IMF reports

A few weeks ago, the IMF issued a couple of interesting reports about Malta. The first report delves into the transformative potential of Artificial Intelligence (AI) on Malta’s labour market. This report provided a detailed analysis of Malta’s digital preparedness, the potential for job displacement due to AI and relevant policy considerations.

The study acknowledges the significant advancements in AI and Generative AI models. These technologies have evolved from automating routine tasks to performing complex cognitive functions. AI systems can now process vast amounts of data, recognise patterns and make decisions, even exceeding human performance on standard benchmarks. This evolution has the potential to reshape the job landscape across various skills and sectors.

Malta is considered digitally well-prepared to leverage the benefits of AI. The country’s authorities are prioritising digital transition, allocating a substantial €196m (1% of 2023 GDP) from EU funds for digital transformation. These strategies focus on investments, public and private sector adoption, education, workforce development and the legal and ethical framework.

The IMF’s AI Preparedness Index (AIPI) indicates that Malta is well-positioned to effectively roll out AI. Malta’s AI preparedness aligns with the average of advanced economies in areas like Regulation and Ethics, Human Capital and Labour Market Policies, Innovation and Economic Integration and Digital Infrastructure. Furthermore, a significant portion (63%) of Malta’s working-age population possesses basic or above-basic digital skills. Maltese companies also exhibit relatively high digital intensity compared to the EU-27 average.

Moreover by 2023, 13.2% of companies in Malta (excluding certain sectors) used at least one AI technology. However, many firms, especially SMEs, face barriers such as a lack of expertise, high cost and system incompatibility.

The report assesses the exposure and complementarity of different job types to AI. It uses a framework that categorises occupations into four dimensions: High Exposure and High Complementarity (HEHC), High Exposure and Low Complementarity (HELC), Low Exposure and High Complementarity (LEHC) and Low Exposure and Low Complementarity (LELC). The analysis, based on microdata from the 2023 Labour Force Survey, suggests that Malta’s labour market will likely experience some job displacement within service-related occupations.

The report concludes that as much as 60% of Malta’s labour market is highly exposed to AI. The high share of business administration professionals, sales workers and clerical support roles with low complementarity indicates that approximately 30% of the labour market is at risk of job displacement. However, Malta’s labour market exhibits slightly higher complementarity than other advanced economies, suggesting potentially higher productivity gains.

The report also identifies specific groups that are more vulnerable to job displacement, whereby women face a higher risk due to their prevalence in service-related sectors with high exposure and low complementarity. Younger workers and individuals with only a secondary school education are also more susceptible.

The report concludes that while Malta is well-prepared to benefit from AI it will likely experience job displacement, particularly among vulnerable groups. To mitigate these risks, the report emphasises the importance of:

• Prioritising reskilling and upskilling: The authorities are encouraged to continue prioritising upskilling and reskilling initiatives through the education system and lifelong learning programmes.
• Bringing Malta closer to the frontier of digitalisation: Efforts to promote digital adoption, especially among SMEs, are crucial. This includes addressing barriers such as high costs and administrative burdens.

By addressing these challenges and implementing appropriate policies, Malta can harness the potential of AI while mitigating the risks of job displacement and ensuring a smooth transition for its workforce.

The second IMF report discusses Malta’s infrastructure. The report outlines that Malta’s rapid economic expansion and population growth, over the last two decades, have created significant bottlenecks in its infrastructure. Thus, this IMF report examined the capacity constraints in key sectors, including power supply, water supply, wastewater treatment, waste management and transportation, highlighting the urgent need for strategic investments and policy adjustments. I believe it is useful to provide a good outline of this report.

Peak electricity demand has risen sharply, increasing by 43% between 2018 and 2023, outpacing population and tourist growth. This surge is attributed to rising temperatures, increased use of air-conditioning, the growing adoption of electric vehicles (EVs) and the introduction of shore-to-ship power. Although Malta’s installed capacity from fossil fuels, renewables and the interconnector with Italy appears adequate for now, further capacity enhancements are in the pipeline.

Plans include a second interconnector, battery storage, a waste incinerator, and renewable energy projects. Projections indicate a 30% increase in peak power demand by 2040 under a high-temperature and high-population growth scenario, requiring new generation or import capacity by around 2033. Plans are underway to explore additional interconnectivity, increase PV capacity and battery storage, and develop offshore wind farms. The authorities also intend to incentivise energy efficiency and enhance consumer flexibility through investments in smart grids.

With regards fresh water supply, presently 36% of the public water supply comes from fresh groundwater and surface water, while the remainder is produced by reverse osmosis (RO) desalination plants. While groundwater abstraction has remained relatively stable, desalinated water production has increased. Certain forecast models project Malta’s population to reach 695,000 by 2040. If we add continued tourist growth, the demand for fresh water is expected to reach 45 million m3 per year. Planned investments aim to increase RO plant capacity to 41 million m3 by 2025 and 47 million m3 by 2028.

On the other hand while Malta has achieved full connection of its population to wastewater treatment plants, it still has around 30% of urban wastewater discharged untreated into the sea, and only a small fraction receives secondary treatment according to EU standards. Upgrades to wastewater treatment and sludge management facilities are planned by 2027, along with disconnecting farmyard waste from the urban wastewater collection network.

Malta has made strides in increasing its use of circular material, reaching 15% in 2022. However, increased total waste generation, driven by population and tourist growth, poses challenges. Investments in incineration and waste-to-energy plants are planned, along with a strategy to reduce construction waste by increasing recycling rates. However, it all depends on the timelines to implement these projects.

Malta’s high population density and limited land area create unique challenges for transport infrastructure. Car ownership is high, resulting in a high number of cars per square kilometre. While public transport is free for residents and the bus fleet is relatively large, its effectiveness is limited by long travel times mainly due to congestion. While various initiatives are planned to ease congestion, such as better traffic management and express bus lines, the real solution lies in reducing car use. This will require measures to increase costs, such as raising fuel prices and introducing parking charges. While expanding the road network may offer temporary relief, a rail-based public transport system could be a more effective long-term solution. However, such a system would be very costly or face geographic constraints.

In conclusion, Malta faces significant investment needs in the short- and medium-term to address infrastructure bottlenecks and meet EU targets. While power and water supply are adequate in the short-term, enhancements are needed. Wastewater treatment and solid waste disposal require investments to reduce environmental stress. The transport sector urgently needs action to ease congestion, although sustainable solutions are costly and require time to implement. Pricing actions related to vehicle and fuel taxes, as well as parking charges, could be beneficial. The planned launch of Vision Malta 2050 offers an opportunity to outline a long-term development strategy, including detailed investment needs and costs.