Published the IMF report on San Marino: “Ambitious fiscal consolidation necessary to ensure sustainability and reduce risks”
San Marino’s economy has been remarkably resilient over the past two years, driven by tourism and manufacturing, but public debt and banking sector difficulties require courageous and swift action.
In a nutshell, this is the picture that the experts of the International Monetary Fund trace for the Republic of San Marino in the latest report, published these days, which follows the visit Article 4 of early October. Thus confirmed what was communicated by the Washington experts in the closing statement of 7 October.
So here is the complete report translated from English
“Washington DC: On November 21, the Executive Committee of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of San Marino and considered and approved the staff evaluation without a meeting.
The San Marino economy has been remarkably resilient over the past two years. After the Russian invasion of Ukraine, San Marino faced an unprecedented energy price shock which, added to the food price shock, led to ahigh irritation and the erosion of real income. However, strong external demand during global supply chain restrictions and a high influx of tourists have boosted economic activity. GDP is estimated to have grown by 8.3% in 2021 and by 3.5% in 2022. The strength of the manufacturing sector has been a key source of resilience.
The energy shock was milder than in neighboring countries since this year and next San Marino has secured advantageous energy import prices, which are translated into rates lower than regional peers at minimal tax costs. At the same time, authorities have allowed price changes to drive demand, while minimizing the disruptive economic impact and supporting vulnerable groups. Despite a strong recovery and the withdrawal of Covid-related support, the fiscal position remains weaker than before the pandemiclargely due to age-related spending pressures. Meanwhile, Bank capitalization and profitability improved in 2021while deposits grew. However, significant challenges remaingiven very large distressed assets and thin capitalisation.
Macroeconomic risks to the economy are significant, including high energy prices and further disruptions to energy supplies, tightening financial conditions and growing global uncertainty. Therefore, it is essential to build fiscal and financial buffers, while accelerating the reform agenda. With the public debt lift and the big one Eurobond rollovers in 2024, ambitious fiscal consolidation is needed to ensure sustainability and reduce risks. About this, the approval of the pension reform scheduled for this year [l’approvazione è avvenuta nell’ultimo Consiglio, dopo la fine della visita, ndr] and the income tax reform for next year are fundamental and cannot be postponed. With interest rates and energy prices likely to be higher for a long time, the banking system is entering a phase of new challenges. Therefore, capital needs to be strengthenedimprove bank efficiency and accelerate the reduction of non-performing loans by avoiding tax risks and concessions.
Evaluation of the administrative committee
As energy prices rise, financial conditions tighten and global uncertainty grows, the economy is expected to slow. Therefore, the priority should be to create budgetary and financial reserveswhile accelerating the reform agenda. The rollover of Eurobonds maturing in 2024 remains a risk.
The authorities’ response to the high energy level allows for price changes to operate and support vulnerable groups. The combination of a long-term gas contract and timely electricity hedging transactions, just before prices increased, allowed tariffs to adjust to cost-recovery levels, but well below neighboring countries. This was done at minimal fiscal costs and avoiding the potentially disruptive macroeconomic impact associated with large tariff increases. Plans to pass on imported energy prices to consumers next year will continue to avoid tax costs and preserve the state-owned utility company’s financial strength.
Rising global interest rates, high public debt and impending eurobond rollovers call for ambitious fiscal adjustment despite the weakening of economic activity. With global financial uncertainty rising, authorities should opportunistically roll over Eurobonds from early next year whenever market conditions are favourable. Given the worsening outlook, policymakers should address the outperformance of revenues this year to build up government deposits while weathering spending pressures. Going forward, the strengthening fiscal position will require a central government fiscal adjustment of 2% of GDP over the next three years to reach a central government primary balance of 2.5% of GDP complemented by pension reform. In particular,
Enter: Proposals to amend the Income Tax Act should be approved promptly and be more ambitious in reducing exemptions and loopholes. Introduce VAT.
Thick: Raising public sector wages and pensions in line with recently agreed private sector collective bargaining agreements could contain spending permanently and support needed fiscal consolidation in the near term.
Pensions: The proposed pension reform stabilizes the systemic deficit over the next decade, but further recalibration of pension spending will be needed to ensure long-term sustainability. The approval of this reform cannot be delayed given the growing deficits of the Social Security.
There is a need to develop a comprehensive debt management strategy that supports debt sustainability and contributes to the development of a domestic debt market in the medium term. With limited fiscal space, San Marino needs a robust medium-term debt management framework that increases predictability. In this context, the conversion of ex SNB non-insurance depositor bonds it will help develop the domestic debt market and reduce the burden on taxpayers.
Bank profitability and capitalization have improved, but significant challenges remain. Versus Extraordinarily high NPLs and the recent halting of efficiency improvements, profitability remains limited and fragile. In the context of declining bond valuations, new pressures have arisen on the capital base. The plan to transparently report the transfer of assets from the trading book to the held-to-maturity investment book is welcome.
The implementation of the NPL reduction strategy should not be further delayed. The delays have postponed the resolution of NPLs by banks. If NPLs are found to have a real economic value below their net book value, their transfer should transparently result in a reduction in capital ratios. Any undercapitalization that might arise should be promptly addressed with credible capital plans. There should be a clear incentive structure for most NPLs to be transferred and NPLs remaining on banks’ books should be calendar provisioned according to European standards.
In a euroised economy without an independent monetary policy, maintaining healthy levels of financial sector liquid reserves is key to maintaining stability and confidence. This is all the more true in view of the limits of the tools available to absorb shocks, the heightened international uncertainty and the increase in volatility in the financial markets. As expected, international reserves declined as banks’ deposits with CBSMs moved abroad to take advantage of higher rates, a trend that is expected to continue in the near term.
San Marino is expected to continue making progress in strengthening the implementation of the AML/CFT framework. Efforts to incorporate the EU anti-money laundering directive in the national legal framework they are welcome, but should be accelerated.
Reforms that preserve and support macroeconomic stability should complement structural reforms needed to stimulate long-term growth. Progress towards the Association Agreement with the EU and labor market reform is good, but should be completed and implemented. In particular, the labor market reform should pay off the recent liberalization of cross-border workers is permanent and increase the flexibility of temporary work. Plans to improve the business climate are essential and further efforts are needed to improve an outdated insolvency framework.”