## 1. Growth at Risk

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### Context
- Malta experienced average growth of nearly 7 percent over the past decade, driven by export-oriented services (tourism, online gaming, professional services) and continuous inflow of labor from outside the EU.
- Per capita income rose to US$45 thousand by 2024, up from US$25 thousand in 2013.
- Population density is fifteen times greater than the EU average, creating strains on infrastructure, housing, and public services.
- Medium-term priority: shift to a productivity-driven growth model, increase investment in human capital, transport, public utilities, new technologies, and advance the green transition; this strategy is reflected in Malta Vision 2050 (Annex V).

### Recent developments and key statistics
- GDP growth:
  - 2023: revised to 10.6 percent.
  - 2024: 6.8 percent.
  - 2025: estimated 3.9 percent.
- Tourism:
  - Tourism spending increased by 23 percent in 2024.
  - Arrivals: record 3.6 million in 2024; 1.8 million in first half of 2025 (13.5 percent year-on-year increase).
- Gaming sector:
  - Contributed about €1.4 billion to gross value-added.
  - Grew at an estimated annual rate of 3.5 percent in 2024.
- Labor market:
  - Employment growth: 5.3 percent in 2024; foreign workers account for over 30 percent of total employment.
  - Unemployment: around 3 percent in 2025.
  - Real wages continued to increase; labor market remains tight.
- Inflation:
  - HICP peak: 7.4 percent in October 2022.
  - HICP: 2.5 percent in November 2025.
  - Core inflation (HICP excluding energy and food): 2.5 percent.
  - Goods inflation below 2 percent.
- Fiscal developments:
  - Fiscal deficit: 4.4 percent of GDP in 2023; 3.5 percent in 2024; estimated 3.2 percent of GDP in 2025.
  - Energy subsidies: 0.9 percent of GDP in 2024 (down from 1.4 percent in 2023).
  - Public debt: 46.2 percent of GDP in 2024; around 47 percent of GDP in 2025.
- Financial sector (June/mid‑2025):
  - Banking system assets: about two times GDP (June 2025).
  - Core domestic banks control 71 percent of banking sector assets; non-core banks 7 percent; international banks 22 percent.
  - Core banks: Tier 1 capital ratio 21 percent; leverage ratio 7.9 percent; liquidity coverage ratio 403 percent; return on equity 10.2 percent; return on assets 0.9 percent.
  - Non-performing loans: about 2 percent of total loans.
  - Life insurance assets: about 15 percent of GDP; solvency capital ratio 268 percent; liquid asset ratio 60 percent in mid-2025.
  - Other insurance companies: about 3 percent of GDP; investment funds: about 7 percent of GDP.
- Real estate:
  - Property prices rose on average by 6.7 percent in 2024; transaction volumes rose by 3.4 percent in 2024.
  - Rental yields increased by about 6 percent in early 2025.
  - House price-to-income ratio remained stable.
- External sector:
  - Current account surplus: 6.3 percent of GDP in 2023; 7.1 percent of GDP in 2024.
  - Projected current account surplus: 6.3 percent of GDP in 2025.
  - External position in 2025 assessed as substantially stronger than implied by medium-term fundamentals and desirable policies (Annex II).

### Outlook and Growth-at-Risk (GaR) results
- Baseline projections:
  - Growth expected at potential of 4 percent in 2026 and over the medium term.
  - Inflation projected to stabilize at around 2 percent by 2026.
  - Fiscal deficit projected to narrow to 2.6 percent of GDP in 2026.
  - Public debt projected to remain stable at about 47 percent of GDP in the medium term.
- GaR model results (one-year-ahead distribution):
  - GaR 5th percentile (5 percent probability of GDP growth falling below): about 1.75 percent (reported GaR 5% = 1.76).
  - GaR 10% = 2.76.
  - Mode = 4.0.
  - Negative Growth Chance = 1.96%.
  - If housing prices fell by 3 standard deviations, GaR estimate would be 0.5 percent.
  - Two-year-out GaR falls below -2 percent, indicating higher medium-term uncertainty.
  - Chance of negative growth next year remains very low—below 5 percent—but has risen compared to last year.

### Downside risks and illustrative scenario
- Downside risks:
  - External: intensified regional conflicts, geoeconomic fragmentation, trade and supply‑chain disruptions, spikes in global food and energy prices, slowdown in major economies (especially Europe), cyberattacks.
  - Domestic: slowdown in migration leading to wage pressures, reduced competitiveness, higher inflation.
  - Prospective: weakening property and housing market affecting banking sector and growth; intensification of competition in gaming reducing growth and fiscal revenue.
- Illustrative downside scenario (higher U.S. tariffs and increased global uncertainty):
  - Direct Malta exposure: goods exports to the U.S. account for 1 percent of Malta’s total export of goods and services (5.3 percent of exports of goods).
  - Scenario impact: Malta’s growth would decline by about 1 percentage point in 2026 and 2027 relative to the baseline.
  - Policy response: allow automatic stabilizers to operate, adjust energy tariffs, use available fiscal space to provide targeted support to the vulnerable.

### Policy discussions and recommendations — A. Strengthening fiscal buffers
- 2026 budget and projections:
  - Authorities’ estimated overall deficit: 3.3 percent of GDP in 2025; budget aims for 2.8 percent of GDP in 2026.
  - Staff projection: 2.6 percent of GDP overall deficit in 2026 (reflecting higher revenue from improved tax compliance).
  - Public debt forecast: stay close to 47 percent of GDP.
  - Consolidation driven by spending cuts (including lower energy subsidies) and less EU-funded investment.
  - Social protection: higher pensions, enhanced support for low-income households, higher child support grants, personal income tax reductions for parents; total social transfers remain similar as a share of GDP.
- Key 2025→2026 budget table highlights (percent of GDP):
  - Overall balance: -3.3 → -2.8 (Change 0.5 ppts)
  - Total revenue: 33.6 → 32.8 (Change -0.9)
    - Current taxes on income and wealth: 14.1 → 13.9 (Change -0.2)
    - Taxes on production and imports: 9.4 → 9.3 (Change -0.1)
    - Social contributions: 5.1 → 5.2 (Change 0.1)
    - Other current and capital revenue: 4.9 → 4.2 (Change -0.7)
  - Total expenditure: 37.0 → 35.6 (Change -1.3)
    - Subsidies: 2.2 → 1.9 (Change -0.3)
    - Compensation of employees: 9.9 → 10.0 (Change 0.1)
    - Intermediate consumption: 8.1 → 7.8 (Change -0.3)
    - Gross fixed capital formation: 4.3 → 3.5 (Change -0.8)
- Medium-term fiscal guidance:
  - Staff recommend anchoring fiscal policy to public debt stability.
  - Baseline: overall deficit of 2.6 percent of GDP would maintain public debt at 47 percent of GDP.
  - MFSP targets: annual reductions in the structural deficit of ½ ppt of GDP, projecting overall deficit to decline to 2.6 percent of GDP in 2028 and 2.2 percent of GDP by 2030.
  - Debt projections (selected paths from tables):
    - MFSP public debt path: 49.2 → 49.8 → 49.9 → 49.5 → 48.8 → 47.8 → 47.8.
    - IMF staff public debt path: 46.2 → 46.9 → 47.1 → 47.1 → 47.1 → 47.1 → 47.1.
- Fiscal space for investment:
  - Preserve debt-stabilizing deficit of 2.6 percent of GDP while creating fiscal space via revenue and expenditure measures to finance infrastructure, pensions, healthcare, climate transition, and technology adoption.

### Policy discussions and recommendations — B. Revenue and tax policy options
- Tax effort and scope:
  - Overall tax burden (taxes plus net social contributions): around 29 percent of GDP in 2024 (fourth lowest in the EU); EU average 40 percent of GDP.
  - Scope for additional revenue via tax policy reform and stronger compliance.
- VAT efficiency:
  - EC estimated Malta's VAT compliance gap at 25.9 percent in 2022.
  - Recent reforms: electronic filing and payments; VAT refund turnaround reduced from five months to 30 days.
  - Further actions: expand risk-based audits; modernize IT systems for large-scale data matching; offset excess credits against tax arrears; comprehensive monitoring of tax arrears; rollout real-time reporting and e-invoicing.
- Corporate Income Tax (CIT) reform considerations:
  - Malta postponed implementation of the Qualified Domestic Minimum Top-up Tax (QDMTT) under OECD Pillar II and EU Minimum Tax Directive until end-2029.
  - Staff estimate: QDMTT could raise an additional 2 percent of GDP.
  - Recommendations: develop a roadmap for phased CIT reform; consider gradual phasing out the refund system while lowering the statutory rate for domestic enterprises; collect data on top-up taxation of Malta’s MNEs in other countries; consider CIT reform in conjunction with personal income tax under full imputation.
  - Authorities working with the EC to design rules for Qualified Refundable Tax Credits.
- Tax administration strengthening:
  - Large taxpayers’ office (LTO) now fully operational; covers several hundred entities and high-net-worth individuals.
  - Achievements: improved LTO enforcement outcomes; unified tax and customs administrations; improved corporate income tax filing and payroll tax compliance; integrated data-driven risk-based model.
  - Planned rollout: real-time reporting, central data warehouse, modern risk management tools.
- Authorities’ stance:
  - Broad agreement with staff on outlook and need to transition to productivity-driven growth.
  - Authorities stressed fiscal prudence, well-capitalized financial sector, and capacity to adjust to external shocks.
  - Authorities view housing market risks as limited, with real estate valuations broadly aligned with fundamentals.

### Box 2 — Corporate Income Tax (CIT): structure, refunds, and reform options
- Structure and mechanics:
  - Statutory CIT rate: 35 percent.
  - Full imputation mechanism: CIT paid is credited against PIT liability; statutory CIT rate of 35 percent equals marginal PIT rate for annual incomes above €60,000.
- Refunds and effective tax rates for non-resident shareholders:
  - 6/7th refund for trading income → ETR 5 percent.
  - 5/7th refund for passive interest and royalty income → ETR 10 percent.
  - 2/3rd refund when company claimed foreign tax relief.
  - 100 percent refund for qualifying participating holdings.
  - Retained earnings remain subject to full 35 percent tax, creating incentive for profit distribution.
- FITWI reform option (September 2025):
  - Optional Final Income Tax Without Imputation (FITWI): eligible companies can choose flat 15 percent tax rate, outside refunds and imputation system.
  - FITWI option time-limited to five years; intended to simplify taxation, mitigate potential top-up taxation abroad, and attract companies that plan to reinvest profits.
- International minimum tax frameworks:
  - In-scope MNEs: consolidated turnover above €750 million; represent less than 3 percent of companies but account for about 30 percent of total turnover.
  - Out-of-scope MNEs (turnover < €750 million): about 17 percent of firms; account for about 40 percent of total turnover.
  - Domestic companies: remaining 80 percent of firms.
  - QDMTT intended to reduce profit shifting and base erosion and allow Malta to collect revenue otherwise lost abroad.
- Implications:
  - High statutory rate (35 percent) plus refund mechanisms yield wide dispersion in ETRs (as low as 5 percent for trading income distributed to non-residents).
  - FITWI 15 percent optional regime could attract reinvestment-focused companies while imputation and refund mechanisms continue to incentivize distribution.
  - OECD Pillar II and EC Minimum Tax Directive (15 percent minimum) target large MNEs and affect a small share of firms that account for a large share of turnover.
- Authorities’ stance on CIT:
  - “Wait-and-see” approach to CIT reform; emphasis on predictability for business continuity and investment.
  - Commitment to fiscal consolidation aiming to reduce the deficit below 3 percent of GDP in 2026.
  - Fixed electricity and fuel prices viewed as underpinning social and economic stability; authorities commit to reprioritizing spending if global energy price shocks occur.

### Innovation, digitalization, energy and climate priorities
- Innovation and digitalization:
  - Progress: increased firm-level investment in innovation, ICT usage and digitalization; lagging in government financing for innovation, human capital development, and product innovation.
  - Government initiatives: Smart Specialization Strategy 2021–27; National Research and Innovation Strategic Plan 2023–27; AI strategy; Digital Innovation Hub; €10 million venture capital fund; €100 million envelope for digitalization and AI uptake (co‑financed by the EU).
  - Recommended actions: incentivize R&D and startups by streamlining access to public funding; strengthen cybersecurity and digital preparedness through training.
- Energy security and climate action:
  - Climate Action Act enacted; Climate Action Authority operational; final updated NECP submitted January 2025.
  - Renewables: achieved 17 percent in energy mix (surpassing original 2030 target of 11.5 percent); revised renewables goal to 24.5 percent.
  - NECP target: approximately 40 percent reduction in greenhouse gas emissions by 2030 compared to 2005.
  - Implementation advances: progress on second Malta–Italy interconnector; grid upgrades; financial incentives for electric vehicles; rooftop‑PV rollout.
  - Further priorities: streamline permitting; upgrade grid infrastructure; phase-out fossil fuel subsidies; reduce transport sector emissions.
  - Climate resilience: Vulnerability and Risk Assessment across 10 sectors completed; procuring expertise to develop a costed National Climate Resilience Plan addressing coastal flooding, sea-level rise, and extreme heat.
  - Public sentiment: nearly half of the public identify climate change as a top global concern.

### Financial sector assessment and supervision
- Overall condition: financial sector remains healthy and resilient, with strong capital and liquidity buffers.
- Vulnerabilities and supervisory priorities:
  - Concentration in banking system and growing exposure to real estate warrant continued supervisory vigilance.
  - Authorities expanding sectoral systemic risk buffer (sSyRB) to all real estate and construction loans and implementing EU Capital Requirements Regulation.
  - NBFIs, digital banks, and crypto service providers require close monitoring, robust regulatory framework, and periodic system‑wide stress testing.
  - AML/CFT framework strengthened but continued vigilance needed for virtual assets and trade-based money laundering.

### Structural reform priorities
- Key recommendations:
  - Address labor shortages and skills mismatches.
  - Invest more in infrastructure and technology.
  - Improve judicial efficiency to reduce business climate drag.
  - Increase incentives for R&D, expand STEM education, streamline startup funding access, and enhance cybersecurity.
- Migration and education strategies aimed at tackling labor market pressures and supporting a shift to higher value‑added activities.
- Authorities’ focus on AI training and digital skills noted as positive.

### Implementation status and Annex highlights
- Annex I — Implementation of IMF Recommendations:
  - sSyRB broadened to include construction and commercial real estate starting June 2026 (authorities plan).
  - Exit strategy from fixed energy price policy: Not implemented.
  - Roadmap for CIT reform: Not implemented; authorities adopt “wait-and-see”.
  - Several recommendations ongoing: fiscal consolidation, public investment management, education reskilling, energy resilience, tourism management, innovation financing.
- Annex II — External Sector Assessment:
  - NIIP increased from 76 percent of GDP in 2018 to 114 percent in 2020, then fell to 80 percent in 2024; expected to remain around 80 percent in 2025.
  - Gross assets and liabilities: around 3,022 and 2,942 (percent of GDP units reported in table heading) — reported as "Gross Assets: 3,022" and "Gross Liab.: 2,942".
  - Key 2024 figures (% GDP): NIIP: 80; Gross Assets: 3,022; Gross Liab.: 2,942.
  - Current account: about 7 percent of GDP in 2024; staff project stable CA surplus of 6.3 percent of GDP in 2025; adjusted CA balance 6.7 percent of GDP after accounting for cyclical and disaster/conflict contributions of -0.4 percent of GDP.
  - CA gap: 5.6 percent of GDP; Implied REER gap: – 6.8 percent.
  - EBA-lite REER model indicates REER undervaluation of about 10 percent.
- Annex III — Risk Assessment Matrix (selected entries):
  - Geopolitical Tensions: Relative Likelihood: High; Impact: Medium; Policy response: allow automatic stabilizers, adjust energy tariffs, targeted support, maintain structural reform.
  - Cyberthreats: Relative Likelihood: High; Impact: Medium; Policy response: strengthen cybersecurity, assess damages, restore IT functions; calibrate macroprudential policies if prolonged stress.
  - Labor Supply Gaps: Relative Likelihood: Medium; Impact: High/Medium; Policy response: allow automatic stabilizers, adjust energy tariffs, provide targeted support, support worker retraining and automation.
- Annex IV — FSAP Recommendations (selected):
  - Risk analysis: enhance liquidity stress testing, sensitivity analysis, and data management (Timing: ST).
  - Macroprudential policy: consider CBM powers with “comply or explain”; close data gaps; refine borrower-based instruments (Timing: ST/MT/I).
  - Supervisory resources: ensure stable MFSA funding, recruitment autonomy, and staffing increases (Timing: I).
  - AML/CFT: strengthen national coordination, risk-based supervision, timely sanctions (Timing: I); 2023 NRA published December 2023.
  - Safety nets: adopt administrative bank insolvency regime; shift insolvency decisions to resolution function; review Resolution Unit staffing (Timing: I).

### Vision 2050 and demographic / labor findings
- Vision 2050 four strategic pillars: sustainable economic growth; citizen-centered services; resilience and education reform; sustainable land and sea management.
- Targets:
  - By 2035: rank in top 20 globally on HDI; raise median disposable income to 115 percent of the EU average.
  - By 2050: reach top 10 in HDI; achieve 135 percent of the EU average in disposable income; attain top-five EU ranking in life satisfaction.
- Demographics and labor (decade up to 2024):
  - Population grew by 26 percent to over half a million.
  - Foreign resident population: 5.5 percent in 2013 → 28.1 percent in 2024.
  - Labor force: just under 190,000 → nearly 317,000.
  - Foreign workers accounted for three-quarters of the rise in employment since 2013 and comprise 39 percent of the workforce; non-EU nationals make up 27 percent of the workforce.
  - Share of foreign workers tops 50 percent in construction, and accommodation and food sectors.
- Sectoral changes and contributions:
  - Economy roughly doubled in real terms over the past decade.
  - Computer programming, consultancy and information services: real value added quadrupled to €1.4 billion (6.8 percent of 2023 GDP).
  - Manufacturing value added: €1.1 billion (5.3 percent of GDP).
  - Construction contributed about 3 percent of total economic growth while gaming added three times as much.

### Labor force participation, shortages, and policy actions
- Participation and drivers:
  - Employment rose from 75.6 percent in 2019 to 83 percent in 2024; EU average 75.8 percent.
  - Gains achieved by mobilizing older, female and younger workers.
  - Policy measures: gradual increase in retirement age; free childcare; tax credits for returning parents; flexible working arrangements; enhanced vocational education.
- Shortages and mismatches:
  - 68 percent of employers in Malta’s service sector report labor shortages limit activities (EU average 24 percent).
  - 90 percent of respondents in an EIB survey: availability of skilled labor primary obstacle to long-term investment; 82 percent cited uncertainty about the future.
  - Declining share of university graduates in STEM fields.
- Capacity strains and quality-of-life impacts:
  - Traffic congestion and pollution costs estimated at about €400 million annually (3.6 percent of GDP) per a 2022 EC report.
  - 2024 WHO report: pollution levels more than double recommended WHO threshold.
  - Waste from construction: 3.9 tons per capita (more than double EU average).
  - Worker retention: in 2023, half of foreign workers departed within two years; nearly a third of EU nationals left jobs after one year.
  - Malta ranked 46 out of 53 countries as desirable for living/working abroad (down from 3rd in 2015).
  - Governance perception: only 29 percent of firms rate political/legal/regulatory environment positively versus 85 percent in 2015.
- Migration policy and reforms:
  - Need for more selective use of foreign labor; priority recruitment and retention of highly skilled foreign workers in IT and financial services.
  - 2025 Labor Migration Policy Strategy initial steps: stricter employer advertising requirements; extended grace periods for terminated non-EU workers; sector-specific skills cards; mandatory pre-departure integration courses; longer residence permits for skilled workers.
- Upskilling and integration measures:
  - Cut administrative delays in immigration processing; offer language courses; ease recognition and transfer of qualifications; provide job search resources; invest in education to upgrade newcomer skills.
  - Authorities plan to expand skills-based migration, strengthen training and integration incentives, and continue investing in STEM, vocational training, and adult education (National Education Strategy 2024-30; Lifelong Learning Strategy 2023-30).
  - Policy actions needed: greater investment in vocational training and adult education; reduce gender employment gap (women aged 50-64) via caregiving support, expanded healthcare, and retirement incentives; strengthen active labor market policies for disabled persons.

*Source: 1. Growth at Risk — Malta (International Monetary Fund).*

### 1. Growth at Risk __________________________________________________________________________________ 9

### Growth at Risk

### Context
- Malta experienced average growth of nearly 7 percent over the past decade, driven by export-oriented services (tourism, online gaming, professional services) and continuous inflow of labor from outside the EU.
- Per capita income rose to US$45 thousand by 2024, up from US$25 thousand in 2013.
- Population density is fifteen times greater than the EU average, creating strains on infrastructure, housing, and public services.
- Medium-term priority: shift to a productivity-driven growth model, increase investment in human capital, transport, public utilities, new technologies, and advance the green transition; this strategy is reflected in Malta Vision 2050 (Annex V).

### Recent Developments
- GDP growth:
  - 2023: revised to 10.6 percent (National Statistics Office revision).
  - 2024: 6.8 percent.
  - 2025: estimated 3.9 percent.
- Tourism:
  - Tourism spending increased by 23 percent in 2024.
  - Arrivals: record 3.6 million in 2024; 1.8 million in first half of 2025 (13.5 percent year-on-year increase).
- Gaming sector:
  - Contributed about €1.4 billion to gross value-added.
  - Grew at an estimated annual rate of 3.5 percent in 2024.
- Labor market:
  - Employment growth: 5.3 percent in 2024, driven by foreign workers who account for over 30 percent of total employment.
  - Unemployment: around 3 percent in 2025.
  - Real wages continued to increase; labor market remains tight.
- Inflation:
  - HICP peak: 7.4 percent in October 2022.
  - HICP: 2.5 percent in November 2025.
  - Core inflation (HICP excluding energy and food): 2.5 percent.
  - Goods inflation below 2 percent.
- Fiscal developments:
  - Fiscal deficit: 4.4 percent of GDP in 2023; 3.5 percent in 2024 (below budget target of 4 percent); estimated 3.2 percent of GDP in 2025.
  - Energy subsidies: declined to 0.9 percent of GDP in 2024 from 1.4 percent in 2023.
  - Public debt: 46.2 percent of GDP in 2024; around 47 percent of GDP in 2025.
- Financial sector (June/mid‑2025):
  - Banking system assets: about two times GDP (June 2025).
  - Core domestic banks control 71 percent of banking sector assets; non-core banks 7 percent; international banks 22 percent.
  - Core banks: Tier 1 capital ratio 21 percent; leverage ratio 7.9 percent; liquidity coverage ratio 403 percent; return on equity 10.2 percent; return on assets 0.9 percent.
  - Non-performing loans: about 2 percent of total loans.
  - Life insurance assets: about 15 percent of GDP; solvency capital ratio 268 percent; liquid asset ratio 60 percent in mid-2025.
  - Other insurance companies: about 3 percent of GDP; investment funds: about 7 percent of GDP.
- Real estate:
  - Property prices and transaction volumes rose on average by 6.7 percent and 3.4 percent, respectively, in 2024.
  - Rental yields increased by about 6 percent in early 2025.
  - House price-to-income ratio remained stable.
- External sector:
  - Current account surplus: 6.3 percent of GDP in 2023; 7.1 percent of GDP in 2024.
  - Projected current account surplus: 6.3 percent of GDP in 2025.
  - External position in 2025 assessed as substantially stronger than implied by medium-term fundamentals and desirable policies (Annex II).

### Outlook and Risks
- Growth projections:
  - Growth expected to be at potential of 4 percent in 2026 and over the medium term.
  - Inflation projected to stabilize at around 2 percent by 2026.
  - Fiscal deficit projected to narrow to 2.6 percent of GDP in 2026.
  - Public debt projected to remain stable at about 47 percent of GDP in the medium term.
- GaR (Growth-at-Risk) model results:
  - Current GaR estimate (5th percentile of one-year-ahead growth distribution): about 1.75 percent (5 percent probability of GDP growth falling below 1.75 percent) relative to projected growth of 4 percent.
  - If housing prices fell by 3 standard deviations, GaR estimate would be 0.5 percent.
  - Chance of negative growth next year remains very low—below 5 percent—but has risen compared to last year.
  - Two-year-out GaR falls below -2 percent, indicating higher medium-term uncertainty.
  - GaR values shown: GaR 5% = 1.76; GaR 10% = 2.76; Mode = 4.0; Negative Growth Chance 1.96% (from distribution figure).
- Downside risks:
  - External: intensified regional conflicts, geoeconomic fragmentation, trade and supply-chain disruptions, spikes in global food and energy prices, slowdown in major economies (especially Europe), cyberattacks.
  - Domestic: slowdown in migration leading to wage pressures, reduced competitiveness, higher inflation.
  - Prospective risks: a weakening property and housing market could affect banking sector and growth; intensification of competition in gaming could reduce growth and fiscal revenue.
- Illustrative downside scenario (higher U.S. tariffs and increased global uncertainty):
  - Direct Malta exposure: goods exports to the U.S. account for 1 percent of Malta’s total export of goods and services (5.3 percent of exports of goods).
  - In the scenario, Malta’s growth would decline by about 1 percentage point in 2026 and 2027 relative to the baseline.
  - Policy response: allow automatic stabilizers to operate, adjust energy tariffs, use available fiscal space to provide targeted support to the vulnerable.

### Policy Discussions and Recommendations
A. Strengthening Fiscal Buffers for Sustainability and Growth Support
- 2026 budget:
  - Authorities’ estimated overall deficit: 3.3 percent of GDP in 2025; budget aims for 2.8 percent of GDP in 2026.
  - Staff projection: 2.6 percent of GDP overall deficit in 2026 (reflecting higher revenue from improved tax compliance).
  - Public debt forecast: stay close to 47 percent of GDP.
  - Consolidation driven by spending cuts (including lower energy subsidies) and less EU-funded investment.
  - Social protection emphasis: higher pensions, enhanced support for low-income households, higher child support grants, personal income tax reductions for parents; total social transfers remain similar as a share of GDP.
  - Total revenue projected to decline from 33.6 percent to 32.8 percent of GDP (mainly due to reduced government fees and EU funds revenue).
  - Key 2025→2026 budget table highlights:
    - Overall balance (– = deficit): -3.3 → -2.8 (Change 0.5 ppts)
    - Total revenue: 33.6 → 32.8 (Change -0.9)
      - Current taxes on income and wealth: 14.1 → 13.9 (Change -0.2)
      - Taxes on production and imports: 9.4 → 9.3 (Change -0.1)
      - Social contributions: 5.1 → 5.2 (Change 0.1)
      - Other current and capital revenue: 4.9 → 4.2 (Change -0.7)
    - Total expenditure: 37.0 → 35.6 (Change -1.3)
      - Subsidies: 2.2 → 1.9 (Change -0.3)
      - Compensation of employees: 9.9 → 10.0 (Change 0.1)
      - Intermediate consumption: 8.1 → 7.8 (Change -0.3)
      - Gross fixed capital formation: 4.3 → 3.5 (Change -0.8)
- Medium-term fiscal guidance:
  - Staff recommend anchoring fiscal policy to public debt stability.
  - Baseline where output grows at potential: overall deficit of 2.6 percent of GDP would maintain public debt at 47 percent of GDP.
  - MFSP targets annual reductions in the structural deficit of ½ ppt of GDP, projecting overall deficit to decline to 2.6 percent of GDP in 2028 and 2.2 percent of GDP by 2030.
  - Debt projections from tables:
    - MFSP public debt path: 49.2 → 49.8 → 49.9 → 49.5 → 48.8 → 47.8 → 47.8 (years shown in table heading).
    - IMF staff public debt path: 46.2 → 46.9 → 47.1 → 47.1 → 47.1 → 47.1 → 47.1 (years shown in table heading).
- Fiscal space for investment:
  - Preserve debt-stabilizing deficit of 2.6 percent of GDP while creating fiscal space through revenue and expenditure measures to finance infrastructure, pensions, healthcare, climate transition, and technology adoption.

B. Revenue and Tax Policy Options
- Tax effort:
  - Overall tax burden (taxes plus net social contributions): around 29 percent of GDP in 2024 (fourth lowest in the EU); EU average 40 percent of GDP.
  - Scope for additional revenue via tax policy reform and stronger compliance.
- Possible measures:
  - Enhancing VAT efficiency:
    - EC estimated Malta's VAT compliance gap at 25.9 percent in 2022.
    - Recent reforms: electronic filing and payments, targeted compliance campaigns, VAT refund turnaround reduced from five months to 30 days.
    - Further actions: expand risk-based audits, modernize IT systems for large-scale data matching, systematically offset excess credits against tax arrears, implement comprehensive monitoring of tax arrears, rollout real-time reporting and e-invoicing.
  - Reassessing the Corporate Income Tax (CIT) regime:
    - Malta postponed implementation of the Qualified Domestic Minimum Top-up Tax (QDMTT) under OECD Pillar II and EU Minimum Tax Directive until end-2029.
    - Staff estimate: QDMTT could raise an additional 2 percent of GDP.
    - Recommendations: develop a roadmap for phased CIT reform; consider gradual phasing out the refund system while lowering the statutory rate for domestic enterprises; collect data on top-up taxation of Malta’s MNEs in other countries; consider CIT reform in conjunction with personal income tax due to CIT-PIT interactions under full imputation.
    - Authorities are working with the EC to design rules for Qualified Refundable Tax Credits.
  - Strengthening tax administration:
    - Large taxpayers’ office (LTO) now fully operational; covers several hundred entities and high-net-worth individuals.
    - Achievements: improved LTO enforcement outcomes, unified tax and customs administrations, improved corporate income tax filing and payroll tax compliance, integrated data-driven risk-based model.
    - Planned rollout: real-time reporting, central data warehouse, modern risk management tools.
- Authorities’ stance:
  - Broad agreement with staff on outlook and need to transition to productivity-driven growth.
  - Authorities stressed fiscal prudence, well-capitalized financial sector, and capacity to adjust to external shocks.
  - Authorities view housing market risks as limited, with real estate valuations broadly aligned with fundamentals.

*Source: 1. Growth at Risk — Malta (International Monetary Fund).*

### Box 2. Corporate Income Tax (CIT)

### Box 2. Corporate Income Tax (CIT)

### Structure and mechanics of Malta’s CIT
- Statutory CIT rate: 35 percent.
- Full imputation mechanism: CIT paid is credited against the personal income tax (PIT) liability of shareholders to avoid double taxation.
- The statutory CIT rate of 35 percent equals the marginal PIT rate for annual incomes above €60,000.

### Refunds and effective tax rates for non-resident shareholders
- Non-resident shareholders (not subject to personal income taxation in Malta) benefit from a refund system that reduces the effective tax rate (ETR) upon profit distribution:
  - 6/7th refund for trading income, reducing the ETR to 5 percent.
  - 5/7th refund for passive interest and royalty income, resulting in an ETR of 10 percent.
  - 2/3rd refund when the company has claimed foreign tax relief.
  - 100 percent refund for qualifying participating holdings.
- Retained earnings remain subject to the full 35 percent tax, creating an incentive for profit distribution.

### FITWI reform option (September 2025)
- Introduction of an optional Final Income Tax Without Imputation (FITWI) regulation in September 2025.
- Eligible companies can choose a flat 15 percent tax rate, outside the refunds and imputation system.
- The FITWI option is time-limited to five years and is intended to:
  - Simplify taxation.
  - Mitigate potential top-up taxation in other jurisdictions.
  - Attract companies that plan to reinvest profits.

### International minimum tax frameworks and scope
- MNEs with consolidated turnover above €750 million (in-scope MNEs) fall under the OECD Pillar II and the EC’s Minimum Tax Directive, envisaging a 15 percent minimum tax on corporate profits.
- In-scope MNEs:
  - Represent less than 3 percent of all companies in Malta.
  - Account for about 30 percent of the total turnover.
- Out-of-scope MNEs (annual turnover less than €750 million):
  - Make up about 17 percent of firms.
  - Account for about 40 percent of the total turnover.
- Domestic companies comprise the remaining 80 percent of firms.
- The QDMTT is intended to reduce the risk of profit shifting and base erosion and allow Malta to collect revenue that may otherwise be lost to other jurisdictions.

### Fiscal and policy context relevant to CIT
- Retained earnings taxed at 35 percent incentivize distribution, interacting with refund mechanisms that significantly lower ETRs for non-resident shareholders.
- Authorities’ stance:
  - A “wait-and-see” approach to CIT reform to observe international developments before major changes, with emphasis on predictability for business continuity and investment.
  - Commitment to fiscal consolidation in line with the EU’s new fiscal framework, aiming to reduce the deficit below 3 percent of GDP in 2026.
  - For energy policy, authorities view fixed electricity and fuel prices as underpinning social and economic stability and justify associated fiscal costs; they commit to reprioritizing spending if global energy price shocks occur.

### Implications and considerations
- The combination of a high statutory rate (35 percent) with refund mechanisms yields wide dispersion in ETRs depending on shareholder residency and income type (as low as 5 percent for trading income distributed to non-residents).
- The FITWI 15 percent optional regime (five-year minimum option) could attract reinvestment-focused companies and reduce complexity for eligible firms, while existing imputation and refund mechanisms continue to generate incentives to distribute profits.
- Implementation of OECD Pillar II and the EC Minimum Tax Directive (15 percent minimum tax) targets large MNEs (consolidated turnover above €750 million) and is designed to curb profit shifting and base erosion, affecting a small share of firms that account for a large share of turnover.

*Box 2. Corporate Income Tax (CIT), from the source PDF.*

### 31.      Malta should build on progress in

### Malta should build on progress in nurturing innovation and digitalization

### Innovation and digitalization: recent progress and gaps
- Malta has boosted firm-level investment in innovation, including ICT usage and digitalization, but continues to lag EU peers in:
  - government financing for innovation,
  - human capital development, and
  - product innovation.
- Government strategies and initiatives:
  - Smart Specialization Strategy 2021–27.
  - National Research and Innovation Strategic Plan 2023–27.
  - A well-developed AI strategy.
  - Digital Innovation Hub.
  - A €10 million venture capital fund.
  - A €100 million envelope for digitalization and AI uptake, co‑financed by the EU.
- Recommended near-term actions to advance innovation and digitalization:
  - Incentivize R&D and support start-ups by streamlining access to allocated public funding.
  - Strengthen cybersecurity and digital preparedness through training to support business dynamism and secure sustainable growth.
- Reference: EC European Innovation Scoreboard 2025: Country Profile Malta.

### Energy security and climate action
- Policy and institutional steps taken:
  - Enacted the Climate Action Act.
  - Operationalized a Climate Action Authority.
  - Submitted a final updated National Energy Climate Plan (NECP) in January 2025.
- Renewables and targets:
  - Malta has achieved 17 percent renewables in its energy mix, surpassing the original 2030 target of 11.5 percent.
  - Malta revised its renewables goal to 24.5 percent.
  - The NECP targets an approximately 40 percent reduction in greenhouse gas emissions by 2030 compared to 2005.
- Implementation advances:
  - Progress on the second Malta–Italy interconnector.
  - Electricity grid upgrades.
  - Financial incentives for electric vehicles and charging stations.
  - Continued rooftop‑PV rollout.
- Further priorities to accelerate the green transition:
  - Continued streamlining of permitting and upgrading grid infrastructure.
  - Phasing-out fossil fuel subsidies.
  - Reducing transport sector emissions.
- Climate resilience planning:
  - Authorities completed a Vulnerability and Risk Assessment across 10 priority sectors.
  - Procuring expertise to develop a costed National Climate Resilience Plan to address coastal flooding, sea-level rise, and extreme heat, alongside investments in urban greening and afforestation.
- Public sentiment: nearly half of the public identify climate change as a top global concern.

### Authorities’ views
- Authorities emphasize structural reforms to shift toward productivity-driven growth.
- Noted headwinds: labor shortages and skills gaps.
- Highlighted measures:
  - Promotion of AI and STEM education.
  - Enhanced incentives for retention of high performing workers.
  - Migrant training to improve workforce integration and productivity.
  - Public investment in AI preparedness and digital transformation.
- On energy security: cited construction of the second electricity interconnector with Italy and grid modernization.
- Acknowledged remaining challenges in the judicial system and on infrastructure.

### Staff appraisal: macroeconomic outlook and risks
- Growth and inflation:
  - Per capita income nearly doubled since 2013.
  - Growth is expected to remain at its potential of around 4 percent in 2026 and over the medium term.
  - Inflation is projected to stabilize at about 2 percent.
- External and domestic risks:
  - Exposures to external shocks include spillovers from regional conflicts and geoeconomic fragmentation, a resurgence in commodity prices, a slowdown in global growth (especially in Europe), and weakening of tourism.
  - Domestic risks include wage pressures and property market corrections affecting competitiveness and financial stability.
- Financial position and projections:
  - Fiscal deficit projected to narrow to 2.6 percent of GDP in 2026.
  - Public debt projected to remain stable at about 47 percent of GDP.
  - Current account expected to remain in surplus.
- Recommended fiscal posture:
  - Medium-term fiscal policy should be anchored on maintaining public debt stable while addressing structural bottlenecks.
  - Phase out untargeted energy subsidies to rationalize expenditure and support climate goals while protecting the vulnerable.
  - Advance digitalization of revenue administration, enhance tax compliance, and strengthen public finance and public investment management to create fiscal space for infrastructure, human capital, and innovation.
  - Develop a roadmap for corporate income tax reform to provide predictability and reduce investor uncertainty.

### Financial sector assessment and supervision
- Overall condition:
  - Financial sector remains healthy and resilient, with strong capital and liquidity buffers.
- Vulnerabilities and supervisory priorities:
  - Concentration in the banking system and banks’ growing exposure to real estate warrant continued supervisory vigilance.
  - Authorities are expanding a sectoral systemic risk buffer to all real estate and construction loans and implementing the EU’s Capital Requirements Regulation.
  - NBFIs, digital banks, and crypto service providers require close monitoring, a robust regulatory framework, and periodic system-wide stress testing.
  - Malta’s AML/CFT framework has been strengthened, but vigilance is needed for emerging risks, especially in virtual assets and trade-based money laundering.

### Structural reform priorities to sustain high growth
- Key reforms recommended:
  - Address labor shortages and skills mismatches.
  - Invest more in infrastructure and technology.
  - Improve judicial efficiency to reduce drag on the business climate.
  - Increase incentives for R&D, expand STEM education, streamline access to funding for start-ups and innovative SMEs, and enhance cybersecurity.
- Migration and education strategies are intended to tackle labor market pressures and support a shift to higher value‑added activities.
- The authorities’ focus on AI training and digital skills is noted as a positive step.

### Operational note
- It is recommended that the next Article IV consultation be held on the 24-month cycle.

*Source: IMF staff report excerpt.*

### Annex I. Implementation of IMF Recommendations

### Annex I. Implementation of IMF Recommendations

### Financial Sector
- Recommendation: Broaden and increase the sectoral systemic risk buffer (sSyRB) for residential mortgages to include all real estate and construction sectors.
  - Actions since 2024 Article IV: The authorities plan to broaden scope of sSyRB to include construction and commercial real estate starting in June 2026.
- Recommendation: Improve the collection of data in commercial real estate.
  - Actions since 2024 Article IV: Ongoing.

### Fiscal Policy
- Recommendation: Prepare an exit strategy from the current fixed energy price policy while protecting vulnerable groups.
  - Actions since 2024 Article IV: Not implemented. The authorities believe that fixed electricity and fuel prices underpin social and economic stability, which justifies the associated fiscal costs.
- Recommendation: Fiscal consolidation in line with the EU’s new fiscal framework.
  - Actions since 2024 Article IV: Ongoing. The fiscal targets established in the 2025-28 medium-term fiscal structural plan are likely to be overperformed.
- Recommendation: Develop and disseminate a roadmap for corporate income tax (CIT) reform in line with the EU’s Directive on Pillar II.
  - Actions since 2024 Article IV: Not implemented. The authorities chose a “wait-and-see” approach to CIT reform, preferring to observe international developments before implementing major changes to safeguard competitiveness.
- Recommendation: Improve public investment management framework and rationalize recurrent spending to achieve credible medium-term consolidation.
  - Actions since 2024 Article IV: Ongoing.

### Structural Reforms
- Recommendation: Strengthen educational outcomes and reskill and upskill the labor force.
  - Actions since 2024 Article IV: Ongoing, including through implementation of the National Education Strategy 2024-30.
- Recommendation: Strengthen Malta’s resilience to energy shocks.
  - Actions since 2024 Article IV: Ongoing, including through National Energy and Climate Plan.
- Recommendation: Improve management of the tourism sector.
  - Actions since 2024 Article IV: Ongoing, including through Malta Tourism Strategy 2021– 2030, which aims to promote sustainable, high-quality tourism.
- Recommendation: Strengthen innovation and its financing to enhance business dynamism.
  - Actions since 2024 Article IV: Ongoing, including through implementation of a Smart Specialization Strategy for 2021–27, which lays out sector-specific measures to leverage technologies and AI and boost innovation.

### Annex II. External Sector Assessment — Overall Assessment and Potential Policy Responses
- Overall Assessment: Based on staff’s estimates, Malta’s external position in 2025 is expected to be substantially stronger than the level implied by medium-term fundamentals and desirable policies.
  - Over the medium term, Malta’s current account (CA) surplus is expected to gradually decline with a decline in savings, while investment remains 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 further 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 increased from 76 percent of GDP in 2018 to 114 percent in 2020 and then fell to 80 percent in 2024.
  - Direct investment comprises the largest component of assets (over about 80 percent).
  - NIIP is expected to remain constant at around 80 percent of GDP in 2025.
  - Gross assets and liabilities are sizable, at around 30 and 29 times GDP, respectively.
- Assessment:
  - Malta’s gross liabilities are sizable. The volatility of financial flows and investment returns presents potential risks, especially in the current global context of economic uncertainty and relatively high interest rates.
  - However, most of the liabilities are direct investments, and the sizable gross asset position mitigates risks.
- Key 2024 figures (% GDP):
  - NIIP: 80
  - Gross Assets: 3,022
  - Gross Liab.: 2,942

### Current Account
- Background:
  - The current account surplus was about 7 percent of GDP in 2024 but below the 2013-2023 average of about 8 percent.
  - A strong service balance offsets a large goods deficit and an increasing primary income deficit.
  - Staff project a stable current account surplus of 6.3 percent of GDP as robust service exports continue throughout 2025.
  - Over the medium term, the CA surplus is expected to gradually decline with a slight decline in savings, while investment remains broadly unchanged.
- Assessment:
  - Considering cyclical and natural disaster/conflict contributions of about -0.4 percent of GDP, the CA balance of 6.3 percent of GDP is adjusted to 6.7 percent of GDP.
  - The EBA-lite CA model suggests a CA norm of -0.8 percent of GDP, with a large positive model residual.
  - Adjustment for remittances/migrant share: The CA norm is adjusted upward by 1.9 percentage points to 1.1 percent of GDP by reducing the negative contribution of the remittance/migrant share variable in the EBA-lite model.
  - Resulting CA gap and REER gap:
    - CA gap: 5.6 percent of GDP
    - Implied REER gap: – 6.8 percent
  - Relative policy gaps contribute 2.1 percentage points to the CA gap, with the contribution of domestic policy gaps of 1.8 percentage points of GDP.

### Real Exchange Rate
- Background: The CPI-based REER has broadly remained stable in 2024. REER has been relatively stable since 2015.
- Assessment: The EBA-lite REER model indicates a REER undervaluation of about 10 percent, slightly larger than that implied by the CA model.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - The capital account is expected to record a surplus of 1.3 percent of GDP in 2025.
  - The financial account balance is expected to have a surplus of 7.6 percent of GDP, 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.

### Annex III. Risk Assessment Matrix — Key Risks, Likelihood, Impacts, and Policy Responses
- Overall RAM note: The relative likelihood is staff’s subjective assessment (“low” <10, “medium” 10–30, “high” 30–50). The RAM reflects staff views as of the time of discussions with the authorities.

- Global Risks (selected entries)
  - Geopolitical Tensions
    - 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, declining tourism flows, and higher commodity prices.
    - Policy response: Allow automatic stabilizers to operate and adjust energy tariffs, while providing targeted financial support to vulnerable. Maintain structural reform momentum to support investment, diversify exports, and promote higher productivity growth.
  - Escalating Trade Measures and Prolonged Uncertainty
    - Relative Likelihood: High
    - Impact if realized: Medium. Supply disruptions, higher shipping costs, and lower global growth would weaken export demand including tourism.
    - Policy response: Same as above.
  - Commodity Price Volatility
    - Relative Likelihood: High
    - Impact if realized: Medium. Higher oil prices would increase energy subsidies and the fiscal deficit, mitigating adverse effect on growth and inflation.
    - Policy response: Adjust energy tariffs, while providing targeted financial support to vulnerable.
  - Financial Market Volatility and Correction
    - Relative Likelihood: High
    - Impact if realized: Medium. Global slowdown could affect growth in Malta and negatively impact the financial sector. However, banks and NBFIs are very liquid and well-capitalized.
    - Policy response: Intensify financial sector oversight. Consider releasing sSyRB buffers if banks fall under stress and providing targeted financial support.

- Global Fiscal and Social Risks
  - Fiscal Vulnerabilities and Higher Long-Term Interest Rates
    - Relative Likelihood: High
    - Impact if realized: Medium. Tighter financial conditions would increase financing costs and lower growth.
    - Policy response: Intensify financial sector oversight and calibrate macroprudential policies. Consider releasing sSyRB buffers to ensure financial stability.
  - Decline in International Aid
    - Relative Likelihood: High
    - Impact if realized: Low. The country does not receive international aid.
    - Policy response: N/A
  - Rising Social Discontent
    - Relative Likelihood: Medium
    - Impact if realized: High. For Malta, the risk is small, but the impact could be large if social instability leads to declining tourist flows and high uncertainty.
    - Policy response: Allow automatic stabilizers to operate and adjust energy tariffs, while providing targeted financial support to vulnerable. Maintain structural reform momentum to support investment, diversify exports, and promote higher productivity growth.

- Other Global and Structural Risks
  - New Trade Agreements
    - Relative Likelihood: Low
    - Impact if realized: Medium. Improved trade and higher global growth would positively affect Malta.
    - Policy response: In case of overheating, tighten fiscal stance and macroprudential regulations; build fiscal buffers.
  - Cyberthreats
    - Relative Likelihood: High
    - Impact if realized: Medium. Payment and financial systems could be disrupted.
    - Policy response: Strengthen cybersecurity, assess damages and restore IT functions. In case of prolonged financial stress, calibrate macroprudential policies such as potentially releasing sSyRB buffers.
  - Climate Change
    - Relative Likelihood: Medium
    - Impact if realized: High/Medium. Extreme events would affect growth, inflation, and tourism.
    - Policy response: Allow automatic stabilizers to operate and adjust energy tariffs, while providing targeted financial support to vulnerable. Maintain structural reform momentum and invest in climate change resilience.
  - Labor Supply Gaps
    - Relative Likelihood: Medium
    - Impact if realized: High/Medium. Reduced migration would adversely affect Malta’s growth and inflation.
    - Policy response: Allow automatic stabilizers to operate and adjust energy tariffs, while providing targeted financial support to vulnerable. Maintain structural reform momentum; support worker retraining and automation.

- Malta’s Specific Risks (selected entries)
  - 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.
  - A systemic risk in the financial system, potentially triggered by the real estate sector (e.g., a drop in prices and demand)
    - Relative Likelihood: Medium
    - Impact if realized: High/Medium. A shock to real estate and the financial system could affect financial stability, reducing credit flow and economic growth.
    - Policy response: Intensify financial sector oversight. Allow automatic stabilizers to operate and adjust energy tariffs, while providing targeted financial support to vulnerable. Maintain structural reform momentum.
  - Unsmooth transition in adopting the OECD Pillar 2
    - Relative Likelihood: Medium
    - Impact if realized: Medium/Low. Malta’s attractiveness as a financial and business location may deteriorate.
    - Policy response: Develop a well-structured roadmap for a phased implementation of the CIT reform. Communicate clearly to investors.

*Source: Annex I–III, Implementation of IMF Recommendations and related Annexes (as presented in the supplied content).*

### Annex IV. FSAP Recommendations

### Annex IV. FSAP Recommendations

### Risk Analysis
- Recommendation: Strengthen the risk analysis by incorporating new dimensions in liquidity stress testing, conducting regular sensitivity analysis on selected vulnerabilities, and enhancing data management. (CBM, MFSA) — Timing: ST
- Authorities’ Actions and Progress:
  - The Central Bank of Malta (CBM) enhanced liquidity and solvency stress testing frameworks by:
    - adding a liquidity-solvency channel to liquidity frameworks;
    - assessing climate-related risks;
    - accounting for IFRS9’s expected losses;
    - assessing household vulnerabilities.
  - Co-operation between the CBM and the European Systemic Risk Board (ESRB) is ongoing on projects including macroprudential analysis, O-SII methodology results, and CRR provisions related to risk weights.
  - Both CBM and MFSA improved data management systems, enhancing granularity and integration of datasets for financial stability assessments.
  - MFSA actions:
    - conducts stress tests for the insurance sector and investment fund liquidity regularly;
    - assesses climate transition risk and developed a composite indicator for non-bank financial institutions (NBFIs);
    - developed a methodology to assess credit risk within financial sector investment portfolios;
    - produces an annual internal Financial Stability Monitor report.
  - Cyber risk monitoring enhancements:
    - MFSA applied an internal cyber mapping tool to the full population reporting under the DORA dataset, identifying interlinkages between financial institutions and third-party ICT service providers and assessing exposure channels.
  - Additional analytical work:
    - monitoring capital markets exposures and risk concentrations;
    - expanded geopolitical risk analysis (e.g., implications from US tariff measures and regional conflicts);
    - continued enhancements on climate risk models, crypto-assets, and real estate (residential and commercial);
    - in-depth analyses on interest rate passthrough, residential real estate misalignment, impact of minimum reserve requirement increases, 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
  - Refine and introduce planned borrower-based instruments to address possible housing and household sector vulnerabilities. (CBM) — Timing: I
- Authorities’ Actions and Progress:
  - A financial stability objective has been added to the MFSA Act; the Joint Financial Stability Board, chaired by CBM governor, has recommendation powers.
  - Data and tools:
    - Since 2021, CBM collects comprehensive real estate data from all banks engaging in real estate lending on a quarterly basis; the database is operational for authorized internal users.
    - NSO developing a database on commercial real estate indicators.
    - CBM and MFSA set up a technical working group to develop methodology aligned with ESRB Recommendation (ESRB/2022/9).
    - CBM developed a Malta-specific cyclical systemic risk indicator in 2023 and constructed a semi-structural credit gap using a multivariate filter.
    - With IMF assistance, CBM developed the first phase of a network model to analyze direct and second-round effects of shocks to common exposures across banks, with plans to extend to other financial segments.
  - MFSA enhancements:
    - DORA dataset enabled full-population network mapping and cyber exposure assessments;
    - granted access to AnaCredit for granular bank lending insights;
    - gathers license-holder exposures to critical benchmarks under Regulation (EU) 2016/1011;
    - developed internal methodology to monitor residential property and rental markets;
    - developed and is extending a risk dashboard for NBFIs to investment funds;
    - gathered information on financial entities’ use of Artificial Intelligence (AI) to assess governance and use cases.

### Financial Sector Supervisory Resources and Independence
- Recommendations:
  - Ensure stable funding for the MFSA, grant it full autonomy over recruitment, and maintain a dedicated statutory committee on supervisory issues. (MFSA, Government) — Timing: I
  - Address supervisory and enforcement capacity gaps by increasing staff and broadening skill sets. (MFSA) — Timing: I
- Authorities’ Actions and Progress:
  - Legal amendments in 2019 allow MFSA recruitment independence.
  - MFSA submitted a 5-year budgetary plan; government committed to cover annual MFSA budgetary shortfalls and capital expenditures.
  - MFSA Board approved a revised fee structure based on a 5-year forecast up to FY2029; proposed a 60/40 model whereby 60 percent of total operational expenditure is netted out by application and supervisory fees and 40 percent received from the budget; capital expenditure covered in full by yearly Capex Government Subvention.
  - The new fee regime implemented as of 1st January 2025; the 60/40 model to be applied gradually over the 5-year forecast period.
  - Recruitment and staffing:
    - As of October 2025, MFSA headcount reached 565 employees, with 300 employees working in supervision.
    - MFSA targets: 575 employees by 2025 and 630 by 2026 (three-year phased staffing plan).
    - MFSA launched Development Plan 2024 – 2026 and revised staff remuneration from 1 January 2024.
  - Training and capacity building:
    - Financial Supervisors Academy delivers an annual Training Curriculum with 25,000 training hours annually.
    - Collaboration with University of Malta for a Post Graduate Diploma in Financial Regulation and Compliance (second intake launched).
    - Staff exchange programs with peer regulators and ESAs.

### Supervisory Actions, Enforcement, and Digitalisation
- Recommendation: Take timely supervisory actions (including for ML/TF) and increase use of monetary fines; ensure supervisory action not delayed through judicial appeal, amending law if needed. (MFSA, FIAU, government) — Timing: ST
- Authorities’ Actions and Progress:
  - FIAU increased human resources, created specialized supervisory teams, improved risk-based supervision, IT tools for risk assessment, and introduced a quality control function.
  - MFSA enforcement and investigations:
    - Investigations in 2024 covered breaches including non-submission of statutory documentation, unauthorized licensable activities, and inadequate governance.
    - 134 enforcement actions imposed in 2024, with administrative penalties amounting to €926,485.
    - Since 2023, MFSA entered a number of settlement agreements to adopt an efficient settlement process.
    - MFSA strengthened Enforcement Function via recruitment and targeted professional training.
    - Revised Publication Policy: allows anonymous notices for non-material breaches and administrative penalties not exceeding €30,000; introduced new retention periods for Settlement Notices and a defined list of non-material breaches.
  - Digitalisation:
    - In 2025, MFSA initiated development of the Supervisory Cycle Management System (SCMS) to automate licensing, compliance, and data analysis.
    - Enforcement Function to benefit from a dedicated Case/Records Management System.

### Banking Regulation and Supervision
- Recommendations:
  - Increase number and risk orientation of onsite inspections of Less Significant Institutions (LSIs). Enhance supervision of third-country branches. (MFSA) — Timing: ST
- Authorities’ Actions and Progress:
  - MFSA conducts bi-annual SREP on LSIs using ECB’s framework, with thematic and deep-dive assessments and Minimum Engagement Level meetings.
  - Onsite visit program covers thematic reviews (outsourcing) and higher-risk areas (credit risk, internal governance, online deposit platforms).
  - In 2025, MFSA’s Banking Supervision completed 5 SREP assessments and is finalizing an additional one; plans to issue 6 SREP decisions by end-2025. Five new SREPs launched during 2025 and in progress.
  - Ongoing supervisory work for LSIs not undergoing SREP includes meetings with Key Function Holders and monitoring financial performance and key risk indicators.
  - Supervision of third-country branches (TCBs):
    - Annual meetings with branch officials to standardize Minimum Engagement Level meetings.
    - Banking Supervision assessing potential impacts on TCBs licensed under Banking Act Cap. 371.
    - Follow-up on three public consultations on RTS and Guidelines on TCBs under the CRD regarding booking arrangements, capital endowment requirements, and colleges of supervisors.
    - Close cooperation with FIAU and MFSA’s Financial Crime Compliance Function on compliance visits in third-country branches.
    - Monthly meetings with ECB’s Malta Country Desk and continuous information sharing.

### Insurance and Securities Regulation and Supervision
- Recommendation: Strengthen conduct supervision and enhance sectoral risk-based supervision framework. (MFSA) — Timing: MT
- Authorities’ Actions and Progress:
  - Conduct supervision based on risk-based prudential supervision outcomes; internal workstream established a dedicated Conduct Risk Model focusing on product design and distribution.
  - Focused onsite inspections of credit institutions distributing insurance products, thematic reviews, and supervisory meetings.
  - MFSA developed and updated various risk analysis tools as part of macro-prudential risk monitoring.

### AML/CFT
- Recommendations:
  - Improve authorities’ assessment and understanding of ML/TF risks and strengthen national coordination. (National Coordination Committee) — Timing: I
  - Adopt a multi-prong strategy: (i) ensure banks apply preventive measures; (ii) fully implement risk-based AML/CFT supervision; (iii) apply timely, dissuasive, 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 Progress:
  - 2023 National Risk Assessment (NRA) published December 2023, coordinated by NCC; improved identification of risks for money laundering, terrorist financing, and proliferation financing.
  - Sector-specific risk assessments (2018–2023) on: (i) virtual financial assets; (ii) terrorist financing; (iii) concealment of beneficial ownership; (iv) organized crime; (v) shadow economy; (vi) corruption; (vii) laundering of proceeds of tax crimes.
  - Issued sector-specific AML/CFT guidance, strategic analyses by FIAU, and increased outreach initiatives.
  - MFSA initiatives:
    - set up Financial Crime Compliance Function (FCCF) to conduct AML/CFT inspections;
    - integrated AML/CFT elements into Prudential and Conduct supervision;
    - FCCF reviews license applications and MLRO questionnaires and interviews proposed MLROs;
    - MFSA conducts AML/CFT on-site examinations as an agent of FIAU, programming based on FIAU’s risk scoring model;
    - MFSA’s integrated risk scoring models include AML/CFT components; enforcement follows FIAU processes with FCCF participation.
  - Fitness and properness assessments performed by MFSA’s Due Diligence Function covering Competence, Reputation, Conflicts of Interest, and Time Commitment on an ongoing basis.
  - FIAU revised supervisory process for banks with sector-specific risk evaluation questionnaires and dedicated teams; administrative penalties on banks increased from 1 in 2017 to 161 in 2021.
  - Malta supports EU-level harmonized AML regulation and supervision and MFSA participates in AMLA working groups and other EU arrangements; MFSA collaborates with FIAU and international authorities via MoUs and bilateral discussions.

### Safety Nets and Crisis Management
- Recommendations:
  - Adopt an administrative bank insolvency regime with explicit powers to transfer assets/liabilities; clarify creditor hierarchy. (Government) — Timing: I
  - Shift responsibility for decisions on bank insolvency and liquidation, post-license revocation, from MFSA’s supervisory function to its resolution function. (MFSA) — Timing: I
  - Review the adequacy of the Resolution Unit’s staffing and increase resources accordingly. (MFSA) — Timing: I
- Authorities’ Actions and Progress:
  - Draft legislation for administrative bank insolvency is in process to be presented to MFSA’s Executive Committee (ExCo) for approval; following ExCo approval, a public consultation will be launched, then legislative review and forwarding to Parliament.
  - MFSA board decided in April 2021 to shift responsibility from supervisory to resolution function and set up a transition team; Resolution Function drafted necessary legislative changes and is actively liquidating banks in conjunction with Banking Supervision.
  - Resolution Function headcount in 2025 stood at 24 FTEs; additional resources will be made available to cover new responsibilities under the Insurance Recovery and Resolution Directive.

*Annex IV. FSAP Recommendations*

### Annex V. Vision 2050

### Annex V. Vision 2050

### Four Strategic Pillars
- First, sustainable economic growth through diversification and higher-value sectors:
  - Tourism: Premium offerings, high-value experiences.
  - Gaming: Regulatory reform, expansion into e-sports and content creation.
  - Shipping & Maritime: Freeport expansion, new trade routes, streamlined ship registration.
  - Financial Services: Fintech, investment funds, multinational HQs.
  - Aviation: Aircraft registration, MRO expansion, long-haul connectivity.
  - High-End Manufacturing: Semiconductors, pharmaceuticals.
  - Smart Construction: Renovation, vertical expansion, sustainable urban planning.
- Second, citizen-centered services to focus on:
  - Healthcare: AI diagnostics, telemedicine, public-private partnerships.
  - Social Policy: Affordable housing, pension reform, inclusive support systems.
  - Mobility: Electric vehicles, Mobility-as  -a-Service, mass transit, drone logistics.
  - Migration: Skills-based integration, fair wage policies, labor market alignment.
- Third, resilience and education reform:
  - Education: Curriculum reform, STEM focus, vocational alignment.
  - Energy: Renewable energy expansion, interconnectors, hydrogen pipelines.
  - Environment: Carbon neutrality, biodiversity, circular economy, waste-to -energy.
  - National Identity: Cultural preservation, cybersecurity, civic trust-building.
- Fourth, sustainable land and sea management:
  - Urban Planning: Compact, livable communities, sustainable architecture.
  - Green Malta: Expansion of green spaces, biofuel adoption, land conservation.
  - Land Reclamation: Environmentally assessed projects for strategic expansion.
  - Gozo Development: Premium tourism, agri-tech, cultural promotion

### Targets
- By 2035:
  - Rank in top 20 globally on the Human Development Index (HDI).
  - Raise median disposable income to 115 percent of the EU average.
- By 2050:
  - Reach the top 10 in HDI.
  - Achieve 135 percent of the EU average in disposable income.
  - Attain top-five EU ranking in life satisfaction.

### Malta: Contextual Findings on Growth, Labor, and Sectors (from Annex VII)
- Demographics and labor supply:
  - In the decade up to 2024, Malta’s population grew by 26 percent to over half a million inhabitants.
  - Foreign resident population rose from 5.5 percent in 2013 to 28.1 percent of the total in 2024.
  - Labor force grew from just under 190,000 to nearly 317,000.
  - Foreign workers accounted for three-quarters of the rise in employment numbers since 2013 and now comprise 39 percent of the workforce.
  - Non-EU nationals alone make up 27 percent of the workforce.
  - The share of foreign workers tops 50 percent in the construction, and accommodation and food sectors.
- Structural change and sectoral contribution:
  - Malta’s economy roughly doubled in real terms over the past decade.
  - Computer programming, consultancy and information services: real value added quadrupled in a decade to €1.4 billion (6.8 percent of 2023 GDP).
  - Manufacturing value added: €1.1 billion (5.3 percent of GDP).
  - Construction contributed about 3 percent of total economic growth while gaming added three times as much.
- Role of foreign labor vs. local participation:
  - Though foreign labor was the main driver of the expansion in the labor force, Maltese workforce participation also increased.

### Annex VII. Table — Change in Sectoral Employment by Nationality, 2013-23
- Agriculture & fishing: Maltese 191, Foreign 444
- Manufacturing: Maltese -3,448, Foreign 7,322
- Construction: Maltese -2,479, Foreign 10,640
- Retail, transport, accommodation & food services: Maltese -2,751, Foreign 30,333
- Information and communication: Maltese 1,822, Foreign 3,225
- Financial services: Maltese 3,229, Foreign 3,586
- Professional services and administrative support: Maltese 15,087, Foreign 24,492
- Public administration, education & health: Maltese 12,082, Foreign 6,547
- Arts & entertainment, other services: Maltese 4,168, Foreign 9,446

### Policy-relevant implications and considerations (as articulated in the source)
- Transitioning to a productivity-driven growth strategy that emphasizes innovation, education and environmental sustainability—consistent with Malta’s Vision 2050—would help mitigate strains from rapid population and labor-force expansion.
- A skills-based immigration policy is highlighted as essential to facilitate the transition into higher value-added services.
- Implementation risks for the Vision include fiscal constraints, institutional inertia, demographic pressures, external shocks, and the physical limits of Malta’s small geography.

*Source: Fund staff.*

### 75.6 percent in 2019 to 83 percent in 2024, compared to an EU average of 75.8 percent,

### 1mltea2026001-source-pdf - 75.6 percent in 2019 to 83 percent in 2024, compared to an EU average of 75.8 percent,

### Labor force participation and drivers of increased employment
- Employment rose from 75.6 percent in 2019 to 83 percent in 2024, compared to an EU average of 75.8 percent.
- Gains largely achieved by mobilizing older, female and younger workers.
- Policy measures contributing to higher participation included:
  - a gradual increase in the retirement age;
  - free childcare;
  - tax credits for returning parents;
  - support for flexible working arrangements;
  - enhanced vocational education.

### Labor shortages, skills mismatches, and capacity strains
- Labor shortages and skills mismatches emerged as byproducts of rapid economic growth.
- 68 percent of employers in Malta’s service sector report that labor shortages limit their activities, versus an average of only 24 percent in the EU.
- 90 percent of respondents in an EIB investment survey said the availability of skilled labor was the primary obstacle to long-term investment; 82 percent cited uncertainty about the future.
- Shortages are particularly acute in technical areas, reflected in a declining share of university graduates in STEM fields.
- Increasing population density has exacerbated overcrowding, strained services and increased pollution, traffic congestion, and habitat destruction.
- A 2022 EC report estimated traffic congestion and pollution costs Malta about €400 million annually, or 3.6% of the country's GDP.
- A 2024 World Health Organization report found that Malta's pollution levels were more than double the recommended WHO threshold.
- Waste from the construction sector is 3.9 tons per capita, more than double the EU average.

### Worker retention, turnover, and quality-of-life impacts
- Low worker retention has contributed to skills mismatches:
  - In 2023, half of Malta’s foreign workers departed within two years of arrival.
  - Nearly a third of EU nationals left their jobs after just one year.
- Factors attributed to high turnover include rising housing costs, comparatively low salaries, limited access to banking and home loans, and restricted opportunities for career growth.
- Malta ranked 46 out of 53 countries as a desirable location for living and working abroad in a recent survey, down from 3rd place in 2015, with concerns about overpopulation, quality of life, environment, and transportation infrastructure.
- Governance concerns: only 29 percent of firms rank Malta’s political, legal and regulatory environment positively versus 85 percent in 2015.

### Migration policy, recruitment, and integration strategy
- Given capacity strains, Malta needs a more selective use of foreign labor to sustain growth and shift to a productivity-based economy.
- Priority is recruitment and retention of highly skilled foreign workers to fill gaps in key sectors such as IT and financial services while limiting non-EU migrants in lower priority areas.
- Research cited: output gains from immigration are highest when policies reduce barriers to integration of skilled migrants.
- Suggested integration and facilitation measures include:
  - cutting down on administrative delays in immigration processing;
  - offering language courses to facilitate social integration;
  - making it easier to recognize and transfer qualifications to avoid gaps in employment;
  - providing access to job search resources;
  - investing in education so newcomers can upgrade their skills.

### Recent reforms and labor migration policy actions
- Initial steps under phased implementation of the 2025 Labor Migration Policy Strategy targeted labor market bottlenecks:
  - stricter employer requirements to advertise vacancies and prioritize hiring Maltese or EU nationals;
  - extended grace periods for terminated non-EU workers;
  - introduction of sector-specific skills cards;
  - mandatory pre-departure integration courses covering language and labor rights;
  - longer residence permits for skilled workers.

### Upskilling, domestic participation, and targeted measures
- Upskilling and further increases in domestic labor force participation could complement targeted foreign worker deployment.
- Authorities plan to:
  - further expand skills-based migration;
  - strengthen training and integration incentives;
  - continue investing in STEM, vocational training, and adult education (prioritized in the National Education Strategy 2024-30 and the Lifelong Learning Strategy 2023-30).
- Policy actions needed:
  - greater investment in vocational training and adult education to address technical field shortages and align skills with employer needs;
  - further reduction of the gender employment gap—particularly among women aged 50-64—through enhanced caregiving support for elderly relatives, expanded healthcare for this age group, and retirement incentives;
  - strengthen active labor market policies to build on recent gains in employment of disabled persons, including upskilling initiatives and provision of reasonable workplace accommodations.

### Data adequacy, dissemination, and statistical developments
- The data provided to the Fund are adequate for surveillance, with some shortcomings:
  - Progress made in revising GDP and external sector data as new administrative sources became available.
  - NBFI data collection does not yet provide needed granularity; Monetary and Financial Statistics rating downgraded to B.
- Corrective actions and capacity development priorities:
  - authorities working to improve external sector statistics, NBFI data, and consistency in external and public finance statistics;
  - recommendation to collect data on top-up taxation of Malta’s MNEs to mitigate foregone revenue risks.
- Malta adheres to the Special Data Dissemination Standard (SDDS) Plus since July 2023 and publishes data on its National Summary Data Page.

*Source: IMF staff report content from the provided PDF excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1mltea2026001-source-pdf.pdf_