Malta: Fixed energy prices should be limited in time and scope – IMF

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Government should prepare an exit strategy from the fixed-energy-price policy while protecting vulnerable groups. In its annual assessment of Malta’s economic and financial performance, the Fund said that this 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 IMF recommended that authorities should reform such plans by next winter 2023/24.

This recommendation was made within a wider context where the Funds calls for further strengthening of the Government’s financial position. It describes the fiscal tightening planned for 2023 as appropriate but has insisted that additional actions are needed to pursue consolidation over the medium term. The IMF notes that while public debt is projected to remain just below 60 percent of GDP, it could be forced on an upward path if growth underperforms or contingent liabilities materialize. To protect against this risk, the authorities need additional measures to mobilize revenues and enhance spending efficiency over the medium term.

In light of global corporate tax reform, the IMF argued that 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. Efforts aimed at identifying the scope for rationalizing recurrent spending should continue, while further steps should be taken to improve the efficiency of public investment, including green investments. 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 described Malta’s economic recovery from the pandemic as remarkable, but the indirect impact of Russia’s war in Ukraine weighs on the outlook. The strong economic recovery continued into 2022, driven by high net exports and consumption. GDP growth is, however, set to slow in 2023 as the confluence of global shocks weighs on the economy. Inflation is expected to gradually decline but remain elevated. Risks to the outlook are tilted to the downside, mainly because the growth slowdown in Europe could be deeper than expected.

The Fund also called for further efforts to strengthen the effectiveness of the AML/CFT framework. While noting the progress Malta has made, the authorities need to continue to demonstrate the effectiveness of supervisory outcomes, including through the effective implementation of sanctions. The Fund also called for structural reforms to improve Malta’s long-term growth and address climate challenges. Malta’s Recovery and Resilience Plan will address part of its structural challenges, but more efforts will be needed, especially to address labor skill mismatches, increase STEM graduates, enhance vocational training, promote research and innovation, and advance the digital transformation of SMEs.

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