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.

San Marino—2014 Article IV Consultation Concluding Statement of the Mission

February 7, 2014

Last year saw some important policy achievements. Nonetheless, the economy suffered another large contraction due to the combined effects of the black list and weak demand from abroad; a recovery in 2014 will depend on these factors reversing. While recapitalizing Cassa di Risparmio della Repubblica di San Marino (CRSM) was important, governance reforms will also need to be enacted in order to return the bank to profitability. The government should build upon the significant savings delivered by the 2014 budget to put public finances on a sound path. Finally, sustained growth and job creation will require rebuilding the economy on new foundations, and this will be best achieved with a continued commitment to greater openness and transparency.

1. Last year saw some important achievements. The double taxation treaty with Italy has finally entered into force, clearing one hurdle for San Marino’s removal from the black list; deposits in the banks have stabilized and even increased in some cases, meaning that banks now have comfortable liquidity; and parliament recently passed an important tax reform.

2. Still, the challenges remain daunting. The economy is estimated to have suffered a circa 5 percent contraction last year, as many firms continue to suffer from the effects of the black list and weak external demand. While there are tentative signs of stabilization in a few specific sectors, a recovery will be difficult despite the authorities’ efforts as long as relations with Italy are not fully normalized and banking sector vulnerabilities remain. More generally, San Marino faces modest medium-term growth prospects, as the task of rebuilding the economy on new foundations after the demise of the old economic model will take time.

3. An immediate priority is to bring CRSM back to profitability. Recapitalizing CRSM was important, as the bank is a cornerstone of the financial system and the economy at large. Nonetheless, the State needs to go further than simply providing funds. Now that legal provisions protecting the Foundation’s majority stake in the bank have been removed, the State should demand a majority stake in line with its capital contributions, something that did not happen in previous recapitalization rounds. This would protect taxpayers’ interests, and be in line with best international practice. Moreover, the new CRSM board members should be appointed primarily on the basis of their banking expertise, so that the board can develop and execute a credible plan to turn around the bank’s fortunes.

4. The crisis has also put significant pressures on other banks in the system. While these banks meet prudential requirements, non-performing loans will continue to put pressure on their capital bases. At this crucial time, the central bank needs to be given appropriate resources to scale up its on-site supervisions, to ensure banks are quickly identifying and tackling any emerging troubles and provisioning adequately for losses. More generally, an external review of banks’ asset quality, in line with what is being done in other European countries, could increase confidence among external investors about the soundness of the Sammarinese banking system.

5. The 2014 budget contains courageous measures that deliver significant savings. The recent tax reform makes the system more efficient by reducing exemptions, and is expected to generate more revenue for the State despite lower nominal tax rates. Furthermore, the budget contemplates significant cuts in public sector wages, cuts which are undoubtedly painful to many but which will lead to a much-needed reduction in expenditure, consistent with the smaller post-crisis Sammarinese economy. All in all, we expect the central government deficit to fall from -2.3 percent of GDP in 2013 to -1.3 percent this year.

6. However, further fiscal consolidation will be required. As a small open economy, San Marino needs fiscal space to respond to potential shocks, all the more given limited access to foreign financing. Yet lower tax revenues due to the crisis together with bank recapitalization costs have pushed public debt up from 11 percent of GDP in 2007 to 30 percent now, while government reserves have been exhausted. Moreover, debt is expected to continue rising in the foreseeable future despite the savings in the 2014 budget. To arrest these trends, the government must aim to gradually move towards a 2—2½ percent of GDP surplus, equivalent to €30—40 million in additional savings.

7. Initiatives underway could and should deliver significant additional savings. The reform of indirect taxation slated for discussion in mid-2014 would present a welcome opportunity to not only make the tax system more efficient but also to generate additional revenue, as the reform of direct taxation did. In parallel, the ongoing expenditure review will help identify potential savings in the areas of public wages, pensions, and health and social benefits. Attention will need to be paid to ensure that cuts are well targeted and equitable.

8. San Marino has made important strides in shedding the legacy of the past. All stakeholders in Sammarinese society understand that the future lies in diversifying beyond banking, and in integrating more deeply with Emilia Romagna—one of the most dynamic regions in Italy—but also with Europe and the world. Despite San Marino’s comparative advantages, notably a competitive tax environment and a relatively flexible labor code, achieving these goals will take time; it will also require a normalization of relations with Italy, in particular the exit from the black list. Continued actions to underscore San Marino’s commitment to openness and transparency, exemplified by the ratification of the double taxation treaty and by the country’s acceptance into the Single Euro Payments Area, will remain the key to success.

We would like to thank the authorities and other interlocutors for the frank and open discussions and their warm hospitality.



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