Public Information Notice: IMF Concludes Article IV Consultation with Belgium

March 8, 1999

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 February 12, 1999, the Executive Board concluded the Article IV consultation with Belgium.1


Growth was sustained by strong domestic demand in 1998. Private sector confidence was boosted by the decisive final advance to EMU, while the household saving ratio continued to fall strikingly, responding to both lower unemployment and success in fiscal consolidation. Private consumption grew by an unexpectedly strong 3.3 percent in 1998, while residential investment experienced a firm upswing. With domestic demand expanding strongly, the indirect impact on exports of the emerging markets crisis resulted in only a slight slowing of GDP growth, to 2.9 percent. By end-year, however, business sentiment was deteriorating sharply. Household confidence remained largely intact, although consumer spending appeared set to decelerate to a pace more closely in line with disposable income growth.

Twelve-month CPI inflation declined to under 1 percent, and competitiveness—while it deteriorated somewhat—remained broadly satisfactory. Inflation benefited from lower import prices, while wage costs were contained by legally-backed pay ceilings. The ULC-based real effective exchange rate, which had depreciated by 7 percent in 1995–96, partially reversed this trend during 1997–98, but competitiveness remained in an adequate range. The current account surplus (BLEU) declined to 5 percent of GDP in 1998, from a peak of 5½ percent in 1997.

The rate of unemployment fell by 1 percentage point in 1997–98, but labor market performance remains unsatisfactory. Long-term and low-skill joblessness are high; distribution and retail sector employment declined in the 1990s; and the overall rate of employment remains low. Moreover, by late 1998 shortages of skilled and semi-skilled labor were being reported in some sectors, ranging from information technology to transportation. Sharp local and regional variations in unemployment persist, reflecting the weak capacity of the labor and product markets to create new jobs and to provide incentives for mobility. Some positive changes are underway in labor and product markets. A new, two-year pact between employers and labor unions, signed in late 1998, was freely negotiated, replacing the legally-mandated pay norms of recent years; moreover, it provides for a differentiation of pay awards between sectors. A number of gradual, but promising, shifts in labor market policy are also in preparation—including a reform of the unemployment benefit and the plan d’accompagnement, and proposals for phased action to mitigate tax traps. In product markets, the staffing of the competition authority has been increased, and the EU-driven telecommunications reform is in place.

The monetary conditions resulting from the DM link played a significant role in fostering the upswing, and changed little over 1997–98. Since the substantial easing of monetary conditions in 1995–96, developments in interest rates and the exchange market have not shown a pronounced trend. Nominal interest rates have continued to decline—with bond yields at record lows. In real terms also, deflated by underlying inflation, long rates have fallen significantly. Real short-term rates, on most measures, have edged up. The real effective exchange rate has remained broadly stable in recent months. Stock price indexes have now returned to close to the level that prevailed before the setback of July–October 1998.

The fiscal deficit has declined well ahead of target. The outcome of 1.3 percent of GDP in 1998 reflected fairly tight expenditure control, notably in the federal budget, and growth and interest rate trends in 1997–98 that were favorable. The structural deficit was cut to under ½ percent of GDP. The primary surplus was slightly above the authorities’ long-standing goal of 6 percent: preserved over the medium term, this would set the stage to cut the debt ratio to 60 percent over the next decade and a half—from 135 percent of GDP in 1993, and 116 percent in 1998. The 1999 budget aims for a general government deficit of 1.3 percent of GDP. With firm control over aggregate spending, it should be possible to reduce the deficit in 1999 to this level or slightly below, despite lower than anticipated economic growth—thus achieving a further reduction, to less than ¼ percent of GDP, in the structural deficit. The federal budget provides for spending to grow somewhat more rapidly than in recent years, reflecting higher allocations to priority needs.

The outlook in 1999 is for growth to slow to just below potential. The index of business conditions has fallen sharply in recent months, having peaked in late 1997; and export market growth is projected to decelerate in 1999. In this setting, investment is likely to grow more slowly. The real disposable income of households is expected to expand somewhat less rapidly; and, although consumer confidence reached a new high in January 1999, some tapering off in the very sharp decline in the household saving ratio of recent years is expected. GDP is likely to increase by 1.9 percent in real terms, while inflation should be about 1 percent.On balance, short-run risks may remain on the downside, reflecting mainly uncertainty about the outlook in Japan and emerging markets and risks to private sector confidence.

Executive Board Assessment

Directors welcomed the discussion as the first Article IV consultation with a Euro-area country since the successful launch of the Euro on January 1, 1999.

Executive Directors commended the authorities on the impressive progress in implementing macroeconomic reforms over the past decade. There had been a steep decline in the fiscal deficit, and the monetary authorities had shown an unwavering commitment to achieving price stability via a hard peg to the deutsche mark. With Belgium a founder member of the Euro area, this policy resolve had delivered its long-standing goal. It had also played a key role in strengthening private confidence, setting the stage for a firm recovery of domestic demand over the past few years.

Against this background, Directors urged the authorities now to set their sights on a major strengthening of structural policies. It was urgent, in particular, to revitalize the labor market—fostering stronger job creation, and reducing the hard core of unemployment among the young and low-skilled. Noting some welcome signs in recent months, Directors encouraged the authorities to move boldly in the period ahead, targeting reforms as sweeping as those achieved on the macroeconomic front.

Directors viewed it as crucial for macroeconomic and structural policies to have a medium-term orientation, which would have a favorable influence on private sector expectations. Directors stressed that strict fiscal policy should remain a top priority for the foreseeable future. This was essential to achieve a further, decisive reduction in the still-high debt burden, before the pressures of population aging began to be felt in the coming decade. It would also create a setting in which there would be more scope for fiscal stabilizers to operate consistently with the Stability and Growth Pact, and for reducing the level of taxation in the economy. Directors therefore welcomed the authorities’ goal of achieving balance in the general government finances over the next few years.

Regarding the near-term outlook, Directors noted that, following two years of robust expansion, the economy was likely to grow more slowly in 1999. However, the prospective slowdown reflected external influences common to the whole Euro area. The outlook for inflation and cyclical developments in Belgium appeared broadly in line with the Euro area average, and thus monetary conditions in the area did not pose any particular problem for the policy mix in Belgium.

In this setting, Directors urged the authorities to hold firmly to their budgetary plans in 1999, thus ensuring a continued reduction in the structural fiscal deficit and the public debt ratio. Directors noted that tax revenues could be somewhat weaker than projected, as a result of slower economic growth. In view of this prospect, and since the burden of earlier fiscal adjustment had fallen disproportionately on public investment, they stressed the need for tightcontrol over current spending, particularly on health care. Several Directors also suggested that consideration be given to fuller operation of automatic stabilizers, in the event of a sharper-than-expected slowdown. However, Directors emphasized the need to address the remaining structural weaknesses in the public finances. Several Directors particularly stressed that pension reform should be accelerated to help improve the long-term sustainability of the fiscal position.

Looking ahead, Directors believed that a further reason for the authorities to strengthen expenditure control was to prepare the ground for a sizable cut in the burden of taxes on labor income over the medium term within their program of fiscal consolidation. They urged the authorities to develop medium-term ceilings on key expenditure areas. Directors considered that achieving the necessary expenditure restraint within Belgium’s federal framework would entail extending the close cooperation among levels of government that had been instrumental in securing the fiscal consolidation of the past decade.

Directors welcomed the recent strengthening of debt management and the move to lengthen debt maturities—which had taken advantage of favorable interest rate conditions to reduce exposure to short-term market risks.

Turning to actions needed to achieve the desired revitalization of the labor market, Directors stressed that decisive progress was required on a broad front. It was essential to address rigidities in wage formation. The recent pact between the social partners, with its openness to differentiating wage settlements across sectors, was viewed as a promising first step toward developing a consensual approach to labor market reform. Directors urged the authorities to proceed expeditiously with plans to strengthen the incentives for the unemployed to enter work or training, including actions on tax and benefit traps. The success in this area will partly depend on how much the tax burden on labor income can be reduced. Directors also underscored the importance of further reforms to improve the working of product markets, including through the removal of administrative barriers to entry in the retail trade and other services, and the further liberalization of shop opening hours. The authorities were encouraged to make every effort to go beyond minimum EU requirements in the area of product market reform.

Directors noted that forceful action to reform the labor and product markets was needed to start reversing the heavy structural unemployment that prevailed in depressed areas, and to secure the basis for sustained growth in output and employment throughout the economy. Directors stressed that, with sufficiently forceful initial actions to launch the process, Belgium would be able to benefit from a virtuous circle in which structural reform, fiscal adjustment, and improved economic performance would be mutually reinforcing.

In the financial sector, Directors commended the steps taken recently to strengthen supervision, including the agreements on who is the lead supervisor for international financial groups operating in Belgium, and greater emphasis on supervision of systemic risks.

Directors commended the quality of Belgium’s development assistance program. Noting that its budget had been reduced as part of the broader strategy of fiscal restraint, Directors urged the authorities to maintain assistance at as high a level as possible.

Belgium: Selected Economic Indicators

1995 1996 1997 1998 19991

Real economy (change in percent)
Real GDP 2.3 1.3 3.0 2.9 1.9
Domestic demand 1.8 1.8 2.3 3.7 2.4
CPI (year average) 1.4 2.1 1.6 1.0 1.1
Unemployment rate (percent of the labor force) 9.9 9.7 9.2 8.8 8.7
Gross national saving (percent of GDP) 22.5 21.7 22.4 23.1 23.3
Gross national investment (percent of GDP) 18.0 17.7 17.7 18.1 18.3
Public finance (percent of GDP)
Federal government balance (deficit-) -4.0 -3.1 -2.3 -1.6 -1.5
General government balance (deficit-) -3.9 -3.1 -1.9 -1.3 -1.2
Public debt 130.8 126.8 121.9 116.4 113.8
Money and interest rates
M2 (end of year, percent change)2 4.9 6.4 7.1 6.7 ...
Money market rate (in percent) 4.8 3.2 3.5 3.6 ...
Government bond yield (in percent) 7.5 6.5 5.8 4.8 ...
Balance of payments of BLEU (percent of GDP)
Trade balance (percent of GDP) 3.5 3.3 3.4 3.0 2.7
Current account (percent of GDP) 5.2 5.3 5.6 5.0 4.6
Official reserves (US$ billion)3 16.2 17.0 16.2 18.3 ...
Exchange rates
Exchange rate regime Member of euro area4

Nominal effective exchange rate (1990=100) 109.3 107.0 102.7 102.7 n.a.
Real effective exchange rate (1990=100) 111.0 108.4 103.8 106.4 n.a.

Sources: Data provided by the authorities; and IMF staff estimates.

1Staff projections.
2For 1998, third quarter.
3Excluding gold.
4While the Belgian franc to euro rate was irrevocably fixed on January 1, 1999, the external exchange rate of the euro is market determined. The Belgian franc will remain in circulation until 2002, when euro banknotes and coins will be issued.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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