Malta must plan ahead due to energy subsidies and global tax rules - IMF

Malta’s economy has recovered strongly following its worst recession in decades due to the COVID-19 pandemic, with economic output growing by 113% in 2021

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Malta’s economy has recovered strongly following its worst recession in decades due to the COVID-19 pandemic, with economic output growing by 113% in 2021.

The declaration came from the International Monetary Fund, in another Article IV consultation, the regular round-ups of economic health the World Bank carries out with countries.

And while inflation has picked up, it remained among the lowest in the euro area, reflecting the government’s policy to freeze retail electricity and fuel prices for all consumers.

GDP growth is expected to slow down in 2023 due to lower consumer purchasing power, dampening domestic demand and weakening external demand from Europe.

“Uncertainty is exceptionally high, and risks are tilted to the downside, including a deeper-than-expected recession in Europe, a possible de-anchoring of inflation expectations, and the realization of money laundering and terrorist financing risks. On the upside, lower-than-expected commodity prices would lead to stronger growth than forecast.”

The IMF’s executive board said Malta’s economic recovery from the pandemic had been “remarkable”, but the indirect impact of Russia’s war in Ukraine weighs on the outlook, and said Malta has to plan ahead due to its energy subsidies.

“The authorities should prepare an exit strategy from the fixed-energy-price policy while protecting vulnerable groups. The exit strategy should aim to contain fiscal costs and introduce market price mechanisms to enhance incentives for energy conservation and help accelerate the green transition while protecting vulnerable groups. The authorities should explore reform options with the aim of gradually rolling them out ahead of winter 2023/24. Ultimately, accelerating the green transition is the best way to strengthen Malta’s resilience to an energy shock,” the IMF said.

The fiscally-conservative IMF also said that while public debt for Malta will remain below the 60% of GDP threshold, this could grow if economic growth decelerates and also due to global challenges to Malta’s tax regime for expatriate multinationals.

“The authorities need to reform the taxation of multinational firms and consider broader reforms to the tax system and to revenue administration with the aim of simplifying and improving the efficiency of the tax system and reducing administration and compliance costs while protecting revenues.”

The IMF said the Maltese government should keep rationlising public spending, and instead focus more on green investment, as well as prepare “pension-related reforms” by encouraging more citizens to take up voluntary occupational pensions and personal pensions.

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