EC forecasts robust recovery for Malta – if tourism sector opens safely

Malta’s economy should see a robust recovery in 2021 and 2022, provided that the tourism sector opens
up safely. In its Spring Forecast, the European Commission said that the recovery is expected to be driven by a rebound in tourism-related services exports, household consumption and investment.

The Commission also noted that Malta’s fiscal position is expected to deteriorate, before improving in 2022 on the back of an accelerating recovery and a winding-down of fiscal support.

In its report about Malta, the Commission noted how the COVID-19 pandemic has decimated tourism proceeds and made a deep dent in consumption. Malta’s GDP fell significantly in 2020 with services exports and household consumption contracting sharply under the pressure of the pandemic and related safety measures. On the contrary, financial services and gaming sector exports continued to perform robustly. Although the pandemic has clearly depressed economic activity in Malta, the government’s sizeable stimulus package has managed to partially offset some of the impact. Wage supplement schemes and other business support measures appear to have cushioned the drop in consumption.

Financial position to worsen

In 2021, the government deficit is projected to increase further to 11.8% of GDP reflecting ongoing supportive fiscal policy. Growing private consumption and a gradual revival of tourism are expected to support the government’s intake from indirect taxes. Revenue from income taxes is projected to grow in line with modest wage growth and the stabilised operating environment for businesses.

Proceeds from the investor citizenship scheme are expected to stabilise at last year’s level. The measures to sustain the recovery including the extended wage supplement scheme, a new round of the voucher scheme, and newly introduced measures to restore the tourism sector, are expected to continue in 2021. As the economy accelerates and economic support measures wear off, the deficit is forecast to decline in 2022 to around 5½% of GDP.

The government debt-to-GDP ratio surged to 54.3% in 2020 following the deterioration of the fiscal position. Reflecting ongoing high primary deficits, the debt ratio is set to increase further and reach 65½% in 2022.