Washington, DC: On September 15, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Malta.
The COVID-19 pandemic has hit the Maltese economy hard. Tourist arrivals fell sharply, 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.
As vaccination proceeds and containment measures ease, economic activity is strengthening. Consumer and business confidence have recovered to pre-COVID-19 levels, and signs of labor markets tightening are emerging. 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, including from a global resurgence of the COVID-19 pandemic and a prolonged placement in the Financial Action Task Force (FATF) grey-list. On the upside, recovery from the pandemic could be faster than expected due to swift global vaccination boosting confidence and economic activity.
Executive Board Assessment[2]
Executive Directors commended the authorities for the swift and bold response to the COVID-19 pandemic. Directors noted that growth is expected to gain momentum in the coming months, although uncertainty remains high and downside risks cloud the outlook. They concurred that targeted, coordinated policy support should continue until the recovery firmly takes hold, balancing near-term growth with long-term stability while pursuing structural reforms to strengthen the economy’s resilience.
Directors agreed that the pace of unwinding fiscal support should be managed carefully and flexibly. Once the recovery is fully entrenched, efforts should focus on rebuilding buffers gradually and fostering infrastructure investment and economic transformation. Directors encouraged strengthening tax administration, managing contingent liabilities, and ensuring pension system sustainability. They recommended a holistic review of the overall tax system, taking into consideration the global minimum corporate tax proposal. They noted that the planned review of the infrastructure investment and management framework is critical to boosting Malta’s capacity to absorb EU funds.
Directors noted that the banking system has proved resilient, but stressed the importance of safeguarding financial stability. They encouraged the authorities to closely monitor banks’ financial positions and risk management, continuously analyze vulnerabilities from the corporate and real estate sectors, and enhance data collection.
While noting recent progress in strengthening the AML/CFT framework, Directors called for urgent action to address the remaining deficiencies in the AML/CFT framework and exit the FATF’s grey list. They recommended prioritizing the areas of transparency on beneficial ownership information and financial intelligence related to money laundering and tax evasion. Directors also advised the authorities to continuously assess high-risk activities and their impact on correspondent banking relationships.
Directors underscored the importance of advancing structural reforms to foster higher and sustainable growth. They encouraged the authorities to further advance labor market reforms and leverage active labor market policies to facilitate resource reallocation. Completing the corporate insolvency framework reform remains an important priority. Further efforts are also needed to promote stronger and more sustainable tourism, and support digital transformation and decarbonization. Directors welcomed the authorities’ commitment to reducing greenhouse gas emissions in line with EU targets.
(Year-on-year percent change, unless otherwise indicated) | ||||||
Projections | ||||||
2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
Real economy (constant prices) | (Percent change year on year) | |||||
Real GDP | 8.6 | 5.2 | 5.5 | -7.8 | 5.7 | 6.0 |
Domestic demand | 2.0 | 8.0 | 7.4 | -2.5 | 5.3 | 3.2 |
CPI (harmonized, average) | 1.3 | 1.7 | 1.5 | 0.8 | 0.7 | 1.8 |
Unemployment rate (percent) | 4.0 | 3.7 | 3.6 | 4.3 | 3.6 | 3.5 |
Public finance | (General government, percent of GDP) | |||||
Overall balance | 3.2 | 1.9 | 0.4 | -10.2 | -11.8 | -6.5 |
Primary balance | 5.0 | 3.4 | 1.7 | -8.9 | -10.4 | -5.2 |
Structural balance 1/ | 3.2 | 1.2 | 0.1 | -7.3 | -9.4 | -5.3 |
Gross debt | 48.5 | 44.8 | 42.0 | 54.8 | 64.6 | 66.9 |
Financial sector | (Percent change year on year) | |||||
Credit to nonfinancial private sector 2/ | 3.5 | 6.7 | 7.4 | 6.6 | … | … |
Credit to the private sector (percent GDP) | 76.5 | 76.1 | 75.4 | 86.0 | … | … |
Interest rates (year average) | (Percent) | |||||
Interest rate for mortgage purposes | 3.1 | 3.1 | 3.0 | 3.0 | … | … |
Ten-year government bond yield | 1.3 | 1.4 | 0.7 | 0.5 | … | … |
Balance of payments | (Percent of GDP) | |||||
Current account balance | 5.7 | 6.3 | 5.7 | -3.6 | -2.5 | -0.3 |
Trade balance (goods and services) | 17.5 | 15.6 | 15.2 | 7.6 | 7.8 | 10.0 |
Exchange rate | ||||||
Exchange rate regime | Joined EMU on January 1, 2008. | |||||
Nominal effective rate (2010=100) | 99.8 | 101.9 | 100.7 | 101.8 | … | … |
Real effective rate, CPI-based (2010=100) | 99.6 | 101.4 | 100.2 | 101.3 | … | … |
Sources: National Statistical Office of Malta; Central Bank of Malta; European Central Bank; Eurostat; European Commission; and IMF staff calculations. 1/ As a percentage of Nominal Potential GDP. 2/ Loans to nonfinancial corporate sector and household/individuals. | ||||||
[1]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.
[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.