How the Iran war could affect Malta’s economy

The escalating conflict involving Iran, the US and Israel is having an impact right across the globe, and Malta, despite its geographic distance, cannot remain insulated.

The island’s structural dependence on imported energy, food and fertilisers means that external shocks could be transmitted rapidly into the domestic economy. While government assurances aim to maintain stability, the scale and duration of the conflict will determine how long Malta can remain shielded.

The Strait of Hormuz, through which the US Energy Information Administration (EIA) estimates around 21 million barrels a day flowed (roughly 21% of global petroleum liquids consumption), has become the central pressure point. It is also a major gas artery: the EIA estimates that, in 2024 about 20% of global LNG trade transited Hormuz, primarily from Qatar.

Attacks on tankers, including a Malta-flagged vessel, and the effective closure of the strait have already pushed oil prices sharply higher. Market volatility has increased to the point where daily statements by Donald Trump and Iranian leaders are influencing price movements in real time.

So far, the impact on Maltese households and businesses has been limited. Energy subsidies introduced during the Ukraine war remain in place, and hedging agreements have locked in gas and petrol prices. However, diesel is reportedly not covered by these hedges, creating a clear vulnerability. Although Malta sources its gas from the Atlantic Basin, reduced Gulf supply could still tighten global markets and indirectly affect Atlantic Basin availability and pricing.

Food prices represent another channel of exposure. With Malta almost entirely reliant on imported foodstuffs, international price increases will inevitably filter through to local shelves. For domestic agriculture, fertiliser markets are a critical concern. Here too, Hormuz matters: the United Nations has warned that around one third of global seaborne fertiliser trade transits the strait.

Rising energy and commodity prices, combined with supply chain disruptions, risk creating shortages of essential goods- Stefano Mallia

Fertiliser production is heavily dependent on natural gas, and UN Trade and Development (UNCTAD) has emphasised that disruptions in gas and shipping can rapidly constrain supplies of key nitrogen inputs such as urea and ammonia. Any sustained disruption will raise production costs and, ultimately, consumer prices for local fruit and vegetables.

Economists caution that the Iran war could trigger a broad inflationary cycle, potentially more severe than the shocks of the 1970s or the post-Ukraine invasion surge of 2022.

Rising energy and commodity prices, combined with supply chain disruptions, risk creating shortages of essential goods. Christine Lagarde, president of the ECB, has warned that “we are facing a real shock that is probably beyond what we can imagine at the moment”, stressing that the economic consequences will not be short-term.

Such uncertainty affects both consumer behaviour and business investment. Globally, firms tend to delay decisions in periods of geopolitical instability while households reduce discretionary spending. A slowdown in global economic activity will inevitably spill over into Malta’s open, trade-dependent economy.

Finance Minister Clyde Caruana has highlighted Malta’s €250 million fiscal buffer, in addition to the €150 million already allocated to energy and fuel subsidies. Prime Minister Robert Abela has argued that Malta’s constitutional neutrality reduces geopolitical exposure, allowing the government to focus on domestic price stability.

For now, subsidies, hedging arrangements and diversified LNG sourcing provide short-term protection. But these measures carry fiscal costs, and global markets remain volatile.

The government has been keen to reassure everyone that we are in a strong position to face up to the outside pressures.

This is positive in that it helps create certainty in a sea of uncertainty. In my view, the government should, however, also be sensitising everyone that there is a limit to the shielding the government can provide and, if the conflict persists, we too will inevitably be impacted.

In an interconnected global economy, even distant wars have local consequences. Malta’s challenge will be to manage these pressures while safeguarding economic stability and maintaining a sense of realism.

Stefano Mallia is vice-president of the Transatlantic Relations Follow-up Committee of the European Economic and Social Committee.