Central Bank warns: Malta needs exit strategy from fuel subsidies

Malta’s fixed-price energy subsidies have shielded households and businesses from the energy crisis but a Central Bank study now calls for a phased exit strategy.

Phasing out the subsidies is essential to avoid long-term fiscal, environmental, and structural costs, Noel Rapa, head of the bank’s Economic Research and Modelling Department argues in a discussion paper.

Fuel and energy subsidies worth millions of euros per year were introduced in the wake of the energy crisis sparked by Russia’s invasion of Ukraine in 2022. Government has promised to retain the indiscriminate subsidy policy for the foreseeable future.

Malta’s electricity prices have remained unchanged since 2014 and the pump price of petrol and diesel has remained static since 2020.

The CBM paper estimates that in 2023, real GDP was 1.3% higher than it would have been without the energy subsidies and headline inflation about 1.2 percentage points lower. Lower-income households, who spend a larger share of their income on energy, benefitted the most. Without the subsidies, they would have experienced almost twice the level of inflation compared to wealthier households.

However, these short-term benefits came at a cost. By 2024, subsidies are estimated to have added four percentage points to the public debt-to-GDP ratio. They also discouraged investment in renewable energy and energy efficiency, slowed Malta’s progress toward its climate goals, and stimulated demand for imported fossil fuels, worsening the trade balance.

According to the study, Malta’s energy pricing strategy now faces a critical turning point. The fixed-price policy has kept retail prices artificially low, weakening market signals that would otherwise encourage conservation and clean energy investment. The study warns that continuing the subsidies risks entrenching fiscal imbalances and delaying Malta’s green transition.

The paper warns that indefinite continuation of subsidies could crowd out other areas of government spending and expose public finances to energy price shocks. While Malta’s current account remains in surplus, the reliance on imported fossil fuels and the lack of adjustment in consumption patterns could lead to a deterioration in external balances over time.

The environmental impact of subsidies

The study shows that had Malta not adopted fixed energy prices through subsidies, the country would likely have seen better environmental results.

Without these subsidies, fossil fuel (brown energy) prices would have risen, pushing more people and businesses to switch to renewable sources (green energy). This would have made green investments, such as solar panels and wind turbines, more attractive and profitable. As a result, investment in clean energy infrastructure could have jumped by nearly 30% by 2022 and remained 10% higher in the years after.

The shift would also have increased the share of renewable energy in Malta’s overall energy mix, with green electricity making up almost 1.5 percentage points more than under the current fixed-price system. At the same time, higher energy costs would have encouraged people to use less energy overall. Together, these changes would have significantly cut greenhouse gas emissions, by about 5% as early as 2022.

In short, while energy subsidies helped protect consumers from rising costs, they also discouraged cleaner energy use and delayed Malta’s progress in reducing pollution and moving toward sustainability.

Which exit strategy?

The paper simulates several exit strategies. An abrupt and unannounced removal of subsidies in 2025 would cause a sharp economic contraction and spike in inflation, with disproportionate hardship for poorer households.

In contrast, a more gradual phase-out between 2025 and 2027 would ease adjustment pressures but may still expose the economy to volatility, especially if fossil fuel prices rise again.

The study finds that combining a gradual tapering of subsidies with fiscal recycling strategies yields the most balanced outcome. In particular, reallocating fiscal savings toward green capital subsidies would boost renewable energy investment and support Malta’s competitiveness. Targeted transfers to vulnerable households could help protect purchasing power and limit social inequality, although such transfers alone do little to stimulate clean energy investment.

The study recommends a clearly communicated, phased exit strategy combined with targeted social support and green subsidies. This approach supports macroeconomic stability, protects vulnerable households, and aligns Malta’s energy policy with its EU climate commitments.

Moreover, energy support policies must evolve to support Malta’s decarbonisation targets. This includes ensuring that long-term strategies are explicitly tied to climate objectives and energy efficiency goals.

The study ends with a warning. When used over an indefinite period, “the fixed energy price system undermines the efficiency of price signals, delays necessary structural adjustments, and may place increasing pressure on government finances and external balances”.  The only alternative to this is “a well-sequenced, transparent, and credible exit strategy” which would enable Malta “to transition from crisis response to long-term resilience.”