IMF Executive Board Concludes 2006 Article IV Consultation with Italy

Public Information Notice (PIN) No. 07/20
February 15, 2007

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2006 Article IV Consultation with Italy is also available.

On February 7, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.1


The economy is enjoying a broad-based, if comparatively modest, cyclical upswing. Output is estimated to have grown by 1¾ percent in 2006--the strongest pace since the beginning of the decade. Inflation is close to that of the euro area, financial conditions are favorable, unemployment is falling, and the current account deficit is moderate. However, growth--constrained by sluggish potential--is projected to ease to around 1½ percent this year. And despite recovering exports and some initial signs of economic restructuring, medium-term productivity and competitiveness trends remain of concern.

Unexpectedly strong revenues contributed to a better underlying fiscal outturn last year. Net of two large one-off operations, the deficit is estimated to have been well below the original target of 3½ percent of GDP, despite recurrent spending overruns. The 2007 budget will likely achieve the objective of bringing the headline deficit under the key 3 percent of GDP threshold. The public debt ratio, after rising in 2005-06, should broadly stabilize at around 107 percent. The 2007 budget included several structural spending containment initiatives, but some of their key aspects have yet to be finalized.

Some progress has been made on broad-based structural reform. Deregulation of selected services got an initial impetus from a decree adopted last July, and a follow-up liberalization package has been approved. However, recent initiatives in labor contracting envision a partial roll-back of earlier liberalizing reforms. Banking sector consolidation and competition have been tangibly boosted, and various reforms to enhance financial sector transparency have progressed. Still, Italy's product and labor markets remain rigid and nonbank financial intermediation is relatively undersized.

Executive Board Assessment

Executive Directors welcomed Italy's economic upturn, noting its broad-based nature, continued employment gains, stable inflation rate, and signs of economic restructuring. At the same time, buoyant revenues are helping the fiscal outturn and progress has been achieved on the structural reform agenda. Directors welcomed the authorities' ambitious medium-term economic plan, and underscored that the opportunity offered by the cyclical upswing and the early phase of the new government's mandate not be missed. New progress in boosting productivity and increasing competition in product and services markets will be needed to sustain good growth performance.

Directors were encouraged by the better-than-anticipated 2006 fiscal outturn, excluding one-off measures. They noted that this mostly reflected stronger revenue buoyancy, a good part of which appears structural. However, primary spending is estimated to have appreciably exceeded the original budget targets, indicating continued expenditure control problems.

Directors considered that the 2007 budget would secure the important milestone of bringing the deficit below 3 percent of GDP. Directors viewed many of the budget's revenue measures as well-founded, especially those combating evasion and widening the tax base. At the same time, while acknowledging some initial expenditure control measures, Directors noted that the planned 2007 adjustment relies heavily on revenues. They accordingly called for rapid progress in structural spending reforms in the key areas of public employment, local government finances, and health care. Safeguarding the financial impact of the already-legislated pension reforms would also be essential. In addition, several state enterprises need restructuring to reduce their drain on public resources. Directors stressed that stronger efforts to control spending in all these areas would be key to rebuilding the primary surplus, driving down debt, and ensuring the durability of Italy's re-entry under the 3 percent of GDP deficit threshold.

Given Italy's aging population and high public debt, Directors cautioned that fiscal consolidation would need to be pursued considerably further for longer-term sustainability to be achieved. To buttress the authorities' medium-term objective of a small overall surplus, Directors encouraged prompt adoption of a multi-year spending framework with clear targets for outer years, backed by explicit expenditure-saving and efficiency-oriented measures. An overhaul of cumbersome budget procedures-including strengthening budgetary governance and introducing an explicit rule assigning revenue overperformance to deficit reduction-would also be helpful. Directors noted that the resulting durable improvements in expenditure control would in due course create scope for tax reduction, while safeguarding fiscal adjustment.

Directors underscored that vigorous pursuit of structural reforms aimed at reducing regulation, increasing competition, and improving the business environment is necessary to raise productivity and growth. In this context, they welcomed recent and planned product market liberalization and competition-enhancing initiatives, and called for accelerated progress across a broad front to garner wide public support, emphasizing the benefits of a well-coordinated strategy and explicit timeframes. While cautioning against any reversal of prior liberalizations of labor contracting, which contributed to buoyant employment growth this past decade, Directors recommended the development of an adequate safety net, with improved unemployment support, to mitigate the effects of the needed greater employment flexibility. They also noted that pension reform, by providing incentives to lengthen the average working life, could support economic growth and welfare.

Directors noted that the financial system remains sound and well supervised, and welcomed recent actions to enhance competition and transparency in financial markets. In particular, the greater contestability observed in the banking sector, reflected in the ongoing consolidation, stands to improve efficiency and the quality of services. Directors also welcomed the significant progress in implementing the recommendations of the 2005 Financial System Stability Assessment. At the same time, Directors underscored that to fully play its role in promoting growth, the financial sector needs to complement its reliance on bank intermediation with a greater role for capital markets. This entails action across a broad front, including measures to improve enforcement of the legal framework.

Directors encouraged the authorities to increase their official development assistance toward the UN target of 0.7 percent of gross national income.

Italy: Selected Economic Indicators


2002 2003 2004 2005 2006 1/

Real economy (change in percent)


Real GDP

0.3 0.0 1.1 0.0 1.7

Total domestic demand

1.3 0.9 1.0 0.3 1.7

Current account balance (in percent)

-0.7 -1.3 -0.9 -1.6 -2.2

CPI (average)

2.6 2.8 2.3 2.2 2.2

Unemployment rate (in percent)

8.6 8.5 8.1 7.7 7.0

Public finance (in percent of GDP)


General government balance

-2.9 -3.4 -3.4 -4.1 -5.0

General government debt

105.5 104.3 103.9 106.6 107.1

Monetary and financial indicators


Private sector credit 2/

7.8 9.1 6.7 10.1 12.0

National contribution to euro area M3 3/

10.7 9.4 5.1 6.3 6.7

6-month interbank rate (percent, end of period) 4/

3.3 2.3 2.1 2.6 3.8

Government bond rate, 10-year (percent)

5.0 4.2 4.3 3.5 4.0

Fund position (as of December 31, 2006)


Holdings of currency (percent of quota)


Holdings of SDRs (percent of allocation)


Quota (millions of SDRs)


Exchange rates


Exchange rate regime

Member of EMU


Euro per U.S. dollar (January 31, 2007)


Nominal effective rate (2000=100)

101.6 105.8 107.2 107.3 107.8

Real effective rate (2000=100) 5/

104.3 111.4 113.8 112.2 111.9

Sources: Istat; IMF, International Financial Statistics; Bloomberg; Eurostat; and Fund staff estimates and projections.

1/ Staff estimates and projections, unless otherwise noted.

2/ Twelve-month credit growth, adjusted for securitizations. 2006 data refer to August.

3/ Excludes currency in circulation held by nonbank private sector. 2006 data refer to November.

4/ Data for 2006 refer to December.

5/ Based on CPI.

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.


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