The IMF’s Article IV surveillance report is one of the most reliable independent assessments of a country’s economic performance. The focus is more on the short and medium-term prospects than on a long-term view of a country’s economic strategy.
This year’s IMF report sends mixed signals on how the Maltese economy is performing. It highlights the ‘impressive’ economic growth and attributes it to “large inflows of foreign workers, allowing rapid labour force growth”.
The continuation of the liberal energy subsidy scheme is also an essential contributor to this growth, characterised by a strong recovery in tourism and robust consumer demand.
Still, the IMF sends sobering signals that the dynamics driving this growth may not be sustainable in the longer term. It remarks that this growth has further strained the already struggling physical infrastructure and the public health system.
Just as poignant is the comment that “income inequality and poverty risks appear to be on the rise, with the elderly population showing signs of increasingly at risk since the pandemic”.
The IMF report goes beyond making observations. It makes expert recommendations, some of which are not new.
It argues that energy subsidies should be phased out as they disincentivise energy savings and green investments.
The energy subsidies account for some 40 per cent of the public deficit and will cost taxpayers €320 million this year. The IMF recommendations on the need to phase out the energy subsidies are identical to those of the European Commission.
Prime Minister Robert Abela remains in a hubris mode. In a Facebook post, he noted that the IMF had praised Malta’s economic leadership. He also described the energy subsidies as “crucial” for the economy without clearly indicating how long they will be kept in place.
The subsidy scheme is, undoubtedly, critically important to support financially distressed households. The rest of the community needs to get used to dealing with market realities and not get addicted to economic painkillers.
Energy subsidies cost the public purse hundreds of millions of euros and are crowding out public investment in other sectors like health, physical infrastructure and education.
The IMF confirmed what economic observers have noted – a property market slowdown. Many will welcome this cooling off in the industry that has seen overinvestment in the last decade. Still, policymakers and operators must work for a soft landing to avoid severe economic shocks.
There are 660 multinational companies domiciled in Malta. The IMF recommends that the country adopt a road map for implementing the 15 per cent minimum tax for these companies.
The six-year extension EU regulations allow before implementing the new corporate tax regime gives a much-needed breathing space. However, tax policymakers and operators must not be complacent. They must define their plans for the transition without undue delay.
The IMF highlights other issues that the government regularly glosses over. These include the importance of strengthening education outcomes – overall and for immigrant students.
The IMF directors focus on other medium-term challenges that Malta faces. They comment: “With Malta’s economy above potential, and with tight labour markets, elevated inflationary pressures and sizeable fiscal deficits, there is a need for accelerating fiscal consolidation to support disinflationary efforts and rebuild fiscal buffers faster to bolster fiscal sustainability.”
Put simply, the IMF is warning that economic growth driven by the ever-increasing flow of foreign labour and open-ended energy subsidies burdening public finances is not sustainable.
It is time for the government to take the IMF recommendations on board.