October 4, 2024
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC – October 4, 2024:
San Marino’s economy remains resilient, supported by a more diversified
growth model with manufacturing and the nonfinancial service exporting
sectors as key drivers. Prudent fiscal policy and access to
international capital markets helped weather the pandemic and energy
crises. However, additional fiscal consolidation is warranted given the
still high debt level and contingent liabilities from the financial
sector. Notwithstanding important progress in resolving legacy issues,
further efforts are needed to improve asset quality and strengthen
banks’ capitalization and profitability. With the recently negotiated
European Union (EU) association agreement, San Marino has a unique
opportunity to accelerate much-needed public and financial sector
reforms and to further the integration with the EU’s single market to
boost confidence in the economy and lift potential growth.
San Marino’s economic growth remained positive despite adverse external
shocks, including a regional slowdown and higher interest rates.
After an exceptionally strong post-pandemic recovery in 2021-22, growth
slowed in 2023 to 0.4 percent following a decline in external demand.
Manufacturing, which has been operating at high levels, has decelerated as
export orders declined, in part due to the phase-out of fiscal incentives
in Italy and a related slowdown in the construction sector. The strong
service sector performance, benefiting from the tourism boom and healthy
domestic demand, kept employment growing at a robust pace.
Growth is projected to edge up in 2024, strengthening further in 2025,
as external demand improves.
Stronger consumption on the back of rising real wages and
higher investment, facilitated by easing financial conditions, will support
domestic and external demand next year. However, there are risks ahead.
Downside risks are related to the weakening of external demand while
remaining vulnerabilities in the financial sector constitute one of the key
domestic risks. The underlying strength of the manufacturing sector, the
healthy private sector balance sheets, and prompt implementation of the EU
association agreement constitute upside risks to the baseline.
The fiscal position was stronger than expectedlast
year but further efforts are needed to ensure sustainability.The
government has saved the cyclical tax revenues, kept expenditures in check
and primary balance stable in 2023. However, moderate government spending
pressures arose in 2024 ―as real spending compression reached its limits
and the cost of interest subsidies for the private sector expanded. The
public debt-to-GDP ratio continued declining, but its level remains high.
Additionalfiscal consolidation is needed to
mitigate financing risks, build fiscal buffers, and reduce the
debt-to-GDP ratio below 60 percent.San Marino is an euroized small
open economy with a vulnerable financial sector and limited fiscal buffers.
The government’s goal of reducing public debt below 60 percent of GDP over
the medium term is an important anchor to guide fiscal policy. To achieve
this target a moderate additional fiscal effort totaling 1 percent of GDP
over the next three years is recommended through:
Designing and implementing a tax reform package introducing a
value-added tax (VAT) and broadening the income tax base.
With a low tax-to-GDP ratio, introducing a VAT in San Marino can
simultaneously enhance fiscal revenues and tax efficiency while
minimizing related distortions, increasing fairness and progressivity,
and aligning indirect tax procedures with international standards,
benefitting the ease of exports. Redesigning tax rebates to avoid
overlaps with other exemptions—such as San Marino Card (SMaC) discounts
and income tax deductions—can further rationalize the system. The
authorities should leverage the technology used for the SMaC in
combination with electronic invoicing to mitigate tax avoidance in the
new VAT system. Equallyimportant, income tax revenues
can be significantly enhanced by rationalizing income tax deductions.
Improving the efficiency of public spending.San Marino
should shift from real expenditure compression across all spending
areas to prioritizing consolidation of spending with low social return.
In this context, it will be important to review transfers to the
private sector―including interest subsidy programs―to ensure that
transfers are more targeted. Reviewing extra-budgetary funds is also
needed to rationalize spending. Large investment plans require sound
prioritization based on rigorous cost-benefit analyses.
Keeping
public wages and pensions growth in check.
Moderate public wage and pension growth was key to improving the
primary balance. Looking forward, given the limited fiscal space, it is
critical to avoid public wage and pension growth above domestic
inflation.
Long-term demographic challenges will require additional parametric
pension recalibration.
The 2022 pension reform has increased contributions, delaying the depletion
of the pension fund for a decade. However, ensuring the long-term
sustainability of the pension system will require further parametric
calibrations to address generous benefits. In addition, there is a need to
continue the gradual diversification of the investments of the pension fund
towards international markets to mitigate concentration of risks and
increase returns.
The debt management strategy needs strengthening to minimize
refinancing risks.
The recently published fiscal strategy marks an important advancement in
the predictability of fiscal policy and communication with investors, but
further efforts are needed to upgrade San Marino’s debt management
capacity, including more autonomy to implement the financing plan approved
in the budget. To smooth the debt amortization of the Eurobond in 2027, the
authorities should consider liability management operations, including
smaller international issuances with longer maturities.
Banks’ liquidity and reported profits improved in 2023, but declining
interest margins, high personnel costs, and remaining legacy
non-performing loans (NPLs) pose risks going forward.
Higher interest rates last year have improved banks’ cyclical profits
without deteriorating the quality of loan portfolios, but structural
profitability remains low. The safeguarding of profits to increase capital,
as requested by the Central Bank, is welcome. However, with limited
income-generating assets, high operating costs, and tight reported
capitalization in some banks, the financial sector remains vulnerable.
A speedy adjustment of banks’ costs is a priority to improve long-term
viability and capital positions.
Most banks’ profitability remains significantly lower than regional peers.
The continuing reduction of income-generating assets in recent years has
not been followed by a scale-down of banking sector employment. San
Marino’s banking system also has the largest number of branches per capita
in Europe. With the EU association agreement, the opening of the banking
sector will bring new opportunities, but San Marino banks need to improve
efficiency to be competitive.
Important progress has been made in implementing the authorities’
strategy to reduce nonperforming loans (NPLs) through an Asset
Management Company (AMC) and calendar provisioning.
The write-off of a large NPL position and AMC securitization have reduced
the NPL ratio from 53 to 21 percent. The asset recovery of the AMC has
progressed better than expected, with the principal of state-guaranteed
senior securities declining from 70 to 44½ million euros in the first half
of 2024. Meanwhile, calendar provisioning has prompted banks to expedite
the recovery and write-offs of NPLs. However, it will be important to
improve dissemination of the information about the AMC asset recovery to
anticipate and address any bottlenecks. The risk weights for junior
securities should be increased faster to reflect the difference between the
net book value and the real economic value of NPLs on banks’ balance
sheets. Any undercapitalization that could arise from the securitization
process and the implementation of calendar provisioning should be promptly
addressed with credible capitalization plans. To strengthen CBSM
supervisory powers and to help attract external capital, legal limits on
banks’ shareholding structure should be lifted.
The bank resolution framework needs to be updated to widen
burden-sharing.
The bank resolution law should be updated to gradually complete the
alignment with EU standards. The process needs to be coordinated with
addressing existing issues in the banking system.
San Marino should continue to make progress to strengthen its AML/CFT
framework.
The domestic legal framework was amended in 2023 to incorporate the 5th EU
AML Directive and improve technical compliance with the FATF standards.
This resulted in an upgrade by MONEYVAL on technical compliance for AML/CFT
sanctions regime. The National ML/TF Risk Assessment will be updated next
year. San Marino should continue working to enhance the adequacy, accuracy,
and up-to-dateness of its central beneficial ownership registry.
The EU association agreement sets an ambitious financial sector reform
agenda.
The agreement requires the central bank of San Marino (CBSM) to complete
the alignment of the regulatory framework with the EU. To that end, the
CBSM will need additional staff and financial resources. The CBSM financial
position should be strengthened to safeguard its independence and support
financial sector stability through an effective lender of last resort
capacity. To comply with EU standards, legacy issues should be addressed,
including through a gradual conversion of the perpetual bond owned by the
state-owned bank into liquid instruments. Overall, while the banking sector
has 15 years to meet the requirements, earlier implementation, as envisaged
by the authorities, will boost confidence.
The conclusion of the EU association negotiations signals strong
commitment to deeper integration with the EU and could lift potential
growth by accelerating structural reforms.
The successful implementation of the agreement is a priority and will
support the competitiveness of the manufacturing sector and help
consolidate gains in tourism. The authorities should ensure sufficient
resources and staff are available to support implementation without
undermining the fiscal consolidation path. In addition, further labor
market flexibility is needed to improve labor reallocation, including in
the banking sector. Real estate market reforms to facilitate price and
market information dissemination and foreign ownership, will be key to
support NPL resolution. Finaly, the authorities should foster energy safety
and green transition, including by allowing households to sell back excess
solar generated electricity.
The mission would like to thank the authorities and other counterparts
for their warm hospitality as well as candid and productive
discussions.
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Boris Balabanov
Phone: +1 202 623-7100Email: [email protected]
@IMFSpokesperson
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Publish date : 2024-10-04 01:17:00
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