IMF tells Malta to plan ahead over energy subsidies and global tax rules

Malta’s economy has recovered strongly following its worst recession in decades due to the COVID-19 pandemic, with economic output growing by 113% in 2021.

The declaration came from the International Monetary Fund, in another Article IV consultation, the regular round-ups of economic health the World Bank carries out with countries.

And while inflation has picked up, it remained among the lowest in the euro area, reflecting the government’s policy to freeze retail electricity and fuel prices for all consumers.

GDP growth is expected to slow down in 2023 due to lower consumer purchasing power, dampening domestic demand and weakening external demand from Europe. “Uncertainty is exceptionally high, and risks are tilted to the downside, including a deeper-than-expected recession in Europe, a possible de-anchoring of inflation expectations, and the realization of money laundering and terrorist financing risks. On the upside, lower-than-expected commodity prices would lead to stronger growth than forecast.”

The IMF’s executive board said Malta’s economic recovery from the pandemic had been “remarkable”, but the indirect impact of Russia’s war in Ukraine weighs on the outlook, and said Malta has to plan ahead due to its energy subsidies.

“The authorities should prepare an exit strategy from the fixed-energy-price policy while protecting vulnerable groups. The exit strategy should aim to contain fiscal costs and introduce market price mechanisms to enhance incentives for energy conservation and help accelerate the green transition while protecting vulnerable groups. The authorities should explore reform options with the aim of gradually rolling them out ahead of winter 2023/24. Ultimately, accelerating the green transition is the best way to strengthen Malta’s resilience to an energy shock,” the IMF said.

The fiscally-conservative IMF also said that while public debt for Malta will remain below the 60% of GDP threshold, this could grow if economic growth decelerates and also due to global challenges to Malta’s tax regime for expatriate multinationals.

“The authorities need to reform the taxation of multinational firms and consider broader reforms to the tax system and to revenue administration with the aim of simplifying and improving the efficiency of the tax system and reducing administration and compliance costs while protecting revenues.”

The IMF said the Maltese government should keep rationlising puhblic spending, and instead focus more on green investment, as well as prepare “pension-related reforms” by encouraging more citizens to take up voluntary occupational pensions and personal pensions.

Malta’s financial system was said to be sound, but emerging risks warranted continued vigilance and close monitoring of banks. Given the banking sector’s large exposure to the housing market, the IMF suggested  introducing a sectoral systemic capital risk buffer for mortgage loans.

The IMF also called for efforts to monitor cyber security risks and strengthen resilience against cyberattacks, and to strengthen anti-money laundering rules. “Boosted resources for AML/CFT supervisors should remain in place to help the long-term sustainability of reforms. Notwithstanding the progress Malta has made, the authorities need to continue to demonstrate the effectiveness of supervisory outcomes, including through the effective implementation of sanctions”

It also said a close monitoring of high-risk sectors, especially virtual financial assets, gaming, and sectors associated with Malta’s citizenship-by-investment programme, should also continue.

“Structural reforms are necessary to improve Malta’s long-term growth and address climate challenges. Malta’s Recovery and Resilience Plan will address part of its structural challenges, but more efforts will be needed, especially to address labor skill mismatches, increase STEM graduates, enhance vocational training, promote research and innovation, and advance the digital transformation of SMEs.

“Labour force participation should also be fostered through incentives for workers to delay retirement and flexible working solutions to address structural labor shortages. On climate change policy, concerted efforts involving all stakeholders should continue to implement the 2021 Low Carbon Development Strategy and seek decarbonization potential by exploiting various sources, including investing in renewable sources.”