Central Bank predicts billion-euro deficit, 6.6% economic contraction

Updated 12:09 PM

Malta’s economy will likely shrink by some 6.6% this year as a result of the Covid-19 pandemic while the government deficit is set to surpass the €1 billion mark, according to the Central Bank of Malta’s latest economic forecasts.

But amid signs of some economic stabilisation in the third quarter of the year, the CBM expects Malta’s gross domestic product to grow by 6.1% in 2021 and 4.2% the following year. However, its projections would still mean that it would take until mid-2022 for Malta’s GDP to return to its 2019 level, and that Malta’s level of economic activity in 2022 would be around 7% lower than what had been forecast prior to the outbreak of Covid-19.

On a more positive note, the Central Bank observed, the projection is significantly better than that for the euro area as a whole. While an increase in unemployment is expected, the CBM predicts it would be milder than economic figures may suggest.

Deterioration in public finances

The economic contraction – and the increased government spending to help counter its effects – will lead to an inevitable deterioration of public finances.

The Central Bank estimates that the government balance is projected to be in deficit of 8.6% of the GDP in 2020. This would translate to a deficit of approximately €1.06 billion this year.

The shortfall in government finances is expected to narrow in 2021, and to stand at 3.5% of the GDP in 2022 – approximately €475 million.

Consequently, the government debt-to-GDP ratio is set to rise from 43.7% in 2019 to 57.9% in 2022. However, this figure remains below the 60% reference value of the Stability and Growth Pact, the EU’s fiscal stability rules, and well below the levels projected for the euro area.

9.3% economic contraction in worst-case scenario

In light of the uncertainty surrounding the pandemic – particularly concerning the development of a vaccine – the CBM also published a more severe scenario in which health protocols in Malta and overseas would have to be enhanced and extended to contain the spread of Covid-19.

In such a scenario, the GDP would shrink by 9.3% this year, and while it would grow by 5.5% and 3.7% in 2021 and 2022 respectively, it would remain below 2019 levels by the end of 2022.

Additionally, in such a scenario, the government deficit would reach 11.3% – €1.35 billion – this year, before narrowing to 5.4% (approximately €707 million) by 2022. The government debt-to-GDP ratio would rise to 66%.

Forecasts vindicate economic measures, government insists

As one might expect, the government sought to focus on the positives to be found in its reaction to the forecasts, stating that the measures it implemented are estimated to have reduced the economic impact of Covid-19 by a third.

It highlighted that the CBM’s study was the first which quantified the impact of its measures, and it confirmed how crucial they had been.

The government also noted that the economy and public finances alike are set to improve as from next year.