COVID wage supplement exposed extent of Malta shadow economy

The prevalence of Malta’s black economy came to the fore during the COVID pandemic, when many workers within the tourism industry could not be eligible for government-issued wage supplements.

The observation is made in Malta’s National Risk Assessment, published in December 2023 by the National Coordinating Committee on Combating Money Laundering and Funding of Terrorism.

A Central Bank study that used two methods to calculate Malta’s shadow economy – a currency demand approach (CDA) and multiple indicators multiple causes (MIMIC) – found this underground economy to range between 15.3% and 23.6% of Malta’s GDP, or anything between €3.9 billion to €6.1 billion.

While the two methods give a somewhat different indication about the trend in the size of the underground economy before 2010, both show that the size of the underground economy in Malta has been quite stable. Both estimates show that between 2008 to 2018, the size of the underground economy in Malta has been quite stable.

But the MIMIC measure shows a slight downward trend, which was captured through a COVID-19 related measure, the wage supplement measure.

The informal economy enables tax crime, and the size of the shadow economy also measures the extent of tax crime.

The 2018 national risk assessment for Malta considered that one of the main sectors that appeared to attract undeclared work was tourism, including hotels and restaurants.

Under the COVID wage supplement measure, businesses and the self-employed that are directly dependent on the tourism industry – tourist accommodation, travel agents, language schools, event organisers and air transport operators – received a wage supplement. For this measure to apply, the relevant work had to be declared and consequently the wage supplement measure was an incentive for the companies and their workers to join the formal economy.

In 2021, a significant rise in the GDP growth was corresponded by a decline in the employment growth, albeit still a positive employment growth rate. “This may indicate that there is a shift towards the informal economy again as pre-wage supplement measures,” the NRA said.

From 2019 to 2020, growth in employment increased at a decreasing rate whereas growth in GDP decreased over the same period from 2019 to 2020. “Therefore, the increase in employment is not explained by an expansion in the economy, which therefore implies that there was a shift from the informal economy to the formal economy.”

Cash control

Through the Cash Control Regulations, any person entering or leaving Malta or transiting through Malta and carrying a sum equivalent to €10,000 or more in cash, is obliged to declare the sum to the Commissioner for Tax and Customs.

From 2017 onwards, outgoing cash is higher than incoming cash, implying that the threat of laundering foreign proceeds of crime in Malta via incoming cash declarations or undeclarations is low, since outgoing cash is higher than that incoming.

However, the report says that checks by Customs, FIAU analysis, police and AG prosecutors, all led to less cash being moved as is evidenced by the decline in the figures of the outgoing cash that declined to €9.2million by 2022. Nonetheless, the threat of such laundering of money via the use of cash still exists.