IMF Executive Board Concludes 2011 Article IV Consultation with Spain

Public Information Notice (PIN) No. 11/102
July 29, 2011

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 2011 Article IV Consultation with Spain is also available.

On July 22, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.1


After more than a decade of strong expansion led by a credit-fueled housing boom, the Spanish economy was hit by three major shocks: the global financial crisis, the busting of Spain’s domestic boom, and the euro area debt crisis. These shocks exposed Spain’s vulnerabilities stemming from accumulated imbalances and pushed the economy into a sharp recession, with the euro area debt crisis subsequently putting pressure on funding costs.

The economy has been gradually recovering and rebalancing. Growth has gradually picked up from the first quarter of 2010, led by strong exports as the rebalancing to external demand proceeded. Private sector savings-investment balances have improved, helping stabilize debt ratios and reduce the current account deficit. The housing market continued to adjust. Real wages moderated and unit labor costs improved. However, at around 21 percent, the unemployment rate is more than twice the euro area average. Inflation has picked up, led by energy prices and indirect taxes, and is again above the euro area average. A reform of collective bargaining aiming at greater firm-level flexibility was presented to Parliament in June 2011, complementing the June 2010 labor market reform.

Fiscal consolidation is underway, aimed at achieving a deficit target of 3 percent of GDP in 2013. The fiscal deficit improved by about 2 percentage points of GDP from 2009 to 9.2 percent of GDP in 2010, and the 2010 deficit target was reached - reflecting both a rebound in revenue, notably in VAT, and lower expenditure. About half of the regions missed their targets, which was more than offset by over-performance by the central government. A comprehensive draft pension reform was agreed with social partners, and the dissemination of fiscal data at the regional level was enhanced.

Banks are deleveraging and increasing their capital buffers but asset quality has continued to deteriorate. Lower lending activity and increasing nonperforming assets have reduced banks’ interest margins, as funding costs have been rising since end-2010. Nonetheless, Spanish banks have increased their Tier 1 capital ratio from 8.4 percent in 2008 to 9.6 percent in 2010, with large international banks continuing to benefit from geographical and business diversification. The saving bank sector was reshaped through a merger/integration process that led the number of savings banks to decline from 45 to 18. Capital standards were strengthened through a decree approved in February 2011 that prompted savings banks to transfer their banking activities to commercial bank entities and prepare plans for recapitalization through IPOs or participation of the Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria—FROB). Transparency was also improved through enhanced disclosure of individual banks’ real estate exposures and funding profiles.

Executive Board Assessment

Executive Directors noted the authorities’ strong and wide ranging policy response to the economic challenges, which has helped strengthen market confidence. Directors underscored, however, that downside risks still dominate and that unwinding imbalances and reallocating resources across sectors will need the support of continued and decisive policy action.

Directors commended the authorities for the reconfiguration of the savings bank sector, enhanced capital standards, and the greater transparency in individual bank exposures. They also welcomed the wide participation of Spanish financial institutions in the recent EU stress tests, and noted that the results highlight the importance of the backstop provided by the authorities. In this regard, Directors agreed that decisive implementation of the reform strategy for the financial sector is critical to allay lingering market concerns. Directors also saw scope for further strengthening provisioning and capital buffers, and building on recent transparency efforts.

Directors noted that an improved policy framework would facilitate the achievement of the fiscal targets. They welcomed the authorities’ commitment to reduce the fiscal deficit, and the recent enactment of pension reform. Directors emphasized that steadfast fiscal adjustment is key, and noted that, if near-term risks to the outlook materialize, additional measures may be needed. Noting the reliance of the adjustment on measures at the sub-national level, Directors urged all levels of government to deliver on their fiscal commitments. They encourage the authorities to be vigilant and consider further fiscal measures as needed to achieve medium-term targets and put the debt ratio on a firmly declining path.

Directors recognized the authorities’ efforts to address entrenched rigidities in the labor market and encouraged them to persevere with reforms to reduce the unacceptably high level of unemployment. In particular, Directors called for more decentralized wage bargaining as well as less indexation and further lowering severance payments.

Directors agreed that structural reforms in the non-tradable sector aimed at raising productivity and the growth potential should complement labor market adjustments. In particular, priority should be given to establishing a more efficient regulatory environment and further opening up regulated professions and services.

Spain: Selected Economic Indicators, 2006–11
(Percent change, unless otherwise indicated)
  2006 2007 2008 2009 2010 2011  

Demand and supply in constant prices


Gross domestic product

4.0 3.6 0.9 -3.7 -0.1 0.8

  Private consumption

3.8 3.7 -0.6 -4.2 1.2 0.7

  Public consumption

4.6 5.5 5.8 3.2 -0.7 -1.2

  Gross fixed investment

7.2 4.5 -4.8 -16.0 -7.6 -2.8

    Construction investment

6.0 3.2 -5.9 -11.9 -11.1 -8.0

Total domestic demand

5.2 4.1 -0.6 -6.0 -1.1 -0.4

Net exports (contribution to growth)

-1.4 -0.8 1.5 2.7 1.0 1.3

Exports of goods and services

6.7 6.7 -1.1 -11.6 10.3 11.0

Imports of goods and services

10.2 8.0 -5.3 -17.8 5.4 5.6

Potential output growth (long run HP-filter)

2.7 2.7 2.4 1.4 0.5 0.4

Output gap (percent of potential)

3.0 3.9 2.4 -2.8 -3.4 -2.9

Household savings (percent of disposable income)

11.1 10.8 13.5 18.2 13.1 12.3



GDP deflator

4.1 3.3 2.4 0.6 1.0 1.6

HICP (average)

3.6 2.8 4.1 -0.2 2.0 3.0

HICP (end of period)

2.7 4.3 1.5 0.9 2.9 2.3

Employment and wages


Unemployment rate (in percent)

8.5 8.3 11.3 18.0 20.1 20.1

Unit labor cost in manufacturing

2.8 4.1 6.9 2.8 -4.6 -1.2

Labor cost in manufacturing

4.1 3.7 4.8 5.0 1.4 1.5

Employment growth

3.9 3.0 -0.4 -6.6 -2.3 -0.1

Labor force growth (in percent) 1/

3.2 2.7 3.0 1.0 0.2 -0.1

Balance of payments (percent of GDP)


Trade balance (goods)

-8.5 -8.6 -7.9 -4.0 -4.4 -4.5

Current account balance 2/

-9.0 -10.0 -9.6 -5.2 -4.5 -4.2

Net international investment position

-65.9 -78.1 -79.3 -91.1 -87.1 -88.6

Nominal effective rate (2000=100) 3/

100.9 102.8 104.4 105.1 101.3 102.6

Real effective rate (2000=100,CPI-based) 3/

102.2 105.0 106.6 106.9 103.6 104.1

Public finance (percent of GDP)


General government balance

2.0 1.9 -4.2 -11.1 -9.2 -6.2

Primary balance

3.7 3.5 -2.6 -9.4 -7.3 -4.1

Structural balance

-1.2 -1.1 -4.9 -9.2 -7.4 -4.7

General government debt

39.6 36.1 39.8 53.3 60.1 67.5

Fund position (June 30, 2011)


Holdings of currency (percent of quota)


Holdings of SDRs (percent of allocation)


Quota (millions of SDRs)


Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.


1/ Based on national definition (i.e., the labor force is defined as people older than 16 and younger than 65).


2/ Capital account not included.


3/ Based on data from IMF, International Financial Statistics. Data for 2011 refer to March 2011.


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. An explanation of any qualifiers used in summing up can be found here:


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