The Labour government is justifiably proud of the mostly glowing biennial report about the Maltese economy, published by the International Monetary Fund recently.  Needless to say, the government trumpeted the positive statements made by the Fund, while the Opposition latched on to certain observations and recommendations to portray a negative picture.

Like in any good report, the real situation is summarised in just under 100 words on the first page of the Fund's press release.  They show that the economic ship has been steaming steadily ahead despite some quite turbulent seas, while there are signs that it will need an upgrade in the near future to ensure that it can continue to navigate at a more moderate but sustained speed. 

The IMF's expert staff found that, despite global uncertainties, Malta has maintained a robust economic performance with growth rates that exceed the EU average, inflation levels near the ECB target, and a sustainable public debt.  While growth will remain above the EU average, it is expected to slow to its potential rate of 4 per cent, due in the main to more moderate labour force expansion as well as saturation of the gaming and tourism sectors.

The Fund's Executive Directors commended the authorities' sound macroeconomic management.  They welcomed: the narrowing fiscal deficit and the authorities' commitment to the EU fiscal framework; the strength of the banking sector, citing high capital and liquidity buffers and low non-performing loans; the authorities' new migration and education strategies; and efforts to strengthen energy security and resilience.  

Were there caveats?  Of course.  I have yet to see an IMF Report   ̶   and I'm talking decades, here    ̶   that does not present any.  I would dare say that, had there been none, I would have described the report as a whitewash. Health warnings by international institutions, be they the IMF, OECD or the European Commission, are obligatory.  

The outcome of the staff review in terms of government policy priorities was two-fold.  First, the focus in the future should be on further strengthening fiscal buffers for future shocks.  Second, there must be more room for investment in infrastructure, human capital, and innovation. The IMF was absolutely clear that long-term growth will depend on reforms that boost productivity and address structural challenges.

If I were to portray the IMF's report in more mundane language, I would say it clearly shows that the current economic model has delivered big results and that there is no need to panic.  However, there is now a need to make structural changes to transfer to a more resilient economic model.  The government has already said this is its future strategy and commits to pursue the development of a new model.

Does this mean that the current model was bad?   Absolutely not. In both normal business strategy and in economic policy, it is considered normal and, in fact, necessary to change or update economic models.  Models are not some fixed, immutable structures akin to the laws of nature; rather they are human-made artefacts that need constant review and updating.

The real world is constantly changing, be it because of technological advances, shifting demographics, climate change, competitive forces, and a reset of the international economic order.   As the assumptions in old models become obsolete, they require updates in order to remain relevant.

Over the last 20 years, we have witnessed several international systemic failures and crises.  There were the major shocks of the 2008 and 2012 financial crises, the huge supply-chain disruptions brought about by Covid, the onset of inflation, and recently the up-ending of international trade relations.  They all revealed flaws in the prevailing economic theories and models which, unfortunately, are yet to be resolved in a new consensus.  Worryingly, there is severe doubt that such a consensus will even emerge. 

This is the reality.  Inane and brainless commentaries do not serve any purpose, except to score cheap political points.  Economic models all over the world, not just in Malta, need to be updated regularly to reflect new societal goals, such as moving from a focus on pure growth to sustainable development or reducing inequality.  Can we please concentrate on this?

The IMF's warnings are pretty standard and are, after all, already shared in Malta by the Government, the Opposition, and stakeholders.   As one of the world's most open economies, we are exposed to external downside risks.  Currently, these include spillovers from intensified regional conflicts and deepening geo-economic fragmentation. Anything that disrupts trade and supply chains can lead to renewed inflation in food and energy prices and, therefore, higher import prices and higher energy subsidies.  It does not need the IMF to be reminded that any slowdown in major economies, especially in Europe, may also drag down tourism and growth. Cyberattacks could add to risks.

Although within our control, a slowdown in migration could lead to wage pressures in an already tight labour market, resulting in weaker competitiveness and higher inflation.  Moreover, while the likelihood of weaker property and housing markets is currently low, it is a prospective risk that could negatively affect the banking sector and growth.  Intensification of competition in gaming from other jurisdictions could also reduce growth and fiscal revenue. On the upside, stronger than anticipated demand for tourism and other services could boost growth.

Of course, while our ability to influence external risks is zero, we do have a greater degree of control over what happens on the domestic front.  It is here that we need to sharpen our act and fast.  

Take tax collection.  Minister Clyde Caruana has made significant strides. The VAT, customs, and income tax departments have been merged, and their operations streamlined, and data from the various units is being cross-referenced. The rate of timely tax return submissions increased from 73% in 2023 to 93% in 2024.  The government has introduced AI-driven systems to identify tax evasion, moving from scanning 1% of taxpayers to analyzing the entire population. In just the first six months of 2024, the tax authorities collected €300 million in unpaid tax arrears. 

Great, but much remains to be done.  The European Commission had estimated that Malta's VAT compliance gap was one of the EU's highest at 25.9 percent in 2022.  Meanwhile, our overall tax burden (taxes plus net social contributions) was around 29 per cent of GDP in 2024, placing it the fourth lowest in the EU and well below the EU average of 40 per cent of GDP.  This difference signals scope for additional revenue by reforming tax policy and strengthening compliance.  The revenue to sustain higher government expenditure, especially in pensions and health for an ageing population, cannot come only from economic growth.

Then there is expenditure rationalization.  Although overall government spending of 37 percent of GDP is lower than the EU average of 49 per cent, and compensation of employees and social security benefits also compares favourably with EU peers, there is room for optimisation.   There is too much waste, not to mention corruption.

The IMF, like all other international institutions, has taken issue with the continuance of energy subsidies.  Indeed, it recommends the introduction of cost-recovery market pricing, though structured in such a way that electricity for households would include a lifeline tariff at the current rate for minimal use; a progressive schedule for higher consumption, encouraging energy conservation; and a gradual transition to cost-pricing for businesses, accompanied by temporary support for energy-intensive enterprises.

These are eminently sensible recommendations, and it is difficult to understand why the Government is so adamant on continuing with a model which was suited to the covid pandemic but is not tenable in the long-run.  Vulnerable and low-income households could still be protected under a reformed energy pricing model, subsidies would not be wasted on high-income households, the current disincentive to energy conservation would be replaced by a more responsible behaviour, and EneMalta would not be deprived of investment funds.

The statement that made the headlines from the IMF report was that Malta's labour-intensive growth model "appears to be approaching its limits."  Naturally, it was fodder for the Opposition, even though all stakeholders, including the government, have acknowledged this fact.  It is no secret that tourism and the importation of thousands of foreign workers have strained both the infrastructure and public services.  What is not mentioned that often is that skills mismatches have become a constraint on business growth.

The IMF says that a new economic model should be attuned to a transition to productivity-driven growth through the development of higher value-added services.  It involves shifting the economy from reliance on low-cost labour, exports of goods, and provision of services towards more sophisticated goods and services that command higher prices.  As a by-product, workers would enjoy better wages and national wealth would increase.  

How?  Let's not mince our words, it is easier said than done.  Such a transition requires fostering research and innovation in a big way, enhancing human capital through higher and more specialised skills and knowledge, investing in education and training in science, technology, engineering, and mathematics, and upgrading technological capabilities.   Do not expect results in the short term.

If that is not enough of a mouthful, consider that the IMF also believes that other priorities include improving judicial efficiency to streamline court procedures and reduce case backlogs; strengthening insolvency frameworks; further reforms in labour markets; better governance - the Achilles heel of the government; easier access to finance; addressing climate risks; and strengthening energy security.  Note that nowhere does the IMF say that the current level of foreign workers should be reduced.  Instead, it says that immigration should be targeted towards more skilled migrants and their integration into labour markets.

The rewards could be substantial.  IMF research finds that structural reforms could lift growth rates in an advanced economy like Malta's by about 5 per cent in the medium term.  

The IMF Report stresses that the Maltese Government recognizes the importance of structural reforms to advance the transition to more productivity-driven growth. The government admitted that labour shortages and skills gaps are potential headwinds and acknowledged remaining challenges in the judicial system and infrastructure.   It also committed to continue efforts to promote AI and STEM education, enhanced incentives for the retention of high performing workers and migrant training to improve workforce integration and productivity; and make more progress toward the green transition.

It appears that the rationale in relation to the economy should be "steady as she goes but upgrade the ship to breathe new life into it, making it more modern, technologically advanced, environmentally friendly, more efficient, and more productive."