Journal Issue
Share
Article

Malta: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
January 2018
Share
  • ShareShare
Show Summary Details

Closing Malta’s Infrastructure Gap1

Pressure on Malta’s public infrastructure has mounted with rapid economic growth and rising immigration. Infrastructure gaps vis-à-vis other EU countries are most striking in road and energy networks, both in quality and quantity. This is reflected in an unparalleled gap in the approximated public capital stock. Long-term GDP benefits from increasing public investment are estimated to be substantial, ranging between 5¼ and 18¼ percent in net present value over 30 years. Malta’s authorities have started to tackle these challenges by upgrading and diversifying the energy system and by launching a comprehensive transport strategy. These efforts go in the right direction and should be implemented in a budget-neutral manner to support a further decline in the public debt-to-GDP ratio.

A. Introduction

1. Malta’s public infrastructure has come under strain. It has struggled to keep pace with the economy’s rapid expansion and the associated influx of migrant workers. The relatively low public capital stock, estimated well below the EU average per capita, as well as subdued public investment rates may unduly constrain Malta’s future growth potential. Infrastructure quantity and in quality show large gaps vis-à-vis the EU average on several fronts. Road congestion is the most notable example, as Maltese drivers waste far more hours on the road per year than in any other EU country. Thus, transportation costs, business productivity, and public health suffer (Attard et al., 2015).

2. The authorities are taking appropriate steps to address the infrastructure challenge. Energy infrastructure is being upgraded, and measures are underway to reduce fuel dependency, improve energy security, and increase diversification. An ambitious National Transport Strategy and Transport Master Plan, adopted in 2016, covers a wide range of road improvements. An estimated €700 million (around 6½ percent of projected 2017 GDP) investment over 7 years is foreseen for upgrading the road network.

3. The main findings of this paper are as follows:

  • Malta’s infrastructure gap vis-à-vis the EU is large in some areas. The estimated public capital stock is comparatively small and has been on a declining trend. The road network as well as power generation lag EU peers, both in term of physical structures and in perceived quality. The authorities have made steps in the right direction to address these gaps.

  • Increased public investment would generate significant long-term GDP gains. Model simulations suggest that a temporary increase of one percentage point of GDP in public investment over 7 years in a budget-neutral manner would raise the net present value of GDP by around 5¼ percent of GDP over 30 years; a permanent increase of the same magnitude would boost that gain to 12 percent. Lifting public spending efficiency to the frontier would further drive up these GDP gains to around 8 percent and 18¼ percent, respectively.

  • Infrastructure financing should ideally be budget neutral. Malta’s fiscal position has improved considerably in recent years, yet further buildup of fiscal buffers is needed against possible adverse macroeconomic conditions. Therefore, reallocating public spending from current to capital expenditure, as well as making public investment more efficient would help boosting infrastructure. Improved use of EU funds, public-private partnerships linked with the new Malta Development Bank, as well as savings from spending reviews would facilitate a budget-neutral investment push.

B. Public Infrastructure in Malta—the State of Play

4. Measuring public infrastructure across countries is not straightforward. The wide scope of infrastructure, difficulties in fair valuation, idiosyncratic geographical conditions, and subjective perceptions all make it challenging to compare infrastructure from one country to another. This section presents a variety of infrastructure measures, recognizing the shortcomings of each individual approach. Hence, instead of relying on one single measure, the analysis seeks to draw on the emerging big picture.

Value measures

5. Infrastructure is closely linked to the public capital stock but accurate valuation can be challenging. The lion’s share of public capital typically consists of infrastructure, with the public sector acting as its main provider. While public capital can also contain machinery, inventories, etc., their share is relatively small. The same usually holds true for the share of privately provided infrastructure (IMF 2014; Bova et al. 2013). Approximating infrastructure by public capital, however, entails the risk of valuation errors due to uncertainty regarding quality levels and depreciation rates. Cognizant of these caveats, the IMF developed a public capital database adopting a cross-country consistent methodology for 170 countries, which relies on the perpetual inventory method and makes time-varying assumptions on depreciation rates and initial capital stocks.

6. Malta’s public capital stock gap is the widest among EU countries. With around $6,000 per capita and around 20 percent of GDP, Malta’s public capital stock per capita is estimated as the smallest among EU countries, implying the widest negative gap. Unlike the EU average, which has halted its downward trend after the global financial crisis, Malta’s public capital stock has been on a decline since the mid-2000s. Correspondingly, and despite temporary increases, public investment rates in Malta are among the lowest in the EU. Hence, if estimated public capital, with its acknowledged caveats, is used as an approximation for infrastructure, Malta has an obvious need to overcome its gaps with EU peers.

Public Capital Stock Per Capita Gap

(PPP-adjusted thousand $, 2015 or latest available year, difference vis-à-vis EU average)

Source: IMF Investment and Capital Stock Dataset.

Public Capital Stock

(percent of GDP)

Sources: IMF staff calculations, IMF Investment and Capital Stock Dataset.

Physical measures

7. Measuring infrastructure in physical units offers a more objective view. Physical infrastructure can be compared across countries without making assumptions on valuation. It also offers a more nuanced view into different types of infrastructure. However, physical measures are silent about the quality of infrastructure, and it can be challenging to adjust the measures for country-specific differences like geographical conditions and population density. In the following, physical infrastructure gaps are expressed as the difference vis-à-vis the average of peer EU countries.

8. Malta’s physical infrastructure gaps paint a mixed picture. Transport infrastructure shows a negative gap in terms of roads while the gap in air transport is positive. Malta’s road network length per inhabitant is below the EU average. However, geographical features like Malta’s small land surface and high population density need to be taken into account (see Box 1). In contrast, the number of air passengers per capita is well above-average in Malta, reflecting Malta’s high share of tourists per inhabitant. Also, Malta’s digital infrastructure is in fairly good shape, as both broadband and cellular phone subscriptions score above average. Electricity generation in Malta, however, is lagging most EU countries.2

Road Density Gap, 2015

(km per 1,000 people, difference vis-à-vis EU average)

Source: European Commission, DESTATIS, Transport Malta; and IMF staff calculations.

Broadband and Cellular Phone Subscription Gaps, 2015

(per 100 people, difference vis-à-vis EU average)

Source: WDI; and IMF staff calculations.

Air Transport Gap, 2016

(passengers carried per capita, difference vis-à vis EU average)

Source: WDI; and IMF staff calculations.

Electricity Generation Gap, 2015

(MWh/person, difference vis-à-vis EU average)

Source: Eurostat; and IMF staff calculations.

Box 1.Addressing Malta’s Road Transport and Energy Challenges

The condition of Malta’s road network calls for a comprehensive revamp. Although the road network in Malta is one of the densest in the EU when measured per square kilometer of land surface, it is below EU average when measured per capita, taking Malta’s high population density into account. The quality perception of road infrastructure is poor, lagging the EU average. Estimations by the European Commission’s Joint Research Centre based on GPS data (EC 2016) indicate that congestion on Malta’s roads remains a serious problem, reflecting in part Malta’s high rates of car ownership.

Car Ownership, 2015

(Passenger cars per 1,000 inhabitants)

Source: European Commission.

Road congestion poses a significant economic burden. According to a study of the University of Malta, commissioned by the European Commission’s representation in Malta, the external cost of road congestion is estimated at €118 million in 2012 (Attard et al., 2015). Adding the costs of accidents, air pollution, climate change and noise, the overall external cost of transport adds up to €274 million in the same year, equal to almost 4 percent of 2012 GDP. In a “no policy change” scenario, the congestion cost is estimated to rise to €154 million by 2030, and the overall external cost of transport will rise to €322 by the same year.

Road Congestion, 2015

(Average annual hours per vehicle)

Note: Malta’s geography and urbanization affect cross country comparability.

Source: European Commission.

Malta is responding with a comprehensive National Transport Strategy and targeted road improvements. Recognizing the strategic importance of Malta’s transport sector for the economy’s competitiveness, the authorities launched a long-term, target-bound framework to advance an integrated transport system. The economic goals of the framework focus on reducing congestion, improving efficiency, strengthening connectivity, reducing operational costs, and enhancing ease of access for tourists. The targets linked to these goals pertain to the completion of the Trans European Transport Network (TEN-T) Core and Comprehensive Networks as well as the achievement of bus speed averages during morning peak hours. Moreover, the authorities are planning to substantially upgrade Malta’s road network, including the repair, asphalting, widening, and new construction of roads, as well as building new junctions. The re-surfacing of roads alone comprises an estimated investment of around €700 million. Measures aimed at reducing congestion also include incentives to use common transport, such as limited free bus usage for minors and tax credits for firms providing employee transport.

Malta’s energy sector has suffered from fossil fuel dependency and unreliable electricity supply. Malta used to rely heavily on imported fossil fuels, with a share of fossil fuels in energy consumption of 85 percent, and an import dependency on fossil fuels of 98 percent in 2015. The quality of electricity supply is lagging the EU average, on the back of electricity interruptions and voltage fluctuations.

Infrastructure upgrades have made progress in tackling Malta’s energy challenges. The authorities have taken steps towards more diversified energy sources. Thanks to a 95-kilometer interconnector cable between Malta and Sicily, operational since 2015, Malta is now connected to the European electricity grid. A new gas-fired power unit and the conversion of an existing plant from heavy fuel to natural gas, supported by an upgraded LNG terminal, contribute to further energy diversification. A gas pipeline to Sicily is in the planning stage. The government is also seeking to enhance Malta’s share of renewable energy sources, notably in photovoltaic energy. A recent study of the Central Bank of Malta suggests that the interconnector, coupled with the move towards gas-fired electricity generation and the envisaged decommissioning of the outdated Marsa fuel power station, raise long-term output via a reduction in marginal costs (Rapa, 2017).

Fuel Dependency, 2015

Source: European Commission.

Qualitative measures

9. Survey-based indicators add the quality dimension. While valuation-based or physical infrastructure measures cannot gauge the condition of existing infrastructure, quality indicators complete the picture based on, admittedly subjective, perception of survey respondents. The World Economic Forum’s Global Competitiveness Indicators cover a range of qualitative infrastructure elements for an almost global sample and are an established source of cross-country comparison.

10. Quality perception confirms the overall picture of Malta’s infrastructure gaps. Like the physical indicators, the quality indicators point to weaknesses in road infrastructure and in electricity supply in Malta compared to the EU average, although the data might not fully capture recent and ongoing investments, including the commencing road overhaul, the construction of a new generating plant and liquefied natural gas (LNG) infrastructure, as well as the interconnector between Malta and Sicily. In contrast, air transport and port quality are perceived as above-standard, fitting into the picture of Malta as a tourism and logistics hub.

Infrastructure Quality

(Score: 1 = worst, 7 = best)

Sources: World Economic Forum, Global Competitiveness Indicators 2017/18.

C. The Macro Effects of Boosting Public Infrastructure

11. A model-based exercise sheds light on the macro impact of boosting public investment. The EUROMOD version of the IMF’s Flexible System of Global Models (FSGM) is calibrated to Malta’s macro conditions and used to simulate public investment shocks. FSGM is a semi-structural model combining both micro-founded and reduced-form formulations of various economic sectors (Andrle et al. 2015). Real GDP is determined in the model as the sum of demand components in the short run, and the level of potential output in the long run. Public investment affects aggregate demand directly and cumulates into a public capital stock which represents public infrastructure.3 A permanent increase in the public capital stock results in a permanent increase in economy-wide productivity. The model is described in more detail in Annex I.

12. The Malta-specific model calibration is used to simulate the following assumptions:

  • Temporary public investment shock. Public investment is assumed to increase by 1 percent of GDP over a period of 7 years, raising the ratio of public investment to GDP from 3 to 4 percent. This scenario corresponds broadly to the authorities’ public infrastructure investment plan to overhaul the road network with an amount of €700 million.4

  • Permanent public investment shock. For comparison of results, the same shock is assumed on a permanent basis, i.e. public investment is raised by 1 percent of GDP indefinitely.

  • Financing. It is assumed that the investment shock is financed by a budget-neutral reallocation from government transfers to government investment.5

  • Efficiency. In line with staff estimations (see Section D), Malta’s public investment efficiency is assumed at 80 percent. Alternatively, public investment efficiency is increased to 100 percent to demonstrate the additional macro benefit of moving to the efficiency frontier.

13. Results point to significant GDP benefits of increased public investment. In line with the model design, short-term GDP effects materialize via the fiscal impulse, while long-term GDP is affected through increased productivity thanks to an expanded public infrastructure stock. Overall, the net present value of additional GDP following the temporary investment shock amounts to 5¼ percent of GDP within 30 years in case of 80 percent efficiency. If full efficiency is assumed, the total GDP effect rises to around 8 percent. In case of a permanent increase of public investment, the net present value of added GDP is estimated at around 12 percent of GDP with 80 percent efficiency, and at around 18¼ percent with full efficiency. More detailed model results are reported in Annex II.

GDP Impact of Public Investment Boost

(net present value effect on GDP, in percent)

Source: IMF staff.

Note: The temporary shock denotes a public investment increase by 1 percent of GDP over 7 years. It remains at the elevated level in the permanent shock scenario. The NPV is discounted over 30 years at a 3 percent interest rate. Efficiency refers to public investment efficiency.

D. Fiscal Policy Implications

14. The benefit of additional infrastructure needs to be balanced with the fiscal cost. Careful cost-benefit analysis is needed when selecting public investment projects and calibrating costs and financing. To ensure stable public finances over the medium term, increased public investment spending should ideally be budget neutral.6 Reallocation of budget resources could be facilitated by the savings generated by Malta’s recent comprehensive spending reviews, and potentially further spending reviews in other fields of government. Public investment projects which are co-financed by EU funds could benefit from an increased and more balanced absorption rate. Private-public partnerships could be used wherever appropriate, aided by new financing instruments of the soon-to-be-operational Malta Development Bank, in line with EU regulations and ensuring prudent risk assessment and robust governance structures.

EU Funds Absorption Rates

(Percent)

Note: Data cover the 2007-13 programming period and the 2-year payments deadline (until end-2015).

Source: European Commission.

15. Reallocation from current to capital expenditure could free up funds for infrastructure investments. The share of capital expenditure, including capital transfers, fell from an annual average of 12.7 percent of total primary expenditure between 1999 and 2007 to 10 percent in 2008-2016. In percent of GDP, capital expenditure decreased from 4.9 to 3.9 percent over the same periods. Going forward, there might be room to increase the share of capital expenditure without affecting total expenditure.

Capital Expenditure

(Annual average)

Note: Capital expenditure includes GFCF and capital transfers.

Sources: Eurostat; and IMF staff calculations.

16. Raising capital spending should focus on the areas most lagging behind. Disaggregating into economic and functional categories provides a more detailed picture of Malta’s public spending. In comparison with EU averages, Malta records relatively high capital spending on environmental, health-related and cultural projects, but capital spending on areas important to infrastructure remain comparatively modest, including general public services, public order, and housing. In economic affairs, Malta’s capital spending ranges slightly below the EU average. Overall, infrastructure development in Malta would notably benefit from a rebalancing of public spending from current to capital spending in those areas that support infrastructure and that are currently underrepresented.

Public spending in Malta vs. EU, 2015(Percent of GDP, economic and functional classification)
Total expenditureCurrent spendingCompensation of employeesGoods and servicesSubsidiesInterest paymentsCurrent transfersSocial benefitsCapital spending
Total expenditure41.235.512.16.51.22.52.211.15.7
General public services6.86.41.41.20.02.51.30.00.4
Defence0.80.50.40.10.00.00.00.00.3
Public order and safety1.21.21.10.10.00.00.00.00.0
Economic affairs5.13.11.11.01.10.00.00.02.0
Environment protection2.00.90.20.70.00.00.00.01.1
Housing and community amenities0.40.30.10.10.00.00.00.00.1
Health5.85.23.11.70.00.00.00.30.6
Recreation, culture and religion1.20.70.30.30.10.00.10.00.5
Education5.54.93.30.50.00.00.80.40.6
Social protection12.412.41.00.80.00.00.010.50.0
Note: Blue cells indicate expenditure items which are more than 30 percent below the EU average; red cells denote those more than 30 percent above. Capital spending includes gross capital formation and capital transfers.Sources. Eurostat; and IMF staff calculations.
Note: Blue cells indicate expenditure items which are more than 30 percent below the EU average; red cells denote those more than 30 percent above. Capital spending includes gross capital formation and capital transfers.Sources. Eurostat; and IMF staff calculations.

17. Public investment efficiency indicators show the potential for greater investment effects. Recent IMF staff analysis constructs indicators which embody the relationship between the public capital stock and indicators of physical infrastructure as well as infrastructure quality (IMF 2015). The efficiency frontier is determined by those countries with the highest levels of infrastructure coverage and quality (output) for given levels of public capital stock and income per capita (inputs). All other countries are placed below the efficiency frontier.

18. Malta’s efficiency gaps amount to around 20 percent. The physical infrastructure indicator gauges public investment efficiency at 76 percent which is broadly average for peer advanced economies (AE). The qualitative, survey-based indicator points to an efficiency score of 84 percent, placing Malta among the lower-ranking advanced economies. Hence, by moving towards the efficiency frontier, Malta could get significantly more physical infrastructure and better infrastructure quality out of its public infrastructure investment.

Public Investment Efficiency Frontier

Public Investment Efficiency Frontier /1

(physical indicator)

1/ The physical indicator combines data on the volume of economic infrastructure and social infrastructure while the survey-based indicator is based on the World Economic Forum’s survey of the quality of key infrastructure services.

Sources: IMF staff.

Public Investment Efficiency Frontier /1

(survey-based indicator)

1/ The physical indicator combines data on the volume of economic infrastructure and social infrastructure while the survey-based indicator is based on the World Economic Forum’s survey of the quality of key infrastructure services.

Sources: IMF staff.

E. Conclusions

19. Malta’s public infrastructure gaps are substantial, notably in roads and energy. Compared to other EU countries, Malta’s road network is smaller on a per-capita basis and suffers from poor quality. High car ownership and sky-rocketing congestion rates aggravate the challenges. Energy generation capacity equally lags EU peers, dependency on fuel imports for power generation has been large, and the reliability of electricity supply is seen as weak. This is mirrored in the EU’s smallest estimated public capital stock per capita.

20. Model estimations confirm the enormous growth potential of enhanced infrastructure. Increasing public investment spending by 1 percent of GDP over 7 years raises long-term GDP by around 5¼ percent in net-present-value terms under current public investment efficiency, and to 8 percent when efficiency moves to the frontier. Permanent increases in public investment boost these effects to 12 and 18¼ percent, respectively.

21. The authorities’ infrastructure plans go in the right direction and should be implemented in a budget-neutral manner. A far-reaching transport strategy has been launched and road overhauls are underway. Energy infrastructure upgrades are paving the way for more diversification and security of supply. These measures appear appropriate in light of the identified infrastructure gaps. As shown by the model simulations, a permanent rather than temporary rebalancing from current to capital expenditure would magnify the GDP gains and should hence be considered in earnest. However, to keep public finances on a stable footing, increased infrastructure expenditure needs to be assessed carefully project-by-project, and financed responsibly. Savings from recent and potentially expanded spending reviews and increased use of public-private partnership and EU funds, in line with EU regulations, can contribute to a fiscally sustainable infrastructure push. Finally, public investment efficiency could be increased by carefully reviewing administrative procedures and addressing potential bottlenecks, for instance by removing overlapping responsibilities and moving towards a holistic public investment management approach across government departments.

References
Annex I. The EUROMOD Model

EUROMOD is part of the Flexible System of Global Models (FSGM), an annual, multi-region, general equilibrium model of the global economy. A detailed description of FSGM’s theoretical structure and its simulation properties are presented in Andrle and other (2015). Each country/regional block within the model, e.g. EUROMOD for Europe, is structurally identical, but with potentially different key steady-state ratios and behavioral parameters. FSGM is a semi-structural model combining both micro-founded and reduced-form formulations of various economic sectors. Real GDP in the model is determined by the sum of its demand components in the short run, and the level of potential output in the long run.

The Real Side

Aggregate demand follows the standard national expenditure accounts identity, where real GDP is the sum of household consumption, private business investment, government absorption and exports of goods and services, less imports of goods and services. The consumption block is micro-founded and uses the Blanchard-Weil-Yaari overlapping generations (OLG) model of households. Using OLG households that have a finite expected lifetime rather than infinitely-lived households results in important non-Ricardian properties whereby the path for government debt, and thus fiscal policy actions, have significant implications for private consumption dynamics. The model also contains liquidity constrained (LIQ) households that do not have access to financial markets, do not save, and thus consume all their income each period. Adding LIQ households amplifies the non-Ricardian properties of the basic OLG household framework.

In the OLG framework, households treat government bonds as wealth since there is a chance that the associated tax liabilities will fall due beyond their expected lifetimes. The OLG formulation thus results in the endogenous determination of national savings given the level of government debt. Consequently, the world real interest rate is endogenous and adjusts to equilibrate the global supply of and demand for savings. The use of an OLG framework necessitates the tracking of all the stocks and flows associated with wealth, and thus the model has full stock-flow consistency. Private business investment is also micro founded and uses an updated version of the Tobin’s Q model, with quadratic real adjustment costs. Investment is negatively correlated with real interest rates. Investment cumulates to the private business capital stock, which is chosen by firms to maximize their profits. The capital-to-GDP ratio is inversely related to the cost of capital, which is a function of depreciation, the real interest rate, the corporate tax rate, and relative prices.

Government absorption consists of spending on consumption and investment goods. Government consumption spending only affects the level of aggregate demand. It is an exogenous choice determined by the fiscal authority. The level of government investment is also chosen exogenously, but in addition to affecting aggregate demand directly it also cumulates into a public capital stock, which can be thought of as public infrastructure (roads, buildings, etc.). A permanent increase in the public capital stock permanently raises the economy-wide level of productivity.

The real competitiveness index (RCI) is the long-run determinant of the level of net exports that adjust to achieve the current account balance required to support the desired net foreign asset position that reflects households’ desired wealth holdings. Exports and imports, individually, are modeled using reduced-form equations. Exports increase with foreign activity, and are also an increasing function of the depreciation in the RCI. Imports increase with domestic activity, and are an increasing function of the appreciation of the real effective exchange rate (REER).

The current account and implied net-foreign-asset positions are directly linked to the saving decision of households. The model can be used to study both creditor and debtor nations as positive or negative net foreign asset positions can be a feature of the well-defined steady-state in the OLG framework.

Aggregate supply is captured by potential output, which is based on Cobb-Douglas production technology with trend total factor productivity, the steady-state labor force, the non-accelerating inflation rate of unemployment (NAIRU), and the actual capital stock. The unemployment rate varies relative to the NAIRU according to an Okun’s law relationship with the output gap.

Prices

The core price in all regions is the consumer price index excluding food and energy, CPIX, which is determined by an inflation Phillips curve. CPIX inflation is sticky and reflects the expected paths of import prices and the economic cycle, as captured by the output gap. In addition, although the direct effects of movements in food and energy prices are excluded, there is a possibility that persistent changes in oil prices can leak into core inflation. In addition, there is a Phillips curve for nominal wage growth. Wage inflation exhibits stickiness and allows the real wage to return to its equilibrium only gradually depending on the expected evolution of overall economic activity.

There is also a full set of prices that mimic the structure of demand: consumption; investment; government; exports; and imports. The GDP deflator itself is a weighted average of the consumption, investment, government, export, and import deflators. The model also incorporates three types of commodities – oil, food and metals and their associated prices. This allows for a distinction between core and headline inflation, and provides richer analysis of the macroeconomic differences between commodity-exporting and -importing regions arising from commodity-based terms-of-trade shocks.

Policy

In the short run, the nominal side of the economy is linked to the real side through monetary policy. The behavior of monetary authorities is represented by an interest rate reaction function. The standard form is an inflation-forecast-based rule operating under a flexible exchange rate. However, the form of the interest rate reaction function is such that there is scope for a fixed exchange rate regime, monetary union, or a managed floating exchange rate regime. Monetary policy can influence activity through both short-term and long-term interest rates. The long-term, 10-year, interest rate is based on the expectations theory of the term structure, plus a term premium. The interest rates on consumption, investment, government debt and net foreign assets are weighted averages of the 1-year and 10-year interest rates, reflecting their differing term structures, and allowing for a meaningful role for the term premium.

The government sector is much broader than government absorption. There is additional spending by the fiscal authority on lumpsum transfers to all households, or targeted exclusively to LIQ households. The fiscal authority chooses a long-run level of debt relative to GDP. To meet its debt target and fulfill spending obligations, the government raises revenue via consumption (VAT), labor, corporate, and lumpsum taxes. In the face of shocks to the economy under the standard fiscal reaction function, all tax rates remain fixed and spending on general lumpsum transfers adjusts to ensure that the public debt-to-GDP ratio is maintained in the medium term. However, the fiscal reaction function can also be specified to use other instruments besides general transfers.

Annex II. Detailed Model Results

Malta: Temporary 1% GDP Increase in Government Investment

Source: IMF staff estimations.

Malta: Permanent 1% GDP Increase in Government Investment

Source: IMF staff estimations.

Prepared by Uwe Böwer. Support with model estimations by Ben Hunt and Keiko Honjo (both RES) is gratefully acknowledged. The paper benefited from useful comments and suggestions from participants of a workshop hosted by the Ministry of Finance.

Malta’s electricity gap may be linked to the lower energy intensity of its largely service-based economy. The recent launch of an electricity connector with Sicily and the related boost in electricity imports, may also play a role.

The model applies a depreciation rate of 4 percent for public capital. Maintenance costs are not explicitly modeled.

While the simulation assumes an equal annual distribution of the additional investment amount, the authorities’ practical implementation of their road overhaul plan may imply an up-front administrative investment followed by a more gradual build-up of use of funds.

A modeling exercise with assumed external financing, e.g. through additional EU funds, pointed to very similar effects for real GDP.

To the extent that higher infrastructure investments spur economic growth, corresponding increases in tax revenues will also contribute to financing public investment.

Other Resources Citing This Publication