Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). 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, and as part of other staff reviews of economic developments.
Belgium - 2009 Article IV Consultation Concluding Statement of the Mission1Brussels, December 14, 2009
In response to the global financial crisis and the severe global downturn, the Belgian authorities have taken decisive measures to support the financial sector and buttress domestic demand. These actions have helped to stabilize the financial sector and cushion the economic contraction but the recovery is expected to be gradual. At the same time, terrain has been lost in addressing the high public debt and public spending pressures related to population aging, and in strengthening competitiveness and labor market participation. It is now urgent to shift the policy focus from crisis management towards addressing the significant challenges of restoring fiscal sustainability, further strengthening financial sector stability, and implementing structural reforms to boost competitiveness and growth, which is already slowing due to demographic changes.
A Gradual and Still Fragile Recovery with Lower Trend Growth
1. Economic activity has begun to revive in the second half of 2009 but the recovery is expected to be gradual and tepid. Exports are likely to pick up further in 2010 and some further restocking could take place. However, the expansion in Belgium’s main trading partners is expected to remain sluggish while relatively high wage costs and supply rigidities remain a constraint on export performance. The considerable wealth losses pursuant to the financial crisis, the high public debt, and the ongoing rise in unemployment would slow consumption growth. Investment remains hampered by the very low rate of capacity utilization and tightened financing conditions. As a result, real GDP growth is projected at 0.8 percent in 2010 and to gradually increase to almost 2 percent over the medium term. Potential growth is expected to be lower than in the pre-crisis period, reflecting the downward impact of demographic factors, notably the aging of the population, and the loss of productive capacity due to the crisis. The unemployment rate will continue to rise and reach about 9 percent in 2010 while inflation pressures are expected to remain subdued in the period ahead.
2. The outlook is unusually uncertain. On the upside, stronger recoveries in partner countries, in particular in the Euro area, would speed up Belgian economic growth. On the downside, the crisis has significantly increased the public debt ratio, which could hamper domestic demand. Moreover, a backlash from the financial crisis cannot be ruled out in view of the still strained capital positions and risky exposures in the banking sector, and credit may not be able to expand in line with the rising demand for loans as the recovery continues.
Preserving Fiscal Sustainability is a Priority
3. Sizable and credible fiscal consolidation efforts, coordinated at all levels of government, are needed over the coming years to avoid an unsustainable debt-deficit spiral. The crisis has led to a significant deterioration in the general fiscal position with the public debt rising to above 100 percent of GDP in 2010, partly undoing earlier successful efforts in debt reduction. In addition, the crisis has highlighted a number of underlying structural weaknesses in Belgian public finances. Key among these are the lack of adequate incentives to keep real spending increases in line with trend economic growth and the off-loading on the federal government of revenue shortfalls, higher social security outlays, and some spending decided at regional and local levels. With pressing aging costs, it is now urgent to address these fiscal imbalances and structural weaknesses.
4. The government’s strategy of targeting a balanced budget by 2015 is appropriate and the draft 2010 budget strikes the right balance between supporting the recovery and initiating the much-needed fiscal consolidation. The intergovernmental burden-sharing agreement for 2009-10 that is to be signed in the coming days and the first multi-year fiscal framework covering 2010-11 are welcome first steps in the consolidation strategy. The draft 2010 budget aims to reduce the overall deficit by ½ percent of GDP and to limit the further rise in the public debt ratio. Given the large fiscal adjustment required in the coming years, it is important to direct any higher-than-budgeted fiscal revenues at every level of government to further deficit reduction. The budget control process that will take place in Spring 2010 should help to ensure the achievement of the 2010 fiscal targets and set appropriately tight objectives for 2011 based on prudent macroeconomic assumptions.
5. The credibility of the government’s consolidation strategy should be enhanced by strengthening the multi-year fiscal framework. Achieving the objective of a balanced budget by 2015 requires a structural fiscal adjustment of at least 0.75 percent of GDP every year to which each level of government should contribute. To ensure continuation of the planned consolidation throughout the coming election periods, it would be important in the next months to extend the intergovernmental burden-sharing agreement over the medium term. The role of the High Finance Council in monitoring and enforcing the implementation of such a reinforced multi-year fiscal framework should be strengthened.
6. Consolidation measures on both the spending and revenue side are needed. Introducing spending limits for each level of government and the social security administration would curb the high real spending growth which cannot be sustained. Consideration should be given to the non-replacement of part of the retiring public servants. In order to address the rising aging costs, it is important to: (i) reform the pension system in order to increase the low effective retirement age (at less than 60 years much below the legal retirement age); and (ii) reduce the excessively high growth norm for real health care spending (at 4½ percent much above trend economic growth). At the same time, the regional governments should tighten their control over the fiscal position of local governments by strictly enforcing the existing golden rule and ensuring feasibility of the local investment budgets. Revenue measures should focus on broadening the tax base and improving revenue collection. Significant gains can also be achieved by streamlining the existing large number of tax expenditures.
7. Decisively curbing the public debt ratio will require moving to a fiscal rule and reforming the current fiscal federalism system. Once a well-articulated medium-term consolidation framework is in place, the government should consider transforming it into a fiscal rule based on combined structural deficit and public debt objectives. A comprehensive reform of the fiscal federalism arrangement should aim at resolving the current large horizontal and vertical imbalances, including by making regional and local governments more responsible for the costs that their decisions impose at the federal level and on the social security system.
Financial Sector Stability Needs to be Strengthened Further
8. Since the worst of the financial crisis, the financial situation of the Belgian banking sector has stabilized but the availability and increasing the quality of capital remain a challenge. The unprecedented government support and improved market conditions have enabled the banks to raise their capital ratios and to de-leverage. While the banks’ increased focus on traditional lending activities is welcome, they will be affected by the difficulties in generating and retaining earnings in a mature and competitive market. Moreover, the banks could face additional losses and write-downs from their residual exposure to risky assets as well as deteriorating asset quality and increased counterparty risks due to the weak economic environment. Belgian banks also remain exposed to potential spillovers from both mature markets and emerging Europe. At the same time, regulatory changes will likely make capital requirements more stringent. The uncertain bank profitability outlook suggests that the banks’ ability to generate internal capital may be constrained and that they may have to continue to rely on external sources of capital, including through private recapitalization, for an extended period.
9. Drawing upon the lessons of the crisis, the authorities have decided to enhance the supervisory framework but heightened vigilance is required during the transition period. A reform of the supervisory framework has been initiated and by early 2011 the National Bank of Belgium (NBB) will be responsible for both micro- an macro-prudential supervision over banks, insurance companies, and pension funds. This reform is welcome and the authorities need to remain vigilant during the transition period to ensure: (i) the appropriate governance of the transitional supervisory body; and (ii) the efficacy of the governing board of the resulting single supervisor. In addition, the authorities have prepared a draft crisis law that aims to establish a rule-based resolution framework to deal with nonviable financial institutions while minimizing moral hazard and losses to taxpayers. As the recent crisis has highlighted the need for international cooperation in financial regulation and supervision, the Belgian authorities should support the implementation of European regulatory reform, including the European Systemic Risk Board and proposals to raise capital adequacy standards in terms of levels and quality. Exit strategies on bank/asset guarantees and deposit insurance need to be aligned with other EU countries
Structural Reforms are Crucial to Improve Competitiveness and Boost Growth
10. A reduction in the competitiveness gap is necessary for Belgium to fully reap the benefits of an expansion of global trade. Notwithstanding some moderation in wage growth this year, the competitiveness gap has led to declining shares of many export sectors in foreign markets. Particular attention should be given to an appropriate adaptation of wage setting mechanisms, supported by measures to increase competition, innovation, and mobility of resources across sectors.
11. Raising the low employment rate in Belgium is needed to increase economic growth and reduce fiscal imbalances. Lifting the Belgian employment rate to the Euro area average could increase potential output growth by about ½ percent per year, on average, over the next five years. While measures to enhance activation policies and to reduce the labor tax wedge are steps in the right direction, more needs to be done. In particular, raising the effective retirement age by limiting pathways into early retirement and stepping up activation and training programs for older workers could bring sizable benefits. To facilitate re-absorption of the unemployed into the labor market, further action is needed to enhance monitoring of job search activities, apply penalties for refusal of suitable jobs, and increase job counseling and training opportunities. In addition, limiting the level of unemployment benefits over time or their duration would be effective in strengthening incentives for job search. With the further rise in cyclical unemployment in 2010, an extension of the temporary unemployment programs until the middle of next year would be welcome.
12. Competition in product and service markets needs to be further strengthened to lower prices and boost external competitiveness and growth. To this end, the Competition Authority should be further empowered and its cooperation with sectoral regulators improve. The Competition Authority should be able to conduct independent sectoral analyses and issue specific recommendations regarding policy changes that could improve competition. In the service sector, the EU Services Directive provides an opportunity for further liberalization that should be fully seized.
1 The mission thanks the Belgian authorities for their generous hospitality and the frank discussions.