Abstract
IMF Country Report No. 23/78
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IMF Country Report No. 23/78
MALTA
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT
February 2023
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Malta, the following documents have been released and are included in this package:
A Press Release.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse-of-time basis, following discussions that ended on
December 9, 2022, with the officials of Malta on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 18.
An Informational Annex prepared by the IMF staff.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2023 International Monetary Fund
Press Release
PR23/33
IMF Executive Board Concludes 2022 Article IV Consultation with Malta
FOR IMMEDIATE RELEASE
Washington, DC –February 8, 2023: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malta on February 2, 2023 and endorsed the staff appraisal without a meeting.
Malta’s economy has recovered strongly following the worst recession in decades due to the COVID-19 pandemic. With the easing of pandemic containment measures, output grew by 11¾ percent in 2021. The economy has continued to expand for the first three quarters of 2022, driven by strong net exports and private consumption, and staff expect growth of 6½ percent in 2022. Inflation has picked up but has 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 to 3¼ percent in 2023 due to lower consumer purchasing power, dampening domestic demand and weakening external demand from Europe. Inflation is expected to gradually decline but remain elevated. 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.
Executive Board Assessment2
In concluding the 2022 Article IV consultation with Malta, Executive Directors endorsed staff’s appraisal, as follows:
Malta’s economic recovery from the pandemic is remarkable, but the indirect impact of Russia’s war in Ukraine weighs on the outlook. The strong economic recovery continued into 2022, driven by high net exports and consumption. GDP growth is, however, set to slow in 2023 as the confluence of global shocks weighs on the economy. Inflation is expected to gradually decline but remain elevated. Risks to the outlook are tilted to the downside, mainly because the growth slowdown in Europe could be deeper than expected.
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 fiscal tightening planned for 2023 is appropriate, given the need to slow inflation and improve the public finances, but additional actions are needed to pursue consolidation over the medium term. While public debt is projected to remain just below 60 percent of GDP, it could be forced on an upward path if growth underperforms or contingent liabilities materialize. To protect against this risk, the authorities need additional measures to mobilize revenues and enhance spending efficiency over the medium term. In light of Pillar II of the global corporate tax reform, 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. Efforts aimed at identifying the scope for rationalizing recurrent spending should continue, while further steps should be taken to improve the efficiency of public investment, including green investments. Long-term demographic trends should be closely monitored to properly plan pension-related reforms, and efforts should continue to promote voluntary occupational pensions and personal pensions.
The financial system remains sound, but emerging risks warrant continued vigilance and close monitoring of banks. The authorities should closely monitor banks’ risk management to ensure that provisions are continuously updated as economic prospects change. Given the banking sector’s large exposure to the housing market, the consideration of introducing a sectoral systemic capital risk buffer targeting mortgage loans is warranted. In addition, efforts to monitor cyber security risks and strengthen resilience against cyberattacks should continue.
The authorities should continue efforts to strengthen the effectiveness of the AML/CFT framework. The 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. The implementation of the national AML/CFT strategy for 2021–2023, as well as the NRA exercise, is important to enhance coordination and supervision to mitigate existing and emerging risks. The close monitoring of high-risk sectors, especially virtual financial assets, gaming, and sectors associated with Malta’s Citizenship by Investment program, 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. Labor 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.
Malta: Selected Economic Indicators, 2018–2023
(Year-on-year percent change, unless otherwise indicated)
As a percentage of Nominal Potential GDP.
Loans to nonfinancial corporate sector and household/individuals.
Malta: Selected Economic Indicators, 2018–2023
(Year-on-year percent change, unless otherwise indicated)
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Real economy (constant prices) | (Percent change year on year) | |||||
| Real GDP | 6.2 | 7.0 | -8.6 | 11.7 | 6.5 | 3.3 |
| Domestic demand | 8.8 | 8.1 | -3.7 | 7.8 | 4.0 | 3.7 |
| CPI (harmonized, average) | 1.7 | 1.5 | 0.8 | 0.7 | 6.1 | 5.2 |
| Unemployment rate (percent) | 3.7 | 3.6 | 4.4 | 3.4 | 3.0 | 3.1 |
| Public finance | (General government, percent of GDP) | |||||
| Overall balance | 2.1 | 0.6 | -9.6 | -7.8 | -5.4 | -5.0 |
| Primary balance | 3.6 | 1.9 | -8.3 | -6.7 | -4.3 | -3.8 |
| Structural balance 1/ | 1.4 | 0.3 | -6.3 | -7.4 | -6.1 | -5.5 |
| Gross debt | 43.7 | 40.3 | 53.0 | 55.2 | 56.6 | 58.5 |
| Financial sector | (Percent change year on year) | |||||
| Credit to nonfinancial private sector 2/ | 7.0 | 6.8 | 6.6 | 6.5 | … | … |
| Credit to the private sector (percent GDP) | 74.0 | 72.2 | 83.0 | 77.6 | … | … |
| Interest rates (year average) | (Percent) | |||||
| Interest rate for mortgage purposes | 3.1 | 3.0 | 3.0 | 2.8 | … | … |
| Ten-year government bond yield | 1.4 | 0.7 | 0.5 | 0.5 | … | … |
| Balance of payments | (Percent of GDP) | |||||
| Current account balance | 6.4 | 4.9 | -2.8 | -4.5 | -3.6 | -3.5 |
| Trade balance (goods and services) | 15.6 | 13.9 | 7.9 | 4.2 | 5.1 | 5.3 |
| Exchange rate | ||||||
| Exchange rate regime | Joined EMU on January 1, 2008. | |||||
| Nominal effective rate (2010=100) | 101.8 | 100.5 | 101.6 | 103.0 | … | … |
| Real effective rate, CPI-based (2010=100) | 104.9 | 103.6 | 104.7 | 103.7 | … | … |
As a percentage of Nominal Potential GDP.
Loans to nonfinancial corporate sector and household/individuals.
Malta: Selected Economic Indicators, 2018–2023
(Year-on-year percent change, unless otherwise indicated)
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| Real economy (constant prices) | (Percent change year on year) | |||||
| Real GDP | 6.2 | 7.0 | -8.6 | 11.7 | 6.5 | 3.3 |
| Domestic demand | 8.8 | 8.1 | -3.7 | 7.8 | 4.0 | 3.7 |
| CPI (harmonized, average) | 1.7 | 1.5 | 0.8 | 0.7 | 6.1 | 5.2 |
| Unemployment rate (percent) | 3.7 | 3.6 | 4.4 | 3.4 | 3.0 | 3.1 |
| Public finance | (General government, percent of GDP) | |||||
| Overall balance | 2.1 | 0.6 | -9.6 | -7.8 | -5.4 | -5.0 |
| Primary balance | 3.6 | 1.9 | -8.3 | -6.7 | -4.3 | -3.8 |
| Structural balance 1/ | 1.4 | 0.3 | -6.3 | -7.4 | -6.1 | -5.5 |
| Gross debt | 43.7 | 40.3 | 53.0 | 55.2 | 56.6 | 58.5 |
| Financial sector | (Percent change year on year) | |||||
| Credit to nonfinancial private sector 2/ | 7.0 | 6.8 | 6.6 | 6.5 | … | … |
| Credit to the private sector (percent GDP) | 74.0 | 72.2 | 83.0 | 77.6 | … | … |
| Interest rates (year average) | (Percent) | |||||
| Interest rate for mortgage purposes | 3.1 | 3.0 | 3.0 | 2.8 | … | … |
| Ten-year government bond yield | 1.4 | 0.7 | 0.5 | 0.5 | … | … |
| Balance of payments | (Percent of GDP) | |||||
| Current account balance | 6.4 | 4.9 | -2.8 | -4.5 | -3.6 | -3.5 |
| Trade balance (goods and services) | 15.6 | 13.9 | 7.9 | 4.2 | 5.1 | 5.3 |
| Exchange rate | ||||||
| Exchange rate regime | Joined EMU on January 1, 2008. | |||||
| Nominal effective rate (2010=100) | 101.8 | 100.5 | 101.6 | 103.0 | … | … |
| Real effective rate, CPI-based (2010=100) | 104.9 | 103.6 | 104.7 | 103.7 | … | … |
As a percentage of Nominal Potential GDP.
Loans to nonfinancial corporate sector and household/individuals.
Title page
MALTA
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
January 18, 2023
KEY ISSUES
Context. Malta’s economy rebounded strongly from the pandemic. However, the indirect impact of Russia’s war in Ukraine, including the anticipated slowdown in the European economy, high and volatile global energy prices, rising import costs, and weakened public finances following the pandemic are weighing on the outlook. The Maltese economy is expected to slow from 61/4 percent this year to 31/4 percent in 2023. The financial system has proved to be resilient to the pandemic with ample capital and liquidity buffers. In June 2022, the Financial Action Task Force (FATF) removed Malta from its grey list of anti-money laundering and combatting the financing terrorism (AML/CFT) framework.
Policy recommendations. The priority is to alleviate the economic impact of the global energy price shock efficiently and cost-effectively, continue fiscal consolidation while supporting the economic recovery, and maintain financial stability. Concerted efforts are required to pursue structural reforms, including green and digital transformation.
Energy and fiscal policy. Prepare an exit strategy from the current fixed energy price policy while protecting vulnerable groups. Tighten the fiscal stance in 2023 to lower inflationary pressure and improve public finances. Reform the taxation of multinational firms and consider broader reforms to the tax system and revenue administration, aimed at improving the efficiency of the tax system and reducing administration costs. Improve public investment management framework and rationalize recurrent spending to achieve a credible medium-term consolidation.
Financial sector. Remain vigilant in monitoring risks, particularly to ensure that banks update the assessment of expected losses as economic prospects evolve and provision accordingly. Consider introducing a sectoral systemic risk buffer to target systemic risks arising from mortgages. Keep close monitoring of high AML/CFT-related risk sectors.
Structural reforms. The pandemic has highlighted the need to reinvigorate structural policies to boost productivity and make the economy more competitive and resilient. Address the skills gap in the workforce, complete the comprehensive insolvency reform plan, further promote digitalization, and advance green investment and decarbonization. In addition, strengthening governance would help sustain medium-term growth.
Approved By
Helge Berger (EUR) and Geremia Palomba (SPR)
Discussions were held in Valletta from November 28 to December 9, 2022. The team comprised Kotaro Ishi (head), Rafael Barbosa, Mahir Binici, and Farid Jimmy Boumediene (all EUR). Yueshu Zhao (EUR) provided research assistance, and Dilcia Noren (EUR) provided administrative assistance. Annalisa Korinthios (Advisor to the Executive Director) participated in the discussions, and Federico Giammusso (Executive Director) attended the concluding meeting. The team met with Central Bank of Malta Governor Scicluna, Central Bank Deputy Governors Bonello and Demarco, Finance Minister Caruana, Permanent Secretary Paul Zahra, Malta Financial Services Authority Acting CEO Mizzi Buontempo, and other senior officials, representatives of labor and business organizations, and financial institutions.
Contents
CONTEXT
RECENT DEVELOPMENTS—RECOVERY FROM THE PANDEMIC
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Tackling the Global Energy Price Shock
B. Ensuring Fiscal Sustainability
C. Safeguarding Financial Stability
D. Pursuing AML/CFT and Governance Reforms
E. Re-Invigorating Structural Reforms
AUTHORITIES’ VIEWS
STAFF APPRAISAL
FIGURES
1. Recovery from the Pandemic Crisis
2. Short-Term Indicators
3. Fiscal Developments
4. Financial Soundness Indicators
5. External Sector
6. Energy
7. Labor Market and Income Inequality Developments
TABLES
1. Selected Economic Indicators, 2020–2028
2. Fiscal Developments and Projections, 2020–2028
3. Financial Soundness Indicators, 2019–2022
4. Balance of Payments, 2020–2028
ANNEXES
I. Implementation of IMF Recommendations
II. Selected COVID-19 Support Measures and Energy and Other Measures in Response to the War in Ukraine
III. External Sector Assessment
IV. Risk Assessment Matrix
V. Malta’s Energy Sector
VI. Debt Sustainability Analysis
VII. Main FSAP Recommendations
VIII. Malta’s Recovery and Resilience Plan—Green Transition
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.
Management has determined it meets the established criteria as set out in Board Decision No. 15207 (12/74); (i) there are no acute or significant risks, or general policy issues requiring a Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.
