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 central bank is not a new role for Demarco. He served as the acting 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 deputy 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 restraint is likely to remain challenging, 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 objectives,” he said in a first interview with MaltaToday. 

There has been a bit of panic on the government’s spending level. Recently, the Fiscal Advisory Council warned of exceptionally high growth in government spending, as did the European Commission in its autumn assessment 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 economy is expected to grow.   

“Public expenditure that increases faster than economic growth could result in higher deficits and debt relative to GDP, which would be undesirable, especially in the case of high debt countries,” Demarco said. “Although Malta’s debt is well below the 60% benchmark, nevertheless, it is very important that public expenditure remains in check to maintain its fiscal space in case of need to counter economic shocks.” 

Renewable 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 strategy for these subsidies. While subsidies served the economy well at a time of high energy price volatility, Demarco says the matter 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, however, the price mechanism can be better utilised, especially in respect of those sectors that use electricity extensively and are booming in activity, such as tourism.” 

The ‘public debt’ bogeyman 

Closer to home, rising debt levels have also become a concern. 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 expenditure has surpassed the billion-euro 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 generate 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 increased. Clearly, Malta’s public debt situation has improved and is far better than the EU average,” he said. 

He also mentioned the IMF’s concluding statement of December 2025, which said that “public debt at the current level of about 47% of GDP, provides a significant buffer for shocks in an increasingly volatile global environment.” 

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 challenging to pin down, as it depends on the ambition of adaptation policies and economic agents’ behavioural changes.  

Demarco still feels that assessing climate change is an uncertain process. “The magnitude and distribution of these impacts depend critically on the ambition, timing and effectiveness of adaptation policies as well as on how households, firms and financial institutions 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 following through on it will still be technically complex and financially challenging. “Recent reports by the NAO and European Commission highlight the need for further progress, particularly in strengthening ownership and accountability for adaptation 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 jurisdiction.  

In Malta, inflation has declined 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. Indeed, 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 driven 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, reflecting the continued boom in tourism in Malta. 

Digital euro vote expected in May 

The ECB issues bank notes and coins, but it does not issue euro money in a digital form. This will change when the bank introduces the ‘digital euro’, a digital form of central bank money. Launched in 2021, this project will allow people to make transactions, online or offline, using central bank money. The system will guarantee privacy, as transactions will be conducted through intermediaries such as licensed credit institutions and payment service providers. The ECB and Eurosystem central banks would have no information about any specific transactions of citizens using the digital euro. 

Demarco said that the European Council has agreed on a draft legislative proposal for the digital euro, and the next step is for the European Parliament to vote on the proposal. The vote is expected to take place in May of this year, he said.  

“So far, both citizens and businesses appear to be supportive of the digital euro. The concerns that have been expressed by some MEPs have largely focused on privacy, which have been by and large addressed by the legislative proposal. Other concerns have been related to financial stability, but this has been catered for through the setting of holding limits that citizens would be allowed to keep,” he said.  

Beyond privacy, European banks are concerned by the investment costs that will come with the digital euro. Even locally, Demarco said that the Central Bank had tried some years ago to bring domestic credit institutions together to operate on a common platform that would enable interoperability among them, but this fell through. “I believe that, apart from fear of intensification of competition, the main obstacle was that each bank had made investments in its own payment system infrastructure and they were reluctant to write off such a cost and engage in a new investment,” he said.  

However, Demarco said this won’t be the case with the digital euro. “The infrastructure costs will be borne entirely by the Eurosystem itself, while banks and payment service providers would incur costs related to the front-end of the system and in monitoring transactions for any potential breaches of AML/CFT rules, as well as in managing potential fraud and disputes.” 

Demarco highlighted that banks and payment service providers stand to gain revenue from a digital euro. Merchant fees that are currently collected from card usage will be shared between the bank of the payer and the bank of the payee, and not with other third-party providers. Meanwhile, given the trend of diminishing use of banknotes, the volume of turnover should continue to increase and in turn raise revenues to intermediaries. 

Digital euro aside, the Maltese banking landscape has changed over the past year, with a Czech bank acquiring MeDirect and Greek CrediaBank set to take over HSBC Malta later this year. During the latter acquisition process, some pundits were concerned that local banks were failing to attract interest from more global banking giants, especially given the loss of the only international banking name in Malta.  

Demarco said this boils down to tighter regulatory requirements in a post-2008 financial crisis world. These requirements have made the banking sector safer, but it has also increased operational costs. “The increase in costs undoubtedly has impacted jurisdictions like Malta where the domestic market is inherently small,” he said. Technological developments have also made it easier for firms in the European Economic Area to provide financial services across the bloc without additional authorisation, dealing another blow to Malta’s limited market.  

“What is more relevant for Malta is that there is a good degree of competition in the banking sector serving the domestic market, that these institutions remain profitable, and that they satisfy comfortably the key regulatory requirements,” he said. “In this regard, all core domestic banks are sound and profitable.” 

Demarco pointed out that what also matters for the local banking sector is that they are able to secure the services of correspondent banks, especially for US dollar transactions. “Domestic banks have undertaken significant investment in technology in respect of due diligence and transaction monitoring, which has attracted big US banks to provide such services to the local banking community. This is essential given the high degree of cross-border business outside the EU.” 

Central Bank to tighten property lending rules 

Central banks within the Eurosystem are limited in their actions because they cannot use monetary policy as a tool for national purposes because monetary policy is oriented towards the euro area as a whole, decided by the Governing Council of the ECB, in which the governor has a seat and vote. However, central banks can maintain financial stability through macro-prudential policy, by addressing systemic risks in the financial system.  

Here, Demarco said that the Central Bank will extend the coverage of the sectoral systemic risk buffer to all property-related lending. As it currently stands, the 1.5% buffer applies only to residential and buy-to-let loans.  

Demarco’s first ECB Governing Council meeting as Central Bank governor is scheduled for 5 February.