IMF Executive Board Concludes 2022 Article IV Consultation with Malta

IMF News, February 8, 2023

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Output grew by 11¾ percent in 2021 following the COVID-19 recession.
Staff expect growth of 6½ percent in 2022.
The economy continued to expand for the first three quarters of 2022, driven by strong net exports and private consumption.
Inflation has picked up but has remained among the lowest in the euro area, reflecting the government’s policy to freeze retail electricity and fuel prices for all consumers.

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

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

Prepare an exit strategy from the fixed-energy-price policy while protecting vulnerable groups.
Exit strategy objectives:
- Contain fiscal costs.
- Introduce market price mechanisms to enhance incentives for energy conservation.
- Help accelerate the green transition.
Explore reform options with the aim of gradually rolling them out ahead of winter 2023/24.
Accelerating the green transition is emphasized as the best way to strengthen Malta’s resilience to an energy shock.

The fiscal tightening planned for 2023 is appropriate to slow inflation and improve public finances, but additional actions are needed to pursue consolidation over the medium term.
Public debt is projected to remain just below 60 percent of GDP, but could be forced upward if growth underperforms or contingent liabilities materialize.
Authorities need additional measures to mobilize revenues and enhance spending efficiency over the medium term.
In light of Pillar II of the global corporate tax reform, authorities need to:
- Reform the taxation of multinational firms.
- Consider broader reforms to the tax system and to revenue administration to simplify and improve efficiency and reduce administration and compliance costs while protecting revenues.
Continue efforts to identify scope for rationalizing recurrent spending.
Further steps to improve the efficiency of public investment, including green investments.
Monitor long-term demographic trends to properly plan pension-related reforms.
Continue to promote voluntary occupational pensions and personal pensions.

Financial system remains sound, but emerging risks warrant continued vigilance and close monitoring of banks.
Authorities should closely monitor banks’ risk management to ensure provisions are continuously updated as economic prospects change.
Consider introducing a sectoral systemic capital risk buffer targeting mortgage loans given the banking sector’s large exposure to the housing market.
Continue efforts to monitor cyber security risks and strengthen resilience against cyberattacks.

Continue efforts to strengthen the effectiveness of the AML/CFT framework.
Boosted resources for AML/CFT supervisors should remain in place to help the long-term sustainability of reforms.
Authorities need to continue to demonstrate the effectiveness of supervisory outcomes, including through effective implementation of sanctions.
Implement the national AML/CFT strategy for 2021–2023 and the NRA exercise to enhance coordination and supervision.
Closely monitor high-risk sectors, especially virtual financial assets, gaming, and sectors associated with Malta’s Citizenship by Investment program.

Structural reforms needed to improve long-term growth and address climate challenges.
Malta’s Recovery and Resilience Plan will address part of its structural challenges, but more efforts needed, especially to:
- Address labor skill mismatches.
- Increase STEM graduates.
- Enhance vocational training.
- Promote research and innovation.
- Advance the digital transformation of SMEs.
Foster labor force participation through incentives for workers to delay retirement and flexible working solutions to address structural labor shortages.
Continue implementing the 2021 Low Carbon Development Strategy and seek decarbonization potential by exploiting various sources, including investing in renewable sources.

Real GDP: 6.2 (2018); 7.0 (2019); -8.6 (2020); 11.7 (2021); 6.5 (2022); 3.3 (2023 projections).
Domestic demand: 8.8 (2018); 8.1 (2019); -3.7 (2020); 7.8 (2021); 4.0 (2022); 3.7 (2023 projections).
CPI (harmonized, average): 1.7 (2018); 1.5 (2019); 0.8 (2020); 0.7 (2021); 6.1 (2022); 5.2 (2023 projections).
Unemployment rate (percent): 3.6 (2018); 4.4 (2019); 3.4 (2020); 3.0 (2021); 3.1 (2022); (2023 not listed).
Overall balance (general government, percent of GDP): 2.1 (2018); 0.6 (2019); -9.6 (2020); -7.8 (2021); -5.4 (2022); -5.0 (2023 projections).
Gross debt (percent of GDP): 43.7 (2018); 40.3 (2019); 53.0 (2020); 55.2 (2021); 56.6 (2022); 58.5 (2023 projections).
Current account balance (percent of GDP): 6.4 (2018); 4.9 (2019); -2.8 (2020); -4.5 (2021); -3.6 (2022); -3.5 (2023 projections).
Trade balance (goods and services, percent of GDP): 15.6 (2018); 13.9 (2019); 7.9 (2020); 4.2 (2021); 5.1 (2022); 5.3 (2023 projections).
Exchange rate regime: Joined EMU on January 1, 2008.
Nominal effective rate (2010=100): 101.8 (2018); 100.5 (2019); 101.6 (2020); 103.0 (2021).
Real effective rate, CPI-based (2010=100): 104.9 (2018); 103.6 (2019); 104.7 (2020); 103.7 (2021).

IMF Executive Board Concludes 2022 Article IV Consultation with Malta — Press Release No. 23/33, February 8, 2023.