in the judiciary and a robust AML/CFT framework; 2023 AML/CFT National Risk Assessment found lower ML/TF risks in gaming and virtual financial asset operators.

### Staff appraisal and policy recommendations
- Macroeconomic outlook:
  - Malta’s recovery from the pandemic was impressive; strong output and employment growth has contributed to demand pressures and capacity constraints.
  - With weaker external demand and waning pent-up demand, GDP growth expected to moderate but continue to expand at a solid pace in 2024.
  - Risks to the outlook tilted to the downside from possible escalation of Russia’s war in Ukraine or the Israel-Gaza conflict.
- Fiscal policy recommendations:
  - Consider accelerating fiscal consolidation to support disinflationary efforts in the short term and rebuild fiscal buffers faster: economy at potential with tight labor markets, strong demand, and elevated inflation—tighter fiscal stance would help contain demand pressure.
  - Energy subsidies should be substantially rationalized and phased out gradually with an exit strategy prepared and implemented to mitigate economic and social impacts; current fixed energy price policy places substantial burden on the budget, limits fiscal space for productivity-enhancing reforms, and blunts incentives for energy savings and efficiency.
  - Continue modernizing revenue administration; explore scope for rationalizing recurrent spending; enhance efficiency of public investments (particularly green); strengthen public procurement.
- Tax reform:
  - CIT reform increasingly urgent given EU’s Directive on OECD Pillar II.
  - Authorities should develop a well-structured roadmap for phased implementation of CIT reform in consultation with stakeholders and announce it by late 2024; roadmap should include PIT reform given interactions between CIT and PIT.
- Structural reforms:
  - Continue strengthening judiciary, AML/CFT, anti-corruption measures, R&D and innovation support, and skills/upskilling policies to boost productivity and achieve sustainable, inclusive growth.

*Source: 1mltea2024001 - 25.*

### 44.      The financial system appears resilient, but continued monitoring of potential pockets

### The financial system appears resilient, but continued monitoring of potential pockets of vulnerabilities is needed.

### Financial system resilience and risks
- The financial system "appears resilient," but "continued monitoring of potential pockets of vulnerabilities is needed."
- Authorities should ensure banks "continue to closely assess how inflation and macro-financial conditions affect vulnerable and leveraged borrowers and update provisions for credit risks accordingly."
- Authorities should "remain vigilant in monitoring price developments in the residential and commercial real estate sectors" and "continue to review the effectiveness and appropriateness of borrower-based measures."
- Limited pass-through from monetary policy to retail lending and deposit interest rates "requires close monitoring, considering its differential effects on bank financial performance depending on bank size and business model."
- "Efforts to strengthen cyber security should continue, given the growing threat of cyberattacks."

Key financial soundness indicators (from text and figures)
- Loan-to-deposit ratio "has stayed constant at around 60 percent."
- Bank exposures to the housing market "exceed 70 percent of resident loans."
- NPL ratios are "at historically low levels with adequate coverage."
- The banking system is "well capitalized" and "bank profitability has improved."

### AML/CFT framework
- "Progress made in improving the AML/CFT framework is welcome."
- Resources for AML/CFT supervisors and regulators "have been boosted," and "collaboration mechanisms, training programs for the private sector, and the risk-based approach have been enhanced."
- The 2023 AML/CFT National Risk Assessment "finds a decline in the residual risk across most sectors, including gaming and company service providers, due to more stringent mitigation measures."
- In light of "the suspension of general public access to the beneficial ownership registry," the authorities "should carefully assess its implications for the overall AML/CFT framework."

### Structural reforms and productivity
- "The authorities should bolster their structural reform efforts to boost productivity, given increasing capacity constraints."
- Malta’s Recovery and Resilience Plan will deliver "crucial reforms and investments in digitalization and green transition."
- Additional priorities: "promote research and innovation, address skill gaps, and strengthen education and immigrant student outcomes."
- There is "a need to refocus Malta’s economic development strategy, including assessing needs in physical and social infrastructure."

### Energy policy, decarbonization, and competitiveness
- "Accelerating decarbonization and boosting investment in renewables will help strengthen Malta’s resilience to energy shocks and its competitiveness."
- It is "imperative to make steady progress in implementing the 2021 Low Carbon Development Strategy and to allow greater pass-through of market energy prices to consumers to enhance energy saving and efficiency."

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

### Selected quantitative highlights and projections (from Tables and Figures)
- Population (2022, millions): 0.52
- Per capita income (2022, euros): 33,496
- Quota (as of November 30, 2023; millions of SDRs): 168.3
- At-risk-of-poverty rate (2020) 1/: 16.9
- Real GDP (year): 2020 -8.1; 2021 12.6; 2022 8.2; 2023 6.2; 2024 5.1; 2025 4.0; 2026 3.6; 2027 3.5; 2028 3.5
- HICP (period average): 2020 0.8; 2021 0.7; 2022 6.1; 2023 5.8; 2024 2.9; 2025 2.1; 2026 2.0; 2027 2.0; 2028 2.0
- Unemployment rate (EU harmonized): 2020 4.4; 2021 3.4; 2022 2.9; 2023 2.5; 2024–2028 2.5 each year
- Gross national savings (% GDP): 2020 24.0; 2021 22.6; 2022 23.0; 2023 21.8; 2024 22.1; 2025 21.9; 2026 21.7; 2027 21.5; 2028 21.2
- General government debt (% GDP): 2020 52.2; 2021 53.9; 2022 51.6; 2023 52.2; 2024 54.5; 2025 55.9; 2026 57.2; 2027 57.1; 2028 56.9
- Net lending/borrowing (overall balance) (% GDP): 2020 -9.6; 2021 -7.4; 2022 -5.6; 2023 -4.8; 2024 -4.4; 2025 -4.0; 2026 -3.6; 2027 -2.9; 2028 -2.8
- Current account balance (% GDP): 2020 2.2; 2021 1.2; 2022 -3.0; 2023 1.9; 2024 2.5; 2025 2.7; 2026 2.7; 2027 2.7; 2028 2.6
- Gross external debt (Percent of GDP) (Table 4 memorandum): 2020 661.9; 2021 606.8; 2022 546.5; 2023 497.9; 2024 464.3; 2025 440.0; 2026 418.7; 2027 399.1; 2028 381.0
- Net international investment position (from figure text): "Net international investment position: 75 percent of GDP"
- Banking sector highlights (Table 3 excerpts): Regulatory capital to risk-weighted assets (Total Banks): 2019 25.2; 2020 25.8; 2021 25.6; 2022 24.9; 2023Q2 25.2
- Liquidity coverage ratio (Total Banks): 2019 345.4; 2020 332.7; 2021 379.0; 2022 373.8; 2023Q2 387.3
- Customer loans to customer deposits (Total Banks): 2019 67.5; 2020 79.3; 2021 75.4; 2022 67.5; 2023Q2 67.2
- Non-performing loans to total gross loans (Total Banks): 2019 3.1; 2020 3.5; 2021 3.1; 2022 2.5; 2023Q2 2.3

*Source: IMF staff compilation of findings, projections, and policy recommendations contained in the chapter.*

### Annex I. Implementation of IMF Recommendations

### Annex I. Implementation of IMF Recommendations

### Financial Sector
- Remain vigilant in monitoring risks, particularly to ensure that banks update the assessment of expected losses as economic prospects evolve and provision accordingly.
  - Actions since 2022 Article IV: Ongoing.
- Consider introducing a sectoral systemic risk buffer to target systemic risks arising from mortgages.
  - Actions since 2022 Article IV: Implemented. In March 2023, the authorities introduced a sectoral systemic capital buffer (SSyRB) targeting residential mortgage exposures, initially set at one percent from end-September 2023 and thereafter at 1.5 percent from end-March 2024.
- Keep close monitoring of high AML/CFT-related risk sectors.
  - Actions since 2022 Article IV: Ongoing.

### Fiscal Policy
- Prepare an exit strategy from the current fixed energy price policy while protecting vulnerable groups.
  - Actions since 2022 Article IV: Not implemented.
- Tighten the fiscal stance in 2023 to lower inflationary pressure and improve public finances and take additional measures to mobilize revenues and enhance spending efficiency over the medium term.
  - Actions since 2022 Article IV: Underway. The structural deficit is expected to narrow from 6 percent of GDP to 5½ percent of GDP in 2023.
- Reform the taxation of multinational firms and consider broader reforms to the tax system and revenue administration aimed at improving the efficiency of the tax system and reducing administration costs.
  - Actions since 2022 Article IV: Underway. In light of the EU’s adoption of the Minimum Tax Directive (Pillar II), the authorities are exploring options to reform the CIT system by leveraging IMF technical assistance.
- Improve public investment management framework and rationalize recurrent spending to achieve a credible medium-term consolidation.
  - Actions since 2022 Article IV: Ongoing. The authorities have requested public investment management assessment TA from the IMF.

### Structural Reforms
- Address the skills gap in the workforce and foster labor force participation.
  - Actions since 2022 Article IV: Ongoing.
- Promote digitalization and advance green investment and decarbonization.
  - Actions since 2022 Article IV: Ongoing, including as a part of Malta’s Recovery and Resilience Plan.
- Complete the comprehensive insolvency reform plan.
  - Actions since 2022 Article IV: Implemented. The new Insolvency Practitioners Act and Pre-Restructuring Act were enacted in December 2022.

*Source: Content unit 1mltea2024001 - Annex I. Implementation of IMF Recommendations.*

### Annex V. Figure 2. Malta: Debt Coverage and Disclosures

### Annex V. Figure 2. Malta: Debt Coverage and Disclosures

### Debt coverage and subsectors included
- Debt coverage in the DSA: 1/CGGGNFPSCPSOther
- 1a. If central government, are non-central government entities insignificant? n.a.
- Subsectors captured in the baseline — Inclusion:
  - 1 Budgetary central government: Yes
  - 2 Extra budgetary funds (EBFs): No
  - 3 Social security funds (SSFs): Yes
  - 4 State governments: Yes
  - 5 Local governments: Yes
  - 6 Public nonfinancial corporations: No
  - 7 Central bank: No
  - 8 Other public financial corporations: No

### Reporting, consolidation, and accounting notes
- Debt consolidation across sectors: Color code legend shown (Chosen Coverage; Missing from recommended coverage; Not applicable).
- Reporting on Intra-Government Debt Holdings: matrix included for holders and issuers (Budget. central govt; Extra-budget. funds; Social security funds; State govt.; Local govt.; Nonfin pub. corp.; Central bank; Oth. pub. fin. corp) with zeros shown.
- Comments and methodological notes:
  - 1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
  - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - 3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.
  - 4/ Includes accrual recording, commitment basis, due for payment, etc.
  - 5/ The nominal value definition provided.
  - 6/ The face value definition provided.
  - 7/ Market value definition and applicability to traded debt securities.
- Basis of recording and valuation categories shown (Not applicable; Debt securities; Loans; IPSGSs 3/; Currency & deposits; Other acct. payable 2/; Non-consolidated; Consolidated; Cash basis; Non-cash basis 4/; Nominal value 5/; Face value 6/; Market value 7/).

*Source: Annex V. Figure 2 (as provided).*

---

### Annex V. Figures 3–7: Public Debt Structure, Baseline, and Risk Assessments

### Public debt structure indicators (high-level)
- Notes indicate multiple perimeter specifications: the perimeter shown is general government for Debt by Currency, Public Debt by Holder, Public Debt by Governing Law, Debt by Instruments, and Public Debt by Maturity.
- Charts presented include:
  - Debt by Currency (percent of GDP): Foreign currency; Local currency; Local-linked.
  - Public Debt by Holder (percent of GDP): External private creditors; External official creditors; Domestic other creditors; Domestic commercial banks; Domestic central bank.
  - Public Debt by Governing Law, 2022 (percent): Domestic law; Foreign law ex. multilateral; Multilateral.
  - Debt by Instruments (percent of GDP): Marketable debt; Non marketable debt.
  - Public Debt by Maturity (percent of GDP): ≤ 1 year; 1-5 years; > 5 years. Residual maturity: 8. years.

### Baseline scenario — key projections and contributions (Percent of GDP unless indicated otherwise)
- Actual and projected public debt (2022–2032):
  - 2022: 51.6
  - 2023: 52.2
  - 2024: 54.5
  - 2025: 55.9
  - 2026: 57.2
  - 2027: 57.1
  - 2028: 56.9
  - 2029: 56.8
  - 2030: 56.6
  - 2031: 56.4
  - 2032: 56.0
- Change in public debt (2022–2032):
  - 2022: -2.3
  - 2023: 0.6
  - 2024: 2.3
  - 2025: 1.4
  - 2026: 1.3
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.1
  - 2030: -0.2
  - 2031: -0.3
  - 2032: -0.3
- Contribution of identified flows (2022–2032):
  - 2022: -0.9
  - 2023: 0.0
  - 2024: 0.7
  - 2025: 0.8
  - 2026: 0.6
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.1
  - 2030: -0.2
  - 2031: -0.3
  - 2032: -0.3
- Primary deficit (2022–2032):
  - 2022: 4.7
  - 2023: 3.7
  - 2024: 3.0
  - 2025: 2.4
  - 2026: 1.9
  - 2027: 1.1
  - 2028: 0.9
  - 2029: 0.9
  - 2030: 0.8
  - 2031: 0.8
  - 2032: 0.8
- Noninterest revenues (2022–2032):
  - 2022: 33.7
  - 2023: 35.0
  - 2024: 34.0
  - 2025: 33.6
  - 2026: 33.3
  - 2027: 33.3
  - 2028: 33.3
  - 2029: 33.3
  - 2030: 33.3
  - 2031: 33.3
  - 2032: 33.3
- Noninterest expenditures (2022–2032):
  - 2022: 38.4
  - 2023: 38.8
  - 2024: 37.0
  - 2025: 36.1
  - 2026: 35.3
  - 2027: 34.3
  - 2028: 34.2
  - 2029: 34.2
  - 2030: 34.1
  - 2031: 34.1
  - 2032: 34.1
- Automatic debt dynamics (2022–2032):
  - 2022: -5.6
  - 2023: -3.7
  - 2024: -2.4
  - 2025: -1.6
  - 2026: -1.3
  - 2027: -1.2
  - 2028: -1.1
  - 2029: -1.0
  - 2030: -1.0
  - 2031: -1.1
  - 2032: -1.1
- Real interest rate and relative inflation (2022–2032):
  - 2022: -1.6
  - 2023: -0.6
  - 2024: 0.2
  - 2025: 0.5
  - 2026: 0.6
  - 2027: 0.8
  - 2028: 0.9
  - 2029: 0.9
  - 2030: 0.9
  - 2031: 0.8
  - 2032: 0.7
- Real growth rate (presented as a sequence covering medium-term projection):
  - 2022: -4.1
  - 2023: -3.0
  - 2024: -2.6
  - 2025: -2.1
  - 2026: -1.9
  - 2027: -1.9
  - 2028: -1.9
  - 2029: -1.9
  - 2030: -1.9
  - 2031: -1.9
  - 2032: -1.9
- Other identified flows, Contingent liabilities, Interest Revenues (minus), Other transactions: all shown as 0.00 for 2022–2032.
- Contribution of residual (2022–2032):
  - 2022: -1.4
  - 2023: 0.6
  - 2024: 1.6
  - 2025: 0.6
  - 2026: 0.7
  - 2027: 0.0
  - 2028: 0.0
  - 2029: 0.0
  - 2030: 0.0
  - 2031: 0.0
  - 2032: 0.0
- Gross financing needs (GFN) (2022–2032):
  - 2022: 11.8
  - 2023: 11.6
  - 2024: 11.0
  - 2025: 9.5
  - 2026: 11.2
  - 2027: 9.8
  - 2028: 7.9
  - 2029: 7.2
  - 2030: 7.4
  - 2031: 6.6
  - 2032: 7.9
- Of which: debt service (2022–2032):
  - 2022: 7.1
  - 2023: 7.9
  - 2024: 8.0
  - 2025: 7.1
  - 2026: 9.3
  - 2027: 8.7
  - 2028: 7.0
  - 2029: 6.3
  - 2030: 6.5
  - 2031: 5.8
  - 2032: 7.1
  - Local currency component equals the debt service numbers above; Foreign currency component is 0.00 for all years.
- Memo indicators:
  - Real GDP growth (percent): 8.2; 6.2; 5.1; 4.0; 3.6; 3.5; 3.5; 3.5; 3.5; 3.4; 3.4
  - Inflation (GDP deflator; percent): 5.3; 3.7; 2.5; 2.1; 2.1; 2.0; 1.9; 1.9; 1.9; 1.9; 1.9
  - Nominal GDP growth (percent): 13.9; 10.2; 7.8; 6.2; 5.8; 5.6; 5.5; 5.5; 5.5; 5.4; 5.4
  - Effective interest rate (percent): 2.0; 2.4; 2.9; 3.1; 3.3; 3.4; 3.5; 3.6; 3.6; 3.4; 3.3

- Staff commentary: "Public debt will rise a bit but then stabilize, reflecting expectations of a narrowing of primary deficits and stable economic conditions."

### Risk assessments and long-term projections
- Figures presented on Medium-Term Risk Assessment and Long-Term Risk Assessment, including indicators:
  - Large Amortization Trigger, GFN-to-GDP ratio, Amortization-to-GDP ratio, Amortization, Overall Risk Indication.
- Alternative long-term projections and scenarios displayed:
  - Medium-term extrapolation; Medium-term extrapolation with debt stabilizing; Historical average assumptions.
- Climate change (mitigation) commentary and scenarios:
  - Staff estimates a substantial investment requirement of approximately 4 percent of GDP annually for climate mitigation.
  - Note: "a significant portion of these investment needs stems from the private sector. As a result, the actual increase in debt may not be as pronounced as assumed under the default scenario."
- Charts compare:
  - Baseline: Extension of fifth projection year
  - With climate mitigation (standardized scenario)
  - With climate mitigation (customized scenario)
  - Projections for Total Public Debt-to-GDP Ratio and GFN-to-GDP Ratio over 2015–2051, and alternative long-run projections including "Baseline with t+5", "Baseline with t+5 and DSPB*", and "Historical 10-year average".
  - Footnote: DSPB: Debt Stabilizing Primary Balance

*Source: Annex V. Figures 3–7 (as provided).*

---

### Annex VI. IMF Fiscal Affairs Department Capacity Development (Revenue Administration and CIT Reform)

### Revenue Administration Reform — activities and findings
- Context:
  - Increasing fiscal pressures following pandemic response and the global energy shock in 2022 prompted the need for further revenue administration reforms.
  - The Office of the Commissioner for Revenue (now the Malta Tax and Customs Administration, MTCA) required strengthening to support fiscal consolidation and increase tax revenue.
- IMF FAD engagement:
  - From November 2022 to November 2023, seven technical assistance (TA) missions were conducted in Malta to assist the authorities in preparing and delivering their reform agenda. After each mission, Fund staff and external experts provided the MTCA with a report summarizing the mission's main findings and recommendations.
- Key areas identified by FAD for attention:
  - (i) Enhancing institutional settings.
  - (ii) Managing risks to revenue (compliance risks) and risks to tax administration operations (enterprise risks) and developing strategies to mitigate them.
  - (iii) Improving some of MTCA's core functions.
  - (iv) Redeveloping an integrated tax administration information technology (IT) system.
  - (v) Implementing a large taxpayer office (LTO).
  - (vi) Progressing with the merger of tax and customs administration.
- Outcomes:
  - FAD support contributed to the Delivering Transformation Strategic Plan 2023–25, launched in May 2023, which led to the merger forming the Malta Tax and Customs Administration and a redesigned organizational structure including dedicated units for Large Taxpayers and Compliance Risk Management.

### Corporate Income Tax (CIT) Reform — context, TA, and recommendations
- Context and EU/OECD developments:
  - On December 12, 2022, the EU adopted a directive establishing global minimum taxation for MNE groups and large-scale domestic groups in the EU with combined financial revenues exceeding €750 million annually and having either a parent company or subsidiary situated in an EU Member State.
  - Pillar II introduces a global minimum effective tax rate (ETR) of 15 percent on income generated in low-tax jurisdictions.
  - EU member states are required to transpose this directive into domestic law by December 31, 2023.
- Malta-specific challenges:
  - Malta's corporate taxation regime includes a refund system that allows shareholders of MNEs to claim a refund of 6/7th of the tax paid in Malta, reducing the ETR from 35 percent to 5 percent.
  - Adoption of the EU directive could diminish Malta's tax advantage for large MNEs over time.
- TA missions:
  - Two TA missions in late 2022 and early 2023 assessed CIT, addressing Pillar II-related issues and broader corporate tax issues.
  - Objectives included: identifying trends for further analysis; analyzing key CIT features and strategies to mitigate challenges/maximize benefits from Pillar II; analyzing MNEs out of scope of Pillar II; addressing the future of the tax refund system; presenting an overarching reform strategy; estimating revenue implications of different CIT reform packages.
- Core TA recommendations and reform strategy (summary):
  - Develop a well-structured roadmap for phased implementation of CIT reform in consultation with stakeholders to provide certainty to international and domestic investors.
  - Specific recommendations include:
    - Introducing, at an early date, a Qualifying Domestic Minimum Top-up Tax (QDMTT) that aligns with EU and OECD guidance.
    - Utilizing revenue generated by the QDMTT to further tax reform initiatives to stimulate economic activity and promote fairness.
    - Keeping the option of introducing an income inclusion rule (IIR) and undertaxed profit rule (UTPR) before it becomes mandatory.
    - Phasing out the tax refund system, with full removal by 2030, and gradually increasing ETRs for out-of-scope MNEs to bring them closer to ETRs faced by others, including domestic enterprises and entities belonging to in-scope MNE groups.
    - Gradually reducing the statutory CIT rate from 35 percent to alleviate the burden on domestic enterprises and foster greater alignment in ETRs.
    - Undertaking a tax expenditure analysis and developing Qualified Refundable Tax Credits (QRTCs) accessible to all companies to address externalities, such as those related to Research and Development (R&D) and the green transition.
- Revenue impact illustrative estimate (TA note):
  - "Revenue impacts of the recommended reform strategy vary depending on new statutory tax rates, the size of refunds, and the size of the semi-elasticity of inward investment with respect to CIT rates, Assuming the new statutory tax rate of 25 percent (down from 35 percent), the refund rate of 5/7th (down from 6/7th), and the semi elasticity of 4, the revenue impact is estimated at around 2¼ percent of GDP."

*Source: Annex VI (IMF Fiscal Affairs Department Capacity Development) — excerpts as provided.*

### Annex VII. Main FSAP Recommendations

### Annex VII. Main FSAP Recommendations

### Risk Analysis
- Recommendation: Strengthen the risk analysis by incorporating new dimensions in liquidity stress testing, conducting regular sensitivity analysis on selected vulnerabilities, and enhancing data management. (CBM, MFSA) — Timing: ST
- Authorities’ actions:
  - The CBM enhanced its liquidity and solvency stress testing frameworks, including by assessing climate-related risks, IFRS9’s expected losses, and household vulnerabilities.
  - Cooperation between the CBM and the European Systemic Risk Board (ESRB) is ongoing on several projects, including macroprudential analysis, O-SII methodology results and Capital Requirements Regulation (CRR) provisions in relation to risk weights.
  - Both the CBM and the MFSA invested in improving the data management system and work closely on identifying risks and pockets of vulnerabilities.
  - The MFSA conducts stress tests for the insurance sector and investment fund liquidity, assesses climate transition risk, and developed a composite indicator for Non-Bank Financial Intermediation.
  - A methodology has been developed to assess credit risk within the financial sector investment portfolio.
  - An internal Financial Stability Monitor report is raised on an annual basis, highlighting emerging systemic risks across sectors.

### Macroprudential Policy
- Recommendations:
  - Consider providing the CBM with powers to recommend actions to be taken by a public authority or public institution, with a “comply or explain” mechanism, and to issue warnings and opinions. Amend the MFSA Act to add a financial stability objective. (Government, MFSA) — Timing: ST
  - Close remaining data gaps and enhance analytical tools. (CBM, NSO, MFSA) — Timing: ST/MT
- Authorities’ actions:
  - A financial stability objective has been added to the MFSA Act. The Joint Financial Stability Board, chaired by CBM governor, has recommendation powers.
  - In 2021, the CBM started collecting comprehensive real estate data from all banks engaging in real estate lending on a quarterly basis; the database is now fully operational for authorized internal users.
  - The NSO started developing a database on commercial real estate indicators.
  - The CBM and the MFSA set up a technical working group to collaborate on developing a methodology to analyze commercial real estate developments, in line with the ESRB Recommendation on vulnerabilities in the commercial real estate sector in the European Economic Area (ESRB/2022/9).
  - The development of a risk dashboard for NBFIs is underway. MFSA continues to develop systemic risk monitoring capacity and has developed an internal methodology to monitor residential real estate property and rental markets.

### Banking Regulation and Supervision
- Recommendations:
  - Increase the number and risk orientation of onsite inspections of Less Significant Institutions (LSIs). Enhance supervision of third-country branches. (MFSA) — Timing: ST
  - Take timely supervisory actions (including for ML/TF) and increase the use of monetary fines. Ensure supervisory action is not delayed through judicial appeal, including by amending the law, if needed. (MFSA, FIAU, the government) — Timing: ST
  - Refine and introduce the planned borrower-based instruments to address a possible buildup of vulnerability in the housing and household sectors. (CBM) — Timing: I
- Authorities’ actions:
  - The MFSA conducts a bi-annual Supervisory Review and Evaluation Process (SREP) model using thematic and deep dive assessments. Minimum Engagement Level Meetings are conducted with banks to follow up on SREP actions; the MFSA aims to adopt a risk-based approach to these meetings and has developed an onsite visit program covering higher-risk areas.
  - The MFSA conducts an annual review of third-country branches and plans to enhance relationships with their home regulators.
  - The FIAU increased human resources, created specialized supervisory teams, improved risk-based supervision approach and IT tools for risk assessment, and introduced a quality control function to reduce subjectivity and ensure consistency in supervisory and enforcement processes.
  - MFSA investigations and enforcement actions have continued to increase; enforcement function strengthened by recruitment of qualified officials in financial investigations.
  - Authorities established a dedicated internal penalty model for calculating administrative penalties.
  - CBM Directive No. 16 defines borrower-based macroprudential measures (effective on July 1, 2019, and revised in November 2021).

### Financial Sector Supervisory Resources and Independence
- Recommendations:
  - Ensure stable funding for the MFSA, grant it full autonomy over its recruitment, and maintain a dedicated statutory committee on supervisory issues. (MFSA, Government) — Timing: I
  - Address the significant gap in supervisory and enforcement capacity by increasing staff and broadening skill sets. (MFSA) — Timing: I
- Authorities’ actions:
  - Legal amendments in 2019 allow the MFSA’s recruitment independence.
  - The MFSA submitted a 5-year plan related to its budgetary resources; the government has committed to covering all annual MFSA budgetary shortfalls. The MFSA is considering review of certain fees.
  - Regulatory Committee is in place with weekly meetings. An Enforcement Decisions Committee is in the process of being set up, pending court developments.
  - The MFSA total headcount is currently 443, an increase of 45 percent since December 2018.
  - The authority undertakes an annual Training Needs Analysis, reviewed by the Financial Supervisors Academy (FSA); the 2024 Annual Training Needs process is in train.

### Insurance and Securities Regulation and Supervision
- Recommendation: Strengthen conduct supervision and enhance the sectoral risk-based supervision framework. (MFSA) — Timing: MT
- Authorities’ actions:
  - Conduct Supervision is based on outcomes from the Risk-Based Supervision frameworks that apply to prudential supervision.
  - An internal workstream aims to establish a dedicated Conduct Risk Model focusing on product design and distribution.
  - MFSA carries out focused onsite inspections of credit institutions, including banks that distribute insurance products through bancassurance, to assess adherence to conduct of business rules.
  - As part of macro-prudential risk monitoring, the MFSA has developed and updated various risk analysis tools that strengthen risk-based supervision across sectors.

### AML/CFT
- Recommendations:
  - Improve the authorities’ assessment and understanding of ML/TF risks and strengthen national coordination. (National Coordination Committee) — Timing: I
  - Adopt a multi-prong strategy that includes: (i) ensuring that banks appropriately apply preventive measures; (ii) fully implementing a risk-based AML/CFT supervision; and (iii) applying timely, dissuasive, and proportionate sanctions and effective fit-and-proper tests. (MFSA, FIAU, ROC, Government) — Timing: I
  - Support establishing an EU-level arrangement responsible for AML/CFT supervision. (Government) — Timing: MT
- Authorities’ actions:
  - A new National Risk Assessment (NRA), coordinated by the National Coordination Committee (NCC), was launched in 2021 and improves on the 2018 NRA in identifying risks and vulnerabilities for ML, TF, and proliferation financing.
  - The NCC facilitates involvement of authorities and private sector representative bodies.
  - Between 2018 and the new NRA, Malta conducted sector-specific risk assessments on virtual financial assets; TF; concealment of beneficial ownership; organized crime; the shadow economy; corruption; and laundering of proceeds of tax crimes.
  - Authorities issued sector-specific AML/CFT guidance, communicated results of strategic analyses by the FIAU, and increased outreach initiatives.
  - The MFSA set up a Financial Crime Compliance (FCC) function to conduct AML/CFT inspections; Prudential and Conduct Supervisory Functions integrated AML/CFT elements in supervisory work.
    - FCC reviews license applications and MLRO questionnaires, conducts interviews with proposed MLROs, and ensures relevant policies and procedures are in place.
    - FCC carries out AML/CFT on-site examinations as agent of the FIAU; programming based on FIAU’s CASPAR risk scoring model. MFSA integrated risk scoring models for prudential supervision include an AML/CFT component.
    - Enforcement related to outcomes from FIAU-programmed inspections follows the standard FIAU enforcement process; FCC officials attend FIAU-chaired committees to provide feedback; final decisions are taken by the FIAU following established methodologies.
  - Fitness and properness assessments at pre- and post-licensing stages are carried out by the MFSA’s Due Diligence Function (DDF) on individual and corporate shareholders, management body members and key function holders.
  - The FIAU’s supervisory process for banks was revised with sector specific risk evaluation questionnaires and dedicated teams. Administrative penalties on banks increased from 1 in 2017 to 161 in 2021.
  - Malta is supporting the EU-level initiative of a harmonized higher-level AML regulation and supervision.

### Safety Nets and Crisis Management
- Recommendations:
  - Adopt an administrative bank insolvency regime with explicit powers to transfer assets/liabilities. Clarify the creditor hierarchy. (Government) — Timing: I
  - Shift responsibility for decisions on bank insolvency and liquidation, post-license revocation, from the MFSA’s supervisory function to its resolution function. (MFSA) — Timing: I
  - Review the adequacy of the Resolution Unit’s staffing and increase its resources accordingly. (MFSA) — Timing: I
- Authorities’ actions:
  - MFSA initiated advance research on possible models to improve the bank insolvency framework; a skeleton document with preliminary suggestions was drawn up at end 2021. Technical assistance and funding were requested from the European Commission; the first draft of the legislation for the Administrative Bank Insolvency regime is complete and discussions are ongoing.
  - The MFSA’s board decided in April 2021 to shift responsibility from the supervisory function to the resolution function and set up a transition team. Significant progress has been made on necessary legislative changes to transfer this role; the project remains at implementation stage. In the meantime, the Resolution function is actively taking on cases to liquidate banks, working closely with Banking Supervision.
  - In the latter part of 2023, headcount allocated to the Resolution function has been improved to 18 FTEs.

*Source: 1mltea2024001 - Annex VII. Main FSAP Recommendations*

### Annex VIII.  Box 1. A Sectoral Decomposition Methodology

### Annex VIII. Box 1. A Sectoral Decomposition Methodology

### Methodology overview
- The generalized exactly additive decomposition (GEAD) by Tang and Wang (2004) is used to estimate sectoral contributions to aggregate labor productivity growth.
- Building on Darmanin and Montebello (2021), aggregate labor productivity growth is decomposed into three terms: (i) within-sector productivity (“pure productivity”), (ii) resource reallocation growth (“reallocation”), and (iii) dynamic reallocation effects (“covariance”).
- Aggregate decomposition is expressed as:
  - G_t = Σ (Y_{i,t-1}/Y_{t-1}) G_{i,t} + Σ (Z_{i,t-1}/Z_{t-1})(p_{i,t} l_{i,t} − p_{i,t-1} l_{i,t-1}) + Σ (Z_{i,t-1}/Z_{t-1})(p_{i,t} l_{i,t} − p_{i,t-1} l_{i,t-1}) G_{i,t}
  - Where G_t denotes aggregate labor productivity growth, G_{i,t} labor productivity growth in sector i (pure productivity effect), l_{i,t} its employment share (static reallocation level effect), and p_i its price level relative to the overall economy (dynamic reallocation growth).

### Interpretation of the three components
- Pure productivity (first term)
  - Captures sectoral efficiency gains as firms within a sector become more efficient at producing output for a given level of input.
  - Reflects technological progress, improved internal processes, or training and upskilling of the workforce.
  - Isolates productivity changes while abstracting from changes in the relative size of a sector.
- Clean reallocation (second term)
  - Holds productivity growth constant and captures structural changes from movement of labor toward productive sectors or entry/exit of firms.
  - Scaled by each sector's productivity level (Z_i) relative to the aggregate (Z), favoring above-average productivity sectors.
- Dynamic reallocation / covariance (third term)
  - Captures covariance between real productivity growth and the reallocation effect.
  - Accounts for effects such as Baumol's cost disease, where resources shift toward sectors with stagnant or declining labor productivity growth.

### Empirical application to Malta (figure captions and observed patterns)
- Time coverage in figures: 2001-22.
- Observed patterns (figure captions and annotations):
  - "Non-native workers now constitute more than half of the workforce in sectors like accommodation and construction."
  - "High immigration has been observed in low-growth sectors..." — depicted by "Shares of Non-Native Workers Growth in Each Economic and Sectoral Real Labor Productivity Growth, 2001-22."
  - "...which has helped the reallocation of natives..." — shown by "Employment Shares for Native Workers Only, 2001-22."
  - "...towards higher paying jobs" — evidenced by "Yearly Wages by Sector, 2001-22."

### Data and results notes
- Annex VIII. Table 1. Malta: Sectoral Decomposition Results (Percent) is referenced but numeric decomposition values are not reproduced in the supplied text.
- The relative importance of each decomposition component differs across countries, industries and over time.

*Source: Annex VIII. Box 1. A Sectoral Decomposition Methodology (extracted from the supplied document).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mltea2024001.pdf_