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12 maltatoday | SUNDAY • 11 JANUARY 2026 INTERVIEW New Central Bank governor flags spending In first interview to the press as Central Bank of Malta governor, Alexander Demarco signals tougher oversight ECONOMIC growth is strong and labour market conditions tight, but new Central Bank Governor Alexander Demarco sees geopolitics and expenditure restraint as defining challenges for 2026. The governorship of the cen- tral bank is not a new role for Demarco. He served as the act- ing governor for a year when his predecessor, Edward Scicluna, stepped away temporarily to face corruption charges in court. Scicluna came back into the role in August 2025, and Demarco resumed his position as depu- ty governor. Now, Demarco is in the role for a five-year term started on 1 January, and he's not blind to the economic risks he might face during his tenure. "Government expenditure re- straint is likely to remain chal- lenging, and with the new EU expenditure rules, the need for government to better identify its priorities is likely to become greater to achieve its fiscal ob- jectives," he said in a first inter- view with MaltaToday. There has been a bit of panic on the government's spending level. Recently, the Fiscal Adviso- ry Council warned of exception- ally high growth in government spending, as did the European Commission in its autumn assess- ment of Malta's budget. Demarco explains that this challenge stems from a stronger emphasis on expenditure growth in the EU's new fiscal rules, which now aim to limit expenditure growth to no more than how much the econo- my is expected to grow. "Public expenditure that in- creases faster than economic growth could result in higher deficits and debt relative to GDP, which would be undesirable, es- pecially in the case of high debt countries," Demarco said. "Al- though Malta's debt is well below the 60% benchmark, neverthe- less, it is very important that pub- lic expenditure remains in check to maintain its fiscal space in case of need to counter economic shocks." Alternative energy investments best way out of fuel subsidies The European Commission had also recommended that Malta wind down its energy subsidies measure. Even the Central Bank had warned that the government needs to think about an exit strat- egy for these subsidies. While subsidies served the economy well at a time of high energy price volatility, Demarco says the mat- ter is best addressed by investing in production and connectivity to renewable energy sources to make Malta less dependent on fossil fuels and natural gas. He acknowledges though that land limitations and massive initial outlays make this a complicated task, especially with the new EU expenditure rules. "At the current juncture, how- ever, the price mechanism can be better utilised, especially in respect of those sectors that use electricity extensively and are booming in activity, such as tour- ism." The 'public debt' bogeyman Closer to home, rising debt levels have also become a con- cern. In euro terms, public debt crossed €11 billion in 2025 and will rise to €12.5 billion this year. Public debt servicing is estimated to cost the country €1.3 billion in 2026, the first time this expendi- ture has surpassed the billion-eu- ro mark. Yet, as a percentage of GDP, Malta's debt level seems sustainable. Demarco explained that debt sustainability is best measured in respect of GDP because output can help estimate the potential revenue a government can gen- erate to finance its expenditure. For Malta, although public debt grew three times in volume terms since it became an EU member, income from wages and profits grew at a faster pace, allowing it to shoulder higher debt in euro terms. "When Malta became an EU Member State in 2004, its debt stood at 71.2% of GDP and was €3.4 billion. […] By 2024, public debt in Malta grew three times as much in euro terms but in terms of GDP it fell to 46.2%, while for the Euro area as a whole it in- creased. Clearly, Malta's public debt situation has improved and is far better than the EU aver- age," he said. He also mentioned the IMF's concluding statement of Decem- ber 2025, which said that "public debt at the current level of about 47% of GDP, provides a signif- icant buffer for shocks in an in- creasingly volatile global environ- ment." Climate adaptation remains an economic risk In a past interview with foreign media, Demarco had remarked that the impact of climate change on key sectors will be challeng- ing to pin down, as it depends on the ambition of adaptation policies and economic agents' behavioural changes. Demarco still feels that as- sessing climate change is an uncertain process. "The mag- nitude and distribution of these impacts depend critically on the ambition, timing and effec- tiveness of adaptation policies as well as on how households, firms and financial institu- tions adjust their behaviour in response to evolving climate risks." He said the government has made a commitment to climate adaptation, as reflected in the Climate Action Act, but follow- ing through on it will still be technically complex and finan- cially challenging. "Recent re- ports by the NAO and European Commission highlight the need for further progress, particular- ly in strengthening ownership and accountability for adapta- tion initiatives." However, he said that at EU level there is also resistance and attempts to water down climate adaptation policies. Inflation driven by tourism in 2025 The primary objective of the Central Bank is to maintain price stability, mainly through interest rate policy. However, for Euro area Member States, interest rates are set according to what is appropriate for the euro area as a whole, and not specifically to any individual ju- risdiction. In Malta, inflation has de- clined from 5.6% in 2023 to 2.4% in 2024, and remained at that level in 2025. In the euro area, inflation declined from 5.4% in 2023 to 2.4% in 2024, and then to 2.1% in 2025. According to Demarco, inflation decline in the euro area in 2025 was driven largely by falls in energy prices, which in Malta remained zero due to the subsidy measure. In- deed, overall inflation excluding energy in 2025 stood at around 2.5% both for the Euro area and Malta. However, he noted that food price inflation in Malta fell from 4.2% in 2024 to 3.2%, while services inflation increased from 2.8% to 3.2%. "The rise in services inflation in Malta during 2025 was driv- en by tourism-related activity, including accommodation and restaurants, and especially air fares, whereas inflation in these components in the Euro area declined in 2025," he said, re- flecting the continued boom in NICOLE MEILAK nmeilak@mediatoday.com.mt The new Central Bank of Malta governor, Alexander Demarco