IMF Survey : San Marino: In Search of New Routes of Growth

May 10, 2016

  • Financial sector downsizing and weak external demand harmed growth
  • Bank balance sheets under reparation, fiscal buffers to be rebuilt
  • IMF technical assistance key to ease capacity constraints

San Marino is looking to diversify its financial sector-oriented economy to turn a recovery from a six-year economic slump into sustained growth.

Cesta Tower defines the skyline of the historical center of San Marino, a microstate surrounded by Italy, trying to diversify its economy (photo: Henryk Sadura Tetra Images/Newscom)

Cesta Tower defines the skyline of the historical center of San Marino, a microstate surrounded by Italy, trying to diversify its economy (photo: Henryk Sadura Tetra Images/Newscom)

Economic Health Check

IMF Survey sat down with the outgoing and incoming San Marino mission chiefs, Alexander Tieman and Kazuko Shirono, to discuss the economic fortunes of the oldest constitutional republic in the world.

IMF Survey: What are some of the challenges of working on a small country?

Tieman: Working on a microstate like San Marino, with 32,000 inhabitants living on some 61 square kilometers, presents challenges but also opportunities. One of the issues, which we usually do not consider in other advanced economies, is capacity bottlenecks. Because of the small population, most government departments as well as the central bank are small by international standards. This implies that broad areas of work tend to land on the shoulders of just a few people, particularly now that the country is committed to follow wide-ranging international legislation and regulations. In addition, it can be really challenging to find people with a specific area of expertise.

On the bright side, the small size of the country makes a consensus-based decision-making process easier, which, in turn, allows for relatively fast policy implementation once decisions are made.

IMF Survey: How did San Marino fare during the global crisis and what are the issues left unresolved?

Shirono: San Marino has lost one-third of its output since the start of the global financial crisis, which is the largest output loss in Europe. The main cause was the sharp downsizing of San Marino’s large financial sector, which came about in part due to a massive outflow of nonresident deposits. The other main source of the loss was weak external demand from trading partners in Europe. Although this year we see the economy bottoming out after six years of recession, the global financial crisis nevertheless left a number of challenges to handle. Dealing with nonperforming loans and repairing the balance sheets of banks are in progress. Fiscal buffers, which served San Marino well in the past, need to be rebuilt to strengthen the economy against future shocks. Importantly, San Marino also needs to diversify its economy so that growth relies less on the financial sector and more on industry and nonfinancial services.

IMF Survey: What has IMF technical assistance meant for the country?

Tieman: Technical assistance can be quite valuable, in particular where specific expertise is difficult to find locally. The IMF has helped with compiling balance of payment statistics, conducting a public expenditure review, and providing advice on bank regulation. In addition, there is an intensive background work with central bank staff on managing and resolving the large stock of nonperforming loans in the banking system. This work resulted in an analysis of both the economic and the legal aspects of the nonperforming loans, as well as concrete policy suggestions. We hold regular consultations with the authorities to follow up on progress in these subjects as well as to identify other areas of need for technical assistance.

IMF Survey: International cooperation appears exceptionally important for a small country like San Marino. Can you give some examples of key areas of collaboration?

Tieman: Indeed, deepening international cooperation has always been a priority for San Marino. That is especially true for the cooperation with Italy, a country with which the microstate shares a language and many cultural and business links. In fact, San Marino has recently concluded a bilateral economic cooperation agreement with Italy, and has set up a credit register to share credit information with international counterparts. San Marino has also revamped its anti-money laundering rules, and now fully complies with international norms.

But international cooperation goes beyond working with Italy. San Marino has concluded a monetary agreement with the European institutions, in which the parties agree that San Marino can use the Euro as its legal tender. And last year, San Marino—together with Monaco and Andorra—started negotiations on an association agreement with the European Union to guarantee the free movement of goods, capital, services, and people. Such agreements are essential for unobstructed international trade and they show the world that San Marino is a place where one can do business and invest confidently.

IMF Survey: You suggested that the country should find a new growth model. What would be its key ingredients?

Shirono: Structural reforms are important to support the authorities’ objective to broaden and diversify the economy. In particular, San Marino should continue to improve its business environment and liberalize its labor market. Such changes will help rebalance the economy toward nonfinancial services and industry. San Marino has already made some progress in these areas. For example, the government put in place a simple and fast online process to establish a business, and by doing so, it lifted the country’s ranking in the World Bank’s Doing Business index by 17 places. Some labor market policies have also been reformed to support business activities: for instance, the hiring of skilled nonresident workers for startups has become easier. The government also plans to increase its capital spending: this year it will embark on a project that upgrades basic tourism infrastructure, which is expected to attract further private investment to the sector.

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The IMF team with country officials (from left to right): Hua Chai, Alessandro Giustiniani, Natalia Stetsenko, Julia Bersch, Minister of Finance and Budget Gian Carlo Capicchioni, Alexander Tieman, Her Excellency Captain Regent Lorella Stefanelli, His Excellency Captain Regent Nicola Renzi, Minister of Foreign Affairs Pasquale Valentini, Minister of Interior and Justice Gian Carlo Venturini, Marta Spinella (photo: courtesy of San Marino authorities)


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