Public Information Notice: IMF Concludes 2001 Article IV Consultation with San Marino

December 21, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 5, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with San Marino.1


San Marino's economic growth performance has remained impressive. Real GDP growth averaged more than 8 percent during 1998-99, driven by strong investment. With employment growth at about 3½ percent in 2000, accelerating credit, and a rebound in GDP growth elsewhere, activity is estimated to have remained buoyant in 2000.

Underlying price pressures moderated in the course of 2000 but rising oil prices kept headline inflation above 3 percent. Inflation developments are coupled with those of Italy but changes in administratively set prices led to a temporary widening of the inflation differential in 1999. Due also to converging wage growth, the differential diminished again in the course of 2000.

Fiscal policy has recently deteriorated. The central government budget deficit widened to around 2¾ percent of GDP during 1999-2000. During most of the 1990s, the central government balance fluctuated around a deficit of about 1 percent of GDP despite a rapid expansion of the tax base, owing largely to overly generous entitlement programs that have boosted primary spending at annual rates near 8 percent since 1993. More recently, the fiscal balance worsened also because of tax administration difficulties related to excessive exemptions and loopholes. Developments through the summer of 2001 suggest no change in the fiscal performance. Nevertheless, reflecting San Marino's prudent fiscal policy in the past, the financial position of the public sector is still sound, albeit much weaker than at the beginning of the decade. Gross public debt is estimated at about 10 percent of GDP and gross assets (including the pension fund) at over 20 percent of GDP.

Important ingredients in San Marino's success during the 1990s were a lower labor cost and a higher take-home wage (thanks to lower payroll taxes) than in surrounding regions that promoted job creation and attracted cross-border commuters. In addition, a diversified production structure and supportive business environment protected San Marino from shocks and fostered growth. With the tax base expanding rapidly, San Marino has been able to sustain very high growth in primary spending, spending that, by and large, does not benefit the commuters who have boosted the tax base.

The government's economic program for 2002 recognizes that public policies need adjustment to maintain the virtuous circle of high economic growth and low taxation. Several fiscal revenue measures with limited effects on economic activity and competitiveness are envisaged together with improvements in tax administration. Some of the measures are temporary, pending the adoption of durable expenditure reforms. Spending is to be slowed through reforms to the public administration, including a hiring freeze and lower growth of public sector wages; and through reforms to the pension and health care systems, notably improvements to management and stronger incentives for cost savings.

In the face of the global slowdown in activity, San Marino's near-term outlook has weakened, but remains comparatively positive. The likely effect of the global slowdown is difficult to predict, as economic activity in San Marino does not appear closely correlated with activity elsewhere in Europe. However, many of the factors that have driven San Marino's growth performance over the past few years are likely to continue to play a role in the near term. Maintaining the high economic growth of recent years over the medium term will be challenging, as San Marino's labor cost advantage over surrounding areas has narrowed considerably and its tax burden has become relatively less favorable.

Executive Board Assessment

Directors observed that San Marino has enjoyed an extended period of remarkably strong economic performance, posting real GDP and employment growth well above the rates recorded in the euro area. Product and labor markets generally work efficiently.

Directors considered that in the immediate future, the factors that have driven the high growth—notably a low tax burden and a favorable business environment—will remain in place and augur well for near-term performance, even if the outlook is uncertain due to the global slowdown. However, the central government budget has moved into a larger deficit, due to weak tax collection and rapidly rising entitlement outlays, and Directors underscored that if left unchecked, this unfavorable fiscal performance could break the virtuous circle of a low tax burden and high growth. This risk has been heightened by the gradual narrowing of San Marino's labor cost advantage over neighboring regions, and further pressure on performance could emerge if surrounding countries reduce their tax burden or reform factor markets.

Against this background, Directors considered that fiscal policy is key to maintaining San Marino's attractiveness as a place to conduct business. They therefore welcomed the authorities' objective to return the central government budget to balance over the next two years. The revenue measures for 2002 are generally well targeted, notably the suspension of the tax expenditure program, which, Directors considered, should be made permanent. They emphasized that further action, focused on containing expenditure growth, will be needed to durably balance the budget in 2003. In this connection, Directors welcomed the authorities' intention to reform the public administration and the entitlement programs, and looked forward to implementation of their plans to gradually align public sector wages with those in the private sector, reduce the size of the civil service through attrition, and reallocate staffing to areas of greatest need.

Looking ahead, Directors encouraged the authorities to pursue a sound fiscal policy over the medium term, by committing to a central government budget in balance or in surplus, a low debt level, and a low tax burden. This would provide an important assurance to economic agents. In view of San Marino's mobile tax base, maintaining budgetary balance or a surplus—a target to which neighboring countries are already committed—would greatly contribute to supporting the long-term growth prospects. Directors also emphasized that the budget should present the intended fiscal policy clearly and be built on a fully specified macroeconomic framework.

Directors welcomed the steps under consideration for reforming the over-generous pension and health care systems. They agreed, however, that placing the pension system on a sound medium-term financial footing will require more ambitious and well-sequenced reforms, including strengthening the link between contributions and benefits, and introduction, over time, of a fully funded pillar. Directors commended the plans to improve management and reduce waste in the health care system, but saw a need for additional measures if the authorities intend to preserve free access to essential health care to future generations.

Directors noted that San Marino's financial sector appears profitable and strong, and they welcomed the authorities' plans to strengthen banking supervision. The adoption of the Basel capital adequacy framework will be an important step in this respect. Directors also encouraged the Office of Banking Supervision (OBS) to publish its periodic reports on the financial sector and move toward frequent and timely reporting of financial soundness indicators. The increasingly competitive environment, and the planned introduction of a legal and regulatory framework permitting insurance and mutual fund activities, will require changes in supervisory policies and practices that need to be supported with an increase in the staffing at the OBS. Directors commended the authorities on adopting a solid legal framework to fight money laundering, and their cooperation in international efforts against the financing of terrorism.

Directors encouraged the authorities to continue their efforts in the area of statistics by increasing resources to remedy remaining deficiencies and, in particular, by producing data on current economic conditions and a full set of public sector accounts in line with Eurostat's ESA95 standards.

San Marino: Selected Economic Indicators

  1996 1997 1998 1999 2000 2001 1/

Real economy (change in percent)            
Real GDP 2/ 4.9 6.9 7.5 9.0 7.5 7.5
Real National Income ... ... 6.1 7.1 ... ...
Employment 2.6 3.3 4.3 4.5 3.5 3.5
Unemployment rate (in percent) 4.9 4.2 4.0 3.2 3.0 2.6
Consumer prices (percent change, period average) 4.9 2.0 2.1 3.3 3.3 3.3
Wages 9.3 5.0 4.2 3.9 1.9 ...
Public finance (in percent of GDP) 3/            
Central government balance -1.8 -1.4 -0.2 -2.6 -2.8 -2.5
Central government deposits 4/ 15.3 13.1 8.4 10.8 2.1 8.5
Gross public debt 5/ 12.8 14.5 14.3 14.0 13.3 ...
Interest rates (end of period) 6/            
Loans 13.8 11.0 8.2 8.1 8.7 9.0
Time deposits 5.5 4.2 3.3 2.6 3.0 2.9
Balance of payments            
Trade balance (in millions of US$) 22.6 ... ... ... ... ...
Current account (in millions of US$) 10.7 ... ... ... ... ...
Exports (in percent of GDP) 218.7 233.8 201.6 196.7 ... ...
Imports (in percent of GDP) 215.8 238.3 203.8 200.0    
Exchange rate regime Uses Italian lira/euro
Present exchange rate
(November 16, 2001)
1.13 euro per US$
Nominal effective (lira, 1990=100) 7/ 75.6 75.8 76.0 74.1 70.7 71.1
Real effective (lira, 1990=100) 7/ 84.9 85.4 86.0 84.3 80.9 81.6

Sources: Sammarinese authorities; IMF staff estimates and projections; and International Financial Statistics database.

1/ IMF staff estimates, unless otherwise noted.
2/ Data for 2000 are Fund staff estimates.
3/ Data are on an accruals basis.
4/ Data for 2001 are for August.
5/ Data for 2000 are for end-September.
6/ Data for 2001 are for end-June.
7/ Data for 2001 are average through end-July.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the December 5, 2001 Executive Board discussion based on the staff report.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100