January 29, 2024
Washington, DC : On January 17, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Malta.
Malta has experienced an impressive recovery from the pandemic and demonstrated resilience to shocks resulting from Russia’s invasion of Ukraine. With weaker growth in Europe and waning post-pandemic pent-up demand, staff expect growth to decelerate somewhat but continue to expand by 6¼ percent in 2023 and 5 percent in 2024, among the highest in Europe. Both headline and core inflation peaked a year ago and have since decelerated as global inflationary pressures have eased. Still, inflation is expected to remain persistent and above 2 percent until late 2025, in part reflecting tight labor markets and sustained demand pressures. The financial system has demonstrated resilience to successive shocks.
The challenge for the medium term is to ensure a robust policy framework to foster strong, socially- and environmentally-sustainable, and inclusive growth. Risks to the outlook are tilted to the downside in part due to spillover effects from a possible escalation of Russia’s war in Ukraine or of the Israel-Gaza conflict, as well as a deeper-than-expected economic downturn in Europe. Domestically, wage and inflationary pressures could be higher and more persistent. On the upside, lower-than-expected commodity prices would help decelerate inflation, ease fiscal pressures, and boost growth.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They commended Malta’s resilience to external shocks and strong post‑pandemic recovery on the back of fiscal support, a persistent inflow of migrants, a strong recovery in tourism, and robust consumer demand. They expected continued solid growth over the medium term, albeit below pre‑pandemic levels, with risks to the outlook tilted to the downside. Directors concurred that raising productivity growth and accelerating the green transition are crucial to ensure sustainable and inclusive growth over the longer term.
With Malta’s economy above potential, and with tight labor markets, elevated inflationary pressures, and sizeable fiscal deficits, Directors stressed the need for accelerating fiscal consolidation to support disinflationary efforts and to rebuild fiscal buffers at a faster pace to bolster fiscal sustainability. They noted that energy subsidies place a substantial burden on the budget, limit fiscal space for supporting productivity‑enhancing reforms, and blunt incentives for energy savings and efficiency; they recommended that such subsidies be phased out while increasing targeted support for vulnerable households. Directors also called on the authorities to continue steps, supported by Fund TA, to modernize revenue administration, rationalize recurrent spending, enhance public investment efficiency, and strengthen oversight of public enterprises.
Given the EU’s adoption of the minimum tax directive (Pillar II), Directors underscored the increasing urgency of developing a well‑structured roadmap for phased implementation of the corporate income tax reform. They recommended that the roadmap also include personal income tax reform to make the adjustment more efficient and less distortionary.
Directors welcomed the resilience of Malta’s financial system while noting that continued monitoring of potential pockets of vulnerabilities, especially in the real estate market, is needed. They encouraged the authorities to closely assess how inflation and macro‑financial conditions affect vulnerable and leveraged borrowers, to remain vigilant in monitoring property price developments, and to continue efforts to strengthen cyber security. Directors welcomed progress made in improving the AML/CFT framework and called for continued efforts in this regard.
Directors encouraged the authorities to bolster structural reform efforts and boost productivity, given increasing capacity constraints. They noted that Malta’s Recovery and Resilience Plan will deliver crucial reforms and investments in digitalization and green transition. However, more efforts are needed to enhance governance and anti‑corruption frameworks, promote research and innovation, address skill gaps, accelerate decarbonization and climate resilience, boost investment in renewables, and strengthen education outcomes—overall and for immigrant students.
It is expected that the next Article IV Consultation with Malta will be held on the standard 12‑month cycle.
Country Report No. 2024/034 : Malta: Selected Issues
Source – IMF