The International Monetary Fund (IMF) has issued a report concerning Malta, and said that the country's financial system is sound and stable, however that risks remain.
The report states that The IMF's Executive Board concluded the Article IV consultation with Malta.
Malta has experienced remarkable growth over the past decade, primarily driven by export oriented service industries, such as tourism and online gaming, it says. "Although growth is expected to moderate, it will remain among Europe's highest in the near term, along with tight labour markets. Inflation has fallen to around 2%, but some inflationary pressures remain in the service sector. Strong growth has been supported by an influx of foreign workers and tourists, leading to increased density and strain on infrastructure and public services. This has raised concerns about the sustainability of the labour-intensive growth model."
It said that the financial system has demonstrated resilience amid successive shocks, reading that over the medium term, Malta's economy is projected to continue outperforming other European countries. "But structural constraints will weigh on growth potential. Risks to the outlook are tilted to the downside. External downside risks include spillovers from intensified Russia's war in Ukraine and the Israel-Gaza conflict and deepening geoeconomic fragmentation. Domestically, wage growth may be higher than expected, resulting in higher inflation. On the upside, tourism exports could grow faster than anticipated, further boosting near-term growth, but at the cost of adding to capacity pressure."
The Executive Board Assessment found that the authorities' commitment to fiscal consolidation is welcome; however, it should focus on shifting policy away from energy subsidies toward investment and innovation.
While taking note that the deficit is expected to decline to around 2¾% of GDP by 2029, and public debt is projected to remain around 50% of GDP, "energy subsidies are expected to remain sizable, accounting for 20% of the fiscal deficit."
Is said that the authorities should gradually but decisively exit the fixed energy price policy by shifting to more targeted subsidies and strengthening market pricing mechanisms.
The report states that the financial system is sound and stable; "however, risks remain due to substantial exposure to real estate, and tightening macro-prudential policy stance is warranted. Vigilant monitoring of real estate markets 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."
It added that further easing of ECB 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, the authorities should consider raising the sectoral systemic risk buffer rate and broadening its scope beyond residential mortgages."
The Board's assessment found that the authorities' commitment to strengthening the AML/CFT framework and advancing judicial reforms is welcome. "They 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. They should also advance judicial reforms, including strengthening the appointment process of the chief justice and improving the efficiency of the justice system."
It said that continued efforts are needed to raise productivity and foster innovation for sustainable long-term growth. The authorities should continue evaluating the effectiveness of various schemes (e.g., grants, tax incentives) to support innovation activities, start-ups, and scale-ups, focusing on their size and overall design, it read.
It adds that 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 behaviour are necessary to meet the 19% reduction target (relative to 2005 levels) by 2030 under the Effort Sharing Regulations. For climate adaptation, the vulnerability risk assessment should be completed, and the adaptation plan updated accordingly."
The report also included the IMF's Staff Report.