Malta's economic recovery from the pandemic has been "remarkably strong" but the government must begin to gradually reduce energy subsidies by this time next year, according to the International Monetary Fund (IMF).

That would mean fuel prices and utility bills would rise, reflecting the price hikes in the international market.

In an interview with Times of Malta on Monday, IMF mission chief for Malta Kotaro Ishi said the IMF understands Malta's economic rationale to mitigate the price hikes, but the decision might have fiscal consequences if the crisis persists, the frozen prices might stifle people's motivation to save on energy and invest in green alternatives instead.

"It is good to keep prices low for low-income and, to a lesser extent, middle-income families after next year, but the government could ask richer or more wasteful consumers to pay a price that is closer to the import price," he said.

"We recommend that an exit strategy is drafted now and kicks off ahead of winter next year."

Ishi, who is the IMF's European Department Deputy Chief, concluded talks with the government in Malta last week, and on Monday the IMF issued a concluding statement describing the preliminary findings of the visit.

The IMF noted that after the pandemic, Malta registered among the highest economic growth rates and among the lowest inflation rates in Europe. Foreign workers returned at pre-pandemic rates and the unemployment rate stayed "at historically low levels".

However, the Ukraine war, the slowing European economy, the high energy prices and "weakened public finances" are making it challenging for Malta to boost further growth while achieving environmentally sustainable goals.

"With global energy prices likely to remain well above pre-war levels for a prolonged period, the government’s strategy to continue the fixed price policy could place a strain on fiscal policy," the IMF said in the statement.

It is recommending the government considers adjusting fuel prices to reflect import prices "as a possible first step".

It also recommended adjustments to utility bills. The current rates could still apply for the lower bands, it said, but higher consumption could be gradually charged at higher rates to reflect international prices and discourage people from wasting energy.

The minimum level of consumption that is needed to support an individual would still be "priced at below marginal cost".

Businesses could also see their financial support stripped away if they do not make efforts to increase energy efficiency, it recommended.

The IMF also called on the government to consider "a peak demand electricity charge".

'Government is on the right path to reducing the deficit'

The IMF also commended the government for planning to reduce the deficit from 5.8% of GDP this year to 5.5% next year.

"The expected size of the fiscal tightening is appropriate given the need to slow inflation and improve public finances," it said.

It also praised the government's plan to reduce the overall deficit to below 3% of GDP by 2025 "but additional action is needed."

"Public debt is, however, projected to hover just below 60% of GDP and could be put on an upward trajectory if growth underperforms," it said.

"Accordingly, additional measures to mobilise revenues and enhance spending efficiency will be required."

Kotaro Ishi said it is paramount for the government to continue to maximise spending efficiency and to reform tax policies.

In this regard, the IMF called on the government "to reform the taxation of multinational firms".

The minimum corporate tax has been a bone of contention for Malta, because if forced into action, it would seriously dent the island’s attractiveness to foreign investors.

On paper, Malta has one of the highest statutory corporate tax rates in the world, taxing 35 percent of end-year company profits. However, the country attracts foreign investment by offering overseas companies a series of rebates and benefits that allow them to bring their corporate tax rate down to an effective five percent.

But the Organisation of Economic Cooperation and Development (OECD) is pushing for a new, global 15 percent minimum tax rate.

'Banking system is sound'

In its conclusions, the IMF also weighed in on the island's banking system, describing it as "sound, with ample capital and liquidity buffers and adequate provisioning."

"But risks are emerging from high inflation and tightening global financial conditions," it said.

"The prompt exit from the Financial Action Task Force’s grey list reflected the authorities’ high-level political commitment. Commendable progress has been achieved, including in the areas of beneficial ownership information, the application of sanctions for non-compliance, and the use of financial intelligence."

However, it also recommended that Malta should closely monitor "high-risk sectors, especially virtual financial assets, gaming, and sectors associated with Malta’s Citizenship by Investment program".

'Enhance effectiveness and efficiency of the justice system'

Kotaro Ishi also said the justice system should become more effective and efficient, especially in shortening the time that court cases usually take to be decided.

The IMF also urged the authorities to invest more in climate-friendly measures and to encourage more students to pursue stem fields (science, technology, engineering and mathematics) to address the "weak technical skills and human resources".