IMF recommends phasing out of energy subsidies

The International Monetary Fund is recommending Malta phase out energy and fuel subsidies while increasing targeted support for vulnerable households.

The recommendation is made in the IMF’s latest review of the Maltese economy and governance structures released on Tuesday by the Washington-based organisation.

The IMF’s executive board said energy subsidies placed a substantial burden on the budget and this “limited fiscal space” for supporting productivity-enhancing reforms and blunted incentives for energy saving.

The recommendation follows a similar one made by the European Commission last year. Government is subsidising the price of electricity, fuel and LPG gas to the tune of €350 million in a bid to keep prices stable. Government has said it will maintain the subsidies until 2026.

The IMF’s Executive Board praised 🇲🇹’s impressive recovery & our resilience to shocks. Continued reforms, together with our policy of fiscal support, are key to these results. Directors also welcomed progress in our AML/CFT framework, digitalisation & the green transition. - RA

— Robert Abela (@RobertAbela_MT) January 30, 2024

The IMF also recommended Malta adopt a roadmap for the eventual implementation of the 15% minimum tax for companies. Malta last year opted to take the six-year extension allowed by EU regulations before implementing the new corporate tax regime.

“Given the EU’s adoption of the minimum tax directive (Pillar II), IMF directors underscored the increasing urgency of developing a well-structured roadmap for phased implementation of the corporate income tax reform,” the organisation said. It also recommended that the roadmap also include personal income tax reform to make the adjustment “more efficient and less distortionary”.

The IMF welcomed progress on improving the anti-money laundering framework but added more efforts are needed to enhance governance and anti-corruption frameworks.

It also called for more efforts to promote research and innovation, address skill gaps, accelerate decarbonisation and climate resilience, boost investment in renewables, and strengthen education outcomes — overall and for immigrant students.

The IMF noted Malta’s resilience to external shocks and the strong post-pandemic recovery on the back of fiscal support, a persistent inflow of migrants, a strong recovery in tourism, and robust consumer demand.

The IMF is expecting “continued solid growth over the medium term”, albeit below pre-pandemic levels.

“Directors concurred that raising productivity growth and accelerating the green transition are crucial to ensure sustainable and inclusive growth over the longer term,” the IMF said.

They added: “With Malta’s economy above potential, and with tight labour markets, elevated inflationary pressures, and sizeable fiscal deficits, directors stressed the need for accelerating fiscal consolidation to support disinflationary efforts and to rebuild fiscal buffers at a faster pace to bolster fiscal sustainability.”

In its macroeconomic analysis, the IMF expects the economy in Malta to expand by 6.25% in 2023 and 5% in 2024, among the highest in Europe.

Headline and core inflation peaked a year ago, the IMF said, having since decelerated as global inflationary pressures have eased.

“Still, inflation is expected to remain persistent and above 2% until late 2025, in part reflecting tight labour markets and sustained demand pressures,” the IMF said.

The organisation said Malta’s Recovery and Resilience Plan will deliver crucial reforms and investments in digitalisation and the green transition.