The International Monetary Fund has praised Malta for its "remarkable" economic recovery after COVID-19 but urged the country to plan the easing of energy subsidies and prepare for reform of the corporate tax system.
It was a message which repeated comments made to Times of Malta last December by IMF mission chief for Malta Kotaro Ishi.
In its annual assessment of the country, the IMF Executive Board observed that Malta’s economy has recovered strongly following the worst recession in decades due to the COVID-19 pandemic. Although inflation has picked up, it remains among the lowest in the euro area, reflecting the government’s policy to freeze retail electricity and fuel prices for all consumers.
But the IMF said the Maltese authorities should prepare an "exit strategy" from the fixed-energy-price policy while protecting vulnerable groups.
This strategy should aim to contain fiscal costs and enhance incentives for energy conservation.
"The authorities should explore reform options with the aim of gradually rolling them out ahead of winter 2023/24," it said. "Ultimately, accelerating the green transition is the best way to strengthen Malta’s resilience to an energy shock."
Tax and pension reforms
The IMF board also urged Malta to prepare tax and pension reforms.
It said that while public debt is projected to remain just below 60 per cent of GDP, "it could be forced on an upward path if growth underperforms".
It also said Malta needed to prepare for the plan, known as Pillar Two, for a global minium 15% tax on big business.
The Maltese authorities need to reform the taxation of multinational firms and consider broader reforms to the tax system with the aim of simplifying and improving its efficiency and reducing costs while protecting revenues.
Pensions
It advised Malta to take further steps to improve the efficiency of public investments, including green investments.
And it warned the country to monitor its ageing population.
"Long-term demographic trends should be closely monitored to properly plan pension-related reforms, and efforts should continue to promote voluntary occupational pensions and personal pensions," the IMF added.
It said Malta's financial system remains sound, but emerging risks warrant continued vigilance and close monitoring of banks.
The authorities should closely monitor banks’ risk management to ensure that provisions are continuously updated as economic prospects change.
Given the banking sector’s large exposure to the housing market, the consideration of introducing a sectoral systemic capital risk buffer targeting mortgage loans is warranted, it said.
In addition, efforts to monitor cyber security risks and strengthen resilience against cyberattacks should continue.
Skills mismatch and labour shortages
The IMF said structural reforms are necessary to improve Malta’s long-term growth and address climate challenges.
Malta’s Recovery and Resilience Plan will address part of its structural challenges, it observed, but more efforts will be needed, especially to address labour skill mismatches, increase STEM (Science, Technology, Engineering and Maths) graduates, enhance vocational training, promote research and innovation, and advance the digital transformation of SMEs.
Labour force participation should also be fostered through incentives for workers to delay retirement and flexible working solutions to address structural labour shortages.