## 1mltea2025001-print-pdf ## Source details **Canonical URL:** [1mltea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1mltea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1mltea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1mltea2025001-print-pdf.pdf.json) --- ### CONTEXT - Growth and convergence - Between 2014 and 2023, growth averaged 6¾ percent. - By 2023, GDP per capita converged with the EU average; export-oriented services (tourism, online gaming) central to growth. - Data revisions and structural pressures - Recent significant revisions to GDP and balance of payments indicate stronger growth and external performance over the past four years and a more favorable fiscal position than previously estimated. - Structural challenges: increased density and pressure on infrastructure (roads, water, sewage, electricity) and public services (education and health); structural labor shortage and mismatches; challenge of advancing the green transition. - Political and strategic context - Government launched “Malta Vision 2050” initiative. - Political: Labor Party holds a comfortable majority; next election expected in 2027. ### RECENT DEVELOPMENTS — GROWTH, LABOR, INFLATION, HOUSING, FINANCE, EXTERNAL - Growth and demand - Growth slowed from 7¾ percent in H2 2023 to 6 percent y/y in H1 2024. - Net export growth moderated as buoyant exports (notably tourism) were offset by increased imports. - Private consumption moderated; gross capital formation recovered driven by intellectual property and residential investment. - Labor market - Employment grew at 5¾ percent in H1 2024. - Unemployment rate at 3 percent in September. - Foreign workers account for over 30 percent of total employment. - Wage growth picked up in Q1 2024; real wages remain lower than two years ago. - Broader indicators point to tight labor market conditions. - Inflation - HICP declined from a peak of 7.4 percent y/y in October 2022 to 2.4 percent in October 2024. - Core inflation fell to 2.0 percent y/y in September; goods inflation below 2 percent; services inflation pressures persist. - Fixed-energy price policy contained headline inflation in 2022; difference with Euro Area has since faded. - Housing and real estate - Real estate transactions declined over two years but began to rebound. - Residential property prices grew by 7 percent over the past year; staff estimate house prices broadly in line with fundamentals; rental prices grew rapidly. - Fiscal developments - Overall fiscal deficit in 2023 was €939 million (4.5 percent of GDP), below budget forecast €944 million (5.0 percent of GDP). - Energy subsidies at 1¼ percent of GDP in 2023; other subsidies (including Air Malta closure costs) at 2¼ percent of GDP. - First nine months of 2024 recorded a cash surplus; staff estimate overall balance at 4 percent of GDP for 2024 with potential for a better outcome. - Banking and financial stability - Credit to NFCs decelerated to 2½ percent y/y in September; household lending robust. - NPL ratio declined to about 2 percent by Q2:2024. - Core domestic banks’ return on equity reached 12 percent. - Core domestic banks: Tier 1 capital ratio 21 percent; leverage ratio 8 percent; LCR above 350 percent. - Sectoral systemic risk buffer (sSyRB) for residential mortgages introduced in 2023 at 1.5 percent. - Domestic life-insurance sector: solvency capital ratio about 268 percent; liquidity asset ratio 59 percent. - Financial system assets about 2.1 times GDP in 2023 (about 1.6 times GDP excluding international banks); core, non-core, international banks accounted for 68 percent, 8 percent, and 24 percent of banking assets in 2023. - External sector - Current account returned to surplus in 2023 at 6¼ percent of GDP, up from -¾ percent in 2022. - 2023 current account below 2017-2023 average of about 11½ percent of GDP. - Improvement driven by stronger services balance, narrower non-fuel goods deficit, lower energy prices. - H1:2024: services exports strengthened while primary income balance weakened. - Staff project stable current account surplus of 6¼ percent of GDP for 2024. - External position in 2024 expected to be substantially stronger than level implied by fundamentals and desirable policies. ### OUTLOOK AND RISKS - Projections - Output growth forecast to decelerate from 7½ percent in 2023 to 5 percent in 2024 and 4 percent in 2025. - Tourism exports expected to taper but continue to grow; non-tourism exports supported by modest recovery in Europe. - Positive output gap of ¾ percent of potential GDP in 2024 projected to gradually close. - Inflation projected to stabilize around 2 percent by mid-2025. - Staff estimate medium-term growth at 4 percent. - Key downside risks - External: spillovers from intensified regional conflicts; geoeconomic fragmentation; trade/supply disruptions; renewed commodity price spikes (including food). - Slower growth in major economies, cyberattacks, misuse of AI. - Domestic: higher-than-expected wage growth leading to higher inflation; faster-than-expected tourism growth could boost near-term growth but exacerbate capacity pressures. ### POLICY DISCUSSIONS — OVERVIEW - Fiscal consolidation recommended in line with the EU’s new fiscal framework. - Phase out fixed-energy price policy while protecting vulnerable groups and reallocate resources to boost long-term economic capacity. - Supervisors to remain vigilant on financial sector risks, especially real estate. - Continued structural reforms to enhance productivity and achieve strong, socially and environmentally sustainable, and inclusive growth. ### A. Ensuring Fiscal Sustainability While Boosting Investment and Innovation Support - Rationale: Tight labor market and anticipated further easing of euro-area monetary policy make fiscal consolidation planned for 2025 appropriate. - 2025 budget objectives and measures - Budget aims to reduce fiscal deficit to 4 percent of GDP in 2025, with lower revenue more than offset by reduced spending. - Revenues: adjustment of personal income tax brackets upward projected to reduce income tax revenue by about ½ percent of GDP; capital and other current revenues projected to decline. - Expenditures: compensation of employees set to decline from 2024 after one-off retroactive payments; subsidies (including energy) will decrease as lower global energy prices reduce subsidies despite fixed retail energy prices. - Capital spending projected to decrease temporarily reflecting lower EU fund disbursements. - EU fiscal framework and medium-term plans - Malta will enter the EU’s Excessive Deficit Procedure in 2025 and opted for the 4-year adjustment period. - MFSP aims to reduce structural deficit by ½ percent of GDP each year. ### MFSP ASSUMPTIONS AND SELECTED NUMERIC PROJECTIONS (AS PRESENTED) - Consolidation target: fiscal adjustment reach 2.6 percent of GDP by 2027. - Selected fiscal table rows (values presented verbatim as in source): - Revenue: 36.0; 31.8; 32.8; 32.8; 32.0; 32.1; 31.9; 32.1; 31.9; 32.2. - Expenditure: 34.0; 36.3; 36.9; 36.8; 35.5; 35.6; 34.9; 35.2; 34.5; 35.1. - Recurrent: 30.0; 31.2; 31.8; 31.8; 31.1; 31.1; 30.3; 30.6; 29.6; 30.1. - Subsidies (of which energy): 1.3; 3.6; 2.5; 2.5; 2.1; 2.1; 2.0; 2.0; 2.0; … energy subcomponent: 1.4; 0.8; 0.8; 0.7; 0.7; 0.7; 0.6; 0.6. - Capital: 4.0; 5.1; 5.0; 5.0; 4.4; 4.4; 4.6; 4.6; 4.8; 4.9. - Net lending/borrowing: 2.0; -4.5; -4.0; -4.0; -3.5; -3.5; -3.0; -3.1; -2.6; -2.8. - Primary balance: 3.4; -3.5; -2.8; -2.8; -2.2; -2.1; -1.6; -1.7; -1.1; -1.4. - Structural balance (% of potential GDP): 1.3; -3.6...; -3.8...; -3.6...; -3.2...; -2.8. - Public debt: 42.0; 47.3; 49.5; 48.9; 50.1; 49.7; 50.0; 50.2; 49.2; 50.2. - Nominal GDP (% change) examples: 10.4; 13.2; 8.1; 8.4; 7.0; 6.5; 7.0; 6.2; 6.3; 6.2. - Real GDP (% change) examples: 8.1; 7.5; 4.9; 5.0; 4.3; 4.1; 4.4; 4.0; 4.5; 4.0. - MFSP medium-term rows (selected): - Nominal GDP (% change): 8.2; 7.1; 7.1; 7.2; 7.3; 7.6; 7.5. - Potential real GDP (% change): 5.1; 4.8; 4.6; 4.6; 4.6; 4.6; 4.5. - Overall fiscal balance (% GDP): -4.0; -3.8; -3.4; -3.0; -2.6; -2.4; -2.2. - Public debt (% GDP): 49.2; 49.8; 49.9; 49.5; 48.8; 47.8; 46.7. - IMF staff projections (selected): - Overall fiscal balance (% GDP): -0.6; -4.0; -3.5; -3.1; -2.8; -2.8; -2.7; -2.7. - Public debt (% GDP): …; 48.9; 49.7; 50.2; 50.2; 50.2; 50.1; 50.1. ### DEBT SUSTAINABILITY AND SCENARIOS - Staff DSA: low risk of sovereign stress (Annex V). - Staff baseline: public debt projected to rise marginally from 47 percent of GDP in 2023 to 50 percent in 2026, remain at this level until 2030, then gradually decline. - Alternative scenario (deficit ~3½ percent of GDP, constant global energy prices, no reduction in goods and services spending, slower renewables expansion): public debt would continue to rise but remain below 60 percent of GDP through 2040. - Significant but temporary energy price shock would increase public debt but not trigger continually rising debt dynamic. - Scenario assumptions (selected): - Energy prices: WEO, gradual decline (baseline); Constant at 2024 level (alternatives). - Energy consumption growth: 0.5 ppts lower than real GDP growth (baseline/alt); Same rate as real GDP growth (higher consumption scenario). - Renewables growth: 5% per year 1/ (baseline/alt); 2.5% per year 1/ (higher consumption scenario). - Goods and services (% GDP): 0.5 ppts of GDP savings over 3 yrs 2/ (baseline/alt); No savings 2/ (higher consumption scenario). - Notes: 1/ Avg. 2019-22: 10.7%; 2/ Takes into account age-related spending increases. ### RISKS AND IMPLEMENTATION CHALLENGES - Consolidation relies on non-energy spending restraint while keeping fixed-energy price policy—risks: - Energy price shocks could require additional measures (e.g., cuts to locally-funded public investment) to comply with fiscal rules. - Broad spending restraint may hinder structural reforms (innovation support, infrastructure, health and education). - Upside: revenue administration reform could yield stronger revenues; under EU framework, overperformance would be saved. ### POLICY RECOMMENDATIONS — FISCAL REORIENTATION AND REVENUE/SPENDING EFFICIENCY - Reallocate resources away from universal energy subsidies toward investment and innovation. - Rationalize energy subsidies while minimizing inflationary impact: - Keep current electricity tariffs for households up to a minimum consumption level and implement more progressive tariff schedule for higher consumption. - Introduce targeted cash transfers for vulnerable groups. - For businesses: gradually shift to full pass-through of market prices; temporary support for energy-intensive firms conditional on energy-efficiency improvements. - Adjust fuel prices to reflect import price changes. - Strengthen revenue administration and public investment efficiency: - Continue Tax and Customs Administration program with IMF TA. - Next steps: (i) complete establishment of a large taxpayer office; (ii) implement compliance and risk management strategy; (iii) deploy new IT systems. - Assess public investment management framework effectiveness (possible IMF PIMA and Climate-PIMA); strengthen public procurement (digitalize, risk-based approach). - Boost investment for sustainable growth and innovation by redirecting fiscal space from subsidy rationalization and revenue administration gains. - Develop a long-term fiscal framework incorporating aging, climate transition, and infrastructure needs; revise Fiscal Act after EU budget rules update. ### CORPORATE INCOME TAX (CIT) REFORM - Malta deferred EU Minimum Tax Directive (OECD Pillar II) implementation until end-2029. - Statutory CIT rate 35 percent; refund system allows 6/7th refund reducing ETR to 5 percent. - Risk: Qualified Domestic Minimum Top-up Tax in other jurisdictions could collect difference between Malta’s ETR 5 percent and Pillar II minimum ETR 15 percent—leading to foregone revenues. - Recommendation: - Develop CIT reform roadmap aligned with EU Directive addressing MNEs (in-scope and out-of-scope) and domestic firms and interactions with personal income tax. - Review expenditure system and introduce Qualified Refundable Tax Credits (QRTCs) to address externalities. - Carefully sequence reforms to protect revenues and investor incentives; disseminate roadmap pending EC clarification of QRTCs rules. ### SAFEGUARDING FINANCIAL STABILITY AND MACROPRUDENTIAL POLICY - Systemic risks centered on real estate—banks’ exposure to real estate ~70 percent of loan portfolio. - Households: indebtedness ~60 percent of GDP; assets 206 percent of GDP; most mortgages variable-rate. - Corporates: Stage 2 and Stage 3 shares declined; total NFC debt 187 percent of GDP in Q2 2024; consolidated corporate indebtedness ~67 percent of GDP (excluding intracompany loans and trade credits). - Central Bank of Malta stress tests: domestic banks have adequate capital and liquidity buffers; stylized adverse scenario inputs include cumulative 4.9 percent fall in GDP and inflation of 12.1 percent over three years. - Recommended actions: - Apply granular risk weights for real estate exposures under CRR III (effective January 1, 2025). - Continue vigilant monitoring of real estate exposures; ensure robust underwriting and appraisals. - Address data gaps in commercial real estate. - Implement EU Digital Operational Resilience Act (effective January 2025). - Macroprudential stance: - Given strong real estate credit growth and anticipated ECB easing, tightening macroprudential policy warranted. - Consider raising sSyRB rate and broadening scope beyond residential mortgages to include construction and commercial real estate. - Periodically review borrower-based measures (LTV, DSTI, maturity limits, speed limits). ### AML/CFT, GOVERNANCE, AND JUSTICE SYSTEM REFORM - AML/CFT: progress made—beneficial ownership information strengthened; 2023 National Risk Assessment indicates residual risk decline in most sectors; vigilance on emerging threats (trade-based money laundering) needed. - Justice system: ongoing reforms (including 2021 Digital Justice Strategy) improving efficiency; further steps needed on chief justice appointment process, case length reduction to boost investor confidence. ### STRUCTURAL REFORMS, INNOVATION, AND RRP - Innovation and skills - Malta strong in digitalization, ICT, intellectual assets but lags in R&D expenditure and human capital. - R&D expenditure 2022: 0.7 percent of GDP (two-thirds private sector). - Government target: raise R&D to 2 percent of GDP by 2030. - Existing strategies: Smart Specialization Strategy 2021–27; National Research and Innovation Strategic Plan 2023-27. - Recommendations: introduce well-designed QRTCs under Pillar II; evaluate effectiveness of grants/loans/tax incentives; streamline access to public funding; assess €10 million state venture capital fund; strengthen AI preparedness and cybersecurity. - Education and labor - Upskilling/reskilling essential; tertiary share rose but STEM graduates stagnated; National Education Strategy 2024-30 and Lifelong Learning Strategy 2023-30 key instruments. - Female labor force participation rose from 36 percent two decades ago to 73 percent today. - Environment and tourism - Net GHG emissions reduced over past decade but projected to rise to around 1990 levels by 2030 without stronger policies. - Renewables share ~13 percent; planned offshore wind uncertain in timing. - Implement 2021 Low Carbon Development Strategy and updated National Energy and Climate Plan; phase out fixed-energy price policy; shift to targeted subsidies and market pricing. - Tourism: implement Malta Tourism Strategy 2021–2030 to manage rapid accommodation growth and capacity pressures. - Recovery and Resilience Plan (RRP) - As of end-October, €166 million out of €328 million (1¾ percent of GDP, all grants) disbursed; about 40 percent of milestones achieved. - Implemented measures include waste strategy for construction, reforms to boost industrial research, national antifraud strategy, and justice system digitalization. ### AUTHORITIES’ OUTLOOK AND STAFF APPRAISAL - Authorities: - Expect moderated economic momentum; inflation stabilizing around 2 percent by mid-2025. - Committed to fiscal consolidation: reduce overall deficit from 4 percent of GDP in 2024 to 2.6 percent of GDP by 2027; keep public debt below 50 percent of GDP medium term. - Prioritize revenue administration reform before CIT reform; continue fixed-energy price policy; would cut non-energy spending in case of energy price shocks to meet EU fiscal targets. - Plan to tighten macroprudential policy by raising sSyRB rate and expanding coverage beyond residential mortgages in 2025. - Staff appraisal and recommended priorities - Growth to remain among Europe’s highest but moderating; risks tilted to the downside. - Overall deficit expected to decline to around 2¾ percent of GDP by 2029; public debt projected to remain around 50 percent of GDP. - Energy subsidies expected to remain sizable, accounting for 20 percent of the fiscal deficit (staff estimate). - Key recommendations: - Gradually exit fixed energy price policy; shift to targeted subsidies and market pricing; reallocate savings to investment (including green), services (health), and innovation. - Develop and disseminate a CIT reform roadmap aligned with EU Pillar II, pending EC clarification of QRTCs; cover foreign and domestic companies and personal income tax interactions. - Incorporate Malta Vision 2050 into a long-term fiscal framework to address aging, climate, and infrastructure spending pressures. - Financial sector: monitor real estate markets, close CRE data gaps, ensure robust underwriting, consider raising sSyRB and broadening scope, continue cyber risk resilience assessments. - AML/CFT and judicial: continue strengthening AML/CFT framework, align gatekeepers’ risk assessments with 2023 NRA, advance judicial reforms. - Innovation and labor: evaluate effectiveness of innovation support schemes, improve education outcomes, increase STEM enrollment, and boost adult learning. - Climate: additional mitigation and behavior change needed to meet 19 percent reduction target (relative to 2005) by 2030 under Effort Sharing Regulations; complete vulnerability risk assessment and update adaptation plan. *Source: 1mltea2025001-print-pdf — IMF staff report content.* ### 1. Short-Term Indicators _________________________________________________________________________ 26 ### 1mltea2025001-print-pdf - 1. Short-Term Indicators _________________________________________________________________________ 26 ### CONTEXT - Between 2014 and 2023, growth averaged 6¾ percent, the second-highest rate in Europe. - By 2023, GDP per capita converged with the EU average, reflecting policies promoting export-oriented service industries such as tourism and online gaming. - Recent significant revisions to GDP and balance of payments data indicate: - stronger growth and external sector performance over the past four years; - a more favorable fiscal position than previously estimated. - Structural challenges: - increased density and pressure on infrastructure (roads, water, sewage, electricity) and public services (education and health) due to foreign workers and tourists; - structural labor shortage and mismatches; - challenge of advancing the green transition. - The government launched the “Malta Vision 2050” initiative to engage the public on Malta’s long-term strategic direction. - Political context: The Labor Party (the center-left) holds a comfortable parliamentary majority; the next election is expected in 2027. ### RECENT DEVELOPMENTS — GROWTH, LABOR, INFLATION, HOUSING, FINANCE, EXTERNAL - Growth and demand - Growth slowed from 7¾ percent in H2 2023 to 6 percent y/y in H1 2024. - Net export growth moderated: buoyant exports (notably tourism) offset by increased imports. - Private consumption moderated as employment growth slows. - Gross capital formation recovered, reflecting increased investments in intellectual property and residential properties. - Labor market - Employment grew at 5¾ percent in H1 2024. - Unemployment rate at 3 percent in September. - Foreign workers account for over 30 percent of total employment. - Wage growth picked up in Q1 2024; real wages remain lower than two years ago. - Broader indicators (labor force participation, vacancy rates, part-time and underemployment shares) point to tight labor market conditions. - Inflation - HICP declined from a peak of 7.4 percent y/y in October 2022 to 2.4 percent in October 2024. - Core inflation (HICP excluding energy and processed food) fell to 2.0 percent y/y in September. - Goods inflation below 2 percent; inflationary pressures remain in services, especially transport and tourism-related services. - Fixed-energy price policy helped contain headline inflation in 2022; the difference with the Euro Area has since faded as European energy prices receded. - Residential property market - Real estate transactions declined over the past two years but recently began to rebound. - Residential property prices grew by 7 percent over the past year, in line with nominal income growth. - Staff estimate house prices broadly in line with fundamentals; rental prices have continued to grow fast. - Fiscal developments - Overall fiscal deficit in 2023 was €939 million (4.5 percent of GDP), below the budget forecast of €944 million (5.0 percent of GDP). - Energy subsidies remained significant at 1¼ percent of GDP in 2023. - Other subsidies, including costs related to the Air Malta closure, remained high at 2¼ percent of GDP. - In the first nine months of 2024, the fiscal balance recorded a cash surplus due to strong revenues (particularly income taxes) and contained spending growth. - Staff estimate the overall balance at 4 percent of GDP for 2024, with potential for a better outcome. - Bank credit and financial stability - Credit growth to non-financial corporates (NFCs) decelerated to 2½ percent y/y in September. - Lending to households remained robust and slightly accelerated; mortgage interest rates little changed. - Low pass-through from ECB policy rates to Malta’s mortgage rates reflects abundant liquidity, high banking system concentration, and low loan-to-deposit ratios. - Non-performing loan (NPL) ratio declined to about 2 percent by Q2:2024. - Core domestic banks’ return on equity reached 12 percent. - Core domestic banks: Tier 1 capital ratio of 21 percent; leverage ratio of 8 percent; liquidity coverage ratio above 350 percent. - Sectoral systemic risk buffer (sSyRB) targeting residential mortgages introduced in 2023 at 1.5 percent. - Domestic life-insurance sector: solvency capital ratio about 268 percent; liquidity asset ratio 59 percent. - Malta’s financial system: total assets about 2.1 times GDP in 2023 (about 1.6 times GDP excluding international banks); core and non-core banks accounted for 68 percent and 8 percent of banking sector assets in 2023; international banks accounted for 24 percent. - External sector - Current account returned to surplus in 2023 at 6¼ percent of GDP, up from -¾ percent of GDP in 2022. - 2023 current account still below the 2017-2023 average of about 11½ percent of GDP. - Improvement driven by stronger service balance, narrower non-fuel goods deficit, and lower energy prices. - In H1:2024, services exports strengthened while the primary income balance weakened. - Staff project a stable current account surplus of 6¼ percent of GDP for 2024. - Malta’s external position in 2024 is expected to be substantially stronger than the level implied by medium-term fundamentals and desirable policies. ### OUTLOOK AND RISKS - Projections - Output growth forecast to decelerate from 7½ percent in 2023 to 5 percent in 2024 and 4 percent in 2025. - Tourism exports expected to taper off but continue to grow given expanded flight capacity and increased winter season arrivals. - Non-tourism exports supported by modest recovery in Europe. - Positive output gap of ¾ percent of potential GDP in 2024 projected to gradually close over the medium term. - Inflation projected to stabilize around 2 percent by mid-2025. - Staff estimate medium-term growth at 4 percent, higher than the EU average but below the pre-pandemic average. - Drivers limiting medium-term potential: lower global growth prospects, maturing of the gaming sector, and potential lower growth in labor-intensive industries as authorities shift to more targeted immigration policy. - Risks (tilted to the downside) - External downside risks: spillovers from intensified regional conflicts; deepening geoeconomic fragmentation; disruptions to trade and supply chains; renewed spikes in global commodity prices (including food); higher import prices. - Slower growth in major economies, including Europe. - Cyberattacks and misuse of AI technologies. - Domestic risks: wage growth higher than expected leading to higher inflation; on the upside, faster-than-expected tourism export growth could boost near-term growth but add capacity pressures. ### POLICY DISCUSSIONS — OVERVIEW - Fiscal consolidation in line with the EU’s new fiscal framework is recommended. - Phase out the current fixed-energy price policy while protecting vulnerable groups and reallocate resources to boost economic capacity in the longer term. - Supervisors should remain vigilant in monitoring and addressing financial sector risks, especially in real estate. - Continued structural reform efforts are imperative to enhance productivity and achieve strong, socially and environmentally sustainable, and inclusive growth. ### A. Ensuring Fiscal Sustainability While Boosting Investment and Innovation Support - Rationale - Given the tight labor market and anticipated further easing of monetary policy in the euro area, fiscal consolidation planned for 2025 is considered appropriate. - 2025 budget objectives and measures - The 2025 budget aims to reduce the fiscal deficit to 4 percent of GDP, with lower revenue more than offset by reduced spending (in percent of GDP). - Key measures include: - Revenues: an adjustment of personal income tax brackets upward to compensate for past inflation is projected to reduce income tax revenue by about ½ percent of GDP. Capital and other current revenues are also projected to decline. - Expenditures: compensation of employees is set to decline from 2024, following one-off retroactive payments related to recent public wage settlements. Subsidies, including energy, will also decrease. Although retail energy prices remain fixed, lower global energy prices will reduce subsidies. - Capital spending is projected to decrease temporarily, reflecting lower disbursements from EU funds. - EU fiscal framework and medium-term plans - The authorities are committed to gradual consolidation in alignment with the EU’s new fiscal framework. - Malta will enter the EU’s Excessive Deficit Procedure in 2025 and has opted for the 4-year adjustment period. - Malta’s Medium-Term Fiscal Structural Plan (MFSP) aims to reduce the structural deficit by ½ percent of GDP each year. *Source: 1mltea2025001-print-pdf - 1. Short-Term Indicators* ### 2.6 percent of GDP by 2027, in line with the EU’s new fiscal framework (Annex IV). The planned ### 1mltea2025001-print-pdf - 2.6 percent of GDP by 2027, in line with the EU’s new fiscal framework (Annex IV). The planned ### Fiscal consolidation, assumptions, and projections - The planned consolidation targets fiscal adjustment to reach 2.6 percent of GDP by 2027, in line with the EU’s new fiscal framework (Annex IV). - Consolidation relies on spending restraint, especially for personnel, goods and services, and social payments. - The current fixed energy price policy will continue; the MFSP assumes constant global energy prices, implying a small reduction in energy subsidies as a share of GDP. - Revenue assumptions are conservative: neither tax increases nor improvements in taxpayer compliance are assumed. - The MFSP projects slightly higher medium-term growth and faster fiscal consolidation than IMF staff projections. - Key numeric projections and assumptions (selected): - Revenue: 36.0; 31.8; 32.8; 32.8; 32.0; 32.1; 31.9; 32.1; 31.9; 32.2 (as presented in table rows). - Expenditure: 34.0; 36.3; 36.9; 36.8; 35.5; 35.6; 34.9; 35.2; 34.5; 35.1. - Recurrent: 30.0; 31.2; 31.8; 31.8; 31.1; 31.1; 30.3; 30.6; 29.6; 30.1. - Subsidies (of which energy): ranges include 1.3; 3.6; 2.5; 2.5; 2.1; 2.1; 2.0; 2.0; 2.0; (energy subcomponent) ...1.4; 0.8; 0.8; 0.7; 0.7; 0.7; 0.6; 0.6. - Capital: 4.0; 5.1; 5.0; 5.0; 4.4; 4.4; 4.6; 4.6; 4.8; 4.9. - Net lending/borrowing: 2.0; -4.5; -4.0; -4.0; -3.5; -3.5; -3.0; -3.1; -2.6; -2.8. - Primary balance: 3.4; -3.5; -2.8; -2.8; -2.2; -2.1; -1.6; -1.7; -1.1; -1.4. - Structural balance (% of potential GDP): 1.3; -3.6...; -3.8...; -3.6...; -3.2...; -2.8. - Public debt: 42.0; 47.3; 49.5; 48.9; 50.1; 49.7; 50.0; 50.2; 49.2; 50.2. - Nominal GDP (% change) examples: 10.4; 13.2; 8.1; 8.4; 7.0; 6.5; 7.0; 6.2; 6.3; 6.2. - Real GDP (% change) examples: 8.1; 7.5; 4.9; 5.0; 4.3; 4.1; 4.4; 4.0; 4.5; 4.0. - Medium-Term Fiscal Structural Plan (selected rows): - Nominal GDP (% change): 8.2; 7.1; 7.1; 7.2; 7.3; 7.6; 7.5. - Potential real GDP (% change): 5.1; 4.8; 4.6; 4.6; 4.6; 4.6; 4.5. - Overall fiscal balance (% GDP): -4.0; -3.8; -3.4; -3.0; -2.6; -2.4; -2.2. - Public debt (% GDP): 49.2; 49.8; 49.9; 49.5; 48.8; 47.8; 46.7. - IMF staff projections (selected rows): - Overall fiscal balance (% GDP): -0.6; -4.0; -3.5; -3.1; -2.8; -2.8; -2.7; -2.7. - Public debt (% GDP): ...; 48.9; 49.7; 50.2; 50.2; 50.2; 50.1; 50.1. ### Debt sustainability and scenarios - Staff debt sustainability analysis suggests a low risk of sovereign stress (Annex V). - Under staff’s baseline: - Public debt projected to rise marginally from 47 percent of GDP in 2023 to 50 percent in 2026, stay at this level until 2030, and then gradually decline. - Alternative scenario (deficit remains around 3½ percent of GDP, with constant global energy prices, no reduction in goods and services spending, and slower expansion of renewable energy): - Public debt would continue to rise but remain below 60 percent of GDP through 2040. - A significant but temporary energy price shock (as experienced in 2022) would increase public debt but would not trigger a dynamic of continually rising debt. - Scenario assumptions (selected): - Energy prices: WEO, gradual decline (baseline); Constant at 2024 level (alternatives). - Energy consumption growth: 0.5 ppts lower than real GDP growth (baseline/alt); Same rate as real GDP growth (higher consumption scenario). - Renewables growth: 5% per year 1/ (baseline); 5% per year 1/ (alt); 2.5% per year 1/ (higher consumption scenario). - Goods and services (% GDP): 0.5 ppts of GDP savings over 3 yrs 2/ (baseline/alt); No savings 2/ (higher consumption scenario). - Notes: 1/ Avg. 2019-22: 10.7%; 2/ Takes into account age-related spending increases. ### Risks and implementation challenges - The consolidation strategy relies on restraining non-energy spending while maintaining fixed-energy price policy; this carries risks: - In the event of energy price shocks, additional measures (e.g., cuts to locally-funded public investment) might be necessary to comply with fiscal rules. - Broad spending restraint may hinder structural reforms, including increasing innovation support, enhancing infrastructure investments, and improving public services (health and education) needed for a growing population. - Upside risk: revenue administration reform could lead to stronger revenues; under the EU’s fiscal framework, overperformance would be saved, as targets are set in terms of net expenditure growth. ### Policy recommendations on fiscal reorientation and revenue/spending efficiency - Reorient resources away from energy subsidies toward investment and innovation to achieve long-term sustainable growth. - Rationalizing energy subsidies while minimizing inflationary impacts: - Keep current electricity tariffs for households up to a minimum consumption level and implement a more progressive tariff schedule for higher consumption—less inflationary than raising tariffs across all bands. - Introduce targeted cash transfers for vulnerable groups. - For businesses: gradually shift to a full pass-through of market prices, with temporary support for energy-intensive firms conditional on improving energy efficiency. - Adjust fuel prices to reflect changes in import prices. - Strengthen revenue administration and public investment efficiency: - Continue the Tax and Customs Administration program to improve tax collection efficiency, with IMF TA (Annex VI). - Next steps: (i) complete establishment of a large taxpayer office; (ii) implement compliance and risk management strategy; (iii) deploy new IT systems. - Spending-side priorities: (i) assess effectiveness and efficiency of public investment management framework (possible IMF PIMA and Climate-PIMA); (ii) strengthen public procurement in line with OECD recommendations (e.g., digitalizing procurement, applying a risk-based approach). - Boost investment for sustainable growth and innovation: - Redirect fiscal space from rationalizing energy subsidies and strengthening revenue administration to innovation support, public investment, and services to address capacity constraints from a growing population. - Develop a long-term fiscal framework to incorporate emerging spending pressures (population aging, climate transition, infrastructure) and a prospective change in tax policy; use planned revision of the Fiscal Act after revised EU budget rules as an opportunity. ### Corporate Income Tax (CIT) reform - Malta has deferred implementation of the EU’s Minimum Tax Directive on OECD Pillar II up until end-2029. - Current statutory tax rate for domestic enterprises is 35 percent, but a refund system allows shareholders of Maltese MNEs to claim a refund of 6/7th of the tax paid in Malta, reducing the effective tax rate (ETR) to 5 percent. - Risk: jurisdictions implementing a Qualified Domestic Minimum Top-up Tax can collect taxes from MNEs within Pillar II scope for the difference between Malta’s current ETR of 5 percent and the Pillar II minimum ETR of 15 percent—leading to foregone tax revenue for Malta. - Recommendation: - Develop a roadmap for CIT reform aligned with the EU Directive to guide taxpayers and investors. - Roadmap should address: (i) CIT for MNEs (within and outside scope of Pillar II) and domestic firms; (ii) personal income tax due to interaction with CIT. - Review current expenditure system and introduce Qualified Refundable Tax Credits (QRTCs) aimed at addressing externalities. - Carefully calibrate sequencing to protect revenues and mitigate distortions in investor incentives. - Develop and disseminate the roadmap promptly, pending clarification of QRTCs rules from the European Commission. ### Safeguarding financial stability and macroprudential policy - Systemic risks are contained but centered on real estate (residential, commercial, construction); banks’ exposure to real estate accounts for 70 percent of total loan portfolio. - Households: - Household indebtedness ~60 percent of GDP, mitigated by household assets at 206 percent of GDP. - Most mortgages have variable interest rates—risk if banks increase mortgage rates (direct risk to households; indirect risk to consumption and macroeconomy). - Corporates: - Share of Stage 2 and Stage 3 loans has declined in corporate loan portfolio despite higher rates. - Total NFC debt fell to 187 percent of GDP in Q2 2024 due to strong GDP growth. - Consolidated corporate indebtedness (excluding intracompany loans and trade credits) ~67 percent of GDP. - Highly indebted corporates or those relying on market-based financing (construction, real estate) may face pressure if growth falters, high rates persist, tourism boom ends, or immigration inflows decline. - Central Bank of Malta stress tests: - Indicate domestic banks have adequate capital and liquidity buffers to withstand severe stress scenarios; all core and non-core domestic banks (except one small bank) meet capital requirements with comfortable margins under an adverse scenario. - Liquidity: all core banks and most non-core banks can maintain liquidity requirements even under a severe bank-run scenario; some banks may have difficulty maintaining liquidity coverage ratios above 100 percent depending on shock severity. - Stress-test stylized inputs referenced: cumulative 4.9 percent fall in GDP and inflation of 12.1 percent over a three-year period (adverse scenario reference). - Recommended actions: - Apply granular risk weights for real estate exposures under the EU’s Capital Requirements Regulation III (effective January 1, 2025). - Continue vigilant monitoring of real estate exposures given sensitivity to macroeconomic conditions, interest rates, population growth, and tourist inflows. - Ensure banks maintain robust underwriting and appraisals for real estate lending. - Address remaining data gaps in commercial real estate for better financial stability analysis. - Implement the EU’s Digital Operational Resilience Act (effective January 2025) to strengthen cybersecurity given rising reliance on AI, digital platforms, and ICT third-party providers. - Macroprudential stance: - Given strong credit growth in real estate and anticipated ECB monetary easing, tightening macroprudential policy is warranted. - Consider raising the sSyRB rate in line with rising risks and broadening its scope beyond residential mortgages to include construction and commercial real estate. - Continue periodic review of the effectiveness of borrower-based measures (loan-to-value, debt-service-to-income, maturity limits, speed limits). ### AML/CFT, governance, and justice system reform - Progress made in AML/CFT framework: strengthened beneficial ownership information and increased resources for supervisors and regulators. - 2023 AML/CFT National Risk Assessment indicated a decline in residual risk in most sectors. - Authorities should remain vigilant on emerging threats (e.g., trade-based money laundering) and ensure gatekeepers align risk assessments with 2023 National Risk Assessment results. - Justice system reform: - Ongoing reforms (including 2021 Digital Justice Strategy) improve efficiency, effectiveness, and accessibility. - Further efforts needed to strengthen chief justice appointment process, improve efficiency, and reduce length of proceedings to boost investor confidence. ### Structural reforms, innovation, and Recovery and Resilience Plan (RRP) - Continued reforms necessary to boost productivity: emphasize innovation, education, training, digital skills, and environmental sustainability as pillars of “Malta Vision 2050” (to be published in Spring 2025). - Growth drivers over past decade: professional services, online gaming, and ICT (higher value-added); trade and tourism (lower value-added) also experienced strong growth. - Influx of foreign workers and increased tourism have strained infrastructure and public services, raising sustainability concerns. - RRP implementation: - Well underway: as of end-October, €166 million out of a total of €328 million (1¾ percent of GDP, all grants) have been disbursed, with about 40 percent of milestones achieved. - Examples of implemented measures: adoption of strategy to reduce waste in construction sector; reforms to boost industrial research; a national antifraud and corruption strategy; digitalization of the justice system. *Source: Ministry of Finance, Eurostat, IMF staff projections and IMF staff analysis as presented in the supplied content.* ### 31. Stepping up efforts to strengthen innovation and its financing should enhance ### Stepping up efforts to strengthen innovation and its financing should enhance ### Innovation performance, gaps, and policy actions - Malta excels in digitalization, ICT usage, and intellectual assets but lags EU peers in R&D expenditure, financing, and human capital, which have deteriorated since 2017. - R&D expenditure in 2022 was 0.7 percent of GDP, two-thirds of which was in the private sector. - The government plans to raise R&D spending (both public and private) to 2 percent of GDP by 2030. - Existing strategies and plans: - Smart Specialization Strategy for 2021–27 (sector-specific measures leveraging technologies, including AI). - National Research and Innovation Strategic Plan 2023-27 to improve Malta’s R&D ecosystem. - Recommendations and measures: - Review and strengthen tax incentives for innovation by timely introduction of well-designed QRTCs under Pillar II; policy design should focus on local R&D activities and skills and technology transfer from abroad. - Continue evaluating effectiveness of grants, loans, and tax incentive schemes to support innovation and start-ups from early stages to commercialization. - Streamline requirements for companies accessing public funding schemes and develop common account management. - Periodically assess the €10 million state-sponsored venture capital fund and eventually integrate it into the venture fund network in Europe. - Strengthen digital preparedness and AI use: maintain AI strategy (since 2019), leverage IMF’s AI Preparedness Index signals, support Digital Innovation Hub and e-government transformation, and continue cybersecurity training and cyber-event exercises. ### Labor force, skills, and education - Continued upskilling, reskilling, and strengthening education outcomes are essential to alleviate labor shortages and facilitate labor mobility amid digitalization. - Malta faces large skills shortages in both technical and transversal areas. - The population share with tertiary education has increased, but the number of STEM graduates has stagnated. - Youth performance (measured by PISA scores) remains a policy focus with limited progress. - Adoption of digital technologies, including AI, could enhance productivity and free up labor in business administration, customer service, and clerical support, but may also result in job losses during the transition. - Key policy instruments to implement robustly: - National Education Strategy 2024-30. - Lifelong Learning Strategy 2023-30. ### Female labor force participation and gender gaps - Female participation rate rose from 36 percent two decades ago to 73 percent today, exceeding the EU average. - Participation among those aged 50-64 years remains low with limited scope to increase; policies incentivize delayed retirement. - Significant progress in narrowing gender gaps in public administration representation, but considerable gaps persist in the private sector, contributing to remaining gender pay gaps. - Continue initiatives to further narrow gender gaps across various measures of gender equality, including representation. ### Environmental sustainability, energy, and tourism - Net GHG emissions have been significantly reduced over the past decade due to the shift from heavy fuel oil to natural gas in power generation, but are projected to rise to around 1990 levels by 2030. - Current policies are insufficient to contain GHG emissions, especially from road transport. - The share of renewable energy remains low at around 13 percent, constrained by limited land availability for large-scale projects. - Planned offshore wind farms would support green electricity supply, but rollout timing is uncertain. - Recommended actions: - Robustly implement the 2021 Low Carbon Development Strategy and the updated National Energy and Climate Plan (forthcoming), especially in transportation and buildings. - Phase out the fixed-energy price policy to enhance consumer incentives for conservation and green investment; shift from universal subsidies to targeted subsidies and stronger market pricing mechanisms. - Complete vulnerability risk assessment and update the adaptation plan for climate adaptation. - Tourism management: - Rapid growth in hotel and other accommodation projects may exacerbate labor shortages, infrastructure bottlenecks, and social and environmental concerns. - Steady implementation of the Malta Tourism Strategy 2021–2030 is needed to promote sustainable, high-quality tourism. - Malta Vision 2050: - Launched in October to improve quality of life across digital innovation, infrastructure, education, healthcare, sustainability, and quality job creation. - A steering committee established; milestones set for 2035 and key performance indicators expected to be published by end-March 2025. - Update the Strategic Plan for Environment and Development 2015 accordingly. ### Authorities’ outlook, fiscal and macroprudential stance - Authorities expect continued positive economic momentum at a more moderate pace; inflation stabilizing at around 2 percent by mid-2025. - They reaffirm commitment to fiscal consolidation under the EU’s new fiscal rules and aim to reduce the overall deficit from 4 percent of GDP in 2024 to 2.6 percent of GDP by 2027 while keeping public debt below 50 percent of GDP over the medium term. - The Ministry of Finance prioritizes revenue administration reform before CIT reform and will consider CIT reform in line with the EU’s Directive on OECD Pillar II pending QRTC clarification from the EC. - Authorities view continuation of the fixed-energy price policy as essential for economic and social stability and note a significant decline in energy subsidies; in case of energy price shocks they would cut non-energy-related expenditure to meet EU fiscal targets. - Financial stability: - Banking system sound with strong capital and liquidity, improved asset quality and profitability; borrower-based mortgage measures (introduced in 2019) strengthened resilience. - Supervisors committed to vigilance on real estate markets and cybersecurity. - Authorities plan to tighten macroprudential policy by potentially raising the sectoral systemic risk buffer (sSyRB) rate and expanding its coverage beyond residential mortgages in 2025. ### Staff appraisal: key projections, risks, and recommended priorities - Growth is moderating but expected to remain among Europe’s highest; supported by foreign workers and tourists, increasing population density and straining infrastructure. - Risks to the outlook are tilted to the downside, including spillovers from regional conflicts. - External position in 2024 expected to be substantially stronger than the level implied by fundamentals and desirable policies. - Fiscal projections and fiscal policy recommendations: - Overall deficit expected to decline to around 2¾ percent of GDP by 2029. - Public debt projected to remain around 50 percent of GDP, below 60 percent EU threshold. - Energy subsidies are expected to remain sizable, accounting for 20 percent of the fiscal deficit. - Staff recommends gradually but decisively exiting the fixed energy price policy, shifting to targeted subsidies and market pricing, and reallocating fiscal space to investment (including green), services (e.g., health), and innovation support. - Develop and disseminate a roadmap for corporate income tax (CIT) reform in line with the EU’s Directive on Pillar II to guide taxpayers and investors, pending EC clarification of Qualified Refundable Tax Credits; the roadmap should cover CIT for both foreign and domestic companies and personal income tax. - Reflect long-term developmental vision (Malta Vision 2050) in a long-term fiscal framework to address spending pressures from population aging, climate transition, and infrastructure needs. - Financial sector recommendations: - Continue vigilant monitoring of real estate markets, close data gaps in commercial real estate, ensure robust underwriting and appraisals for real estate loans. - Consider raising the sectoral systemic risk buffer rate and broadening its scope beyond residential mortgages. - Continue cyber risk resilience assessments for financial institutions. - AML/CFT and judicial reforms: - Continue strengthening the AML/CFT framework and risk-based approach, monitor emerging threats (e.g., trade-based money laundering), align gatekeepers’ risk assessments with the 2023 National Risk Assessment, and advance judicial reforms including strengthening the appointment process of the chief justice and improving justice system efficiency. - Innovation and labor-market priorities: - Continue evaluating effectiveness of schemes (grants, tax incentives) supporting innovation, start-ups, and scale-ups, focusing on size and design. - Continue efforts to improve educational outcomes, increase STEM enrollment, enhance digital skills, and boost adult learning. - Continue initiatives to further narrow gender gaps across measures of gender equality, including representation. - Climate targets and adaptation: - Additional mitigation measures and changes in public behavior are necessary to meet the 19 percent reduction target (relative to 2005 levels) by 2030 under the Effort Sharing Regulations. - Complete the vulnerability risk assessment and update the adaptation plan accordingly. *Source: IMF staff report content.* ### 53. It is recommended that the next Article IV consultation be held in the standard 12- ### MALTA ### Short-Term Indicators - Economic sentiment: volatile with subdued consumer confidence; capacity utilization has risen. - Sector confidence: - Construction and industry sector confidence declined; service sector confidence improved. - Industrial production: continues to recover from the pandemic. - Tourism: tourist arrivals have continued to increase (Tourist Arrival: Oct-24; series shown in thousands, SA). - Sources cited: European Central Bank, Central Bank of Malta, European Commission, and IMF staff calculations. ### Fiscal Developments - Fiscal deficit: remains substantial but has narrowed since the pandemic. - Public debt: public debt ratio has fallen to below 50 percent of GDP. - Primary deficit: expected to narrow over the medium term, reflecting an improvement in the structural balance. - Revenue reliance: Malta’s reliance on corporate income tax revenues remains well above the EU average (Corporate Income Tax Revenue, 2021: chart comparing countries; MLT shown among others). - Age-related spending: projections depend on migrant patterns; alternative scenarios for aging cost estimates include: - Baseline projection (BP) and BP with higher migration and lower migration (percent of GDP shown across long horizons). ### Financial Soundness Indicators - Capitalization: banking system is well capitalized (Regulatory capital ratios and Tier 1 ratios depicted). - Profitability: bank profitability has improved (Return on equity and Return on assets series). - Asset quality: - NPL ratios: historically low levels with adequate coverage. - NPLs to total gross loans: series showing values around 2.1–3.7 percent across banks (see charts). - Coverage ratios: shown in chart (total coverage ratio series). - Housing and credit: - House prices: remained steady as a share of income (Price to Income Ratio: 2024Q2). - Loan-to-deposit ratio: around 60 percent (resident credit and deposit growth series). - Credit gaps: broadly around zero (Real Credit per Capita Gap: MA, HP, CF filters). ### External Sector - Current account: returned to a surplus in 2023. - Goods and services: - Narrowing of the goods deficit contributed to current account surplus. - Service exports dominate total exports (Exports of services and goods expressed as percent of GDP). - Competitiveness: - CPI-based REER has depreciated slightly since 2019 despite a nominal appreciation (NEER and REER, CPI Based, 2015=100). - External position: - Gross international assets and liabilities exceed 30 times GDP, with sizable FDI. - International investment position, net: 95 percent of GDP (June -2024 figure shown). - Sources: Haver Analytics, Eurostat, IMF World Economic Outlook, and IMF staff calculations. ### Labor Market and Structural Indicators - Unemployment: declined to historically low levels (Unemployment Rate: Malta vs Euro area; 2024Q2 noted). - Labor supply: - Labor shortages mitigated by influx of foreign workers and higher female participation. - Employment by citizenship: Maltese nationals and foreign citizenship series shown (levels in 1,000s). - Net migration (% population): 0.7 (2021), 4.2 (2022), 1.9 (2023), 1.8 (2024), with projections 1.8, 1.7, 1.7, 1.7, 1.6, 1.5 for 2025–30 (Table 1). - Skill shortages: prevalent, especially in technical areas; breakdown of skills (Technical, Adaptability and Flexibility, Critical Thinking, etc.) with percent shares shown. - Tertiary graduates: number of graduates rose overall but slightly declined in STEM (Tertiary Education Graduates (1,000) series). ### Key Macroeconomic Projections and Indicators (Table 1: Selected Economic Indicators, 2021–30) - Real GDP (year on year change): - 2021: 13.5 - 2022: 4.1 - 2023: 7.5 (Est.) - 2024: 5.0 - 2025: 4.1 - 2026: 4.0 - 2027: 4.0 - 2028: 4.0 - 2029: 4.0 - 2030: 3.9 - Domestic demand (year on year change): 12.0 (2021), 8.1 (2022), 11.7 (2023), 5.1 (2024), 5.0 (2025), 4.3 (2026), 4.4 (2027), 4.3 (2028), 4.4 (2029), 4.3 (2030). - Investment (% GDP): 24.0 (2021), 25.2 (2022), 19.6 (2023), 19.3 (2024), 19.2 (2025), 19.7 (2026), 20.0 (2027), 20.2 (2028), 20.3 (2029), 20.3 (2030). - Gross national savings (% GDP): 33.4 (2021), 24.4 (2022), 25.9 (2023), 25.6 (2024), 25.5 (2025), 25.7 (2026), 25.4 (2027), 25.5 (2028), 25.4 (2029), 25.3 (2030). - Unemployment rate (Age 15-74): 3.8 (2021), 3.5 (2022), 3.5 (2023), 3.0 (2024–30 series shows 3.0). - HICP (avg): 0.7 (2021), 6.1 (2022), 5.6 (2023), 2.5 (2024), 2.2 (2025), 2.0 (2026–30 mostly 2.0). - Credit to the private sector (growth): 5.8 (2021), 8.2 (2022), 8.3 (2023), 4.2 (2024), 5.8 (2025), 6.3 (2026), 6.0 (2027), 5.6 (2028), 5.7 (2029), 5.7 (2030). - General government finances (% GDP): - Revenue: 32.5 (2021), 32.5 (2022), 31.8 (2023), 32.8 (2024), 32.1 (2025–30 series around 32.2–32.3). - Expenditure: 39.5 (2021), 37.8 (2022), 36.3 (2023), 36.8 (2024), 35.6 (2025), 35.2 (2026), 35.1 (2027), 35.0 (2028), 34.9 (2029), 35.0 (2030). - Net lending/borrowing: -7.0 (2021), -5.2 (2022), -4.5 (2023), -4.0 (2024), -3.5 (2025), -3.1 (2026), -2.8 (2027), -2.8 (2028), -2.7 (2029), -2.7 (2030). - Consolidated debt (gross): 49.6 (2021), 49.4 (2022), 47.4 (2023), 49.0 (2024), 49.7 (2025), 50.2 (2026), 50.2 (2027), 50.2 (2028), 50.1 (2029), 50.1 (2030). - External accounts (% GDP): - Current account: 9.4 (2021), -0.8 (2022), 6.4 (2023), 6.3 (2024), 6.3 (2025), 6.0 (2026), 5.4 (2027), 5.4 (2028), 5.1 (2029), 5.0 (2030). - Gross external debt: 374 (2021), 334 (2022), 323 (2023), 337 (2024), 337 (2025), 328 (2026), 321 (2027), 314 (2028), 308 (2029), 303 (2030). - Memorandum: - Nominal GDP (bn €): 16.7 (2021), 18.2 (2022), 20.7 (2023), 22.4 (2024), 23.9 (2025), 25.3 (2026), 26.9 (2027), 28.6 (2028), 30.3 (2029), 32.1 (2030). - Population (1,000): 516 (2021) up to 614 (2030). - GDP per capita ($): 38,230 (2021), 36,959 (2022), 41,205 (2023), 43,938 (2024), 45,224 (2025), 47,020 (2026), 48,907 (2027), 50,912 (2028), 53,152 (2029), 55,435 (2030). ### Fiscal Developments and Projections (Table 2) - Revenue composition (percent of GDP, selected): - Revenue: 32.5 (2021), 32.5 (2022), 31.8 (2023), 32.8 (2024), 32.1 (2025–30 ~32.2). - Current revenue: 31.5 (2021), 31.6 (2022), 30.8 (2023), 31.8 (2024), 31.4 (2025), 31.4 (2026), 31.5 (2027), 31.6 (2028), 31.6 (2029), 31.6 (2030). - Tax revenue: 22.4 (2021), 22.7 (2022), 21.8 (2023), 22.4 (2024), 22.2 (2025), 22.3 (2026), 22.4 (2027), 22.5 (2028), 22.5 (2029), 22.5 (2030). - VAT: 6.0 (2021), 6.5 (2022), 6.1 (2023), 6.4 (2024), 6.6 (2025), 6.6 (2026), 6.6 (2027), 6.7 (2028), 6.7 (2029), 6.7 (2030). - Expenditure composition: - Expenditure: 39.5 (2021), 37.8 (2022), 36.3 (2023), 36.8 (2024), 35.6 (2025), 35.2 (2026), 35.1 (2027), 35.0 (2028), 34.9 (2029), 35.0 (2030). - Interest payments: 1.0 (2021), 0.9 (2022), 1.0 (2023), 1.2 (2024), 1.3 (2025), 1.4 (2026), 1.5 (2027–30 series ~1.5). - Capital expenditure: 4.8 (2021), 4.0 (2022), 5.1 (2023), 5.0 (2024), 4.4 (2025), 4.6 (2026), 4.9 (2027), 4.9 (2028), 4.9 (2029), 4.9 (2030). - Balances: - Operating balance: -2.2 (2021), -1.2 (2022), 0.5 (2023), 1.0 (2024), 0.9 (2025), 1.5 (2026), 2.1 (2027), 2.1 (2028), 2.2 (2029), 2.2 (2030). - Primary balance: -6.0 (2021), -4.3 (2022), -3.5 (2023), -2.8 (2024), -2.1 (2025), -1.7 (2026), -1.4 (2027), -1.3 (2028), -1.2 (2029), -1.3 (2030). - Net lending/borrowing: -7.0 (2021), -5.2 (2022), -4.5 (2023), -4.0 (2024), -3.5 (2025), -3.1 (2026), -2.8 (2027), -2.8 (2028), -2.7 (2029), -2.7 (2030). - Government balance sheet: - Consolidated debt: 49.6 (2021), 49.4 (2022), 47.4 (2023), 48.9 (2024), 49.7 (2025), 50.2 (2026), 50.2 (2027), 50.2 (2028), 50.1 (2029), 50.1 (2030). - Net debt: 39.9 (2021), 40.1 (2022), 37.6 (2023), 38.6 (2024), 39.7 (2025), 40.5 (2026), 40.9 (2027), 41.4 (2028), 41.7 (2029), 42.1 (2030). - Memorandum: - Fiscal impulse: 3.6 (2021), -2.4 (2022), 0.0 (2023), -0.2 (2024), -0.5 (2025), -0.4 (2026), -0.3 (2027), 0.0 (2028), 0.0 (2029), 0.1 (2030). - Gross financing requirement: 11.4 (2021), 9.0 (2022), 9.2 (2023), 7.7 (2024), 5.8 (2025), 7.2 (2026), 8.0 (2027), 8.2 (2028), 6.7 (2029), 6.6 (2030). ### Balance of Payments (Table 3) - Current account (percent of GDP): 9.4 (2021), -0.8 (2022), 6.4 (2023), 6.3 (2024), 6.3 (2025), 6.0 (2026), 5.4 (2027), 5.4 (2028), 5.1 (2029), 5.0 (2030). - GNFS balance: 19.3 (2021), 11.3 (2022), 17.9 (2023), 19.8 (2024–25 series ~19.8–19.4). - Balance on goods: -12.0 (2021), -17.4 (2022), -11.8 (2023), -12.0 (2024), -12.4 (2025), -12.8 (2026), -13.4 (2027), -13.9 (2028), -14.4 (2029), -15.0 (2030). - Exports and imports of goods and services: detailed series with Exports of services: 95.3 (2021), 100.2 (2022), 99.9 (2023), 101.6 (2024), up to 110.0 (2030). - Primary income, net: -9.3 (2021), -10.5 (2022), -11.2 (2023), -13.0 (2024), -12.9 (2025), -12.8 (2026), -12.7 (2027), -12.6 (2028), -12.5 (2029), -12.4 (2030). - Financial account: 11.4 (2021), -2.8 (2022), 9.3 (2023), 9.2 (2024), 7.5 (2025), 7.3 (2026), 6.6 (2027), 6.3 (2028), 6.1 (2029), 6.0 (2030). - Direct investment, net: -85.0 (2021), -7.8 (2022), -4.9 (2023), -5.0 (2024), and forecast -10.0 for 2025–30 (percent of GDP). - International investment position, net: 105 (2021), 100 (2022), 93 (2023), 95 (2024), 98 (2025), 99 (2026–30 series around 100–100). - Gross external debt: 374 (2021), 334 (2022), 323 (2023), 337 (2024), 337 (2025), 328 (2026), 321 (2027), 314 (2028), 308 (2029), 303 (2030). - Memorandum: International reserves (bn €): 1.0 (2021), 1.1 (2022), 1.1 (2023), 1.3 (2024–30 largely 1.3–1.3–1.3–1.3–1.3–1.3). ### Financial Soundness Indicators (Table 4, selected series) - Regulatory capital to RWAs (Total Banks): 21.7 (2020), 22.7 (2021), 23.0 (2022), 24.7 (2023), 24.2 (Jun-24). - Regulatory Tier 1 capital to RWAs (Total Banks): 18.6 (2020), 19.5 (2021), 19.6 (2022), 21.0 (2023), 20.7 (Jun-24). - Leverage ratio (Total Banks): series including 7.6–9.5–10.0–9.5–9.5 shown in table. - Profitability (ROA, ROE): ROA and ROE series with notable movements; ROA around 1.3 (Jun-24 for core domestic banks), ROE variously reported across bank groups. - Asset quality: - NPLs to total gross loans (Total Banks): 3.7 (2020), 3.5 (2021), 2.7 (2022), 2.5 (2023), 2.2 (Jun-24). - Overall NPL Ratio excluding CBM placements: 5.1 (2020), 5.3 (2021), 3.7 (2022), 3.3 (2023), 2.9 (Jun-24). - Total coverage ratio: series across bank groups with values in table (various levels). - Liquidity: - LCR (Total Banks): 328.2 (2020), 359.9 (2021), 380.0 (2022), 369.1 (2023), 351.2 (Jun-24). - Customer loans to customer deposits (Total Banks): 58.4 (2020), 55.2 (2021), 56.0 (2022), 58.9 (2023), 60.6 (Jun-24). - Balance sheet indicators: Assets-to-GDP and other ratios reported across years in the table. ### Recommendation - It is recommended that the next Article IV consultation be held in the standard 12-month cycle. *Sources: Authorities' data, Eurostat, European Commission, European Central Bank, Central Bank of Malta, Malta Financial Services Authority, Haver Analytics, IMF World Economic Outlook, IMF Financial Soundness Indicator, and IMF staff calculations.* ### 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. - Status: Ongoing. - Consider introducing a sectoral systemic risk buffer to target systemic risks arising from mortgages. - Status: Implemented. In February 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. - Status: Ongoing. ### Fiscal Policy - Prepare an exit strategy from the current fixed energy price policy while protecting vulnerable groups. - Status: Not implemented. - Accelerate planned fiscal adjustment. - Status: Not implemented. The structural balance is projected to deteriorate in 2024, before improving from 2025 onward. - 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. - Status: 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. - Status: Ongoing. ### Structural Reforms - Address the skills gap in the workforce and foster labor force participation. - Status: Ongoing through the implementation of the National Education Strategy 2024-30 and the Lifelong Learning Strategy 2023-30. - Promote digitalization and advance green investment and decarbonization. - Status: Ongoing, including as a part of Malta’s Recovery and Resilience Plan and various public support schemes. - Complete the comprehensive insolvency reform plan. - Status: Implemented. The new Insolvency Practitioners Act and Pre-Restructuring Act were enacted in December 2022. --- ### Annex II. External Sector Assessment ### Overall assessment and policy guidance - Overall Assessment: Malta’s external position in 2024 (staff’s estimates) is expected to be substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Over the medium term, the current account (CA) surplus is expected to gradually decline with an increase in private investment, while savings remain broadly unchanged. - The country’s large positive net international investment position (NIIP) significantly mitigates external vulnerabilities. - Potential Policy Responses: - Structural policies aimed at raising investment, including in research and development, digital, and climate, would help reduce the surplus. - Authorities should continue evaluating the effectiveness of various schemes (e.g., grants, tax incentives) to support innovation activities, start-ups, and scale-ups, focusing on their size and overall design. ### Foreign assets and liabilities: position and trajectory - Background: NIIP (which excludes direct investment intercompany lending) increased from 76 percent of GDP in 2018 to 115 percent in 2020 and then fell to 93 percent in 2023, mostly driven by BOP developments. Direct investment comprises the largest component of assets (over 80 percent). - Projection: NIIP is expected to remain constant at around 95 percent of GDP in 2024. - Gross positions: Gross assets and liabilities are sizable, at around 31 and 30 times GDP, respectively. - Assessment: Gross liabilities are sizable and financial flow volatility and investment returns present potential risks, but most liabilities are direct investments and the sizable gross asset position mitigates risks. ### Key 2024 external position statistics (percent of GDP) - NIIP: 95 - Gross Assets: 3,124 - Gross Liab.: 3,029 ### Current Account - Background: - The current account surplus was 6¼ percent of GDP in 2023, up from -¾ percent in 2022 but below the 2017-2023 average of about 11½ percent. - Improvement drivers: stronger service balance, narrower non-fuel goods deficit, and lower energy prices; primary and secondary income balances remained largely unchanged. - H1 2024: services exports strengthened, while the primary income balance weakened. - Staff project a stable current account surplus of 6¼ percent of GDP as robust service exports continue throughout 2024. - Medium-term expectation: CA surplus expected to gradually decline with an increase in private investment, while savings remain broadly unchanged. - Assessment and adjustments: - Considering cyclical contributions of -0.1 percent of GDP, the CA balance of 6.3 percent of GDP (staff estimate) is adjusted to 6.4 percent of GDP. - The EBA-lite CA model suggests a CA norm of -0.4 percent of GDP, with a large positive model residual. - Adjustment for remittances: the CA norm is adjusted upward by 1.9 percentage points to 1.5 percent of GDP by reducing the negative contribution of the remittance/migrant share variable in the EBA-lite model (from -2.4 percentage points to -0.5 percentage points). - Result: The CA gap is estimated at 4.9 percent of GDP, with an implied REER gap of -5.1 percent. - Relative policy gaps contribute 1.9 percentage points to the CA gap, with the contribution of domestic policy gaps being 1.7 percentage points of GDP. ### Real Exchange Rate - Background: The CPI-based REER depreciated by 0.1 percent during the first three quarters of 2024, following an appreciation of 3.5 percent on average in 2023. - Assessment: The EBA-lite CA model indicates a REER undervaluation of about 5 percent for 2024. ### Capital and Financial Accounts: flows and policy measures - Background: The capital account is expected to record a surplus of 1.2 percent of GDP in 2024, and the financial account balance is expected to have a surplus of 9.2 percent, with positive contribution from net portfolio and other investment flows more than offsetting net FDI flows. - Assessment: Malta’s large financial account surplus is expected to moderate in the medium-term in line with current account dynamics. ### FX Intervention and Reserves Level - Background and Assessment: The euro (free-floating) is a global reserve currency. Reserves held by the euro area are typically low relative to standard metrics. ### Malta: EBA-lite Model Results, 2024 (selected entries) - CA-Actual: 6.3 - Cyclical contributions (from model): (-) -0.1 - Adjusted CA: 6.4 - CA Norm (from model): -0.4 - Adjustments to the norm (+): 1.9 - Adjusted CA Norm: 1.5 - CA Gap: 4.9 - Elasticity: -1.0 - REER Gap (in percent): -5.1 - Note: Based on the EBA-lite 3.0 methodology; cyclically adjusted, including multilateral consistency adjustments. --- ### Annex III. Risk Assessment Matrix ### Global risks (sources, likelihood, impact, policy response) - Intensification of regional conflict(s) (Gaza and Israel, Russia’s war in Ukraine, other regional conflicts or terrorism) - Relative Likelihood: High - Impact if realized: Medium. As a small, open island economy, Malta’s growth and inflation would be adversely affected by a slowdown in the global economy and higher commodity prices. - Policy response: Provide targeted fiscal and financial support measures; maintain structural reform momentum to spur investment and promote higher productivity growth. - Deepening geoeconomic fragmentation - Relative Likelihood: High - Impact if realized: High/Medium. Supply disruptions, higher shipping costs, and lower global growth would harm Malta’s growth and inflation. - Policy response: Same as above. - Global growth surprises (slowdown) - Relative Likelihood: Medium - Impact if realized: High/Medium. Export demand, including tourism, will weaken, affecting overall growth. - Policy response: Same as above. - Monetary policy calibration (major central banks) - Relative Likelihood: Medium - Impact if realized: Medium. Could de-anchor inflation expectations and raise financing costs. - Policy response: Intensify monitoring of the financial sector and calibrate macroprudential policies to ensure financial stability. - Cyber-threats - Relative Likelihood: High - Impact if realized: Medium. Payment and financial systems could be disrupted. - Policy response: Follow a cyber security contingency plan; assess damages and restore IT functions. ### Malta-specific risks - Higher-than-expected wage pressures - Relative Likelihood: Medium - Impact if realized: Medium. Higher wages would raise inflation and weaken external competitiveness. - Policy response: Maintain structural reform momentum to spur investment and promote higher productivity growth. - Cyclical systemic risk in the financial system - Relative Likelihood: Medium - Impact if realized: Medium. An easing of monetary policy could boost credit growth. - Policy response: Prepare for tightening countercyclical capital buffers. - Unsmooth transition in adopting the OECD Pillar 2 (OECD Pillar 2/CIT reform) - Relative Likelihood: Medium - Impact if realized: Medium/Low. Malta’s attractiveness as a financial and business location may deteriorate, affecting fiscal revenues and foreign investment. - Policy response: Develop a well-structured roadmap for a phased implementation of the CIT reform and communicate clearly to investors. - Note on RAM: The relative likelihood categories reflect staff’s subjective assessment (“low” <10, “medium” 10–30, “high” 30–50). Conjunctural shocks and scenarios may materialize over a shorter horizon (12 to 18 months); structural risks persist longer. --- ### Annex IV. The EU’s New Economic Governance Framework and Its Implications on Malta - Framework entry into force: April 2024. - Purpose: Strengthen fiscal sustainability by creating incentives for growth-enhancing reforms and basing adjustment requirements on a debt sustainability analysis (DSA). - Key rules: - Countries with debt ratios above 60 percent and/or fiscal deficits larger than 3 percent of GDP are required to implement fiscal adjustments that restore long-term fiscal sustainability over a four-year period or a seven-year period (if undertaking structural reforms or making public investments that strengthen growth, resilience, and fiscal sustainability). - At the end of the adjustment period, debt should be on a downward path or remain below 60 percent of GDP over the following 10 years, even under adverse conditions, and the structural primary deficit should be below 1.5 percent of GDP. - Long-term aging-related health care and pension costs must be internalized in medium-term fiscal strategies. - Implications for Malta: - Because Malta’s debt is below 60 percent of GDP, there is no requirement related to debt. - The deficit minimum requirement applies: Malta is required to reduce the structural primary deficit by at least 0.5 percentage points of GDP annually to reach 3 percent of GDP. - The Maltese authorities have opted for the 4-year adjustment period. The European Commission’s DSA (including stress tests) indicates that a deficit target of 3 percent of GDP by 2027 is appropriate. - Projected long-term aging-related spending pressures are negligible for the next decade given projected population growth. --- ### Annex V. Sovereign Risk and Debt Sustainability Assessment ### DSA summary assessment and risk of sovereign stress - Final assessment: The overall risk of sovereign stress is low, reflecting a relatively low level of vulnerability in the near, medium, and long term. - Near-term and medium-term: Medium-term risks assessed as low, consistent with the mechanical signal. - Long-term: Risks are low over the extended period, though debt is projected to rise marginally over the long term. Aging-related expenditures on health and social security are taken into account, but projections are sensitive to immigration patterns and the number of retired migrants. - Main considerations: - Malta is at a low overall risk of sovereign stress. Most indicators have started to normalize as the recovery from the COVID-19 and energy price shocks has been strong. - While debt is expected to rise marginally over the projection horizon, it remains low. - Medium-term risks as analyzed by the GFN Financeability Module are low. - Risk of sovereign stress could be affected by materialization of contingent liabilities, or a real GDP growth shock. - Effective implementation of fiscal adjustment is important to mitigate these risks and ensure manageable gross financing needs while facilitating a decline in debt levels. - Over the longer run, Malta should continue with reforms to tackle risks arising from population aging. ### Debt coverage, disclosures, and structure (high-level) - Debt coverage in the DSA: the perimeter shown is general government; subsectors captured in the baseline include Budgetary central government (Yes), Social security funds (SSFs) (Yes), State governments (Yes), Local governments (Yes); Extra budgetary funds (EBFs), Public nonfinancial corporations, Central bank, and Other public financial corporations are not captured in the chosen coverage. - Public debt structure indicators (charts provided in source) show: - Debt by currency (Foreign currency, Local currency, Local-linked) across 2014–2032 projection horizon. - Public debt by holder (External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks) across 2014–2029 projection horizon. - Public debt by governing law, by instruments (Marketable vs Nonmarketable debt), and by maturity (≤ 1 year, 1–5 years, > 5 years); residual maturity: 8.1 years. *Source: 1mltea2025001-print-pdf - Annex I. Implementation of IMF Recommendations* ### Annex V. Figure 4. Malta: Baseline Scenario ### Annex V. Figure 4. Malta: Baseline Scenario ### Baseline public debt and trajectory - Public debt (Percent of GDP): - Actual 2023: 47.4 - 2024: 48.9 - 2025: 49.7 - 2026: 50.2 - 2027: 50.2 - 2028: 50.2 - 2029: 50.1 - 2030: 50.1 - 2031: 50.0 - 2032: 49.7 - 2033: 49.3 - Change in public debt (Percent of GDP): - 2023: -2.0 - 2024: 1.6 - 2025: 0.8 - 2026: 0.5 - 2027: 0.0 - 2028: 0.0 - 2029: -0.1 - 2030: -0.1 - 2031: -0.2 - 2032: -0.3 - 2033: -0.4 - Contribution of identified flows to change in public debt (Percent of GDP) mirrors "Change in public debt" over 2024–2033: - 2023: -1.2 - 2024: 1.6 - 2025: 0.8 - 2026: 0.5 - 2027: 0.0 - 2028: 0.0 - 2029: -0.1 - 2030: -0.1 - 2031: -0.2 - 2032: -0.3 - 2033: -0.4 ### Primary balance, revenues, and expenditures (Percent of GDP) - Primary deficit: - 2023: 3.5 - 2024: 2.8 - 2025: 2.2 - 2026: 1.7 - 2027: 1.4 - 2028: 1.3 - 2029: 1.3 - 2030: 1.3 - 2031: 1.2 - 2032: 1.2 - 2033: 1.2 - Noninterest revenues (Percent of GDP): - 2023: 31.8 - 2024: 32.8 - 2025: 32.0 - 2026: 32.1 - 2027: 32.2 - 2028: 32.2 - 2029: 32.2 - 2030: 32.2 - 2031: 32.2 - 2032: 32.2 - 2033: 32.2 - Noninterest expenditures (Percent of GDP): - 2023: 35.3 - 2024: 35.6 - 2025: 34.2 - 2026: 33.8 - 2027: 33.6 - 2028: 33.5 - 2029: 33.5 - 2030: 33.5 - 2031: 33.5 - 2032: 33.4 - 2033: 33.4 ### Automatic debt dynamics and real rates (Percent of GDP or percent) - Automatic debt dynamics: - 2023: -4.7 - 2024: -2.5 - 2025: -1.8 - 2026: -1.6 - 2027: -1.5 - 2028: -1.5 - 2029: -1.5 - 2030: -1.5 - 2031: -1.6 - 2032: -1.8 - 2033: -1.9 - Real interest rate and relative inflation (same series shown twice as "Real interest rate" and "Real interest rate and relative inflation"): - 2023: -1.3 - 2024: -0.2 - 2025: 0.2 - 2026: 0.4 - 2027: 0.4 - 2028: 0.4 - 2029: 0.4 - 2030: 0.4 - 2031: 0.2 - 2032: 0.2 - 2033: 0.1 - Relative inflation: - All years 2023–2033: 0.0 ### Real growth and other flows - Real growth rate (presented as negative values for 2023 onward): - 2023: -3.4 - 2024: -2.3 - 2025: -1.9 - 2026: -1.9 - 2027: -1.9 - 2028: -1.9 - 2029: -1.9 - 2030: -1.9 - 2031: -1.9 - 2032: -1.9 - 2033: -1.9 - Other identified flows / Other transactions (Percent of GDP): - 2023: 0.0 - 2024: 1.3 - 2025: 0.4 - 2026: 0.4 - 2027: 0.2 - 2028: 0.1 - 2029: 0.2 - 2030: 0.2 - 2031: 0.3 - 2032: 0.3 - 2033: 0.3 - Contingent liabilities and (minus) Interest Revenues: - All years 2023–2033: 0.0 - Contribution of residual: - 2023: -0.8 - 2024–2033: 0.0 ### Gross financing needs and debt service (Percent of GDP) - Gross financing needs: - 2023: 6.9 - 2024: 6.3 - 2025: 6.2 - 2026: 9.3 - 2027: 9.5 - 2028: 11.3 - 2029: 10.3 - 2030: 11.0 - 2031: 11.6 - 2032: 12.0 - 2033: 12.1 - Of which: debt service: - 2023: 3.4 - 2024: 3.6 - 2025: 4.0 - 2026: 7.6 - 2027: 8.2 - 2028: 9.9 - 2029: 9.0 - 2030: 9.8 - 2031: 10.3 - 2032: 10.8 - 2033: 11.0 - Local-currency debt service (matches debt service series above): - 2023: 3.4 - 2024: 3.6 - 2025: 4.0 - 2026: 7.6 - 2027: 8.2 - 2028: 9.9 - 2029: 9.0 - 2030: 9.8 - 2031: 10.3 - 2032: 10.8 - 2033: 11.0 - Foreign-currency debt service: - All years 2023–2033: 0.0 ### Memo macro indicators (percent unless indicated) - Real GDP growth (percent): - 2023: 7.5 - 2024: 5.0 - 2025: 4.1 - 2026: 4.0 - 2027: 4.0 - 2028: 4.0 - 2029: 3.9 - 2030: 3.9 - 2031: 3.9 - 2032: 4.0 - 2033: 4.1 - Inflation (GDP deflator; percent): - 2023: 5.3 - 2024: 3.2 - 2025: 2.4 - 2026: 2.1 - 2027: 2.1 - 2028: 2.1 - 2029: 2.1 - 2030: 2.1 - 2031: 2.2 - 2032: 2.3 - 2033: 2.4 - Nominal GDP growth (percent): - 2023: 13.2 - 2024: 8.4 - 2025: 6.6 - 2026: 6.2 - 2027: 6.2 - 2028: 6.1 - 2029: 6.1 - 2030: 6.1 - 2031: 6.2 - 2032: 6.4 - 2033: 6.6 - Effective interest rate (percent): - 2023: 2.4 - 2024: 2.7 - 2025: 2.7 - 2026: 2.8 - 2027: 2.9 - 2028: 3.0 - 2029: 2.9 - 2030: 2.9 - 2031: 2.7 - 2032: 2.7 - 2033: 2.6 ### Staff commentary on baseline - "Public debt is projected to rise marginally before beginning to decline in the medium-term projection horizon. The authorities' planned fiscal consolidation, if implemented, would lead to an earlier and more rapid decline of public debt." ### Medium-term risk assessment (summary points and indices) - Debt fanchart module: - Fanchart width (percent of GDP): 35.6 0.5 - Probability of debt non-stabilization (percent): 0.1 0.4 - Terminal debt-to-GDP: x 20.1 0.4 - Debt fanchart index (DFI): 1.4 - Risk signal: 3/Moderate - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP): 8.8 3.0 - Initial banks' claims on the general government (pct bank assets): 6.7 2.2 - Change in banks' claims in stress (pct banks' assets): 6.3 2.1 - GFN financeability index (GFI): 7.3 - Risk signal: 4/Low - Medium-term index and final assessment: - Debt fanchart index contribution: 1.4 - GFN financeability index contribution: 7.3 - Risk signal: 5/ (final assessment line indicates "Medium-term risks are assessed as low, consistent with the mechanical signal. However, the index is near the threshold to moderate risk.") - "Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct." - "Prob. of false alarms, 2024-2029, if stress predicted: 48.9 pct." - Staff commentary: "Medium-term risks are assessed as low, consistent with the mechanical signal. However, the index is near the threshold to moderate risk." ### IMF Fiscal Affairs Department capacity development and CIT reform recommendations - Revenue Administration Reform (summary of FAD engagement 2022–2024): - Several TA missions from November 2022 to November 2024 supported development of a revenue administration reform program and a high-level implementation roadmap. - Key areas identified for attention: - (i) strengthening risk management (compliance risks and enterprise risks); - (ii) implementing a large taxpayer office (LTO); - (iii) enhancing tax arrears management and collection; - (iv) redeveloping an integrated tax administration information technology (IT) system; - (v) progressing with the merger of the tax and customs administrations. - Delivering Transformation Strategic Plan 2023–25 launched May 2023 and led to establishment of the Malta Tax and Customs Administration (MTCA) with dedicated units for Large Taxpayers and Compliance Risk Management. - Corporate Income Tax (CIT) reform context and challenges: - EU/OECD Pillar II: global minimum effective tax rate (ETR) of 15 percent for MNE groups with combined financial revenues exceeding €750 million annually; EU Member States required to transpose directive by December 31, 2023. - Malta's refund system reduces ETR from 35 percent statutory rate to 5 percent via a 6/7th refund; adoption of the EU directive could diminish Malta's tax advantage for large MNEs. - FAD TA missions in late 2022/early 2023 assessed CIT and provided options and revenue estimates. - Key TA recommendations for CIT reform and sequencing (listed): - Introduce, at an early date, a Qualifying Domestic Minimum Top-up Tax (QDMTT) that aligns with EU and OECD guidance. - Utilize revenue generated by the QDMTT to further tax reform initiatives to stimulate economic activity and promote fairness. - Keep the option of introducing an income inclusion rule (IIR) and undertaxed profit rule (UTPR) before it becomes mandatory. - Phase out the tax refund system, with full removal by 2030, and gradually increase ETRs for out-of-scope MNEs, bringing them closer to the ETRs faced by others, including domestic enterprises and entities belonging to in-scope MNE groups. - Gradually reduce the statutory CIT rate from 35 percent to alleviate the burden on domestic enterprises and foster greater alignment in ETRs across various entities. - Undertake a tax expenditure analysis and develop Qualified Refundable Tax Credits (QRTCs) accessible to all companies to address externalities such as R&D and the green transition. - Estimated illustrative revenue impact (from footnote assumptions): - 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: IMF staff estimates and projections; IMF Fiscal Affairs Department technical assistance summary.* ### Annex VII. Main FSAP Recommandations ### Annex VII. Main FSAP Recommandations ### 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 and findings: - The Central Bank of Malta (CBM) enhanced its liquidity and solvency stress testing frameworks, including by assessing climate-related risks, IFRS9’s expected losses, and household vulnerabilities. - Co-operation 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 Malta Financial Services Authority (MFSA) invested in improving the data management system and worked closely on identifying risks and pockets of vulnerabilities. - Working groups set up to collaborate on topics such as the ESRB Recommendation on commercial real estate (ESRB/2022/9) and CRR Article 124-126 on mortgage and commercial risk weights adequacy. - MFSA: regular stress tests for the insurance sector and investment fund liquidity; assessment of climate transition risk; developed a composite indicator for non-bank financial institutions (NBFIs); developed methodology to assess credit risk within the financial sector investment portfolio; annual internal Financial Stability Monitor report. - Preliminary MFSA assessment on cyber risk and interlinkages with third-party service providers; plan to expand analysis once Digital Operational Resilience Act (DORA) data are available. - In-depth analyses recently done on interest rate passthrough, residential real estate misalignment, impact of an increase in minimum reserve requirements, and interconnectedness assessments for resolution plans. ### 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 and findings: - A financial stability objective has been added to the MFSA Act. The authorities note that 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 National Statistics Office (NSO) started developing a database on commercial real estate indicators. - CBM and MFSA set up a technical working group to collaborate on methodology to analyze further commercial real estate developments, in line with ESRB/2022/9. - CBM developing a risk dashboard for NBFIs; dashboards for banks and domestically relevant insurance and investment funds created. - CBM developed a Malta-specific cyclical systemic risk indicator in 2023 (available on the CBM website) and a semi-structural credit gap using the multivariate filter linking credit gaps with other macroeconomic variables. - With IMF aid, CBM is developing a network model to analyze direct and second-round effects of shocks to common exposures across banks, with plans to extend model to other segments of the domestic financial system. - MFSA developed internal methodology to monitor residential real estate property and rental markets; collecting data on EU regulation on benchmarks in financial instruments and financial contracts (2016/1011) annually to identify financial stability consequences from discontinuation of critical benchmarks. - MFSA developed a risk dashboard for NBFIs and is extending it to investment funds to capture entities that carry out bank-like activities. ### Borrower-based Macroprudential Instruments - Recommendation: 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: - 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 and findings: - Legal amendments in 2019 allow the MFSA’s recruitment independence. - MFSA submitted a 5-year plan relating to budgetary resources; government committed to covering all annual MFSA budgetary shortfalls and capital expenditures. - MFSA Board of Governors approved a revised fee structure based on a new 5-year forecast up to FY2029. MFSA proposed a 60/40 model based on cost recovery; Minister of Finance has agreed (60 percent of total operational expenditure netted by revenue streams; remaining 40 percent to be received in quarterly tranches from the budget). MFSA plans to implement a new fee structure on January 1, 2025. - Regulatory Committee meets weekly. An Advisory Group of external legal and financial services experts appointed to advise on strengthening frameworks. - As of October 2024, MFSA reached annual target of 520 employees while aiming to increase headcount to 575 in 2025 and 630 in 2026. - Total MFSA supervisory headcount: 279 - Enforcement headcount: 36 - MFSA launched Development Plan 2024 – 2026. - From 1 January 2024, staff remuneration completely revised to be competitive. - The Financial Supervisors Academy delivers an annual Training Curriculum and maintains more than 20,000 training hours annually. ### 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 - Authorities’ actions: - MFSA conducts a bi-annual Supervisory Review and Evaluation Process (SREP) on LSIs adopting ECB’s framework, using thematic and deep dive assessments. - Minimum Engagement Level meetings conducted with banks to follow up on SREP actions, adopting a risk-based approach. - Onsite visit program covering thematic reviews (e.g., outsourcing) and higher-risk areas (credit risk, internal governance, online deposit platforms and related risks). - MFSA holds annual meetings with officials of branches to standardize Minimum Engagement Level meetings for risk-based supervision of third-country branches (e.g., Türkiye). - Close cooperation with FIAU and MFSA’s internal Financial Crime Compliance Function on compliance visits in third-country branches. - MFSA actively participates in quarterly meetings with the ECB’s contact group on third-country branches. ### Supervisory Actions, Enforcement, and ML/TF - Recommendation: 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, FAIU, the government) — Timing: ST - Authorities’ actions: - FIAU increased human resources, created specialized supervisory teams, improved risk-based supervision approach, improved IT tools for risk assessment, and introduced a quality control function. - MFSA investigations and enforcement actions have continued to increase, including actions on clone companies and unlicensed exchange platforms. Majority of enforcement actions in 2023 were administrative penalties. - Since 2023, MFSA entered into settlement agreements to adopt an efficient settlement process. - Enforcement Function strengthened through recruitment of qualified and experienced officials in financial investigations. ### 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 based on outcomes from risk-based supervision frameworks that apply to prudential supervision. - Internal workstream established 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, and conducts thematic reviews and supervisory meetings. - MFSA developed and updated various risk analysis tools as part of macro-prudential risk monitoring to 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 and findings: - The 2023 National Risk Assessment (NRA), coordinated by the National Coordination Committee (NCC), was published in December 2023 and improved on the 2018 NRA. - Between 2018 and 2023, sector-specific risk assessments were carried out on: (i) virtual financial assets; (ii) terrorist financing; (iii) concealment of beneficial ownership; (iv) organized crime; (v) the shadow economy; (vi) corruption; and (vii) the laundering of the proceeds of tax crimes. - Authorities issued sector-specific AML/CFT guidance, communicated FIAU strategic analyses, and increased outreach initiatives. - MFSA initiatives to enhance national coordination include receipt and issuance of Requests for Information, red-flagging process between MFSA and FIAU, and escalation of suspicious transaction reports. - MFSA set up a financial crime compliance function (FCCF) to conduct AML/CFT inspections; Prudential and Conduct Supervisory Functions integrated AML/CFT elements in supervisory work. - FCCF reviews license applications and MLRO questionnaires, conducts interviews with proposed MLROs. - MFSA carries out AML/CFT on-site examinations as an agent of the FIAU; programming based on FIAU’s risk scoring model. - MFSA’s integrated risk scoring models for prudential supervision include an AML/CFT component. - Enforcement follows FIAU’s enforcement process; FCCF officials attend FIAU-chaired committees; decisions finally taken by the FIAU. - Fitness and properness assessments performed by MFSA’s Due Diligence Function on individual and corporate shareholders, management body members, and key function holders. - FIAU’s supervisory process for banks revised with sector specific risk evaluation questionnaires and dedicated teams. - Administrative penalties on banks increased from 1 in 2017 to 161 in 2021. - Malta supports the EU-level initiative of a harmonized higher-level AML regulation and supervision and MFSA participates in AMLA-related working groups. - MFSA Strategic Statement dated February 2023 emphasizes continued operational collaboration with FIAU, other regulators, and law enforcement, within the NCC framework and the National AML/CFT Strategy. ### 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 and findings: - MFSA initiated advanced research on possible models to improve the bank insolvency framework. Draft legislation of the Administrative Bank Insolvency regime is in the process of finalization; next steps include presenting the first draft to other authorities and the Ministry for Finance, internal approval, and public consultation. - MFSA board decided in April 2021 to shift responsibility from the supervisory function to the resolution function and set up a transition team. Legislative amendments have been drafted; internal discussions to time amendments with the Administrative Bank Insolvency Legislation. Resolution function actively taking on cases to liquidate banks, working closely with Banking Supervision. - Resolution function headcount raised to 24; currently has 19 FTEs and is in the process of recruiting other FTEs to meet full headcount. ### Data Adequacy (Annex VIII summary points included in Annex VII) - Findings from Data Adequacy assessment: - The data provided to the Fund are adequate for surveillance. - Changes since the last Article IV consultation: authorities continue to work to improve external sector statistics in collaboration with Eurostat. GDP and external sector data were revised. Further progress made by the statistical office in developing a database on commercial real estate indicators. - Corrective actions and capacity development priorities: authorities are working to improve external sector statistics and to address remaining weaknesses regarding consistency in the external and public finance statistics. - Rationale: Malta publishes timely economic statistics and most macroeconomic statistics can be accessed through Eurostat and Haver Analytics. GDP data were revised as benchmarks were revised EU-wide on the initiative of Eurostat. External sector data were revised as new administrative data sources became available. *Source: Annex VII. Main FSAP Recommandations (1mltea2025001-print-pdf).* ### Annex VIII. Table 2. Malta: Data Standards Initiatives ### Annex VIII. Table 2. Malta: Data Standards Initiatives ### Participation and publication - Malta adheres to the Special Data Dissemination Standard (SDDS) Plus since July 2023 and publishes the data on its National Summary Data Page. - The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board (https://dsbb.imf.org/). ### Data categories covered (as listed in the table) - Exchange Rates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Reserve/Base Money - Broad Money - Central Bank Balance Sheet - Consolidated Balance Sheet of the Banking System - Interest Rates - Consumer Price Index - Revenue, Expenditure, Balance and Composition of Financing ‒ General Government - Revenue, Expenditure, Balance and Composition of Financing ‒ Central Government - International Investment Position - Stocks of Central Government and Central Government-Guaranteed Debt - External Current Account Balance - Exports and Imports of Goods and Services - GDP/GNP - Gross External Debt ### Frequency, timeliness, and reporting conventions (from table notes) - Frequency and timeliness codes: - “D” daily - “W” weekly or with a lag of no more than one week after the reference date - “M” monthly or with lag of no more than one month after the reference date - “Q” quarterly or with lag of no more than one quarter after the reference date - “A” annual - "SA" semiannual - "I" irregular - "NA" not available or not applicable - "NLT" not later than - Note on reserve assets: Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions. - Note on interest rates: Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - Note on financing composition: Includes foreign, domestic bank, and domestic nonbank financing. - Note on general government: The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - Expected frequency and expected timeliness in the table reflect the encouraged frequency under the e-GDDS and required frequency under the SDDS and SDDS Plus; any flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected. ### Selected date/timeliness entries (as shown in the table) - Multiple series show latest observations in Oct. 2024 and Nov. 2024. - Several series reference "2024Q2" with associated received dates such as Sep. 2024 and Nov. 2024. - Examples of explicit numeric codes and timing strings appearing in the table: "Current", "DDD.........", "Oct. 2024", "Nov. 2024", "MMM301W30", "MMM302W12", "MMM301M30", "QQA/Q902Q/12M90", "QQM301M30", "QQQ901Q90", "QQM308W42", "QQQ901Q70", "QQQ901Q180". - These codes are those presented verbatim in the table for frequency/reporting/timeliness entries. ### Observations on data provision to the Fund - The table indicates data provision to the Fund and publication under the Data Standards Initiatives through the National Summary Data Page. - For countries participating in the Data Standards Initiatives, entries in the DSBB-based summaries are used to populate the table; for non-participants entries are shown as "..." (per the table note). *Source: Annex VIII. Table 2. Malta: Data Standards Initiatives (as of November 30, 2024) — Staff Report materials provided in the source PDF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mltea2025001-print-pdf.pdf_