The Malta Independent 29 February 2024, Thursday
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Malta should ‘prepare an exit strategy’ from energy subsidy policy – IMF staff statement

Friday, 24 November 2023, 11:22 Last update: about 4 months ago

Malta marked an ‘impressive recovery’ from the Covid-19 pandemic, a report by International Monetary Fund (IMF) staff said, but adds that Malta should ‘prepare an exit strategy’ from the energy subsidy policy.

The above was said in an IMF Staff Concluding Statement. “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.” In this case, the concluding statement was for the 2023 Article IV Mission.

“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.”

The Maltese government has been subsidising energy and fuel, and as per the Budget for next year, plans to continue doing so. Prime Minister Robert Abela had said, in October, that the support the government gave regarding energy prices "is the most important measure over the past months and years, and will also be the most important measure in the Budget (…) to ensure complete stability in all energy prices." He said that he is convinced this is the right direction. "Ask yourselves two questions, if our families were paying hundreds more a month in energy bills, today would they be living better or worse? If we didn't introduce stability in energy prices, would families today be able to better plan their future? We know the answer to these clearly, which is why the decision to keep energy prices stable is clear."

The IMF staff statement reads that Malta has marked an 'impressive recovery' from the pandemic and demonstrated substantial resilience to shocks resulting from Russia's invasion of Ukraine. "With weaker external demand and waning post-pandemic pent-up demand, growth is normalizing but is still expected to be among the highest in Europe. Persistent inflationary pressures are expected, while concern has risen about capacity constraints."

It listed a number of key priorities.

The first listed reads: “Initiate a front-loaded fiscal tightening to rebuild fiscal buffers at a faster pace and help contain demand pressures. Prepare an exit strategy from the current generous energy subsidy policy and gradually implement it, with a view to containing fiscal costs and risks and enhancing incentives for energy conservation and transition, while protecting vulnerable populations.”

The second is: “Maintain vigilance in monitoring financial sector risks, particularly in the areas of borrower creditworthiness, cyber security, and money laundering/terrorist financing.”

The third is: “Boost structural reform efforts in innovation, digitalization, labour markets, education, and green transformation to achieve high, socially- and environmentally-sustainable, and inclusive growth.”

Regarding the energy subsidies, the statement reads that the ongoing energy price shock can no longer be viewed as temporary, “and suppressing the price signal does not help incentivize energy conservation or green transition. In addition, the sheer size of the subsidies limits fiscal space in reallocating resources to productivity-enhancing reforms while consolidating the fiscal position. Accordingly, in line with staff’s recommendations in the 2022 Article IV Consultation, the authorities should prepare an exit from the fixed price policy, with the aim of containing fiscal costs and strengthening market price mechanisms to enhance conservation while protecting low-income and, to a lesser extent, middle-income households.”

The strategy, it said, should be “implemented predictably and could move gradually, beginning with adjusting fuel prices to better reflect their import costs in line with past practices while also making the electricity tariff structure more progressive. A gradual move may ease pressures on consumers but would also delay the benefits of exit while leaving public finances vulnerable to further energy price increases.”

Regarding Malta’s recovery from the pandemic, the statement reads that output growth has rebounded sharply since the reopening of the economy in 2021. “The recovery has been aided by fiscal support, increased labour participation, large inflows of foreign workers, and, more recently, limited passthrough from monetary policy interest rates to domestic retail lending rates. With weaker external demand and waning post-pandemic pent-up demand, staff expect real GDP to moderate but continue to expand by around 4 percent in 2023 and 3½ percent in 2024, among the highest growth rates in Europe. Labour markets remain tight, while the unemployment rate remains at historically low levels. Both headline and core inflation peaked a year ago and have since decelerated as global inflationary pressures have eased. Still, staff expect elevated inflation to remain persistent and above the 2 percent target until late 2025, in part reflecting tight labour markets and sustained demand pressure. The challenge for the medium term is to ensure a robust policy framework to foster strong, socially- and environmentally-sustainable, and inclusive growth.”

Among other things, the statement that “the authorities should continue to pay close attention to income inequality and poverty risk. The 2024 Budget introduced additional support for vulnerable groups, including pensioners. Given the risk of persistently high costs of living, the authorities should continue to closely monitor impacts of inflation and other economic developments on inequality and evaluate the adequacy of the current tax and benefit system.”

It also said that “in light of flagging productivity and looming structural capacity constraints, there is a need to refocus Malta’s economic development strategy. Key themes should include analyzing: (i) gaps in the needed labor force and skills to achieve sustainable long-term growth; (ii) immigration policies to ensure there is the right supply of skills needed to meet demand; and (iii) needs in physical and social infrastructure, including roads, housing, education, and health services. The existing national planning strategy, Strategic Plan for Environment and Development 2015, should be updated expeditiously to reflect the latest demographic projections, and sectoral policies (e.g., tourism) should be aligned.”

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