Shadow economy is 21% of GDP

Malta’s underground economy appears to have stabilised at an average below 21% of overall economic activity in recent years, a Central Bank of Malta study shows.

The figure is close to levels measured in Baltic countries and somewhat lower than other Southern European countries.

The study, An Analysis of the Shadow Economy in Malta, was carried out by Tiziana Marie Gauci and Noel Rapa, research economists at the Central Bank.

They used two methods based on differing variables to estimate the size of the shadow economy and although results are different, both suggest it has remained relatively stable over the past 10 years.

The study defines the shadow economy as activities that are productive and legal but deliberately concealed from public authorities to avoid paying taxes and meeting regulatory standards. This excludes illegal activities such as drug trafficking.

The authors warn that given the hidden nature of the underground economy, estimates are surrounded by a considerable degree of uncertainty.

One model that tries to estimate the amount of excessive cash in the economy, shows how the size of the shadow economy increased from 9.6% of GDP in 2000 to 21% of GDP in 2015. Since 2015, the underground economy shrunk to 20.4% last year.

The other model that takes into account employment factors and the tax burden, estimates the average size of the shadow economy between 2000 and 2004 at 25.2%, going down to an average of 20% of GDP between 2015 and 2019.

Despite the differences, the two models indicate that the size of the shadow economy has stabilised over the past decade.

Underground activity impacts government revenue, puts pressure on legitimate businesses by way of labour resources, creates unfair competition and distorts indicators that are used to influence public policy decisions.

However, studies have also shown that benefits can be derived from the shadow economy because it creates extra added value that will be spent in the official economy. It can also act as employer of the last resort in times of turmoil and recession.