The International Monetary Fund (IMF) has released its April reports, titled Global Economy in the Shadow of War, providing a stark assessment of an international recovery derailed. While the global economy was poised for an upgrade in growth earlier this year, the outbreak of war in the Middle East on 28 February, has cast a long shadow over the economic horizon.
For Malta, the “downside risks” highlighted by the IMF are not merely theoretical – they represent immediate structural challenges.
The IMF notes a critical difference between this crisis and the 2022 energy shock. While 2022 saw a “steep supply curve” where prices could be brought down without a major slowdown, the 2026 supply curve appears much “flatter”. The IMF “reference forecast” now sits at 3.1% for 2026, a downward revision caused largely by the conflict. However, the IMF clearly outlines that if energy infrastructure is significantly damaged, global growth could plummet to 2%, bringing the world close to a recession.
Malta’s economy is fundamentally tied to its “connectivity”. The IMF identifies the direct effect of commodity price increases as a “textbook negative supply shock” that raises the costs of transportation and energy.
For Malta, which relies heavily on imported goods and international connectivity, the following global trends are most concerning. The closure of the Strait of Hormuz and damage to production facilities threaten an energy crisis on an “unprecedented scale” with global headline inflation projected to rise to 4.4% in 2026.
The IMF warns that “energy-importing countries” and those with “weaker tourism and business activity” will suffer most from the conflict’s spillovers. As a Mediterranean island, Malta is highly sensitive to the price of aviation fuel. The IMF notes that the direct effect of commodity price increases raises the cost of transportation. Sustained high fuel prices will lead to increased airplane ticket costs, potentially dampening the tourism boom Malta has been experiencing. Things could get worse if flights get cancelled due to the lack of aviation fuel from certain European airports. Moreover, higher inflation reduces the purchasing power of tourists from Malta’s core European markets, likely leading to reduced “discretionary spending” abroad.
A significant portion of the IMF report focuses on the urgency of rebuilding fiscal buffers. So far Malta has adopted a broad-based energy subsidies to protect households. However, the IMF explicitly warns that such measures are often “poorly designed and very costly for the public purse”. The IMF urges governments to shift from broad caps to support that is “temporary, targeted, and preferably delivered through existing social safety nets”.
To navigate this “profoundly changing economic and geopolitical landscape”, the IMF advocates for policies that are robust across multiple scenarios.
- Aggressive Energy Diversification: The IMF emphasises that “accelerating energy transition” is a key pillar for energy security. For Malta, reducing dependence on global hydrocarbon transit routes is no longer just a green initiative – it is a national security priority.
- Rebuilding Fiscal Buffers: Governments are urged to mobilise revenues and reprioritise expenditures to “replenish fiscal buffers for future shocks”.
- Preserving Price Signals: The report argues that preserving price signals is essential to “transmit a critical market signal of scarcity” and encourage demand reduction.
I was recently following an interview with Economics Professor Steve Keen and I could not stop thinking on economic growth in Malta. Too often, we operate on the assumption that projected economic growth will occur regardless of external developments. However, this insightful interview clearly highlights several global macroeconomic forces that will shape the economic reality of any nation heavily reliant on international trade and energy imports. In this interview Professor Keen emphasises that our global production systems are far more fragile than economists realise. With the closure of the Strait of Hormuz, you have not only an energy choke point but also fertilisers. A war that cuts off a substantial amount of fertiliser supplies doesn’t just raise prices but it creates a physical shortage of food.
Malta, as an island nation, is particularly vulnerable to all this and no local policy can fully insulate a country from this magnitude of global contraction. So while macroeconomic growth may be externally dictated, Professor Keen suggests two ways to regain some degree of local control, for any country. He strongly advises moving away from oil dependency and investing in local solar power to insulate against energy price shocks and shortage and he also suggests that nations should look for ways to produce their own food to create a “bit of insulation” against global chaotic events.
In the view of Professor Keen, economic growth is currently at the mercy of geopolitical stability and resource availability. For a nation to have more control, it must shift away from a “fragile” globalised system towards a more self-sufficient model of energy and food production.
In conclusion, I believe the message is clear. Malta, like any country, needs to move beyond emergency responses toward a “comprehensive policy package”. By focusing on fiscal sustainability, labour upskilling and targeted support to create more supply resilience, Malta can mitigate the “acute macroeconomic trade-offs” that the IMF predicts will haunt the global economy for the remainder of 2026.
