Mission Concluding Statement 

Malta: Staff Concluding Statement of the 2024 Article IV Mission

November 18, 2024

Valletta, Malta:

Malta has experienced remarkable growth over the past decade. Although growth is expected to moderate, staff anticipate that it will remain among Europe’s highest. Inflation has fallen to around 2¼ percent, yet some inflationary pressures persist in services. Strong growth has been supported by an influx of foreign workers and tourists, leading to increased population density and strain on infrastructure. The financial system remains resilient and stable. Policy priorities are as follows:

• Consolidate the fiscal position aligned with the EU’s new fiscal framework. Phase out the fixed energy price policies and reallocate the resulting fiscal space for investment (including green) and productivity-enhancing policies.
• Safeguard financial stability by maintaining close monitoring of risks that could arise from banks’ concentrated lending to the real estate sector. A tightening bias in the macroprudential policy stance is warranted.
• Further develop and implement the productivity-driven growth strategy that emphasizes innovation, digitalization, education, training, and environmental sustainability.

Economic outlook and risks

1. Staff expects growth to moderate from high levels. Growth is projected to decelerate from 7½ percent in 2023 to 5 percent in 2024 and 4 percent in 2025, while still remaining among Europe’s highest. Exports (including tourism) are expected to slow but continue to be robust, supported by a modest recovery in Europe. Private consumption growth remains solid, while investment is set to recover. Beyond 2025, medium-term growth is projected to stay around 4 percent, down from an average of 6¾ percent over the past decade, due to a moderation in tourism demand, the maturing gaming sector, and a decline in net immigration inflows.
2. Labor markets remain tight, with some inflationary pressures. Employment has grown fast, with foreign workers accounting for the majority of the increase, while the unemployment rate remains at historic lows. Other indicators, such as labor force participation and job vacancy rates, also point to tight labor markets. Wage pressures have remained relatively contained, however, partly due to increased inflows of foreign workers. Although inflation has fallen, pressures persist in the service sector. Staff expects inflation to stabilize at 2 percent by mid-2025.
3. Risks to the outlook are tilted to the downside. Key external risks include escalation of the conflict in the Middle East and of Russia’s war in Ukraine and deepening geoeconomic fragmentation. These could lead to sharply higher global energy and commodity prices. Domestically, wage growth and inflation may be higher than expected, especially given tight labor markets. On the upside, stronger-than-expected tourism exports would boost growth.

Consolidate fiscal positions in alignment with the EU’s new fiscal framework

4. The authorities’ commitment to fiscal consolidation is welcome. The 2025 budget aims to reduce the overall deficit from 4 percent of GDP in 2024 to 3.5 percent in 2025. Revenue losses due to upward adjustments to personal income tax brackets for past inflation are more than offset by containing increases in compensation of employees and subsidies. Tightening fiscal policy is cyclically appropriate, given tight labor markets and the anticipated easing of monetary policy. Beyond 2025, the authorities expect the overall deficit to decline to 2.6 percent of GDP by 2027, adhering to the net expenditure growth ceilings under the EU’s new fiscal rules. General government debt is projected to remain around 50 percent of GDP through 2027.  
5. However, fiscal consolidation should focus on shifting policy away from energy subsidies toward investment and innovation for long-term sustainable growth. With lower global energy prices, energy subsidies are projected to decline from a peak of 1¾ percent in 2022 to ¾ percent in 2025. Yet, they remain sizable, accounting for 20 percent of the fiscal deficit. In line with last year’s staff recommendations, the authorities should gradually but decisively exit the current fixed energy price policy by shifting to more targeted subsidies and strengthening market pricing mechanisms. This will reduce fiscal risks associated with energy price shocks, enhance incentives for energy conservation, and help accelerate the green transition. The resulting fiscal space should be allocated to public investment (including green), services (e.g., education), and innovation support (see below).
6. Strengthening revenue administration and expenditure efficiency is critical for fiscal consolidation. Progress has been made in enhancing the operational autonomy of the Malta Tax and Customs Administration and its governance structure. The next steps include (i) completing the establishment of a large taxpayer office, (ii) implementing the compliance and risk management strategy, and (iii) deploying new IT systems. On the spending side, priorities include (i) strengthening public procurement in line with the OECD’s recommendations (e.g., digitalizing procurement processes, applying a risk-based approach) and (ii) assessing the effectiveness and efficiency of the public investment management framework, including green investments.
7. 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, focusing on infrastructure, innovation, education, health, and environmental sustainability. Developing a long-term fiscal framework is essential for strengthening policy decision-making and aligning fiscal planning with strategic priorities. The planned revision of the Fiscal Act presents an opportunity to implement this reform.
8. The authorities should develop a roadmap for corporate income tax (CIT) reform that aligns with the EU’s Minimum Tax Directive (Pillar II) to guide taxpayers and investors. While Malta’s wait-and-see approach—by deferring the implementation of Pillar II—allows for adaptation to international developments, it risks ceding revenue to other jurisdictions that adopt the directive sooner. Following last year’s staff recommendations, the authorities should develop a roadmap that addresses CIT (for both foreign and domestic companies) and personal income tax due to their interaction. The roadmap should be developed and disseminated promptly, pending clarification of rules regarding Qualified Refundable Tax Credits (QRTCs) from the European Commission.

Safeguarding financial stability

9. The financial system is sound, with banks holding ample capital and liquidity buffers; however, risks remain due to substantial exposure to real estate. Applying granular risk weights for real estate exposures under the EU’s Capital Requirements Regulation III (effective January 1, 2025) will strengthen banks’ capital requirements. Nonetheless, vigilant monitoring of real estate markets—considering their sensitivity to economic growth, interest rates, population growth, and tourist flows—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, given the increased reliance on artificial intelligence (AI), digital platforms, and third-party providers, as well as heightened geopolitical tensions.
10. Given strong credit growth in real estate and an anticipated monetary easing in the euro area, a tightening bias in the macroprudential policy stance is warranted. The sectoral systemic risk buffer (sSyRB) on residential mortgages, introduced last year at 1.5 percent, has strengthened banks’ structural resilience to potential housing market shocks. However, further easing of 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 (including residential mortgages, commercial real estate, and construction), the authorities should consider raising the sSyRB rate and broadening its scope beyond residential mortgages. The effectiveness of borrower-based measures should also continue to be reviewed periodically.
11. Progress is underway to strengthen the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework. In particular, resources for AML/CFT supervisors and regulators have been significantly bolstered. The authorities 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.  

Pursuing structural reforms

12. Promoting high-productivity economic activity and innovation is essential for sustainable long-term growth. Public and private spending on research and development in Malta is low. The authorities should continue evaluating the effectiveness of various schemes (e.g., grants, tax incentives, loan guarantees) to support innovation activities, start-ups, and scale-ups, focusing on their size and overall design. The timely introduction of well-designed QRTCs under Pillar II is crucial. In addition, the authorities should ease applicants’ administrative burden for accessing these public funding schemes. The recent establishment of Malta’s Venture Capital Fund is a step in the right direction; however, its size (currently €10 million) and design should be periodically assessed. Advancing e-government is also key to facilitating digital adoption in the private sector.
13. Innovation and digitalization require a workforce equipped with the right skills. Malta excels in digitalization and is well-positioned to harness the benefits of AI. However, there are significant shortages of highly skilled workers. While digital technologies, including AI, enhance productivity, they may also lead to job displacement. The focus should continue to be on improving educational outcomes, increasing STEM enrollment, enhancing digital skills, and boosting adult learning uptake (for both Maltese and foreign workers). Robust implementation of the National Education Strategy 2024-30 and the Lifelong Learning Strategy 2023-30 is critical.  
14. 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. Key priorities include (i) implementing the 2021 Low Carbon Development Strategy and the updated National Energy and Climate Plan (forthcoming), especially in transportation and buildings, (ii) phasing out the fixed-energy price policy to enhance consumers’ incentives for energy conservation and green investment, and (iii) increasing public green investment (e.g., renewable energy). For climate adaptation, the vulnerability risk assessment should be completed, and the adaptation plan updated accordingly.
15. The tourism sector requires more effective management. With numerous hotel projects underway and a rise in other types of accommodation, tourism may continue to grow significantly, potentially exacerbating labor shortages, infrastructure bottlenecks, and social and environmental concerns. Attention should be given to steadily implementing the Malta Tourism Strategy 2021–2030, which aims to promote sustainable and high-quality tourism.

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The mission thanks the authorities and private sector counterparts for their warm hospitality and candid, high-quality discussions. The team is especially grateful to the Central Bank of Malta and the Ministry of Finance for their assistance with meeting arrangements and logistical support.