Malta: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, November 18, 2024
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- Published: November 18, 2024
Mission overview and key messages
- Malta has experienced remarkable growth over the past decade; growth is expected to moderate but remain among Europe’s highest.
- Inflation has fallen to around 2¼ percent; some inflationary pressures persist in services.
- Growth supported by an influx of foreign workers and tourists, increasing population density and straining infrastructure.
- Financial system remains resilient and stable.
- Policy priorities:
- Consolidate the fiscal position aligned with the EU’s new fiscal framework.
- Phase out the fixed energy price policies and reallocate the resulting fiscal space for investment (including green) and productivity-enhancing policies.
- Safeguard financial stability by maintaining close monitoring of risks from banks’ concentrated lending to the real estate sector; a tightening bias in the macroprudential policy stance is warranted.
- Further develop and implement a productivity-driven growth strategy emphasizing innovation, digitalization, education, training, and environmental sustainability.
Economic outlook and risks
- Growth projections:
- 2023: 7½ percent
- 2024: 5 percent (projected)
- 2025: 4 percent (projected)
- Medium-term (beyond 2025): around 4 percent
- Decadal average (past decade): 6¾ percent
- Sectoral outlook:
- Exports (including tourism) expected to slow but remain robust, supported by a modest recovery in Europe.
- Private consumption growth remains solid.
- Investment is set to recover.
- Labor market and inflation:
- Labor markets remain tight; employment has grown fast with foreign workers accounting for the majority of the increase.
- Unemployment rate remains at historic lows.
- Wage pressures have remained relatively contained, partly due to increased inflows of foreign workers.
- Inflation expected to stabilize at 2 percent by mid-2025.
- Some inflationary pressures persist in the service sector.
- Risks (tilted to the downside):
- External: escalation of the conflict in the Middle East, escalation of Russia’s war in Ukraine, and deepening geoeconomic fragmentation that could raise global energy and commodity prices.
- Domestic: wage growth and inflation may be higher than expected given tight labor markets.
- Upside: stronger-than-expected tourism exports could boost growth.
Fiscal consolidation and public finances
- Authorities’ fiscal stance:
- 2024 overall deficit: 4 percent of GDP
- 2025 budget aims to reduce the overall deficit to 3.5 percent
- Authorities expect the overall deficit to decline to 2.6 percent of GDP by 2027
- General government debt projected to remain around 50 percent of GDP through 2027
- Energy subsidies and reallocation:
- Energy subsidies projected to decline from a peak of 1¾ percent in 2022 to ¾ percent in 2025.
- Energy subsidies account for 20 percent of the fiscal deficit.
- Recommendation: gradually but decisively exit the fixed energy price policy, shift to more targeted subsidies and strengthen market pricing mechanisms; reallocate resulting fiscal space to public investment (including green), services (e.g., education), and innovation support.
- Revenue administration and expenditure efficiency priorities:
- Complete establishment of a large taxpayer office.
- Implement the compliance and risk management strategy.
- Deploy new IT systems for the Malta Tax and Customs Administration.
- Strengthen public procurement in line with OECD recommendations (e.g., digitalizing procurement processes, applying a risk-based approach).
- Assess effectiveness and efficiency of the public investment management framework, including green investments.
- Fiscal planning and tax reform:
- Develop a long-term fiscal framework aligned with “Malta Vision 2050” priorities.
- Revision of the Fiscal Act presents an opportunity to implement long-term fiscal planning reforms.
- Develop a roadmap for corporate income tax (CIT) reform aligned with the EU’s Minimum Tax Directive (Pillar II), addressing CIT for both foreign and domestic companies and personal income tax due to their interaction.
- Roadmap should be developed and disseminated promptly, pending clarification of rules regarding Qualified Refundable Tax Credits (QRTCs) from the European Commission.
Safeguarding financial stability
- Systemic soundness:
- Banks hold ample capital and liquidity buffers.
- Significant exposures to real estate remain a risk.
- Regulatory changes and monitoring:
- Applying granular risk weights for real estate exposures under the EU’s Capital Requirements Regulation III (effective January 1, 2025) will strengthen capital requirements.
- Continue vigilant monitoring of real estate markets given sensitivity to economic growth, interest rates, population growth, and tourist flows.
- Close remaining data gaps in the commercial real estate sector.
- Supervisors should ensure robust underwriting and appraisals for loans to the real estate sector.
- Macroprudential policy:
- Given strong credit growth in real estate and anticipated monetary easing in the euro area, a tightening bias in macroprudential policy is warranted.
- Sectoral systemic risk buffer (sSyRB) on residential mortgages introduced last year at 1.5 percent has strengthened resilience.
- Authorities should consider raising the sSyRB rate and broadening its scope beyond residential mortgages.
- Periodic review of the effectiveness of borrower-based measures recommended.
- Operational resilience and AML/CFT:
- Continue thorough assessments of cyber risk resilience in financial institutions given increased reliance on AI, digital platforms, and third-party providers and heightened geopolitical tensions.
- Progress underway to strengthen the AML/CFT framework; resources for AML/CFT supervisors and regulators significantly bolstered.
- Continue vigilance on emerging threats (e.g., trade-based money laundering) and align gatekeepers’ business and customer risk assessments with the 2023 National Risk Assessment results.
Structural reforms: productivity, labor, climate, and tourism
- Innovation and digitalization:
- Public and private spending on research and development in Malta is low.
- Evaluate effectiveness of schemes (grants, tax incentives, loan guarantees) supporting innovation, start-ups, and scale-ups, focusing on size and design.
- Timely introduction of well-designed QRTCs under Pillar II is crucial.
- Ease administrative burdens for applicants accessing public funding schemes.
- Malta’s Venture Capital Fund established; current size is €10 million and its size and design should be periodically assessed.
- Advancing e-government is key to facilitating digital adoption.
- Workforce and skills:
- Malta excels in digitalization and is well-positioned to harness AI benefits but faces significant shortages of highly skilled workers.
- Digital technologies, including AI, may lead to job displacement even as they enhance productivity.
- Focus on improving educational outcomes, increasing STEM enrollment, enhancing digital skills, and boosting adult learning uptake for both Maltese and foreign workers.
- Robust implementation of the National Education Strategy 2024-30 and the Lifelong Learning Strategy 2023-30 is critical.
- Climate policy and green transition:
- Malta’s 2030 target under the Effort Sharing Regulations: 19 percent reduction (relative to 2005 levels).
- Key priorities:
- Implement the 2021 Low Carbon Development Strategy and the updated National Energy and Climate Plan (forthcoming), especially in transportation and buildings.
- Phase out the fixed-energy price policy to enhance incentives for energy conservation and green investment.
- Increase public green investment (e.g., renewable energy).
- For climate adaptation: complete the vulnerability risk assessment and update the adaptation plan.
- Tourism management:
- Numerous hotel projects and rise in other types of accommodation may continue to drive significant tourism growth.
- Potential risks: exacerbating labor shortages, infrastructure bottlenecks, and social and environmental concerns.
- Recommendation: steadily implement the Malta Tourism Strategy 2021–2030 to promote sustainable and high-quality tourism.
Closing acknowledgements
- The mission thanks the authorities and private sector counterparts for their warm hospitality and candid, high-quality discussions.
- The team expresses particular gratitude to the Central Bank of Malta and the Ministry of Finance for assistance with meeting arrangements and logistical support.
Source: IMF Communications Department, "Malta: Staff Concluding Statement of the 2024 Article IV Mission", November 18, 2024.