IMF Executive Board Concludes 2006 Article IV Consultation with Belgium

Public Information Notice (PIN) No. 07/26
March 5, 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 Belgium is also available.

On February 16, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1


The economic upturn that started in mid-2005 has remained on track. On the heels of a catch-up in private investment, the revival of private consumption and the cyclical expansion in neighboring countries have broadened the recovery to all sectors of the economy. Underlying inflation has been stable and broadly in line with the euro area average. At odds with developments elsewhere in the euro area, the unemployment rate has not declined significantly. Comparatively faster labor force growth, high relative labor costs, and less wage moderation seem to be contributing factors. The real exchange rate has been appreciating, eroding competitiveness, and while exports shares have kept up well in value, they have declined in volume terms. Nonetheless, the current account has remained in surplus.

Despite some real exchange rate appreciation and interest rate hikes, monetary conditions have remained accommodating, only recently reaching their long-run average. Fiscal policy turned procyclical in 2006, imparting an impulse of almost 1 percentage point of GDP, as growth surprised on the upside. The 2007 budget aims for a surplus of 0.3 percent of GDP and a structural improvement of 0.6 percent of GDP. Recourse to one-off measures to reach budget objectives is set to diminish, and primary spending growth will be slightly below GDP growth. Federal government spending is more restrictive, but regional authorities, which have little or no debt and an increasing share of revenue, are set to ramp up spending.

Against this background, economic growth is expected to slow but maintain a robust pace. The staff projects GDP growth to decline from nearly 3 percent in 2006 to 2.2 percent in 2007, as rising interest rates dampen demand, residential construction eases from its recent sustained vigorous pace, the fiscal stance turns restrictive, and the global environment softens. Over the long run, demographics are likely to lessen growth, and aging-related costs will add several percentage points of GDP to fiscal spending.

Benefiting from a benign risk environment, low interest rates and effervescent equity markets, financial enterprises are experiencing high returns. Banks remain well capitalized, and solvency and coverage ratios of insurance companies and pension funds have been rising. The internationalization of financial institutions has been accelerating, while banks are expanding in nontraditional areas and emerging markets. Households have been increasing their claims on institutional investors, and mortgage financing has been their largest source of credit. Corporate deleveraging is continuing.

In line with the 2005 Financial Sector Assessment Program (FSAP) recommendations, regulations and supervision in banking, insurance, securities, payments, and settlement have been fully aligned with international standards, pension fund and insurance supervision upgraded, and internal controls and operation of the supervisory agency improved.

On other structural issues, the upward trend in employment rates is set to continue, though it will contribute only two thirds of the long-term increase targeted by the authorities. The measures of the recently implemented Generation Pact will help to cover part of the remaining gap. Emphasis is being placed on activation and training policies. Marginal taxes on the high skilled have been cut, efforts to promote research and development bolstered, and the administrative burden on businesses and households reduced. The services sector is set to be subject to international competition in line with the EU directive.

Executive Board Assessment

Executive Directors commended the authorities on their sound fiscal and financial policies, and in particular, the significant fiscal consolidation which has allowed the economy to perform well and the financial sector to gain further resilience. They identified population aging and globalization as the key long-run challenges and expressed some concern about the recent erosion of competitiveness. Addressing these issues requires building up budget surpluses, moderating wage growth, and further improving education and the functioning of labor and product markets. To achieve these objectives in a timely manner, Directors called for a coordinated early and decisive policy response across all levels of government.

Directors noted that the pace of economic growth was expected to ease, but remain robust in 2007. They saw uncertainties surrounding this outlook associated with house price developments, external demand, and a possible euro appreciation. Directors agreed that the real effective exchange rate was broadly in line with fundamentals, but emphasized that competitiveness should not be allowed to erode further, which would require wage moderation and productivity-enhancing structural reforms.

Directors welcomed the strength and resilience of the financial sector. They commended the authorities on the major strides made in improving the already high quality of supervision, in line with the 2005 FSAP recommendations. Directors emphasized that there is a need to further improve cooperation between the supervisory agency (CBFA) and the central bank. They encouraged supervisors to focus on the rapid expansion of bank-insurance groups in nontraditional areas and other countries, which is changing the systemic risk profile of the financial system.

Directors welcomed the authorities' intentions to fully implement their multi-pronged approach to dealing with aging, consisting of fiscal adjustment and growth-enhancing reforms. In this context, Directors recommended a more ambitious path for fiscal consolidation, and considered that the authorities should lock in the structural adjustment and nominal surplus targeted in the 2007 budget, and the reduced recourse to one-off fiscal measures. Directors noted that further pension reforms would be essential, especially the phasing out of early retirement systems and the establishment of full actuarial fairness of the pension system. The growth of health care spending should be contained, building on recent progress in this area.

Directors observed that successful fiscal consolidation would require a revision to fiscal federalism arrangements and a strengthening of fiscal institutions. Though essentially a political matter, they underscored that in revising the revenue-sharing and allocation of spending responsibilities across levels of governments, accountability and coordination of fiscal and economic policies among federal and sub-federal entities would need to be strengthened, particularly as the fiscal objective shifts from balancing the budget to building up surpluses. Directors welcomed the resumption of the activities of the High Council of Finance and supported the authorities' intention to enhance the internal stability pact.

Directors felt that further labor market reforms, building on the steps taken in the Generation Pact, would be essential to lift employment rates and lower the costs of aging and encouraged the authorities to work on building the necessary consensus. They welcomed the sharpened focus on job search incentives and assistance, while recommending further streamlining and coordination of labor market policies across regions. They saw a need to lower the tax burden on labor, improve training, and reduce the generosity of out-of-work benefits. In particular, the duration of unemployment benefits would need to be limited in time. Over the medium term, Directors felt that the wage bargaining framework ought to be made more conducive to job creation, by taking better into account developments in productivity and employment rates in setting wages. They welcomed reforms in product markets, the reduction in the administrative burden, and the policies under way to promote innovation. Directors encouraged the authorities to accelerate the removal of obstacles to competition in the services sector.

Belgium: Selected Economic Indicators

  2003 2004 2005 2006 1/ 2007 1/

Real economy (change in percent)


Real GDP

1.0 2.7 1.5 2.9 2.2

Domestic demand

0.9 2.9 2.1 2.7 1.7


1.5 1.9 2.5 2.4 1.9

Unemployment rate (in percent)

8.2 8.4 8.4 8.3 8.1

Public finance (percent of GDP)


General government balance

0.0 0.0 -2.3 0.0 0.0

General government balance excluding Eurostat

adjustment 2/

0.0 0.0 0.1 0.0 0.0

Structural balance

-0.8 -0.7 0.2 -0.7 -0.4

Primary balance

5.4 4.7 2.0 4.1 3.9

General government debt

98.6 94.4 91.5 87.4 84.1

Interest rates (percent)


Money market rate (3 months)

2.3 2.1 2.2 3.0 ...

Government bond yield

4.2 4.1 3.4 3.8 ...

Balance of payments (percent of GDP)


Trade balance

3.5 2.7 1.6 1.2 1.4

Current account

4.1 3.5 2.5 2.4 2.7

Official reserves (US$ billion)

11.0 10.4 8.2 8.1  

Exchange rate


Exchange rate regime

  Member of EMU

Euro per U.S. dollar (January 4, 2006)


Nominal effective rate (2000=100, ULC based)

101.6 105.7 106.8 106.9  

Real effective rate (2000=100, ULC based)

104.8 109.4 111.8 113.8  

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

1/ IMF staff estimates and projections.

2/ According to Eurostat, the debt transfer of the national railway company to the Railway Infrastructure Fund should be accounted as expenditure in 2005.

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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