July 21, 2021
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: The fallout from the COVID-19 crisis has hit the Maltese economy hard, particularly its large tourism sector. Using fiscal buffers, the authorities have taken swift actions to support households, businesses, and the healthcare system. With the rapid rollout of the COVID-19 vaccine, the economy has reopened for the summer tourism season, and growth is projected to rebound this year. Uncertainty remains high, however. The near-term policy imperative is to gradually unwind pandemic-related support measures and shift to policies targeted at facilitating resource reallocation to productive and high-growth potential activities. Other key challenges include addressing deficiencies in the anti-money laundering and combatting the financing of terrorism (AML/CFT) framework, and pursuing structural reforms to strengthen the economy’s resilience and sustainability.
1. The COVID-19 pandemic has hit the Maltese economy hard. Tourist arrivals fell sharply to below 25 percent of pre-pandemic levels, and contact-intensive services were severely affected due to domestic mobility restrictions. As a result, real GDP contracted by 7¾ percent in 2020, the worst recession in decades. Nonetheless, the authorities’ swift and bold policy response helped mitigate the impact, preventing large-scale layoffs, bankruptcies, and credit disintermediation.
2. As vaccination proceeds and containment measures ease, economic activity is strengthening. Output grew by 1.9 percent (q/q) in the first quarter of 2021, and signs of labor markets tightening are emerging. Consumer and business confidence have recovered to pre-COVID-19 levels. Staff expect the economy to grow by around 5¾ percent in 2021 and 6 percent in 2022, assuming further progress in global vaccination, an unleashing of pent-up demand for contact-intensive services, and a gradual recovery in international tourist arrivals. Uncertainty is still very high, with risks to the outlook tilted to the downside. Key downside risks include a global resurgence of the COVID-19 pandemic, the uncertain long-term impact of the crisis on the economy, a labor shortage due to reduced inflows of foreign workers, and a prolonged placement in the FATF grey-list which could adversely affect correspondent banking relationships (CBR) and foreign direct investment inflows. On the upside, recovery from the pandemic could be faster than expected due to swift global vaccination boosting confidence and economic activity.
A. Shifting Policies to Support a Strong Recovery
3. The pace of unwinding COVID-19 related support measures should balance the near-term need to support growth and long-term economic stability. Most of the support measures are set to expire by the end of 2021. As economic growth gains momentum, the authorities should prepare a plan for tapering support measures (e.g., the wage supplement scheme), including adjusting their size and eligibility criteria. Unwinding of support measures will need to be carefully managed and well-coordinated between fiscal and financial sector policies to avoid “cliff effects” that could derail the recovery. If health risks reemerge or the recovery falters, some support measures may need to be extended, refocusing on sectors and people that are still significantly affected by the pandemic.
4. The pandemic’s impact on the corporate sector should continue to be carefully monitored. While support measures have prevented large-scale bankruptcies, the pandemic may have caused lasting damage to firms’ balance sheets, undermining their capacity to invest for a strong post-pandemic recovery. It is important to assess the extent of the deterioration of corporate sector balance sheets and consider whether additional measures to support firms are needed, including investment tax credits, subsidized loans, as well as solvency support to viable small and medium-sized enterprises. Public support should be provided transparently, consistent with overall policy goals, and time-bound with a clear exit strategy to minimize fiscal risks.
B. Ensuring Long-term Fiscal Sustainability
5. Once the recovery is on firm ground, policies should focus on rebuilding fiscal buffers. With the economic recovery, the expiration of most COVID-19 related measures, and the containment of spending growth, the fiscal deficit is projected to narrow rapidly from 2022 onward, and debt to fall steadily over the medium term. The authorities remain committed to eventually returning to a structural fiscal balance and to reducing the debt-to-GDP ratio to 60 percent over the medium term. The mission supports the planned comprehensive review of COVID-19 related spending to proceed efficiently with fiscal consolidation. The fiscal consolidation strategy should retain space for public investment to underpin growth and address infrastructure gaps. In order to ensure efficiency in public investment delivery, it is important to regularly update a pipeline of well-defined infrastructure projects. The authorities’ plan to review the infrastructure investment and management framework is welcome in this regard.
6. The authorities should continue efforts to tackle long-standing fiscal vulnerabilities to ensure fiscal sustainability. Risks to fiscal revenues include the collection of deferred taxes, relatively low tax revenues, and high reliance on corporate income tax (CIT). Efforts to strengthen tax administration should continue, with the aim of identifying loopholes and exploiting digitalization. In light of the global minimum CIT proposal, a holistic review of the overall tax system would be useful. In addition, rising contingent liabilities call for strategies to strengthen the financial footing of state-owned enterprises. Finally, promoting voluntary occupational pensions and personal pensions, and increasing the effective retirement age will help address long-term age-related spending pressures and improve the sustainability of the pension system.
C. Safeguarding Financial Stability and Pursuing AML/CFT Reform
7. Banks have remained resilient, maintaining adequate capital and liquidity buffers to absorb potential shocks. Given high uncertainty, however, vigilance in risk monitoring is needed. Banks could be exposed to several risks, including a rise in corporate insolvencies, real estate market corrections, and propagation of financial distress through intercompany loans. Bank supervisors should therefore continue to closely monitor banks’ financial positions and risk management and ensure that banks update the assessment of expected losses as economic prospects evolve and provision accordingly. Enhanced data collection and monitoring are essential for intercompany lending. The support measures for the real estate market should expire in summer 2021 as planned.
8. The authorities should expeditiously address the effectiveness of the AML/CFT framework. Over the past two years, the authorities have made good progress in strengthening the AML/CFT framework, including by addressing technical deficiencies. In late June, however, the FATF put Malta under increased monitoring (“grey list”) owing to concerns about the effectiveness of some aspects of Malta’s framework. In line with the FATF action plan, the authorities need to intensify efforts to demonstrate effectiveness by: (i) ensuring the accuracy of beneficial ownership information; (ii) enhancing the use of financial intelligence to support tax and money laundering cases; and (iii) focusing the Financial Intelligence Unit’s analysis on criminal tax offenses. The authorities should also continue efforts to mitigate financial integrity and reputational risks in high-risk activities (e.g., virtual financial assets, gaming, and citizenship by investment program), while maintaining close monitoring of CBR pressures.
D. Advancing Structural Reforms for Higher and Sustainable Growth
9. Reinvigorating structural reforms to raise Malta’s productivity and achieve strong and sustainable growth is critical. The authorities have published several strategic papers to solicit nationwide efforts to identify and implement growth strategies. The near-term priorities include facilitating the reallocation of labor and capital. In this regard, labor market reforms should be further advanced, focusing on upskilling and reskilling workers to narrow the skill gaps. To facilitate corpore sector restructuring, ongoing work on the corporate insolvency framework should be completed by mid-next year, as planned. Following the recent publication of Malta Tourism Strategy 2021–2030, the authorities should move to take actions to make the sector stronger and more sustainable by utilizing new digital technologies, enhancing a greener tourism system, improving tourism infrastructure, and increasing value-added in the sector.
10. Promoting digital transformation, innovation, and decarbonization will also be key to achieving higher and sustainable growth. EU funds, including the EU Recovery and Resilience Facility, will support investment in these areas. Ongoing work to update the National Digital Strategy should provide a good opportunity to take stock of Malta’s past experience and keep Malta among Europe’s digital frontrunners. Given that Malta is still trailing EU peers in R&D investment, there is room to boost public spending in R&D and strengthen the innovation ecosystem. On climate change policy, the mission welcomes the authorities’ commitment to reducing greenhouse gas emissions under the EU Effort Sharing Regulation by 19 percent (compared to 2005 levels) by 2030.
11. Further strengthening of the governance framework is critical to attract investors. To this end, the authorities should continue efforts to fully meet the recommendations of the Council of Europe’s Venice Commission and the Group of States Against Corruption, including by enhancing the efficiency of the judiciary system.