Malta - Economy

Malta has a small domestic market, produces only about 20 per cent of the food it needs, and has no raw materials, a limited supply of fresh water and no energy resources other than solar energy. Its only resources are its ports and its educated and skilled people. Development has been based on shipbuilding and repairing, manufacturing for export, tourism, and, more recently, free port activities and financial and business services. Malta’s medium-term outlook remains strong, but as a small and open economy, policies ahead should continue to focus on further enhancing the economy’s resilience to shocks and strengthening competitiveness.

By 2017 Malta was one of fastest-growing economies in Europe. Following an average growth of nearly 8 percent in 2014-15, output was estimated to have expanded by 4.1 percent in 2016, supported by strong domestic demand. Robust job creation drove unemployment to record lows, despite rising labor supply, while subdued wage pressures contributed to low inflation. The external position remained strong, with sizable exports of services keeping the current account in surplus. Owing to buoyant revenues and consolidation measures, the 2016 fiscal deficit narrowed to an estimated level of 0.7 percent of GDP, well below the budget target of 1.1 percent of GDP, while public debt declined further to about 60 percent of GDP.

Domestic banks remained well-capitalized and liquid, with profitability well above the levels seen in European peers. Banks’ asset quality continues to improve, while measures had been taken to reduce legacy non-performing loans. Credit growth to the private sector was subdued as credit to the non-financial corporate sector contracted, but mortgage lending remained buoyant, resulting in higher household debt and further increase in banks’ exposure to property-related loans. Residential property prices showed a positive momentum in the face of rising demand and sluggish supply response.

In 1979 the UK military base (a major employer and generator of government revenue) closed; consequently the 1980s global recession leading to a worldwide collapse of shipbuilding hit Malta particularly hard, and there were numerous factory closures. During the 1990s, the public sector was reduced and state enterprises privatised. Expansion of tourism and liberalisation of investment, international trade, fiscal policy and the financial services sector led to steady growth, averaging nearly five per cent p.a. over the decade.

The long period of good, steady growth came to an end in 2001, as export demand fell and the economy stalled during 2001–04. After four years of stagnation, growth resumed, rising to 4.3 per cent in 2007 and 4.4 per cent in 2008. But the rapidly worsening international economic conditions and global fall in demand caused growth to collapse in 2009 (–2.8 per cent), recovering in 2010 (4.3 per cent), and remaining steady at one to three per cent p.a. 2011–15.

Malta joined the European Union in May 2004 and adopted the euro currency in January 2008, replacing the Maltese lira. During the second quarter of 2010, Malta’s economy grew at a slower pace, while first-quarter growth was reported as 3.4%. Economic growth for 2011 was expected to reach a little over 2%. Possessing few indigenous raw materials and a very small domestic market, Malta's economic development since the beginning of the 1990s has been based on tourism, accounting for roughly 30% of GDP, and exports of manufactured goods, mainly semi-conductors, which account for some 78% of total exports.

Tourist arrivals and foreign exchange earnings derived from tourism have steadily increased since the late 1970s. The introduction of low-cost flights in 2007 was the main contributor to the 10.6% increase in tourist arrivals over 2006. During 2009 the tourism industry faced a difficult external environment, as Malta’s major source markets were severely affected by the global recession. This was reflected in an 8.4% drop in tourist arrivals, to about 1.2 million. The tourism industry picked up in 2010, with outbound passengers totaling 294,053, an increase of 11% over 2009, and inbound tourists topping 1.3 million, an increase of 13% over 2009 and an all-time high for the Maltese islands. Increases were recorded in both the number of repeat tourists and first-time visitors. The cruise liner sector, which experienced 26.6% growth in 2007, saw passenger arrivals decline by 20.9% in 2009. The sector recuperated in 2010, with cruise passengers totaling 491,201, up by 11.7% over the previous year.

Malta has a relatively flexible labor market. Unemployment was 10% for 2010. With its highly educated, English-speaking population, Malta has seen growth in high value-added manufacturing and in the services sector, away from the traditional low-cost manufacturing in textiles. The banking system remains highly concentrated, with two of the four local commercial banks accounting for about 90% of total loans and deposits.

The Maltese Government pursued a policy of gradual economic liberalization, taking some steps to shift the emphasis in trade and financial policies from reliance on direct government intervention and control to policy regimes that allow a greater role for market mechanisms. Malta's accession into the EU marked the total dismantling of protective import levies on industrial products, increasing the outward orientation of the economy. Malta joined the Exchange Rate Mechanism II (ERM-II) in 2005 to put itself on the path to enter the Eurozone.

Consolidation of public finances improved. The budget deficit was revised as of December 2010, amounting to 3.63% of GDP according to the Malta National Statistics Office.