The International Monetary Fund has raised its economic growth projections for Malta and urged the Maltese authorities to prepare a plan for tapering support measures such as the wage supplement scheme, including adjusting their size and eligibility criteria.

In its latest country report, it said output grew by 1.9 percent (q/q) in the first quarter of 2021, and signs of labour markets tightening are emerging.

Consumer and business confidence have recovered to pre-COVID-19 levels and it expects the economy to grow by around 5.75 percent in 2021 (from a projection of 4.7% in April) and 6 percent in 2022, assuming further progress in global vaccination, an unleashing of pent-up demand for contact-intensive services, and a gradual recovery in international tourist arrivals. Those projections are up by more than a percentage point. 

Unwinding of support measures will need to be carefully managed and well-coordinated between fiscal and financial sector policies to avoid “cliff effects” that could derail the recovery. If health risks reemerge or the recovery falters, some support measures may need to be extended, refocusing on sectors and people that are still significantly affected by the pandemic.

But it warned that uncertainty is still very high.

"Key downside risks include a global resurgence of the COVID-19 pandemic, the uncertain long-term impact of the crisis on the economy, a labour shortage due to reduced inflows of foreign workers, and a prolonged placement in the FATF grey-list which could adversely affect correspondent banking relationships (CBR) and foreign direct investment inflows."

But on the upside, recovery from the pandemic could be faster than expected due to swift global vaccination boosting confidence and economic activity.

The Fund said unwinding of support measures introduced as a reaction to COVID-19 will need to be carefully managed and well-coordinated between fiscal and financial sector policies to avoid “cliff effects” that could derail the recovery. If health risks re-emerge or the recovery falters, some support measures may need to be extended, refocusing on sectors and people that are still significantly affected by the pandemic.

Review of the tax system, retirement age

The IMF urged the Maltese authorities to continue efforts to tackle long-standing fiscal vulnerabilities to ensure fiscal sustainability.

Risks to fiscal revenues, it said, include the collection of deferred taxes, relatively low tax revenues, and high reliance on corporate income tax (CIT).

"Efforts to strengthen tax administration should continue, with the aim of identifying loopholes and exploiting digitalization. In light of the global minimum CIT proposal, a holistic review of the overall tax system would be useful. In addition, rising contingent liabilities call for strategies to strengthen the financial footing of state-owned enterprises.

"Finally, promoting voluntary occupational pensions and personal pensions, and increasing the effective retirement age will help address long-term age-related spending pressures and improve the sustainability of the pension system," the IMF said.

FATF greylisting

With regard to Malta's greylisting by the Financial Action Task Force, the IMF said that over the past two years, the authorities have made good progress in strengthening the anti-money laundering/financing of terrorism (AML/CFT) framework, including by addressing technical deficiencies.

"In line with the FATF action plan, the authorities need to intensify efforts to demonstrate effectiveness by: (i) ensuring the accuracy of beneficial ownership information; (ii) enhancing the use of financial intelligence to support tax and money laundering cases; and (iii) focusing the Financial Intelligence Unit’s analysis on criminal tax offenses. The authorities should also continue efforts to mitigate financial integrity and reputational risks in high-risk activities (e.g., virtual financial assets, gaming, and citizenship by investment program), while maintaining close monitoring of CBR pressures."

 

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