## Malta: Staff Concluding Statement of the 2021 Article IV Mission

_IMF News, July 21, 2021_

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**Canonical URL:** [Malta: Staff Concluding Statement of the 2021 Article IV Mission](https://www.imf.org/en/news/articles/2021/07/21/mcs-072121-malta-staff-concluding-statement-of-the-2021-article-iv-mission)

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## Bibliographic details
- Published: July 21, 2021

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### COVID-19 impact, near-term outlook, and key risks
- Tourist arrivals fell sharply to below 25 percent of pre-pandemic levels.
- Real GDP contracted by 7¾ percent in 2020.
- Output grew by 1.9 percent (q/q) in the first quarter of 2021.
- Staff expect the economy to grow by around 5¾ percent in 2021 and 6 percent in 2022, assuming further progress in global vaccination, an unleashing of pent-up demand for contact-intensive services, and a gradual recovery in international tourist arrivals.
- Consumer and business confidence have recovered to pre-COVID-19 levels; signs of labor markets tightening are emerging.
- Downside risks (tilted to the downside) include:
  - a global resurgence of the COVID-19 pandemic;
  - the uncertain long-term impact of the crisis on the economy;
  - a labor shortage due to reduced inflows of foreign workers;
  - a prolonged placement in the FATF grey-list which could adversely affect correspondent banking relationships (CBR) and foreign direct investment inflows.
- Upside scenario: recovery could be faster than expected if swift global vaccination boosts confidence and economic activity.

### A. Shifting policies to support a strong recovery
- Near-term policy imperative: gradually unwind pandemic-related support measures and shift to policies targeted at facilitating resource reallocation to productive and high-growth potential activities.
- Most support measures are set to expire by the end of 2021.
- Recommendations for tapering support:
  - prepare a plan for tapering support measures (e.g., the wage supplement scheme), including adjusting their size and eligibility criteria;
  - coordinate fiscal and financial sector policy to avoid “cliff effects” that could derail the recovery;
  - if health risks reemerge or the recovery falters, consider extending some support measures with refocusing on sectors and people still significantly affected.
- Corporate sector monitoring:
  - assess extent of deterioration of corporate balance sheets from the pandemic;
  - consider additional support where needed, including investment tax credits, subsidized loans, and solvency support to viable small and medium-sized enterprises;
  - ensure public support is transparent, consistent with overall policy goals, time-bound, and has a clear exit strategy to minimize fiscal risks.

### B. Ensuring long-term fiscal sustainability
- With recovery, expiration of COVID-19 measures, and containment of spending growth, the fiscal deficit is projected to narrow rapidly from 2022 onward, and debt to fall steadily over the medium term.
- Authorities remain committed to eventually returning to a structural fiscal balance and to reducing the debt-to-GDP ratio to 60 percent over the medium term.
- Mission supports the planned comprehensive review of COVID-19 related spending to proceed efficiently with fiscal consolidation.
- Fiscal consolidation strategy guidance:
  - retain space for public investment to underpin growth and address infrastructure gaps;
  - regularly update a pipeline of well-defined infrastructure projects;
  - proceed with the authorities’ planned review of the infrastructure investment and management framework.
- Addressing long-standing fiscal vulnerabilities:
  - risks to fiscal revenues include collection of deferred taxes, relatively low tax revenues, and high reliance on corporate income tax (CIT);
  - continue strengthening tax administration, identify loopholes, and exploit digitalization;
  - conduct a holistic review of the overall tax system in light of the global minimum CIT proposal;
  - adopt strategies to strengthen the financial footing of state-owned enterprises due to rising contingent liabilities;
  - promote voluntary occupational pensions and personal pensions, and increase the effective retirement age to help address long-term age-related spending pressures and improve pension system sustainability.

### C. Safeguarding financial stability and pursuing AML/CFT reform
- Banks have remained resilient, maintaining adequate capital and liquidity buffers.
- Continued vigilance and risk monitoring are needed given high uncertainty.
- Financial sector risks include:
  - a rise in corporate insolvencies;
  - real estate market corrections;
  - propagation of financial distress through intercompany loans.
- Supervisory recommendations:
  - continue close monitoring of banks’ financial positions and risk management;
  - ensure banks update assessment of expected losses as economic prospects evolve and provision accordingly;
  - enhance data collection and monitoring for intercompany lending.
- The support measures for the real estate market should expire in summer 2021 as planned.
- AML/CFT framework:
  - Malta was placed under increased monitoring (“grey list”) by FATF in late June due to concerns about effectiveness of some aspects of the framework;
  - in line with the FATF action plan, intensify efforts to demonstrate effectiveness by:
    - ensuring the accuracy of beneficial ownership information;
    - enhancing the use of financial intelligence to support tax and money laundering cases;
    - focusing the Financial Intelligence Unit’s analysis on criminal tax offenses;
  - continue efforts to mitigate financial integrity and reputational risks in high-risk activities (e.g., virtual financial assets, gaming, and citizenship by investment program);
  - maintain close monitoring of CBR pressures.

### D. Advancing structural reforms for higher and sustainable growth
- Reinvigorate structural reforms to raise productivity and achieve strong and sustainable growth.
- Near-term priorities:
  - facilitate reallocation of labor and capital;
  - advance labor market reforms focused on upskilling and reskilling to narrow skill gaps;
  - complete ongoing work on the corporate insolvency framework by mid-next year, as planned.
- Tourism strategy:
  - following Malta Tourism Strategy 2021–2030, take actions to make the sector stronger and more sustainable by utilizing new digital technologies, enhancing a greener tourism system, improving tourism infrastructure, and increasing value-added in the sector.
- Digital transformation, innovation, and decarbonization:
  - EU funds, including the EU Recovery and Resilience Facility, will support investment in these areas;
  - update the National Digital Strategy to take stock of past experience and keep Malta among Europe’s digital frontrunners;
  - increase public spending in R&D and strengthen the innovation ecosystem, noting Malta is still trailing EU peers in R&D investment.
- Climate commitment:
  - the mission welcomes the authorities’ commitment to reducing greenhouse gas emissions under the EU Effort Sharing Regulation by 19 percent (compared to 2005 levels) by 2030.
- Governance and investor attraction:
  - further strengthen the governance framework to attract investors;
  - continue efforts to fully meet the recommendations of the Council of Europe’s Venice Commission and the Group of States Against Corruption, including enhancing the efficiency of the judiciary system.

*IMF Staff Concluding Statement, July 21, 2021.*

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## References

- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Malta and the IMF](http://www.imf.org/external/country/MLT/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2021/07/21/mcs-072121-malta-staff-concluding-statement-of-the-2021-article-iv-mission_