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Central Bank of Malta Cautions on Rising Fiscal Risks Amid Slowing Economic Growth
August 17 2024 14:10 by PCLMedia
The Central Bank of Malta (CBM) has issued a warning about escalating fiscal risks in its economic forecast for 2024-2026, noting that these risks are likely to increase the national deficit.
In a statement dated 20 August 2024, the CBM outlined several factors that could worsen Malta’s fiscal situation:
“Fiscal risks are skewed towards increasing the deficit. These risks include potential overspending in current expenditures, such as higher-than-expected costs for energy support measures if commodity prices rise above forecasts. Additionally, there is a possibility of increased public pension and wage costs in the later years of the forecast. If these risks materialize, they may be partially countered by expected fiscal consolidation efforts to meet EU fiscal regulations.”
This caution comes as the CBM projects a moderation in Malta’s economic growth, though it remains robust. The bank forecasts a 4.4% growth in Malta’s gross domestic product (GDP) for 2024, slowing to 3.5% in 2025 and 3.4% in 2026.
The CBM’s concerns echo recent warnings from the Malta Fiscal Advisory Council (MFAC) and the European Commission. The MFAC recently advised the government to reduce spending and address revenue deficits despite ongoing economic growth. The European Commission has also suggested phasing out emergency energy support measures to help reduce Malta’s deficit.
The MFAC has criticized the high cost of energy subsidies, which amount to €320 million annually, and has recommended preparing a strategy to exit the fixed-energy-price policy. This would involve adopting a more targeted approach and promoting energy-saving incentives.
Similarly, the European Commission has urged Malta to phase out energy-related subsidies in 2024 to help reduce the deficit. The government has yet to specify when it will end these subsidies, which could lead to a rise in living costs—an unpopular move following recent election results. The government has not yet addressed this issue in its response to the Commission.
As Malta seeks to align with stringent EU fiscal rules, its central government debt rose by approximately €800 million last year. Despite this, the debt-to-GDP ratio actually decreased by 1.2 percentage points to 50.4%, thanks to strong economic growth which has masked the increasing debt burden.
Under Prime Minister Robert Abela, Malta’s debt has surged by €4 billion, reaching €9.93 billion by April, about 51% of GDP. This increase is largely due to €1.09 billion in Malta Government Stock issuances, along with higher foreign loans and euro coin issuances.
The CBM forecasts that the general government deficit-to-GDP ratio will decrease from 4.1% in 2024 to 3.1% by 2026. However, the general government debt-to-GDP ratio is expected to rise, reaching 54.1% by 2026. This increasing debt trend, combined with the identified fiscal risks, poses a concerning outlook for Malta’s fiscal health.
The CBM’s projections are particularly relevant as Malta is under an excessive deficit procedure from the European Commission. With the country’s deficit at 4.9% of GDP in 2023, exceeding the EU’s 3% limit, the government faces significant pressure to implement corrective measures. On a more positive note, the CBM forecasts a substantial drop in inflation from 5.6% in 2023 to 2.5% in 2024, reaching 2.0% by 2026. Employment growth is expected to moderate, with the unemployment rate remaining close to 3%.
In July 2024, Malta’s inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), was 2.3%, up slightly from 2.2% in June. This is lower than the euro area’s inflation rate of 2.6% and the EU average of 2.8%.
Within Malta, the highest annual inflation rates were seen in miscellaneous goods and services (4.5%) and food and non-alcoholic beverages (4.1%). The restaurants and hotels sector had the greatest impact on overall inflation, while the communication sector experienced a notable deflation of -12.2%.
In the broader European context, Malta’s inflation rate of 2.3% positions it among the lower-inflation countries, with Finland (0.5%), Latvia (0.8%), and Denmark (1.0%) recording the lowest rates. Conversely, Romania (5.8%), Belgium (5.4%), and Hungary (4.1%) had the highest rates.
Compared to last year, when Malta’s inflation was 5.6%, the current rate indicates a significant reduction in price pressures, aligning with the broader European trend of decreasing inflation rates.
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