IMF says Malta must prepare exit strategy on generous energy, fuel subsidies

Maltese citizens must be weened off subsidies to be able to focus on energy savings and efficiency and meet challenge of persistent inflation till 2025

Finance Minister Clyde Caruana has said energy subsidies are essential for families and businesses
Finance Minister Clyde Caruana has said energy subsidies are essential for families and businesses

Malta has registered an impressive recovery from the pandemic, demonstrating substantial resilience to shocks resulting from Russia’s invasion of Ukraine, the International Monetary Fund has declared in its 2023 concluding statement.

The World Bank’s annual review however said it wanted the island to prepare an “exit strategy” from the generous energy subsidy policy, to contain a larger deficit and enhance incentives for energy conservation, while protecting vulnerable populations.

Malta was described as an “economy at its full potential” with strong domestic demand, a tight labour market and rising prices.

But the World Bank said the government had to start phasing out the energy subsidies, saying price hikes on the global market were no longer temporary.

It also said suppressing the price does not help incentivise energy conservation or green transition. “The sheer size of the subsidies limits fiscal space in reallocating resources to productivity-enhancing reforms while consolidating the fiscal position,” it said of the multi-million spend in subsidised energy and fuel costs.

Analysts said Malta should start gradually phasing out the subsidies while protecting low-income and, to a lesser extent, middle-income households – first by adjusting fuel prices to better reflect their import costs, while also making the electricity tariff structure more progressive. “A gradual move may ease pressures on consumers but would also delay the benefits of exit while leaving public finances vulnerable to further energy price increases.”

It also said that to implement its 2021 Low Carbon Development Strategy, consumers had to be able to appreciate the cost of market energy prices to change consumption behaviours.

The IMF had praise for Malta’s budgetary grants to vulnerable groups and pensioners, tighter tax collection system, as well as new resources in the fight against money laundering.

But it warned of flagging productivity and looming structural capacity constraints, calling for a refocused development strategy.

These included labour force gaps and new skills, immigration policies that ensure the right supply of skills to meet demand, and better roads, housing, education, and health services.

It even called for an update of Malta’s planning policies. “The existing national planning strategy, Strategic Plan for Environment and Development 2015, should be updated expeditiously to reflect the latest demographic projections, and sectoral policies (e.g., tourism) should be aligned.”

Malta’s real growth in 2024 could be 3.5%, among the highest growth rates in Europe, with record low unemployment levels, but with inflation expected to remain anove 2% till late 2025. It is expected that the country will still be reeling from wage and inflationary pressures.

In turn, fiscal deficits in Malta will see a small decling to 4.5% in 2024, with energy subsidies tagged at 1.75% of GDP – 40% of gross domestic product.