Malta's labour-intensive economic growth model is approaching its limits, according to the International Monetary Fund (IMF), which is calling for a strategic shift toward productivity-driven expansion.
In its latest country report, the IMF praised Malta's strong economic performance but warned that continued reliance on population growth and foreign labour is no longer sustainable. Infrastructure constraints, rising population density and tight labour markets are increasingly restricting further expansion. Malta's population density is now around 15 times higher than the EU average, highlighting the pressure placed on housing, transport and public services.
On public finances, the IMF noted encouraging progress, with Malta's fiscal deficit narrowing from 4.4% of GDP in 2023 to an estimated 3.2% in 2025, and projected to fall further to 2.6% in 2026. Public debt is expected to remain stable and sustainable at around 47% of GDP. However, the Fund recommended gradually phasing out untargeted energy subsidies, which are estimated to cost 0.8% of GDP in 2025, in order to free resources for infrastructure investment and the green transition.
The IMF said Malta's financial system remains healthy and resilient, supported by strong capital buffers, ample liquidity and low levels of non-performing loans. Nevertheless, it warned that banks' growing exposure to the property and construction sectors poses a vulnerability. Lending to real estate and construction now accounts for about 72% of the private loan portfolio, up from 61% a decade ago.
This concentration is amplified by abundant liquidity, sustained economic growth and incentives linked to tourism and short-term rental investments. While low mortgage rates and a strong labour market have helped contain defaults, the prevalence of variable-rate mortgages leaves lower-income households exposed to potential interest rate increases.
Stress tests carried out by the Central Bank of Malta indicate that domestic banks are generally well positioned to withstand severe economic shocks, with only extreme scenarios resulting in liquidity pressure at a small number of institutions. The IMF urged continued close monitoring, strict underwriting standards and the use of macroprudential tools, including broader systemic risk buffers.
Structural weaknesses remain a concern, particularly in the labour market and judiciary. About 68% of service-sector employers report labour shortages, far above the EU average of 24%. The IMF recommends a more targeted, skills-based migration policy alongside greater investment in domestic upskilling.
Looking ahead, the IMF considers Malta's economic outlook positive but subject to downside risks from external shocks, including geopolitical tensions and potential spikes in global energy prices. Overall, the Fund concludes that sustaining growth will require a decisive move away from labour-driven expansion toward higher productivity, innovation and efficiency.