IMF Executive Board Concludes 2024 Article IV Consultation with Malta
IMF News, January 22, 2025
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- Published: January 22, 2025
Overview and recent developments
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malta; the Board considered and endorsed the staff appraisal on a lapse of time basis.
- Malta has experienced remarkable growth over the past decade, primarily driven by export-oriented service industries, such as tourism and online gaming.
- Growth is expected to moderate but remain among Europe’s highest in the near term, accompanied by tight labor markets.
- Inflation has fallen to around 2 percent, but some inflationary pressures remain in the service sector.
- Strong growth has been supported by an influx of foreign workers and tourists, increasing density and straining infrastructure and public services.
- The financial system has demonstrated resilience amid successive shocks.
Risks and medium-term outlook
- Over the medium term, Malta’s economy is projected to continue outperforming other European countries, but structural constraints will weigh on growth potential.
- Risks to the outlook are tilted to the downside.
- External downside risks: spillovers from intensified Russia’s war in Ukraine and the Israel-Gaza conflict; deepening geoeconomic fragmentation.
- Domestic downside risks: higher-than-expected wage growth, resulting in higher inflation.
- Upside scenario: tourism exports could grow faster than anticipated, boosting near-term growth but adding to capacity pressure.
- Malta’s external position in 2024 is expected to be substantially stronger than the level implied by fundamentals and desirable policies.
- The key challenge is to enhance a productivity-driven growth strategy for socially and environmentally sustainable growth.
Fiscal policy and public finances
- The authorities’ commitment to fiscal consolidation is welcome; emphasis should be on shifting policy away from energy subsidies toward investment and innovation.
- The overall deficit is expected to decline to around 2¾ percent of GDP by 2029, while public debt is projected to remain around 50 percent of GDP, below 60 percent of the EU’s debt ceiling.
- Energy subsidies are expected to remain sizable, accounting for 20 percent of the fiscal deficit.
- Policy recommendation: gradually but decisively exit the fixed energy price policy by shifting to more targeted subsidies and strengthening market pricing mechanisms.
- Fiscal space freed from subsidy reform should be allocated to investment (including green), services (e.g., health), and innovation support.
- The authorities’ long-term developmental vision (“Malta Vision 2050”) should be reflected in fiscal planning via a long-term fiscal framework that accounts for population aging, climate transition, and infrastructure needs.
Tax policy and corporate income tax (CIT) reform
- Authorities should 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.
- Deferring Pillar II implementation allows adaptation to international developments but risks ceding revenue to jurisdictions that adopt the directive sooner.
- The roadmap should encompass reforms addressing CIT (for both foreign and domestic companies) and personal income tax.
Financial sector stability and macroprudential policy
- The financial system is sound and stable; however, risks remain due to substantial exposure to real estate.
- Recommendation: tighten macroprudential policy stance.
- Continue vigilant monitoring of real estate markets and close remaining data gaps in the commercial real estate sector.
- Supervisors should ensure banks maintain robust underwriting and appraisals for loans to the real estate sector.
- Continue thorough assessments of cyber risk resilience in financial institutions.
- Consider raising the sectoral systemic risk buffer rate and broadening its scope beyond residential mortgages, given increasing banks’ exposures to real estate.
- Further easing of ECB monetary policy combined with ongoing strong growth in Malta could stimulate additional credit expansion in real estate.
AML/CFT framework and judicial reforms
- The authorities’ commitment to strengthening the AML/CFT framework and advancing judicial reforms is welcome.
- Recommendations:
- Remain vigilant in monitoring emerging threats, such as trade-based money laundering.
- Continue enhancing the risk-based approach by ensuring gatekeepers (e.g., financial institutions) align business and customer risk assessments with the 2023 National Risk Assessment results.
- Advance judicial reforms, including strengthening the appointment process of the chief justice and improving the efficiency of the justice system.
Productivity, innovation, and labor market policies
- Continued efforts are needed to raise productivity and foster innovation for sustainable long-term growth.
- Authorities should evaluate the effectiveness of schemes (e.g., grants, tax incentives) supporting innovation activities, start-ups, and scale-ups, focusing on size and design.
- The establishment of Malta’s Venture Capital Fund is a positive step.
- Innovation and digitalization require a skilled workforce; recommendations include improving educational outcomes, increasing STEM enrollment, enhancing digital skills, and boosting adult learning.
- Having made notable progress in boosting female participation, authorities should continue initiatives to further narrow gender gaps across various measures of gender equality, including representation.
Climate mitigation and adaptation
- Concerted efforts from both the public and private sectors are essential to achieving Malta’s ambitious climate goals.
- 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.
- For climate adaptation, complete the vulnerability risk assessment and update the adaptation plan accordingly.
Selected economic indicators (2021–26)
- Real GDP (expenditure) (% change): 2021: 13.5, 2022: 4.1, 2023: 7.5, 2024: 5.0, 2025: 4.0, 2026: (blank)
- Domestic demand (% change): 2021: 12.0, 2022: 8.1, 2023: 1.7, 2024: 5.1, 2025: 4.3, 2026: (blank)
- Output gap (% potential output): 2021: 2.3, 2022: -0.8, 2023: 0.0, 2024: 0.6, 2025: 0.4, 2026: 0.1
- Gross national savings (% GDP): 2021: 33.4, 2022: 24.4, 2023: 25.9, 2024: 25.6, 2025: 25.5, 2026: 25.7
- Investment (% GDP): 2021: 24.0, 2022: 25.2, 2023: 19.6, 2024: 19.3, 2025: 19.2, 2026: 19.7
- Consumer prices (HICP, avg) (% change): 2021: 0.7, 2022: 6.1, 2023: 5.6, 2024: 2.5, 2025: 2.2, 2026: 2.0
- Consumer prices (HICP, eop) (% change): 2021: 2.6, 2022: 7.3, 2023: 3.7, 2024: 2.1
- Employment (Labor % change): 2021: 3.0, 2022: 6.7, 2023: 5.4, 2024: 3.8
- Wages (Labor % change): 2021: 2.7, 2022: 3.9, 2023: 3.6
- Unemployment rate (%): 2021: 3.5
- Net migration (% population): 2021: 4.2, 2022: 1.9, 2023: 1.8
- Credit to the private sector (% change): 2021: 5.8, 2022: 8.2, 2023: 8.3, 2024: 6.3
- Credit to the private sector (% GDP): 2021: 73.4, 2022: 72.6, 2023: 69.5, 2024: 66.7, 2025: 66.2, 2026: 66.3
- Short term deposit rate: 2021: -0.5, 2022: 0.3, 2023: 3.4, 2024: …
- Long-term bond yield: 2021: 0.5, 2022: 2.4
- Net lending/borrowing (General government finances % GDP): 2021: -7.0, 2022: -5.2, 2023: -4.5, 2024: -4.0, 2025: -3.5, 2026: -3.1
- Structural balance (% potential GDP): 2021: -3.8, 2022: -1.9, 2023: -3.6, 2024: -3.2
- Structural primary balance (% potential GDP): 2021: -2.8, 2022: -1.0, 2023: -2.6, 2024: -2.3, 2025: -1.8
- Consolidated debt (gross) (% GDP): 2021: 49.6, 2022: 49.4, 2023: 47.4, 2024: 49.0, 2025: 49.7, 2026: 50.2
- Current account (%GDP): 2021: 9.4, 2022: 6.4, 2023: 6.0
- International investment position, net: 2021: 105, 2022: 100, 2023: 93, 2024: 95, 2025: 97, 2026: 98
- Gross debt 1/: 2021: 374, 2022: 334, 2023: 323, 2024: 337, 2025: 328
- Net debt 1/: 2021: -186, 2022: -173, 2023: -171, 2024: -184, 2025: -191, 2026: -198
- MEMORANDUM ITEMS:
- Nominal GDP (bn €): 2021: 16.7, 2022: 18.2, 2023: 20.7, 2024: 22.4, 2025: 23.9, 2026: 25.3
- Population (1,000): 2021: 516, 2022: 520, 2023: 542, 2024: 553, 2025: 563, 2026: 573
- GDP per capita ($): 2021: 38,230, 2022: 36,959, 2023: 41,205, 2024: 43,938, 2025: 45,224, 2026: 47,020
- Real effective exchange rate: 2021: -0.6, 2022: -3.7, 2023: 1.1
IMF Executive Board Concludes 2024 Article IV Consultation with Malta, January 22, 2025.