Washington, DC – January 15, 2025: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] 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. Although growth is expected to moderate, it will remain among Europe's highest in the near term, along with 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, leading to increased density and strain on infrastructure and public services. This has raised concerns about the sustainability of the labor-intensive growth model. The financial system has demonstrated resilience amid successive shocks.
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 include spillovers from intensified Russia's war in Ukraine and the Israel-Gaza conflict and deepening geoeconomic fragmentation. Domestically, wage growth may be higher than expected, resulting in higher inflation. On the upside, tourism exports could grow faster than anticipated, further boosting near-term growth, but at the cost of adding to capacity pressure.
Executive Board Assessment [2]
Malta has experienced remarkable growth over the past decade, while concerns about growing capacity constraints are rising. Although moderating, growth is expected to remain among Europe's highest. Growth has been supported by an influx of foreign workers and tourists, increasing population density and straining infrastructure. Risks to the outlook are tilted to the downside, including spillover effects from regional conflicts. 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.
The authorities' commitment to fiscal consolidation is welcome; however, it should focus 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. However, energy subsidies are expected to remain sizable, accounting for 20 percent of the fiscal deficit. The authorities should gradually but decisively exit the fixed energy price policy by shifting to more targeted subsidies and strengthening market pricing mechanisms. The resulting fiscal space should be allocated to investment (including green) and services (e.g., health), and innovation support.
The 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. While deferring Pillar II implementation allows for adaptation to international developments, it risks ceding revenue to other jurisdictions that adopt the directive sooner. The roadmap should encompass reforms addressing CIT (for both foreign and domestic companies) and personal income tax.
The authorities' long-term developmental vision should be reflected in fiscal planning. The government recently launched "Malta Vision 2050" to establish the country's long-term strategic direction. It is essential to develop a long-term fiscal framework that reflects emerging spending pressures related to population aging, climate transition, and infrastructure needs. This would help to set priorities and align fiscal planning with strategic goals.
The financial system is sound and stable; however, risks remain due to substantial exposure to real estate, and tightening macroprudential policy stance is warranted. Vigilant monitoring of real estate markets should continue, along with efforts to close the remaining data gaps in the commercial real estate sector. Supervisors should ensure that banks maintain robust underwriting and appraisals for loans to the real estate sector. Additionally, the authorities should continue conducting thorough assessments of cyber risk resilience in financial institutions. Further easing of ECB monetary policy and ongoing strong growth in Malta could stimulate additional credit expansion in real estate. Given banks' increasing and significant exposures to real estate, the authorities should consider raising the sectoral systemic risk buffer rate and broadening its scope beyond residential mortgages.
The authorities' commitment to strengthening the AML/CFT framework and advancing judicial reforms is welcome. They should remain vigilant in monitoring emerging threats, such as trade-based money laundering, and continue enhancing the risk-based approach by ensuring that gatekeepers (e.g., financial institutions) align their business and customer risk assessments with the 2023 National Risk Assessment results. They should also advance judicial reforms, including strengthening the appointment process of the chief justice and improving the efficiency of the justice system.
Continued efforts are needed to raise productivity and foster innovation for sustainable long-term growth. The authorities should continue evaluating the effectiveness of various schemes (e.g., grants, tax incentives) to support innovation activities, start-ups, and scale-ups, focusing on their size and overall design. The establishment of Malta's Venture Capital Fund is a step in the right direction. Innovation and digitalization require a skilled workforce. Therefore, it remains essential to continue efforts to improve educational outcomes, increase STEM enrollment, enhance digital skills, and boost adult learning. Having made notable progress in boosting female participation, the authorities should continue their initiatives to further narrow gender gaps across various measures of gender equality, including representation.
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, the vulnerability risk assessment should be completed, and the adaptation plan updated accordingly.
Malta: Selected Economic Indicators, 2021–26
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
