December 10, 2024
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Republic of San Marino. The Board considered and endorsed the staff appraisal on a lapse of time basis.[2]
San Marino’s economy has remained resilient, with economic activity stabilizing at high levels and record employment, despite the regional slowdown and high interest rates. Growth has slowed due to weakening external demand but remains positive as the decline in manufacturing activity has been offset by strong performance in the service sector. With easing financing conditions and the stabilization of external demand, growth is expected to pick up gradually. Inflation has declined to below two percent and it is expected to remain at low levels.
The fiscal position is stronger than expected. The government has saved the cyclical tax revenues, kept expenditures in check, and achieved strong primary balance in 2023. On the financial sector, banks’ liquidity and reported profits improved in 2023, while the NPL securitization and asset management company have progressed as expected. The securitization, together with large write-offs, has significantly reduced NPL ratios. However, critical challenges remain in the banking sector, due to the need to reduce operating costs, still large noninterest-generating assets, and tight capitalization in some banks.
Downside risks stem from lingering weakness in external demand, tighter than expected global monetary conditions, and remaining vulnerabilities in the domestic financial sector. On the upside, faster implementation of the EU association agreement could deepen economic integration with EU and lift potential growth.
Executive Board Assessment
In concluding the 2024 Article IV Consultation with San Marino, Executive Directors endorsed staff appraisal as follows:
San Marino’s economy has remained resilient, stabilizing at high activity levels despite the regional slowdown and high interest rates. Growth has slowed due to weakening external demand but remains positive as the decline in manufacturing activity has been offset by strong performance in the service sector, which has supported robust employment growth. In addition, the external position is broadly in line with fundamentals and desirable policies for 2023. However, there are risks ahead, including those associated with a possible weakening of external demand and remaining vulnerabilities in the financial sector.
The fiscal position was stronger than expected, however, further efforts are needed to ensure the public debt level declines below 60 percent of GDP. With growing spending pressures ahead, it is important to continue saving any tax revenues overperformance. While the public debt-to-GDP ratio is declining, its level remains high and an additional fiscal consolidation totaling 1 percent of GDP over the next three years is needed to ensure debt is on a robust declining path.
Designing and implementing a tax reform package that introduces a value-added tax (VAT) and broadens the income tax base would help achieve this goal. An income tax reform will allow to rationalize sizable income tax deductions. 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. However, careful design and planning is needed to ensure a smooth transition.
The fiscal position should be also strengthened by rationalizing government spending. This can be achieved by improving the efficiency of spending and containing public wages and pensions growth. To maximize the social return of public investments, the authorities should ensure that large investment plans undergo rigorous cost-benefit analyses.
Long-term demographic challenges will require additional parametric pension recalibration within the next decade. The generous benefits and low penalties for early retirement that undermine sustainability still need to be addressed.
The debt management strategy needs to be enhanced 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. To smooth the Eurobond amortization in 2027, the authorities should consider liability management operations, including smaller international issuances with longer maturities.
Cyclical profits helped to improve banks’ liquidity and capital; however, declining interest margins, high personnel costs, and remaining legacy non-performing loans (NPLs) pose risks going forward. While higher interest rates have improved banks’ cyclical profits, structural profitability remains low. The safeguarding of profits to increase capital, as requested by the Central Bank, is welcome. Nevertheless, with limited income-generating assets, high operating costs, and tight capitalization in some banks, the financial sector remains vulnerable.
A speedy adjustment of banks’ costs is essential to improve long-term viability and capital positions. Most banks’ profitability remains significantly lower than that of regional peers, primarily due to high operational costs associated with a large number of branches and a low ratio of income-generating assets per employee. With the EU association agreement, the opening of the banking sector will present new opportunities, but San Marino’s banks must improve their efficiency.
Important progress has been made 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. Moving forward, it is crucial to improve the dissemination of information about the AMC’s recovery operations and performance. Additionally, the risk weights for junior securities, should be increased faster to reflect 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.
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. In addition, limits on banks’ shareholding structure should be promptly lifted.
San Marino should continue to make progress to strengthen its AML/CFT framework. The transposition of the 5th EU AML Directive in the domestic framework and improvement of technical compliance with the FATF standards are welcome. San Marino should continue working to enhance the adequacy, accuracy, and up-to-datedness of its central beneficial ownership registry. Finally, the authorities should ensure that the FIA has adequate resources to achieve its mandate.
The EU association agreement sets an ambitious financial sector reform agenda. To complete the alignment of the regulatory framework with the EU, 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. Overall, while the banking sector has 15 years to meet the requirements, earlier implementation will boost confidence.
Structural reforms are critical to lift potential growth. The conclusion of the EU association negotiations, which signals strong commitment to deeper integration with the EU, is welcome. The successful implementation of the agreement is a priority to enhance productivity and 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 dissemination and foreign ownership, will be key to support NPL resolution.
Republic of San Marino: Selected Economic and Social Indicators, 2020–29
GDP per capita (2022): 53,876 U.S. dollars
Population (2022): 34,025 persons
Life expectancy at birth (2018): 86.6 years
Literacy, adult (2015): 96 percent
Proj.
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Activity and Prices
Real GDP (percent change)
-6.8
14.2
7.9
0.4
0.7
1.3
1.2
1.1
1.3
1.3
Domestic demand
-10.5
11.3
10.5
2.0
0.9
1.2
1.4
1.3
1.2
1.2
Final consumption
-2.8
3.5
9.9
2.0
1.1
1.2
1.1
1.1
0.9
0.9
Fixed investment
-25.0
3.6
9.6
0.5
0.1
1.5
2.5
2.5
2.5
2.5
Net exports
1.5
5.7
0.6
-1.1
0.0
0.4
0.2
0.1
0.4
0.4
Exports
-7.5
27.1
15.6
-1.0
0.1
1.6
1.5
1.4
1.6
1.6
Imports
-9.6
27.8
18.0
-0.5
0.1
1.6
1.6
1.6
1.6
1.6
Contribution to real GDP growth (percent)
Domestic demand
-7.5
2.7
6.8
1.1
0.6
0.9
1.0
1.0
1.0
1.0
Final consumption
-1.5
2.0
5.1
1.1
0.6
0.7
0.6
0.6
0.5
0.5
Fixed investment
-6.0
0.7
1.7
0.1
0.0
0.3
0.4
0.4
0.5
0.5
Inventories
-0.8
5.9
0.9
0.4
0.1
0.0
0.0
0.0
0.0
0.0
Net exports
1.5
5.7
0.2
-1.1
0.0
0.4
0.2
0.1
0.4
0.4
Exports
-12.5
44.9
28.7
-2.0
0.2
3.1
2.9
2.8
3.1
3.1
Imports
14.0
-39.3
-28.5
0.9
-0.2
-2.7
-2.7
-2.7
-2.8
-2.8
Employment (percent change)
-0.5
2.0
1.6
1.2
0.7
0.7
0.7
0.3
0.3
0.3
Unemployment rate (average; percent)
7.3
5.2
4.6
3.9
3.9
3.9
3.9
3.9
3.9
3.9
Inflation rate (average; percent)
-0.1
2.1
5.3
5.9
1.3
2.0
2.0
2.0
2.0
2.0
GDP deflator (percent change)
0.5
1.5
2.8
5.3
2.4
2.1
2.0
2.0
2.0
2.0
Nominal GDP (percent change)
-6.3
16.0
10.9
5.7
3.1
3.4
3.2
3.1
3.3
3.3
Nominal GDP (millions of euros)
1,352.4
1,568.7
1,739.4
1,838.1
1,895.3
1,959.9
2,023.3
2,086.1
2,154.9
2,226.1
Public Finances (percent of GDP) 1/
Revenues
21.6
20.7
22.1
21.4
20.7
20.3
20.3
20.3
20.3
20.3
Expenditure
59.2
37.1
21.7
22.1
22.2
21.6
21.5
21.4
20.6
20.5
Overall balance
-37.6
-16.4
0.4
-0.7
-1.5
-1.3
-1.1
-1.1
-0.3
-0.2
Primary balance net of bank support
-0.8
-2.2
2.9
2.4
1.5
1.6
1.6
1.6
1.6
1.6
Government debt (official)
71.6
64.1
70.8
70.0
64.9
63.6
62.4
61.2
59.2
57.1
Public debt 2/
71.6
81.3
74.5
72.2
68.0
66.7
65.3
64.1
61.9
59.8
Money and Credit
Broad Money (BM) (percent change)
5.5
4.9
1.4
0.6
…
…
…
…
…
…
Private sector credit (percent change)
-4.1
-10.8
0.0
-23.6
…
…
…
…
…
…
Net foreign assets (percent of GDP)
141.4
137.3
119.6
96.8
…
…
…
…
…
…
Commercial banks
94.4
87.4
89.2
58.0
…
…
…
…
…
…
Central bank
47.0
49.9
30.3
38.9
…
…
…
…
…
…
External Accounts (percent of GDP)
Current Account
2.8
5.4
15.5
13.9
6.4
4.6
3.2
2.1
2.3
2.3
Exports
157.9
174.1
197.4
189.6
182.3
179.9
178.2
176.7
176.7
176.4
Imports
144.5
158.5
173.0
166.1
164.8
163.8
163.5
163.2
163.0
162.8
Gross int. reserves incl. pledged assets (millions of euros)
637.0
842.6
671.4
756.6
746.6
746.6
746.6
746.6
746.6
746.6
Gross int. reserves (millions of euros)
637.1
842.5
533.0
739.6
729.6
729.6
729.6
729.6
729.6
729.6
Financial Soundness Indicators (percent)
Regulatory capital to risk-weighted assets
10.7
14.4
14.6
16.7
…
…
…
…
…
…
NPL ratio 3/
61.1
59.0
53.1
21.0
…
…
…
…
…
…
NPL coverage ratio 3/
64.4
65.0
69.8
33.6
…
…
…
…
…
…
Return on asset (ROA)
-0.4
0.3
0.3
0.8
…
…
…
…
…
…
Liquid assets to short-term liabilities
33.1
44.0
43.1
50.1
…
…
…
…
…
…
Sources: International Financial Statistics; IMF Financial Soundness Indicators; Sammarinese authorities; World Bank; and IMF staff.
1/ For the central government.
2/ Central government (official) debt plus Social Security Fund and BNS debt.
3/ CBSM supervisory data. Latest data reflect changes related to Banca CIS resolution. Supervisory data, as opposed to FSI data, reflect retrospective revisions made by banks in their annual financial statements. Loans and NPLs to banks are excluded in calculating each indicator.
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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Publish date : 2024-12-10 06:49:00
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