IMF Executive Board Concludes 2007 Article IV Consultation with Spain

Public Information Notice (PIN) No. 07/54
May 18, 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 for the 2007 Article IV Consultation with Spain is also available.

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


The prolonged phase of economic expansion continued in 2006, with growth accelerating during the year to reach an average 3.9 percent. Domestic demand remained the engine of growth, but demand composition showed some signs of rebalancing. Private consumption and housing investment growth moderated, affected by rising interest rates and stretched household balance sheets. In turn, nonhousing investment and export growth quickened, supported respectively by rising corporate profitability and firming external demand. On the supply side, industrial output and productivity picked up. Job creation continued at a fast pace, with further declines in unemployment and increases in occupation rates. Buoyant fiscal revenues raised the general government surplus to an unprecedented 1.8 percent of GDP-despite steadily rising primary expenditure-and public debt declined below 40 percent of GDP.

The current account deficit widened to 8.8 percent of GDP and net external liabilities rose to
58 percent of GDP. The latter's domestic counterpart was rising private sector indebtedness, which reached 185 percent of GDP. A modest deceleration in household lending was offset by strong corporate borrowing reflecting substantial investment and M&A activity. Average annual inflation increased in 2006, but inflation and the inflation differential with the euro-area average narrowed by end-2007 as oil prices declined and pressures from household spending eased somewhat. The favorable economic environment underpinned strong financial sector profitability. Loan losses, although rising, remained at low levels and well provisioned. Exposure to the real estate sector, however, continued to increase.

Executive Board Assessment

Directors commended the stability-oriented macroeconomic policies and structural reforms that have underpinned Spain's prolonged economic expansion. They welcomed the continued strong output and employment growth observed in 2006 and so far in 2007, as well as the incipient rebalancing of the sources of growth as reflected in a slowing of housing investment and some strengthening of exports. Directors noted these developments were in line with the central scenario of a smooth deceleration of growth over the medium term. Directors also welcomed the positive contribution of large immigration flows to Spain's growth performance.

Directors, nevertheless, cautioned that the sustained increase in private sector indebtedness, reflected in the widening current account deficit, poses risks going forward. In particular, they noted that a sharper-than-expected balance-sheet consolidation, a possible correction in high real estate valuations, and the need to regain competitiveness within EMU may-given persistent economic rigidities-entail a possibly protracted period of slow growth. To forestall such a scenario, Directors stressed the need to safeguard budgetary stability while tempering demand; to expand supply and improve competitiveness by increasing productivity and reducing inflation relative to the euro area; and to preserve financial sector stability.

Directors welcomed the unprecedented fiscal surplus of 1.8 percent of GDP in 2006 and the reduction of government debt to less than 40 percent of GDP. They noted however that this result was due to revenue buoyancy and that primary spending has been rising steadily. Directors thus called for a more resolute expenditure-based countercyclical fiscal stance in the current favorable environment, in keeping with the new Budget Stability Law. To this end, many Directors advised that the 2008 budget aim to keep central government primary expenditure constant as a share of GDP. While Directors saw merit in the authorities' strategy to increase spending on infrastructure, research and development, and education, some suggested that a thorough review of the efficiency of such spending be undertaken.

Directors stressed that regional governments, which account for a large share of expenditure, should contribute to fiscal restraint by aiming for an appropriately ambitious surplus. Successful implementation of the Budget Stability Law also requires strengthening fiscal accountability by improving transparency of the public accounts, in particular through more timely reporting of fiscal data at the territorial level.

Directors underscored the need for further steps to secure longer-term fiscal sustainability, particularly in light of the potential budgetary impact of the ageing population. While welcoming the continued accumulation of social security surpluses in the Reserve Fund and the contribution of the recent pension reform, Directors encouraged early action in the next legislature to place the pension and health care systems on a sustainable long-term path.

Directors encouraged determined implementation of the authorities' National Reform Program, which addresses some of the key factors constraining productivity. They called, in particular, for stepped-up implementation of competition-enhancing efforts, underpinned by a strong political commitment to promoting contestable markets. Specifically, Directors supported early passage of the new Competition Law, proactive exercise of the competition authority's new powers, and a strengthening of the independence of sectoral regulators. Directors also saw implementation of the EU Services Directive as an opportunity to foster deregulation and competition in sheltered sectors. Several Directors also noted the need for more ambitious labor market reforms.

Directors welcomed the vibrancy, soundness, and stability of the financial sector, and encouraged continued Bank of Spain vigilance in the face of strong credit growth and exposure to the real estate sector. Directors looked forward to passage of pending legislation to implement the Markets in Financial Instruments Directive and Basel II.

Spain: Selected Economic Indicators, 2002-06

  2002 2003 2004 2005 2006


Real economy (change in percent)


Real GDP

2.7 3.0 3.2 3.5 3.9

Domestic demand

3.2 3.8 4.8 5.0 4.6

HICP (average)

3.6 3.1 3.1 3.4 3.6

Unemployment rate (in percent)

11.5 11.5 11.0 9.2 8.5

Public finance (general government; in percent of GDP)


Overall balance

-0.3 0.0 0.5 1.1 1.8

Primary balance

2.4 2.3 2.6 2.9 3.5

Interest rates


Money market rate

3.3 2.3 2.0 2.1 2.8

Government bond yield

5.0 4.1 4.1 3.4 3.8

Balance of payments (in percent of GDP)


Trade balance

-5.0 -5.1 -6.4 -7.6 -8.3

Current account

-3.3 -3.5 -5.3 -7.4 -8.8

Fund Position (as of February 28, 2007)


Holdings of currency (in percent of quota)


Holdings of SDRs (in percent of allocation)


Quota (in millions of SDR)


Exchange rate


Exchange rate regime

Euro Area Member

Present rate (April 05, 2007)

US$ 1.3428 per euro

Nominal effective rate (2000 = 100)

102.9 106.7 107.8 105.9 107.0

Real effective rate (2000 = 100)

106.4 111.1 113.3 113.3 114.8

Sources: INE; Bank of Spain; IFS; and IMF staff estimates.

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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