EU questions the sustainability of Malta’s economy

Updated 04:22 PM
European Commission President Ursula von der Leyen speaks during a media conference after an extraordinary meeting of the EU college of commissioners at EU headquarters in Brussels.

The EU winter report on the Member States’ key socio-economic challenges was published on Wednesday and for Malta, a spotlight was shone on the sustainability of the economy and the strains which the weaknesses in the anti-money laundering framework have put on relationships with correspondent banks. The report points out that there has been no progress made in making sure that pensions and health-care are addressed to make finances sustainable.

The report points out that Malta’s fast-growing economy has long-term sustainability challenges. The Maltese economy has been experiencing fast growth and sustained employment creation for years. Recent reform efforts have helped to encourage investment in a number of important areas, said the report, but long-term structural challenges remain, including:

  • the fiscal sustainability implications of ageing;
  • low skills levels and
  • governance vulnerabilities.
  • demographic and economic growth will put further pressure on Malta’s infrastructure and natural resources
  • need to strengthen long-term resilience through innovation;
  • need to improve infrastructure quality and
  • take further steps towards a climate-neutral and environmentally sustainable economy

The EU noted that economic growth is expected to slow down to 4% in 2020. It noted that inflation, as well as the surplus, are expected to stabilise at 1.5% and 1% of GDP respectively. The report said that the increase in tax revenues by the government will most likely be used in favour of public investment. It added that “…while social and healthcare spending as a percentage of GDP is set to stabilise below the figures observed in the past”.

Different sectors, different needs

On Banking: generally in good health but continued weaknesses in the anti-money laundering framework has put strains on relationships with correspondent banks.

On Investment: innovation, natural resource management, skills and infrastructure are crucial to moving out of the construction driven bottleneck.

On environmental sustainability: needs to be placed in focus and promoted by (i) continuous improvement in resource management and (ii) increasing the economy’s energy efficiency. 

On transport: limited progress made in ensuring sustainable transport and reducing traffic congestion

On Judiciary and governance: Limited progress made in the strengthening the judicial independence and efforts to detect and prosecute corruption.

On Social rights:  A relatively good performance with one of the highest employment growth in the EU and a drop in both, the overall and long-term unemployment rates over recent years.

On Income inequality: this was reported as stable, although, some population groups face a higher risk of poverty than others.

On education: High level of early school leaving and poor education outcomes, (both of which are greatly determined by the type of school a pupil attends), limit equal opportunities. 

On Sustainable Development Goals: Malta has made some progress on the United Nations’ Sustainable Development Goals (SDGs). It made significant progress on the goals relating to decent work and economic growth. However, Malta still faces significant challenges on SDG 9 (industry, innovation and infrastructure). In particular, gross domestic R&D expenditure as a share of GDP has been declining.

Key structural issues

The key structural issues which the EU report observed focus on the fiscal. The Maltese economy remains open to money laundering risks. The report noted that while the supervision of financial markets has improved gradually, three aspects of the Maltese economy are particularly prone to money-laundering risks: (i) its specialisation in remote gaming; (ii) its specialisation in virtual assets and (iii) its citizenship and residency schemes.

Construction sector must give way

The unabated growth of residential house prices needs close monitoring. Demand pressures have led to a surge in residential investments. These demand pressures have, in turn, been driven by job-rich growth, low-interest rates, inward migration and booming tourism. There are now signs of overheating in the residential real estate market and surging house prices have also raised concerns about affordability, especially in the rental sector.

The labour market is tightening, resulting in labour shortages and a greater reliance on foreign workers. Employment rates continue to increase for both men and women. The participation of young women in the labour market has significantly increased, facilitated by free childcare. However, the gender employment gap in Malta remains the highest in the EU.

Poor education will impede future growth

Poor educational outcomes are set to impede future growth. Persistently high student underachievement and early school leaving make it difficult to meet the need for skilled labour. This also has long-term implications for social inclusion, because children from socially disadvantaged families are less likely to benefit from the best education opportunities and are more likely to lag behind their more advantaged peers.

Inequalities and poverty have stabilised after declining in recent years, but certain groups face higher risks of poverty. Child poverty has decreased, but children whose parents are single, foreign or with low income are at higher risk of poverty. The social integration of non-Maltese people, despite their high participation in the labour market, is limited.