## 1belea2021001

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### Executive Board Assessment and Staff Appraisal
- Timely, strong, sustained policy response cushioned impacts on households, firms, and activity.
- Uncertainty remains high, dominated by Covid-19 dynamics; near-term risks are balanced.
- Directors' guidance:
  - Keep targeted support in place until the crisis abates and recovery is firmly entrenched.
  - Then refocus policies on long-standing fiscal and structural challenges.
  - Rebuild buffers via a credible, expenditure-led adjustment plan achieving ambitious and steady deficit reduction while protecting critical social spending and creating space for growth-enhancing public investment.
  - Endorse spending reviews and concrete reforms to contain aging and benefits pressures and improve efficiency.
  - Support tax reforms under preparation, including measures aimed at enhancing compliance.
  - Financial sector: avoid premature policy tightening; remain vigilant to real estate risks and consider macroprudential measures.
  - Social and labor market: pivot from preserving jobs to fostering reallocation and participation through active labor market policies and fundamental reforms of social benefits, wage-setting, and employment-protection.

### Outlook and Risks
- Growth projections:
  - Recovery to 5.4 percent in 2021, 3.1 percent in 2022, then return to potential of 1.3percent over the medium term.
- Potential output growth: 1.1 (2019), -2.7 (2020), 3.5 (2021), 1.7 (2022).
- Output gap (in percent): 0.1 (2019), -3.7 (2020), -1.7 (2021), -0.3 (2022).
- Near-term risks:
  - Upside: stronger recovery with vaccination/reopening.
  - Downsides: prolonged pandemic, tighter financing conditions, post-pandemic loss of policy momentum.
- Scarring and Covid specifics:
  - Scarring likely more contained than initially feared; reallocation hampered by labor and product market rigidities.
  - Vaccination progress: >67 percent with at least one dose; 50 percent fully-vaccinated.
  - Target: full vaccination for 70 percent by September is within reach.
  - Economy contracted by -6.3 percent in 2020; GDP fell by 15 percent in H1 2020.

### Fiscal Policy Findings and Recommendations
- Fiscal outlook (selected series, percent of GDP):
  - General government balance: -1.9 (2019), -9.4 (2020), -7.1 (2021), -4.5 (2022).
  - Structural balance: -2.2 (2019), -7.4 (2020), -6.3 (2021), -4.4 (2022).
  - Primary balance: 0.1 (2019), -7.4 (2020), -5.4 (2021), -3.1 (2022).
  - General government debt: 98.1 (2019), 114.1 (2020), 113.6 (2021), 113.1 (2022).
  - Revenue: 50.2 (2019), 50.6 (2020), 50.3 (2021), 50.2 (2022).
  - Expenditure: 52.1 (2019), 60.0 (2020), 57.4 (2021), 54.6 (2022).
- Policy recommendations:
  - Continue targeted support until recovery is firmly entrenched, focused on hard-hit households and firms.
  - Rebuild fiscal buffers through medium-term consolidation focused on aging pressures, better benefit targeting, and spending efficiency.
  - Generate additional savings to create space for higher public investment and green-digital transformation.
  - Pursue tax reforms to lower labor taxes, simplify the tax system, meet climate objectives, broaden bases, and enhance compliance.
  - Undertake spending reviews and concrete reforms to contain aging and benefits pressures and improve efficiency.

### Financial Sector and Macroprudential Policies
- Measures and developments:
  - Counter-cyclical capital buffer (CCyB) released; possible reinstatement from Q2:2022 at the earliest.
  - ECB debt purchases (~80 percent of net issuance) lowered yields; interest payments remained at 2 percent of GDP.
  - Moratoria affected €35bn of loans—3½ percent of portfolios—at the summer 2020 peak; ended in June 2021.
  - Large loan guarantee envelopes announced; take-up limited.
- Policy guidance:
  - Avoid premature policy tightening; use available buffers to bolster recovery.
  - Vigilance to real estate risks; consider macroprudential measures if imbalances mount.
  - Assist financial sector adaptation to low interest rates, digitalization, and climate change.
  - Continue efforts to strengthen the AML/CFT framework.

### Structural Reforms and Labor Market
- Key challenges:
  - Deep-rooted labor and product market rigidities, labor market fragmentation, weak business dynamism.
  - Vulnerable groups disproportionately affected: younger, temporary, and lower-skilled workers.
- Recommended reforms:
  - Shift from preserving jobs to facilitating reallocation and participation via active labor market policies (ALMPs) as recovery firms.
  - Fundamental reforms of social benefits, wage-setting, and employment-protection.
  - Enhance debt-restructuring and insolvency frameworks; reduce regulatory barriers to firm entry and competition.
  - Use the National Recovery and Resilience Plan (NRRP) to boost reforms and green-digital transformation; require coordinated federal-regional efforts.

### Key Statistics (selected)
- Real GDP growth: 1.8 (2019), -6.3 (2020), 5.4 (2021), 3.1 (2022).
- Domestic demand: 1.6 (2019), -6.0 (2020), 4.6 (2021), 4.1 (2022).
- Exports, goods and services: 1.0 (2019), -4.6 (2020), 6.6 (2021), 5.3 (2022).
- Imports, goods and services: 0.8 (2019), -4.3 (2020), 5.6 (2021), 6.5 (2022).
- Unemployment rate: 5.4 (2019), 5.6 (2020), 6.2 (2021), 6.1 (2022).
- Employment growth: 1.6 (2019), 0.0 (2020), -0.5 (2021), 0.8 (2022).
- Consumer prices: 1.2 (2019), 0.4 (2020), 2.3 (2021), 2.1 (2022).
- Nominal GDP (EUR billions): 476.3 (2019), 451.2 (2020), 486.4 (2021), 512.1 (2022).
- Population (millions): 11.5 (2019), 11.5 (2020), 11.5 (2021), 11.6 (2022).
- Covid-19 fiscal support and impacts:
  - Support: 5 percent of GDP in 2020 (¾ STW, SE, and regional grants); deficit widened from 1.9 percent to 9.4 percent of GDP.
  - Debt rose from 98 percent to 114 percent of GDP in 2020.
  - Use of STW schemes: 36.5 percent of employees and 50 percent of SE were covered at the April 2020 peak.

### Financial Sector Resilience and Risks (chapter 7 highlights)
- Public borrower support and supervisory measures helped the financial sector weather the crisis.
- Outcomes and indicators:
  - Unemployment rose through mid-2020 then subsided; bankruptcies dropped by a third last year.
  - Aggregate NPL ratios remained stable; some uptick in impaired exposures to hard-hit firms.
  - Bank profitability supported by low-cost Eurosystem funding; capital cushions strengthened.
- Risks:
  - Low interest rates pressure margins.
  - Provisions may be drawn down as support and moratoria end.
- Real estate and household savings:
  - Households channeled additional savings of €25 billion in 2020 into renovation and purchases.
  - Commercial real estate prices held up despite higher vacancies.
- External position:
  - Current account turned into a small deficit in 2020.
  - CA gap assessed at -1.8 percent of GDP; REER assessed overvalued by 4.3 percent.

### Fiscal Stance, Near-term Guidance, and Medium-term Strategy
- Near-term:
  - Fiscal stance in 2021 appropriately supportive and increasingly targeted.
  - Support projected at 3 percent of GDP in 2021, down from 4.7 percent.
  - Solvency needs estimated by staff at 0.5-2 percent of GDP.
  - Solvency support should leverage private resources, be coordinated, monitored, and tapered as risks abate.
  - Pandemic-related spending should remain temporary and be phased out with recovery.
- Medium-term:
  - Authorities’ plan: fixed annual effort of 0.2 percent of GDP from 2021 and variable effort up to 0.4 percent from 2022 (staff view: plan has shortcomings and unlikely to stabilize debt).
  - Staff recommendation: an effort averaging at least 0.7 percent of GDP annually during 2022-29 to place debt on a downward trajectory from 2024 and reach structural balance by 2029.
  - Adjustment should be expenditure-led and create room for green-digital transformation.
    - Focus areas: containing aging costs (pensions, health), improving benefit targeting and incentives, improving spending efficiencies, reducing duplication and subsidies.
    - Expand and integrate federal and regional spending reviews into the annual budget process.
  - Public investment target: increase by 1½ ppts to 4 percent of GDP by 2030, initially relying on RRF grants.
    - Additional savings of 0.2 percent of GDP needed by 2027 to replace RRF grants.
    - A further 0.2-0.3 percent is needed annually thereafter to reach the 4-percent 2030 investment target.

### Tax Reform Priorities
- Anti-fraud plan (adopted in June) aims for yields of 0.2 percent of GDP by 2024.
- Consider integration of social security contribution and personal income tax collections to lower compliance costs and address fraud risks.
- Comprehensive revenue-neutral reform to lower the tax burden on labor should:
  - Address tight tax-bracket structure at lower incomes.
  - Enhance incentives for labor-market participation, especially for low/medium income and second earners.
  - Restore tax neutrality across different forms of investment, income, and savings.
  - Offset revenue losses through base broadening and reduce favorable PIT treatments.
  - Reduce consumption tax expenditures to rebalance the tax mix.
  - Simplify the exceptionally complex tax system and modernize real estate taxation to address climate objectives.
- Expected international tax changes (notably a global minimum corporate income tax) may boost revenues.

### Box: Post-Pandemic Fiscal Adjustment (quantified)
- Structural deficit expected to widen from 2 percent of GDP in 2019 to 5 percent in 2026, driven by:
  - COVID-19-related spending increases: 0.3 percent of GDP.
  - New policies: 0.6 percent of GDP.
  - Higher aging-related and other benefits: 0.9 percent of GDP.
- Under staff baseline:
  - Primary balance remains well below its debt-stabilizing level by 2.5 ppts of GDP in 2026.
  - Debt would be 21 ppts above the pre-crisis baseline if no additional adjustment is made.
- Staff prescription:
  - Annual structural effort of at least 0.7 percent of GDP over 2022-29 to bring debt on downward path from 2024 and reach structural balance by 2029.
  - Additional savings needed after RRF funding expires from 2027 to finance higher public investment.

### Fiscal, Financial, Macroprudential, and Structural Policy Details (¶18–31 highlights)
- Fiscal:
  - Authorities agree fiscal policy should remain supportive short-term and rebuild buffers thereafter; adjustment should be expenditure-led drawing on spending reviews.
  - Targeted support may be needed after broad support phases out in October.
  - NBB and HCF caution not to extrapolate favorable interest-growth differential; strong upfront commitment and steady consolidation required.
  - Policy change: restrict tax advantages for company cars to zero-emissions vehicles only from 2026.
- Financial and macroprudential:
  - Banks have adequate buffers; use them to mitigate pressures as aid scales back.
  - Recognize credit losses promptly; engage early with viable-but-temporarily-challenged borrowers.
  - Avoid premature policy tightening; allow existing buffers to be used.
  - Pockets of vulnerability: loans from moratoria/guarantees; in Q1:2021 loans subject to moratoria or public guarantees were < €50 billion from a €960 billion portfolio; borrowing by heavily-affected firms was €65 billion.
  - RE vulnerabilities: house prices supported by €25 billion (5½ percent of GDP) excess savings channeled into residential properties in 2020.
  - NBB maintained risk-weight add-on for housing loans (since Dec 2013) and supervisory expectations from Dec 2019 limiting riskier mortgage lending.
  - If imbalances mount, consider macroprudential tightening for highly-leveraged borrowers and commercial segment.
- Structural reforms:
  - Pivot from protecting jobs to facilitating reallocation: condition STW on training/redeployment; shift support to hiring subsidies, retraining, ALMPs.
  - Employment target: raise employment rate to 80 percent by 2030 (+10 ppts), concentrated in Brussels and Wallonia.
  - Measures under consideration: reduce benefit claw-back, improve working conditions, reintroduce “pension bonus,” expand partial retirement, increase parental leave and childcare affordability, combat discrimination, entitle workers to 5 training days annually.
  - Strengthen restructuring/insolvency: introduce SME out-of-court procedures, early-warning mechanisms, allow creditors to initiate procedures, incentivize restructuring via tax relief/haircuts on government claims.
- Recovery and Resilience Facility (RRF):
  - Belgium to receive 1.3 percent of 2021 GDP of grants over 2021-26.
  - RRP expected to lift public investment by 0.1-0.2 ppts, potentially crowd in private investment, raise output by 0.2 percent at peak and 0.1 percent in long run.
  - Largest components: building-renovation (17 percent) and transport infrastructure (11 percent).
  - Implementation challenges: permitting, supply constraints, labor shortages, federal-regional competence division.
- Climate policy:
  - Recommended: eliminate fuel subsidies, credible long-term carbon-pricing framework, complementary measures (regulation, feebates, transition support).
  - Modify company-car taxation to favor zero-emissions vehicles; integrate carbon pricing into tax reforms.
  - Federal and regional climate proposals should be coherent and monitorable.

### Covid-19 Developments, Macroeconomic and Financial Indicators (Annex highlights)
- Pandemic waves with peak infections in fall 2020; mortality declined with vaccination rollout.
- Mobility approaching pre-pandemic levels; confidence indicators point to strong recovery.
- Real GDP (percent change, 2019–2026): 1.8, -6.3, 5.4, 3.1, 1.8, 1.4, 1.3, 1.3.
- Household saving ratio: 13.0, 21.9, 17.1, 14.3, 14.0, 13.7, 13.4, 13.0.
- Public finance projections (percent of GDP):
  - Revenue: 50.2, 50.6, 50.3, 50.2, 50.1, 50.2, 50.0, 50.0 (2019–2026).
  - Expenditure: 52.1, 60.0, 57.4, 54.6, 54.7, 55.1, 55.1, 55.3.
  - General government debt: 98.1, 114.1, 113.6, 113.1, 114.2, 116.2, 118.3, 120.5.
- Banking sector soundness (selected series 2010–2020):
  - Return on assets: 0.5, 0.0, 0.1, 0.3, 0.5, 0.6, 0.6, 0.6, 0.5, 0.6, 0.4.
  - Return on equity: 10.7, 0.7, 3.0, 5.9, 7.7, 10.1, 9.1, 8.7, 8.0, 8.7, 5.9.
  - NPLs (percent of gross loans): 2.8, 3.2, 3.2, 3.1, 2.7, 2.6, 2.4, 2.1, 1.9, 1.9, 2.1.
  - Regulatory capital to RWA: series showing improvement, e.g., 20.3 in latest year.

### External Sector Assessment (Annex III)
- Overall assessment: external position in 2020 moderately weaker than implied by fundamentals and desirable policies.
- NIIP: declined to 45 percent of GDP at end-2020 (from 51 percent end-2019).
- Gross foreign assets: 467 percent of GDP in 2020.
- Current account (2020): -0.2 percent of GDP; staff CA gap: -1.8 percent of GDP (including COVID-19 adjustment).
- REER assessment: IMF staff estimates REER overvaluation midpoint 4.3 percent in 2020.

### Debt Sustainability Analysis — Baseline and Stress Tests (Annex V highlights)
- Public debt and financing:
  - Gross public debt: 2019: 103.7; 2020: 98.1; 2021: 114.1 (est.); 2022: 113.6; 2023: 113.1; 2024: 114.2; 2025: 116.2; 2026: 118.3.
  - Medium-term headline: debt projected to decrease to 113.6 percent in 2021 before increasing to 120.5 percent in the medium term.
  - Public gross financing needs: 12.3 (2019), 14.3 (2020), 21.4 (2021 est.); projection-horizon average ~19 percent of GDP.
- Stress-test outcomes (selected):
  - Growth shock: debt-to-GDP increases by 3.1 ppts in 2023 relative to baseline.
  - Interest rate shock (266 bps increase starting 2022): debt-to-GDP reaches 124 percent in 2026; gross financing needs +2 ppts in 2026 relative to baseline.
  - Combined macro-fiscal shock: debt 127.6 percent in 2026; gross financing needs 22.1 percent in 2026.
  - Contingent liability shock: debt reaches 147 percent of GDP in 2026.
- Policy implications:
  - Return to sustainable public finances requires credible adjustment; recommended annual structural effort of at least 0.7 percent of GDP over 2022-29.
  - Increase employment rate and implement spending reviews; boost public investment to 3.5 percent of GDP by 2025 and to 4 percent by 2030.

### Risk Assessment Matrix (Annex IV — selected risks and policy responses)
- Global risks:
  - Global resurgence of Covid-19: Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: High.
    - Policy response: focus on vaccination; targeted fiscal support; avoid preventing resource reallocation through efficient bankruptcy and reskilling.
  - De-anchoring of US inflation expectations: Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: High.
    - Policy response: pursue fiscal consolidation once recovery secured; use financial sector buffers to resolve NPLs and grant flexibility to viable borrowers.
- Belgium-specific risks:
  - Political uncertainty slowing recovery and delaying reforms: Relative Likelihood: Medium; Expected Impact: High.
    - Policy response: build consensus and efficient coordination across governing bodies.
  - Early withdrawal of fiscal support: Relative Likelihood: Medium; Time Horizon: MT; Expected Impact: Medium.
    - Policy response: well-timed withdrawal and targeted assistance.
  - Prolonged low-growth/low-inflation and very low interest rates leading to search-for-yield and RE vulnerabilities: Relative Likelihood: Medium; Expected Impact: High.
    - Policy response: deploy macroprudential toolkit; strengthen bank buffers; monitor non-bank intermediaries.
  - Money laundering cases affecting financial center reputation: Relative Likelihood: Low; Expected Impact: High.
    - Policy response: strengthen AML/CFT frameworks.

*Source: IMF staff report excerpts and annexes from the Belgium — Staff Report for the 2021 Article IV Consultation (content unit 1belea2021001).*

### 3.1 percent in 2021-22 before returning to potential of 1.3percent over the medium term.

### 1belea2021001 - 3.1 percent in 2021-22 before returning to potential of 1.3percent over the medium term.

### Executive Board Assessment and Staff Appraisal
- Executive Directors commended the timely, strong, sustained policy response to the pandemic that cushioned impacts on households, firms, and activity.
- Uncertainty remains high, dominated by Covid-19 dynamics; near-term risks are balanced.
- Directors called for targeted support to remain in place until the crisis abates and recovery is firmly entrenched, then for policies to refocus on long-standing fiscal and structural challenges.
- Rebuilding buffers: importance of a credible, expenditure-led adjustment plan to achieve ambitious and steady deficit reduction calibrated over the medium term while protecting critical social spending and creating space for growth-enhancing public investment.
- Endorsement of spending reviews and concrete reforms to contain aging and benefits pressures and improve efficiency.
- Support for tax reforms under preparation, including measures aimed at enhancing compliance.
- Financial sector: noted resilience and timely adoption of micro- and macroprudential policies; emphasized avoiding premature policy tightening and vigilance to real estate risks, including possible macroprudential measures.
- Social and labor market: stressed pivot from preserving jobs to fostering reallocation and participation through active labor market policies and fundamental reforms of social benefits, wage-setting, and employment-protection.

### Outlook and Risks
- Growth projections and path:
  - Growth is projected to recover to 5.4 percent in 2021, 3.1 percent in 2022, before returning to potential of 1.3 percent over the medium term.
  - Potential output growth: 1.1 (2019), -2.7 (2020), 3.5 (2021), 1.7 (2022).
  - Output gap (in percent): 0.1 (2019), -3.7 (2020), -1.7 (2021), -0.3 (2022).
- Near-term risks:
  - Upside: stronger recovery as vaccination/reopening proceeds.
  - Downsides: a prolonged pandemic, tighter financing conditions, and post-pandemic loss of policy momentum.
- Scarring: likely more contained than initially feared, but resource reallocation is hampered by deep-rooted labor and product market rigidities; pandemic deepened pre-existing fiscal and structural challenges.
- Covid-19 specifics:
  - Vaccination progress cited as >67 percent with at least one dose; 50 percent fully-vaccinated.
  - Target of full vaccination for 70 percent by September is within reach.
  - Economy contracted by -6.3 percent in 2020; GDP fell by 15 percent in H1 2020.

### Fiscal Policy Findings and Recommendations
- Fiscal outlook:
  - General government balance: -1.9 (2019), -9.4 (2020), -7.1 (2021), -4.5 (2022).
  - Structural balance: -2.2 (2019), -7.4 (2020), -6.3 (2021), -4.4 (2022).
  - Primary balance: 0.1 (2019), -7.4 (2020), -5.4 (2021), -3.1 (2022).
  - General government debt: 98.1 (2019), 114.1 (2020), 113.6 (2021), 113.1 (2022).
  - Revenues and expenditures (percent of GDP): Revenue 50.2 (2019), 50.6 (2020), 50.3 (2021), 50.2 (2022); Expenditure 52.1 (2019), 60.0 (2020), 57.4 (2021), 54.6 (2022).
- Policy recommendations:
  - Continue targeted support until recovery is firmly entrenched, targeted to hard-hit households and firms.
  - Rebuild fiscal buffers through medium-term consolidation focused on addressing aging pressures, better benefit targeting, and spending efficiency.
  - Additional savings are required to create space for ambitious plans to raise public investment spending and foster green-digital transformation.
  - Tax reforms should aim to lower labor taxes, simplify the tax system, and meet climate objectives, with base broadening and enhanced compliance.
  - Undertake spending reviews and concrete reforms to contain aging and benefits pressures and improve efficiency.

### Financial Sector and Macroprudential Policies
- Measures and developments:
  - Monetary and regulatory measures reversed an early tightening of financial conditions.
  - Counter-cyclical capital buffer was released (with reinstatement from Q2:2022 at the earliest).
  - ECB debt purchases (~80 percent of net issuance) lowered yields; interest payments remained at 2 percent of GDP.
  - Moratoria affected €35bn of loans—3½ percent of portfolios—at the summer 2020 peak, but ended in June 2021.
  - A large envelope for loan guarantees was announced; take-up was limited.
- Policy guidance:
  - Avoid premature policy tightening to allow use of available buffers to bolster the recovery.
  - Vigilance to real estate risks, consideration of macroprudential measures as needed.
  - Assist the financial sector in adapting to low interest rates, digitalization, and climate change.
  - Continue efforts to strengthen the AML/CFT framework.

### Structural Reforms and Labor Market
- Key challenges:
  - Deep-rooted labor and product market rigidities, labor market fragmentation, and pre-existing weak business dynamism.
  - Disproportionate pandemic impact on vulnerable groups; younger, temporary, and lower-skilled workers particularly affected.
- Recommended reforms:
  - Foster reallocation and participation through active labor market policies as recovery firms.
  - Fundamental reforms of social benefits, wage-setting, and employment-protection to ease rigidities and meet ambitious employment objectives.
  - Enhance debt-restructuring and insolvency frameworks; reduce regulatory barriers to firm entry and competition to boost business dynamism.
  - Use the National Recovery and Resilience Plan (NRRP) to boost reforms and green-digital transformation; substantial, coordinated federal-regional efforts required to meet climate targets.

### Key Statistics (selected from Table 1 and text)
- Real GDP growth: 1.8 (2019), -6.3 (2020), 5.4 (2021), 3.1 (2022).
- Domestic demand: 1.6 (2019), -6.0 (2020), 4.6 (2021), 4.1 (2022).
- Exports, goods and services: 1.0 (2019), -4.6 (2020), 6.6 (2021), 5.3 (2022).
- Imports, goods and services: 0.8 (2019), -4.3 (2020), 5.6 (2021), 6.5 (2022).
- Employment and labor:
  - Unemployment rate: 5.4 (2019), 5.6 (2020), 6.2 (2021), 6.1 (2022).
  - Employment growth: 1.6 (2019), 0.0 (2020), -0.5 (2021), 0.8 (2022).
- Prices:
  - Consumer prices: 1.2 (2019), 0.4 (2020), 2.3 (2021), 2.1 (2022).
  - GDP deflator: 1.7 (2019), 1.1 (2020), 2.2 (2021), 2.1 (2022).
- Balance of payments:
  - Goods and services balance (contribution to GDP growth): 0.2 (2019), -0.3 (2020), 0.9 (2021), -0.9 (2022).
  - Current account: 0.3 (2019), -0.2 (2020), 0.0 (2021), -0.5 (2022).
- Memorandum:
  - Nominal GDP (in billions of euros): 476.3 (2019), 451.2 (2020), 486.4 (2021), 512.1 (2022).
  - Population (in millions): 11.5 (2019), 11.5 (2020), 11.5 (2021), 11.6 (2022).
- Covid-19 fiscal support and impacts:
  - Support was 5 percent of GDP in 2020 (¾ STW, SE, and regional grants); the deficit widened from 1.9 percent to 9.4 percent of GDP.
  - Debt rose from 98 percent to 114 percent of GDP in 2020.
  - Use of STW schemes: 36.5 percent of employees and 50 percent of SE were covered at the April 2020 peak.

*Source: Belgium — Staff Report for the 2021 Article IV Consultation (IMF).*

### 7.      Public borrower support and supervisory measures helped the financial sector weather

### 7.      Public borrower support and supervisory measures helped the financial sector weather the crisis

### Financial sector resilience and risks
- Public support, moratoria, and suspension of government claims provided liquidity to households and firms and limited job losses and bankruptcies.
- Unemployment picked up through mid-2020 and then subsided; bankruptcies dropped by a third last year.
- Aggregate NPL ratios remained stable, amid some uptick in impaired exposures to hard-hit firms.
- Bank profitability held up, aided by low-cost Eurosystem funding, and capital cushions strengthened.
- Risks:
  - Low interest rates are pressuring margins.
  - Provisions set aside during the crisis may be called on as support and moratoria are phased out.

### Real estate and household savings
- Real estate segments performed well despite the crisis.
- Households channeled additional savings of €25 billion in 2020 into renovation and purchases.
- Commercial real estate prices held up despite higher vacancies.

### External position
- The current account turned into a small deficit in 2020, driven by lower trade and secondary-income balances, including lower manufacturing exports.
- Mitigating factors included lower energy prices, sustained pharmaceutical exports, and an improved services balance (lower net travel/transport service imports).
- Adjusting for transitory Covid-19 impacts:
  - The CA gap was assessed to be -1.8 percent of GDP.
  - The REER was assessed to be overvalued by 4.3 percent.

### Outlook and risks (macro projections)
- With continued policy support, vaccination roll-out, scaled-back containment, and an improved global outlook, growth projections:
  - 2021: 5.4 percent
  - 2022: 3.1 percent
  - Medium term (return to): 1.3 percent
- A pick-up of inflation is expected in 2021-22, driven by strong base effects and transitory supply bottlenecks.
- Risks to the outlook are significant and judged to be balanced:
  - Upside from full reopening and decisive reforms associated with NGEU.
  - Downside from a protracted pandemic, narrowing fiscal space, post-pandemic fatigue/complacency, lack of policy consensus, tighter financing conditions, and climate risks (notably July floods).

### Authorities’ views
- Authorities expect slightly higher output growth in 2021 (5.5 percent) and somewhat lower growth in 2022-23.
- They see growth returning to potential (~1.3 percent), with modest scarring, but note uncertainty now that loan moratoria have mostly ended.
- Authorities consider inflationary pressures to be transitory but note risks from wage indexation.

### Fiscal policy stance and near-term recommendations
- The fiscal stance in 2021 is appropriately supportive and increasingly targeted.
  - Support is projected at 3 percent of GDP, down from 4.7 percent.
- Key measures (STW, SE) were extended through September; SE and regional grants are more targeted.
- Funding for public investment vehicles has been increased to provide (quasi-) equity support to viable firms.
- Policy guidance:
  - Maintain targeted fiscal support until recovery firms, with a focus on solvency needs and hard-hit households.
  - Solvency needs are estimated by staff at 0.5-2 percent of GDP.
  - Solvency support should leverage private-sector resources and expertise, be coordinated across governments, closely monitored for cost/effectiveness, and tapered as risks abate.
  - If downside risks materialize, further targeted extensions of STW/SE may be needed.
  - Recent expansions of social spending (including pandemic- and non-pandemic-related increases) add fiscal pressure and should be addressed through reforms or offsetting adjustments.
    - Noted non-pandemic structural increases include health, minimum pensions, and social assistance totaling ½ percent of GDP.
  - Pandemic-related spending should remain temporary and be phased out with recovery.

### Medium-term fiscal strategy and reform priorities
- Policies should rebuild fiscal space once recovery is secured; the authorities’ current adjustment plan has shortcomings and is unlikely to stabilize debt.
  - The government’s plan incorporates a fixed annual effort of 0.2 percent of GDP from 2021 and a variable effort of up to 0.4 percent from 2022.
  - Staff recommendation: an effort averaging at least 0.7 percent of GDP annually during 2022-29 to place debt on a downward trajectory from 2024 and reach the medium-term objective (MTO) of structural balance by 2029.
- Adjustment should be expenditure-led and create room for green-digital transformation:
  - Focus on containing aging costs (pensions, health), improving benefit targeting and incentives, improving spending efficiencies (health, education), and reducing duplication and subsidies.
  - Federal and regional spending reviews should be expanded and integrated in the annual budget process.
  - Public investment target: increase by 1½ ppts to 4 percent of GDP by 2030, initially relying on RRF grants.
    - Additional savings of 0.2 percent of GDP need to be generated by 2027 to replace RRF grants.
    - A further 0.2-0.3 percent is needed annually thereafter to reach the 4-percent 2030 investment target.

### Tax reform priorities
- Tax reforms under development aim to strengthen compliance and reduce labor taxes and should be extended in key areas:
  - Anti-fraud plan (adopted in June) aims for yields of 0.2 percent of GDP by 2024; success depends on resourcing, program management, risk identification/mitigation, and access to third-party data.
  - Consider integration of social security contribution and personal income tax collections to lower compliance costs and address fraud risks.
  - Comprehensive revenue-neutral reform to lower the tax burden on labor should:
    - Address tight tax-bracket structure at lower incomes.
    - Enhance incentives for labor-market participation, especially for low/medium income and second earners.
    - Restore tax neutrality across different forms of investment, income, and savings.
    - Offset revenue losses through base broadening and reduce favorable PIT treatments (including for in-kind compensation).
    - Reduce consumption tax expenditures to rebalance the tax mix and reduce reliance on labor taxes.
    - Simplify the exceptionally complex tax system, and modernize real estate taxation to address climate objectives.
  - Expected international tax changes (notably a global minimum corporate income tax) may boost revenues.

### Box: Post-Pandemic fiscal adjustment (key quantified points)
- Structural deficit expected to widen from 2 percent of GDP in 2019 to 5 percent in 2026, driven by:
  - COVID-19-related spending increases: 0.3 percent of GDP
  - New policies: 0.6 percent of GDP
  - Higher aging-related and other benefits: 0.9 percent of GDP
- Timing and pace of adjustment should be state-contingent; adjustment should start once growth is sustained and slack subsiding (expected in 2022):
  - Output is expected to recover to 2019 levels by 2022Q1 but remain 1.8 percent below pre-crisis projections in 2022.
- Under staff’s baseline projections:
  - The primary balance remains well below its debt-stabilizing level by 2.5 ppts of GDP in 2026.
  - Debt would be 21 ppts above the pre-crisis baseline if no additional adjustment is made.
- To bring debt on a downward path from 2024 and reach structural balance by 2029, staff recommends an annual structural effort of at least 0.7 percent of GDP over 2022-29, underpinned by credible, concrete reforms.
- Additional savings will be needed after RRF funding expires (from 2027) to finance higher public investment.

*Source: IMF staff report excerpt (chapter 7).*

### 18.      The authorities agreed that fiscal policy should remain supportive in the near term and

### 18–31: Fiscal, Financial, Macroprudential, and Structural Policies

### Fiscal policy: near-term support and medium-term buffers
- Authorities agreed fiscal policy should remain supportive in the near term and focus on rebuilding buffers thereafter, with adjustment drawing more on growth and employment gains.
- Targeted support may be needed after broad support is phased out in October.
- Risks and principles:
  - Recognized risks of higher borrowing costs and the desirability of rebuilding buffers.
  - Agreed that adjustment should be expenditure-led and draw on spending reviews, making room for additional investment spending.
  - Highlighted strong, positive effects on public finances from structural reforms that boost employment and growth.
  - NBB and HCF cautioned against extrapolating the currently favorable interest-growth differential and agreed that a strong, well-articulated, upfront commitment and steady consolidation would secure credibility and mitigate the drag on growth.
- Tax reform and administration:
  - Authorities welcomed initial views on tax reform and stressed that detailed action plans to fight fraud are being developed annually to underpin ambitious yields targeted for 2022-24.
  - Agreed priorities: fairness, simplicity, and efficiency, with neutrality achieved by broadening individual income and consumption tax bases.
  - Reduction/elimination of unproductive tax expenditures is another priority.
  - Policy change: restricting tax advantages for company cars to zero-emissions vehicles only from 2026.

### Financial and macroprudential policies
- Pandemic support measures cushioned impacts, but strains may emerge, calling for policy flexibility and active engagement of borrowers by banks.
- Banking sector resilience and recommended actions:
  - Banks have adequate buffers, including under stress, which should be deployed to mitigate pressures on households and corporations once aid is scaled back.
  - Credit losses should be recognized promptly to facilitate resource reallocation.
  - To restore debt-servicing capacity for viable-but-temporarily-challenged borrowers, banks should engage early and offer tailored forbearance within established supervisory/regulatory frameworks.
  - Policymakers should avoid premature policy tightening by allowing the use of existing buffers as needed.
- Pockets of vulnerability:
  - Deteriorating credit quality of loans that benefited from moratoria, loans under guarantee, and exposures to pandemic-affected sectors.
  - In Q1:2021, loans subject to (active or expired) moratoria or originated with public guarantee were less than €50 billion, from a portfolio of €960 billion. Borrowing by heavily-affected firms was €65 billion.
- Real estate (RE) vulnerabilities and macroprudential stance:
  - Despite the crisis, prices of residential and some commercial RE segments (e.g., logistics) have risen, supported by low interest rates.
  - House prices benefitted from channeling some excess savings accumulated during the pandemic: €25 billion, 5½ percent of GDP, in 2020, into residential properties.
  - The NBB has maintained a risk-weight add-on for housing loans in place since December 2013 and affirmed December 2019 supervisory expectations that set limits on riskier mortgage lending.
  - If imbalances mount, macroprudential tightening should be considered to constrain lending to highly-leveraged borrowers and strengthen buffers, also encompassing the commercial segment.
- Longer-term financial sector challenges:
  - Home-host issues due to large presence of foreign banks require sufficient buffers at local affiliates.
  - Prolonged low interest rates test business models and encourage search for yield at higher risk.
  - Supervisors should stay alert to vulnerabilities among non-bank financial institutions.
  - Emerging challenges: digitization and cybersecurity risks and climate-affected assets.
  - Recommended information-gathering: required data collection on energy efficiency of RE exposures and testing of cyber defenses, to be incorporated into systemic assessments.
  - Continued reinforcement of the AML/CFT framework and enhanced collaboration between supervisory, tax, and judicial authorities is encouraged.

### Structural reforms: labor, product markets, insolvency, and investment
- Labor-market fragmentation and vulnerable groups:
  - Pandemic deepened labor-market fragmentation; women and younger, lower-skilled, lower-income, and foreign-born workers were particularly affected.
  - These workers are overrepresented in temporary contracts used in hard-hit sectors (hospitality, retail trade) and in STW.
  - Broad pandemic-related support (STW, SE) has helped preserve jobs, but broad support will phase out in October.
- Policy shift recommended:
  - Pivot from protecting jobs to facilitating reallocation as recovery strengthens; replace broad support with targeted measures.
  - Unlike SE, STW is not targeted to hard-hit firms or scaled by losses and could be conditioned on seeking training/education or redeployment.
  - As recovery strengthens, shift support to hiring subsidies, retraining, and other active labor-market policies (ALMPs, e.g., language, life-long learning), especially given continuing (STEM) and emerging (low-skilled) shortages.
  - Lift the temporary freeze of unemployment benefit (UIB) degressivity and carefully target planned increases in social assistance.
- Employment goal and reforms:
  - Authorities’ aim: raise the employment rate to 80 percent by 2030, a sharp hike (+10 ppts) concentrated in Brussels and Wallonia and among disadvantaged groups.
  - Planned measures include:
    - Reducing benefit claw-back when combining work with unemployment or minimum social benefits.
    - Improving working conditions to reduce sickness/disability.
    - Incentivizing later labor-market exit by reintroducing a “pension bonus” and expanding partial retirement.
    - Increasing parental leave and childcare affordability.
    - Combatting discrimination.
    - Enhancing training (e.g., entitling workers to 5 training days annually).
  - Formulation of specific measures is at early stages, with implementation foreseen in 2023-24.
  - More fundamental reforms could include increasing UIB degressivity and cutting its duration, revisiting the mechanism governing real benefit increases, reducing seniority pay, allowing greater flexibility to align wages and productivity, and reforming collective dismissals.
- Product-market reforms and productivity:
  - Need to boost competition and productivity by reducing red tape (especially for start-ups), easing entry barriers (especially in retail distribution and services), improving risk capital availability (e.g., facilitating venture-capital financing and eliminating favorable tax treatment of safe assets), and rationalizing overlapping R&D tax incentives.
  - Increased infrastructure investment recommended.
- Restructuring and insolvency frameworks:
  - Pre-pandemic reforms eased insolvency resolution but left gaps (e.g., only debtors may initiate restructuring; no dedicated SME out-of-court procedures).
  - Temporary measures introduced in March 2021 aim to improve access to judicial reorganization, especially for SMEs, and facilitate early restructuring with limited court involvement.
  - Plans to strengthen early-warning mechanisms, introduce special SME out-of-court procedures, boost resources, and allow creditors to initiate procedures in the context of transposition of the EU Restructuring and Insolvency Directive next year are welcome and should be accelerated where possible.
  - Government could incentivize restructuring through tax relief/haircuts on its claims.
- Recovery and Resilience Facility (RRF) opportunity:
  - Belgium will receive 1.3 percent of 2021 GDP of grants over 2021-26.
  - The Recovery and Resilience Plan (RRP) contains federal and regional components and investment and reforms in decarbonization, digitalization, mobility, inclusion, and productivity.
  - Expected impacts:
    - Lift public investment by 0.1-0.2 ppts.
    - Potentially crowd-in private investment.
    - Raise output by 0.2 percent at peak and by 0.1 percent in the long run, and narrow gaps to emissions-reduction targets.
  - Largest components: building-renovation and transport infrastructure (17 and 11 percent).
  - Implementation challenges: administrative hurdles (e.g., permitting), supply constraints (transitory price pressures, labor shortages in construction), and competencies divided among federal-regional governments (e.g., ALMPs).
  - Some RRP spending is only partially financed by RRF grants and non-RRF grant investments are 0.1 percent of GDP annually over 2021-26; some funding will be diverted to flood-reconstruction efforts, with adjustments to prioritize these efforts.
- Climate policy and carbon pricing:
  - Meeting ambitious climate targets requires additional efforts and heightened policy coordination and execution.
  - Belgium has reduced emissions on aggregate, but transport, buildings, and parts of industry are lagging.
  - Recommended actions: eliminate fuel subsidies, put in place a credible long-term carbon-pricing framework, and use complementary measures (regulation, feebates, transition support) to maintain public support.
  - Modifying company-car taxation to favor zero-emissions vehicles and incorporating carbon pricing into tax reforms are timely initiatives.
  - Federal and regional climate proposals should be detailed in a clear, monitorable action plan with close links to commitments.

### Authorities’ views (summarized)
- Authorities shared staff’s assessment of financial stability risks and indicated readiness to adjust policies as needed.
- Emphasized banks’ role in supporting households and firms during the crisis and the need to deploy ample buffers, grant forbearance to viable-yet-temporarily-challenged borrowers, and ensure credit provision for the recovery.
- Acknowledged effectiveness of macroprudential measures in mitigating RE risks but noted remaining vulnerabilities and possible lasting changes from the pandemic (business travel, e-commerce, teleworking).
- Agreed that labor- and product-market reforms are needed to spur reallocation, participation, productivity, and growth, but noted constraints: many initiatives are in early technical stages, time is needed to design policies and build broad support, scope of reforms is bound by the coalition agreement, and competencies are divided among federal and regional authorities.
- Emphasized importance of coordinated action, building on administrative simplification and digitalization initiatives, with objectives aligned with the NRRP.

*Source: Excerpt from IMF staff report chapter (content unit 1belea2021001).*

### 32.      The authorities share climate priorities highlighted by staff and see the EU Green Deal

### 1belea2021001 - 32.      The authorities share climate priorities highlighted by staff and see the EU Green Deal

### Staff appraisal and macro outlook
- Belgium has navigated the Covid-19 shock well, with a timely, strong, and sustained policy response.
- A well-targeted vaccination rollout has facilitated reopening and kickstarted recovery.
- Growth is expected to remain robust, driven by private consumption and investment and an improving global environment.
- Scarring will likely be more contained than initially feared.
- Uncertainty remains high, dominated by Covid-19 dynamics.
- Near-term risks are balanced: confidence indicators point to substantial upside with full reopening, although a prolonged global pandemic and tighter financing conditions may weaken the outlook.
- As Covid-19 recedes, renewed policy momentum at the federal level and federal-regional coordination may face headwinds/lack of consensus.

### Fiscal policy stance and medium-term adjustment
- Fiscal support should be maintained until recovery firms, while putting in place a credible medium-term adjustment plan to rebuild buffers.
- Broad support was rightly extended in 2021, phasing out from October.
- Continued support, if needed, should be carefully targeted and measured, including given limited, narrowing fiscal space.
- The government’s adjustment plan foresees a modest consolidation that does not stabilize debt, with many measures remaining to be specified, and public finances left vulnerable to shocks.
- Adjustment recommendation:
  - Adjustment of at least 0.7 percent of GDP annually during 2022-29, allocated across the federal and regional governments with binding targets, would bring deficit and debt on a firmly downward path and restore buffers for future shocks.
- Additional savings (or higher revenues) would build greater resilience and will be needed to create space to reach the authorities’ objectives of increasing public investment and green-digital transition.
- More ambitious, well-defined, upfront commitments would boost credibility.

### Concrete spending reforms
- Reforms should underpin the adjustment and focus on:
  - Containing aging costs.
  - Improving benefit targeting and labor-market incentives.
  - Reducing public administration duplication and subsidies.
  - Increasing spending efficiency, informed by spending reviews.
- Observations and gaps:
  - New policies include higher structural social spending, adding to aging pressures.
  - Health care, poverty-reduction, and pension reforms are under development but rely heavily on employment gains and refrain from unemployment, pension, and benefit reforms in line with past recommendations.
  - Spending reviews are an important instrument and should move from pilots to major expenditure areas, with decisive follow-up.
- Tax reforms under preparation to enhance compliance and lower labor taxes, offset by base-broadening, are welcome.

### Financial sector policy
- Policy should foster deployment of buffers to bolster the recovery, while remaining vigilant to systemic risks and structural challenges.
- A premature policy tightening should be avoided, with bank buffer utilized, as needed, to absorb losses, aid viable-but-temporarily-challenged debtors, and meet credit demand.
- Real estate risks should be monitored for misalignment between prices and fundamentals that may require macroprudential measures.
- Continuing challenges that require policy action:
  - Low interest rates.
  - Digitalization.
  - Climate change.
  - AML/CFT issues.

### Labor policy and reallocation
- Labor policies should shift from preserving jobs to facilitating reallocation and participation.
- Any further near-term support should be well-targeted and timebound.
- Policies should pivot to facilitating reallocation through hiring subsidies, (re-)training, and other ALMPs, especially given re-emergence of labor shortages and acceleration of digitalization and automation.
- Beyond refining plans to target increased employment opportunities for vulnerable groups, more fundamental reforms of social benefits, wage-setting, and employment-protection along the lines of past staff advice are needed to ease impediments to labor mobility/flexibility and meet ambitious employment objectives.
- These reforms can also help strengthen Belgium’s external position, which is moderately weaker than implied by fundamentals and desirable policies.
- Mixed federal-regional competencies underscore the need for effective coordination.

### Complementary reforms to support reallocation and productivity
- Near-term measures:
  - Strengthen restructuring/insolvency provisions, especially for SMEs.
  - Introduction of a preliminary agreement that reduces timelines and court involvement and improves access to judicial reorganization is a welcome step.
  - To avoid system congestion as support is unwound, accelerate plans to strengthen early warning mechanisms, introduce dedicated SME out-of-court procedures, boost resources, and allow creditors to initiate procedures.
  - Restructuring could be incentivized through tax relief or haircuts on government claims.
- Medium-term measures:
  - Reduce red tape for start-ups and other entry barriers.
  - Improve access to risk capital and efficiency of R&D incentives.
  - Boost public investment.
- The RRF provides an opportunity to boost investment, productivity, and growth, although labor- and product-market reform plans need to be further developed and strengthened.

### Climate-policy coordination and execution
- The authorities share climate priorities highlighted by staff and see the EU Green Deal as an opportunity to strengthen efforts.
- With revision of EU targets and legislation, national policies and strategies need updating, providing scope for sharpening goals, streamlining decision-making, and accelerating change.
- The authorities support the phase-out of fuel subsidies and carbon pricing in an effective, predictable manner, complemented by measures to address distributional consequences.
- Exploration of options for environmental fiscal reform is underway.
- Political agreement on burden sharing of emission reductions across federal-regional governments is needed; some options to improve coordination may require constitutional change.
- Practical steps noted:
  - Modifying tax incentives to encourage a shift to emissions-free company cars and plans to phase out fuel subsidies are a promising start.
  - Federal and regional authorities should work in unison at an accelerated pace to roll-out policies to discourage emissions-intensive activities by households and firms within a credible, predictable long-term framework.
  - Carbon pricing should form a central part of the mix, complemented by incentive and regulatory mechanisms.
  - Federal-regional climate proposals should aim for coherence with clear and monitorable links to commitments.

*IMF staff appraisal excerpt from 1belea2021001 - 32. The authorities share climate priorities highlighted by staff and see the EU Green Deal*

### 40.      It is proposed that the next Article IV consultation take place on the standard 12-

### 1belea2021001 - 40.      It is proposed that the next Article IV consultation take place on the standard 12-

### Covid-19 developments
- Belgium experienced several waves of the pandemic, with infections peaking in the fall of 2020 and improvements in the relative number of hospitalized Covid-19 patients over time.
- Mortality has progressively ebbed over the course of the pandemic, reflecting progress with vaccinating the population.
- Following renewed tightening of restrictions until the spring of 2021, economic reopening is underway with mobility gradually approaching pre-pandemic levels.
- Key datapoints and indicators shown (as presented):
  - New cases (7-day moving average per 100,000 population) plotted Feb-20 to Jul-21 for Belgium, France, Germany, Netherlands (Sources: OWID).
  - Hospitalized COVID-19 patients (non-ICU and ICU) Mar-20 to Jul-21 (Sources: Sciensano; and IMF staff calculations).
  - Deaths (7-day moving average per 100,000 population) Feb-20 to Jul-21 (Sources: OWID).
  - COVID-19 vaccinations (Percent of population as of Jul 25, 2021) — country comparisons and EU27+UK average (Sources: OWID; and WEO IMF).
  - Stringency of containment measures and Mobility (Google mobility report; IMF staff calculations). Note: Mobility baseline is median value during Jan 3–Feb 6, 2020.

### Macroeconomic developments
- Output and demand:
  - Real GDP growth series and components highlight a sharp contraction in 2020 and recovery dynamics thereafter.
  - Real GDP (Q-on-Q growth) shows swings exceeding most other euro area countries.
  - Private final consumption, Public final consumption, Gross capital formation, Net exports and GDP reported in Real Growth by Components (Percent, Y-o-Y).
- Income and confidence:
  - Despite output contraction, disposable income growth remained positive thanks to support measures.
  - Confidence surpassed pre-pandemic levels, driving a strong recovery in industrial production and retail sales.
- Inflation:
  - Belgium: HICP inflation and core HICP inflation shown 2015–2021 with volatility due to pandemic-related dislocations.
- Selected indicators presented (sources: Haver Analytics, WEO, National Bank of Belgium, Eurostat).

### Fiscal developments
- Pre-pandemic and pandemic fiscal position:
  - Post-GFC rebuilding of fiscal buffers halted in 2018; debt and deficit levels remained well-above pre-GFC levels.
  - Indirect taxes collapsed with the decline in consumption; support mitigated income and direct tax declines.
  - Expenditure measures and lower output drove the deficit increase relative to the pre-Covid-19 baseline.
  - With debt trending up and expenditure among the highest in Europe, expenditure-led consolidation will be needed.
- Key fiscal series and indicators (as presented):
  - Structural Primary Balance and Public Debt (In percent of GDP) 2002–2020 (Source: NBB and IMF staff calculations).
  - Structural Deficit Projections in Stability Programs (Percent of Potential GDP) 2013–2024 (Sources: Belgian authorities; and IMF staff calculations). Note: Data for 2021 and beyond are projections; 1/ Based on staff calculations.
  - Treasury tax collection indices (December 2019=100) and decomposition of deviation of fiscal balance from pre-pandemic forecast (In percent of GDP, 2020-21). Sources: NBB; IMF staff calculations; WEO.

### Labor market developments
- Impact and policy absorption:
  - Covid-19 interrupted recent labor market gains, but job losses were limited as the shock was largely absorbed through working hour reductions facilitated by the expanded STW scheme.
  - Possible labor hoarding occurred due to tight pre-crisis labor market even as job vacancies plummeted.
- Distributional effects:
  - Vulnerable workers hit hard, adding to pre-existing labor market fragmentation; prospects and incentives to find work deteriorated from an already low base.
  - Excessive regulation of retail and service sectors may impede needed reallocation.
- Key labor indicators (as presented):
  - Sectoral indicators for retail and services sectors (OECD Rank; PMR indicator score differences).
  - Change in Employment in 2020 (Percent change in employment and hours worked 2019Q4-2020Q4).
  - Job Vacancies and Job Losses (Percent and percentage change 2019Q4-2020Q4).
  - Unemployment, Employment and Participation Rates (In percent) 2016Q1–2020Q4.
  - Labor Market Developments, 2021Q1: unemployment rate change and employment growth by groups (percentage points, relative to 2019Q4).

### External sector developments
- Current account and trade:
  - The Covid-19 shock reversed a recent improvement of the current account balance.
  - Trade surplus narrowed in 2020 as exports contracted more than imports, mitigated by improvements in Terms of Trade.
  - Services balance turned into a surplus, driven by transport and travel.
  - Net income remained roughly unchanged despite lower net investment income; net transfers declined.
- Net asset position and exchange rates:
  - Belgium continues to enjoy a comfortable net asset position (NIIP series presented).
  - Real and nominal exchange rates appreciated in 2020, with the increase in ULC reflecting labor market effects.
- Key numerical items (as presented):
  - Current Account (Moving 4Q sum, in percent of GDP) 2016–2021.
  - Trade Balance (In Euro billions, and rolling 4Q sum in percent of GDP).
  - Services exports and imports in 2020 by category with shares (Total; Transport (20%); Travel (7%); Financial (7%); ICT (12%); Other business services (37%); Other (16%)).
  - Net International Investment Position (Percent of GDP) 2005–2020.
  - NEER and REER indices (2005=100).

### Financial sector developments
- Credit and indebtedness:
  - Household borrowing held up comparatively well; credit growth to non-financial corporations ebbed, reflecting tighter financing conditions since the onset of the pandemic.
  - Loans with a worsened risk profile (stage 2) increased while impaired exposures (stage 3) remained stable.
  - Private sector indebtedness rose further; mortgage lending grew robustly with sustained house price inflation.
  - Household financial assets provide some cushion against elevated debt levels.
- Key financial indicators (as presented):
  - Private Sector Lending (Year-on-year percent change) 2012–2021 (Total, NFCs, Households).
  - NFC financing conditions and credit constraints (Percentages).
  - Bank loan classification and cost of risk (stage 2, stage 3, cost of risk).
  - Household and corporate indebtedness (Percent of GDP) and mortgage lending and house price indices (2015=100; mortgage lending stock: billions of euro).
  - Household debt and financial assets (EUR billion) series.
- Banking sector soundness (Table 7 highlights):
  - Return on assets series 2010–2020: 0.5, 0.0, 0.1, 0.3, 0.5, 0.6, 0.6, 0.6, 0.5, 0.6, 0.4.
  - Return on equity 2010–2020: 10.7, 0.7, 3.0, 5.9, 7.7, 10.1, 9.1, 8.7, 8.0, 8.7, 5.9.
  - Non-performing loans (NPL) as percent of gross loans 2010–2020: 2.8, 3.2, 3.2, 3.1, 2.7, 2.6, 2.4, 2.1, 1.9, 1.9, 2.1.
  - Regulatory capital to risk-weighted assets series: 19.3, 18.5, 18.1, 18.7, 17.3, 18.7, 18.8, 19.0, 18.8, 20.3.

### Projections and selected macroeconomic indicators (Table 3 highlights)
- Real economy (2019–2026, percent change unless otherwise indicated):
  - Real GDP: 1.8, -6.3, 5.4, 3.1, 1.8, 1.4, 1.3, 1.3.
  - Domestic demand: 1.6, -6.0, 4.6, 4.1, 2.1, 1.6, 1.6, 1.7.
  - Private consumption: 1.5, -8.7, 3.8, 6.8, 2.3, 1.5, 1.7, 1.6.
  - Gross fixed investment: 3.5, -6.9, 11.2, 2.5, 2.6, 2.0, 1.3, 1.8.
  - Exports, goods and services: 1.0, -4.6, 6.6, 5.3, 4.1, 3.6, 3.4, 3.4.
  - Imports, goods and services: 0.8, -4.3, 5.6, 6.5, 4.4, 4.0, 3.8, 3.8.
  - Household saving ratio: 13.0, 21.9, 17.1, 14.3, 14.0, 13.7, 13.4, 13.0.
- Prices:
  - Consumer prices: 1.2, 0.4, 2.3, 2.1, 1.9, 1.9, 1.8, 1.8.
- Employment:
  - Unemployment rate (in percent): 5.4, 5.6, 6.2, 6.1, 5.9, 5.8, 5.7, 5.7.
- Public finance (percent of GDP):
  - Revenue: 50.2, 50.6, 50.3, 50.2, 50.1, 50.2, 50.0, 50.0.
  - Expenditure: 52.1, 60.0, 57.4, 54.6, 54.7, 55.1, 55.1, 55.3.
  - General government balance: -1.9, -9.4, -7.1, -4.5, -4.7, -4.9, -5.0, -5.3.
  - Structural primary balance: -0.2, -5.7, -4.8, -3.0, -3.4, -3.7, -3.7, -4.0.
  - General government debt: 98.1, 114.1, 113.6, 113.1, 114.2, 116.2, 118.3, 120.5.
- Memorandum:
  - Nominal GDP (in billions of euros): 476.3, 451.2, 486.4, 512.1, 531.0, 548.1, 564.8, 582.3.
  - Population (in millions): 11.5, 11.5, 11.5, 11.6, 11.6, 11.7, 11.7, 11.8.

### Balance of payments (Table 4 highlights, in percent of GDP)
- Balance on current account: 0.3, -0.2, 0.0, -0.5, -0.5, -0.3, -0.1, 0.1 (2019–2026).
- Exports of goods and services: 81.8, 80.5, 82.7, 82.8, 83.0, 83.3, 83.4, 83.4.
- Imports of goods and services: -81.2, -80.1, -82.3, -83.0, -83.2, -83.4, -83.3, -83.1.
- Portfolio investment, net: -1.4, 4.5, 5.1, 4.0, 3.5, 3.2, 3.1, 3.0.
- Other investment, net: 1.1, -5.7, -5.5, -5.3, -5.1, -4.9, -4.7, -4.5.

### General government operations and balance sheet (Table 5 and Table 6 highlights)
- General Government Statement of Operations (selected lines, percent of GDP):
  - Revenue: 50.2 (2019), 50.6 (2020), 50.3 (2021 projection).
  - Expenditure: 52.1 (2019), 60.0 (2020), 57.4 (2021 projection).
  - Net lending/borrowing: -1.9 (2019), -9.4 (2020), -7.1 (2021 projection).
  - Primary balance: 0.1 (2019), -7.4 (2020), -5.4 (2021 projection).
  - Gross government debt: 98.1 (2019), 114.1 (2020), 113.6 (2021 projection).
- General Government Consolidated Balance Sheet (2010–2020, percent of GDP):
  - Net financial worth series: -82.0 (2010) ... -101.9 (2020).
  - Financial assets: 26.8 (2010) ... 41.4 (2020).
  - Liabilities: 108.8 (2010) ... 143.3 (2020).

### Main recommendations from the 2017 FSAP Mission and status updates (Table 8)
- Systemic risk analysis: Enhance the risk analytical framework (ST).
  - Status: (i) In 2020 NBB undertook a full top-down stress test for six LSIs and SI subsidiaries; tool for NII projections developed. (ii) No new actions since 2020. (iii) NBB supervisory expectations for Belgian mortgage credit standards applicable since 1 January 2020 include insurance companies. (iv) NBB-FSMA update on asset management and non-bank intermediation published 6 May 2021. (v) NBB pursuing further work on CRE data gaps in line with the ESRB Recommendation.
- Prudential policy, supervision, oversight:
  - Approve promptly the new macroprudential measure and enhance NBB’s ability to implement cyclical tools (ST).
    - Status: (i) Residential real estate macroprudential measure extended through end-April 2022 by royal decrees; (ii) CCyB de-activated in Mar 2020; (iii) NBB expectations on LTV, DTI, DSTI maintained.
  - Strengthen bank supervision for internal models and loan classification (C).
    - Status: TRIM follow-up continues; ECB guidance on credit risk in pandemic sent to SIs; NBB consulted on EBA GL implementation for LSI (applicable since June 30, 2021).
  - Insurers: address liquidity risk, analyze reinsurance growth, improve capital quality (ST). Status: planned alignment with EIOPA statements; limited new actions since 2020.
- FC supervision and SWIFT oversight: multiple ST actions and updates; some actions pending or postponed due to Covid-19.
- Financial safety net and crisis management:
  - Ensure feasibility of resolution strategies for banking groups with important subsidiaries (MT). Status: new wave of resolution plans being adopted, internal MREL in process; NBB demonstrated capacity in SRB dry run.
  - Strengthen Deposit Insurance Scheme (DIS) measures (ST). Status: limited new actions since 2020; draft bill to segregate Guarantee Fund expected by Q3 2021.
- AML/CFT:
  - Ensure adequate transparency of beneficial ownership (MoF) (MT). Status: national UBO register fully operational; law of 20 July 2020 transposed 5th AMLD.
- Timing notation in Table 8: C=continuous; I=immediate (within one year); ST=short term (within 1–2 years); MT=medium term (within 3–5 years).

*Source: 1belea2021001 - 40.      It is proposed that the next Article IV consultation take place on the standard 12- (IMF staff compilation from the supplied content).*

### Annex I. Status of Previous Article IV Recommendations

### Annex I. Status of Previous Article IV Recommendations

### 2020 Article IV Recommendations — Policy Actions: Fiscal Policy
- Contain the effects of the pandemic through targeted temporary support measures (ST).
  - Support measures amounting to 4.7 and 3.0 percent of GDP put in place in 2020 and 2021.
  - Measures involved existing programs (STW, SE) with timebound extensions of eligibility and benefits, and new, targeted, and temporary measures.
- Design and implement a medium-term fiscal consolidation strategy underpinned by efficiency-enhancing spending reforms (MT).
  - The federal government developed an adjustment plan with fixed and variable/conditional efforts over 2021-24.
  - The plan is not yet supported by fully-elaborated reform plans and does not place debt on a downward trend.
- Reduce current spending by containing healthcare and pension costs, improving the targeting and labor-market incentives of social benefits, strengthening the efficiency of subsidies, and reducing duplication in public administration (MT).
  - Events affected by Covid-19 response.
  - Pilot spending reviews underway in three areas: working from home and government real estate; health care efficiency; fiscal benefits for R&D.
  - Aim to identify new areas for spending reviews in September 2021.
- Create space to lower the labor tax wedge by broadening tax bases and reducing exemptions (MT). Simplify taxation of capital income.
  - Tax reform plans initiated by the new government to focus on reducing the labor tax wedge and broadening bases.

### 2020 Article IV Recommendations — Policy Actions: Financial Sector Policy
- Stand ready to take additional measures to address near-term risk related to the pandemic (ST).
  - Fiscal and financial support measures helped ease pandemic impacts.
- Continue to implement FSAP recommendations (ST/MT), including:
  - (i) use macroprudential policies as needed;
  - (ii) complete technical standards on reporting for financial groups;
  - (iii) ensure feasibility and effectiveness of bank-resolution strategies;
  - (iv) strengthen deposit insurance by segregating the Guarantee Fund from government funds.
  - See Table 6.

### 2020 Article IV Recommendations — Policy Actions: Structural Reforms
- Once the health situation normalizes continue efforts to integrate vulnerable groups through active labor-market policies and training programs (ST).
  - Events affected by Covid-19 developments.
  - Plans under consideration to strengthen integration of vulnerable groups, including in the context of measures to meet the government’s objective of raising employment to 80 percent by 2030.
- Bolster female labor force participation, strengthen work incentives by reforming unemployment benefits, improve labor mobility, and boost flexibility (wage-setting, collective dismissals) (MT).
  - See discussion in ¶24-26.
- Reduce red tape for startups, lower regulatory barriers to competition, support innovation (improve access to venture capital and the efficiency of R&D tax incentives; reduce tax distortions), and boost infrastructure investment (ST/MT).
  - Events affected by Covid-19 developments.
  - Some reduced red-tape and new funds through public financing vehicles to support innovation in the context of pandemic response.
  - Plans to boost infrastructure investment and broad reform objectives outlined in NGEU/RRP.
- Prepare a comprehensive policy strategy to meet emission reduction targets (ST/MT).
  - New, more ambitious European targets announced in July.
  - A comprehensive strategy will be needed to meet the targets, including in light of limited emissions reduction in transport and buildings and the transitional replacement of nuclear power generation with gas.

*Source: IMF staff; see IMF Country Report 20/91 for 2020 recommendations.*

### Annex II. Covid-19 Response (Selected Measures and Timing)

### Fiscal: Above-the-line (Health, Employment, Income, Liquidity)
- Health-related: Provision for Covid-19 costs (PPE, testing, IC capacity, etc.); advance payments to hospitals; support to hospital staff, GPs; structural increase health care / mental health care; health care support regional governments.
- STWP scheme: Expansion of “temporary unemployment” (TU) by easing access and increasing replacement rate from 65 to 70%, subject to a wage ceiling, and daily allowance for up to 26 days.
  - Eligibility narrowed from Sept to firms in hard-hit sectors or having used TU for 20% of workforce in Q2, before reverting to broad eligibility under “force majeure” from mid-Nov.
  - Timing: Mar-Aug 20; Sep-Dec 20; Nov 20-Sep 21.
- Transfers to SE (self-employed): Expansion of replacement income (RI) with various schemes: “Recovery RI”, “Double RI”, “Parental leave RI”, “Crisis RI”.
  - Timing: Mar-Dec 20; June-Dec 20; Nov 20-Sep 21; Sep 20-Jun 21; Feb-Sep 21; From July 21.
- Other social transfers: support to local social services; top-up of minimum social benefits; end-year bonus for LT temporary unemployed and workers in hospitality; freezing of degressivity of unemployment benefits; supplemental allowance for work incapacity.
  - Timing: Jun 20-Jun 21; Nov-Dec 20; Apr 20-Jun 21; Nov 20-Jun 21.
- Business grants: One-off compensation to firms forced to close or with significantly reduced turnover.
  - Timing: Mar 20-June 21.
- Tax relief measures:
  - Loss carry-backward: deduction of expected 2020 losses from 2019 tax liabilities.
  - Partial exemption withholding tax for hard-hit sectors (50% of increase).
  - Exemption social security contribution for SE.
  - Increased investment allowance: CIT (SMEs) and PIT (from 8 to 25%).
  - Recovery reserves: profits in 2021-2023 will be CIT exempt up to the amount of 2020 losses, provided equity and employment are at or above pre-crisis levels.
  - Timing: June-Aug 20; Mar-Dec 20.
- Sector support: VAT reduction hospitality; exemption employers’ SSC; subsidies to national railway company, air traffic control; regional measures for care, childcare, education, culture, tourism, sports, media.
  - Objective: Solvency support.

### Fiscal: Below-the-line (Liquidity and Solvency)
- Public guarantees:
  - Guarantee scheme for new bank loans with maturity up to 12mo (envelope of €50bn); banks assuming first loss tranche up to 3%; equal loss sharing for losses between 3 and 5%; and 20-80 loss sharing between banks and state for losses over 5%. €[3.3]bn used. Claims up to June 30, 2023.
  - Second guarantee scheme for new bank loans to SMEs with maturity up to 36mo (envelope of €10bn carved out of the first scheme), extended in Dec to 60mo; uniform 20-80 loss distribution between banks and state. €[338]mn used. Claims up to June 30, 2025. [Scheme for loans up to 36mo extended until end-Dec 2021.]
  - Guarantee schemes for bridge loans at regional level (envelope €2bn). €[379]mn used.
  - Timing: April-Dec 20; July 20—Dec 21; Mar-Dec 20.
- Equity support:
  - Capital injections: convertible loans to Brussels Airlines (€250mn) and Aviapartner (€25mn).
  - Subordinated loans and capital injections through federal/regional investment vehicles.
  - New funds created: Federal Transformation Fund (target €1.5bn, o/w €750mn public); Flanders Welfare Fund (target €500mn, o/w €240mn public); Wallonia Solvency and Recovery Fund (€400mn); Brussels capital injection (target €160mn, o/w €106mn public), new regional fund (€40mn).
  - Timing: Jun/Jul 20; Feb 21; Jun 20; Jun 20 | Mar 21; May 20 | Mar 21.
- Financial and Macroprudential:
  - Loan moratoria on eligible business loans and mortgage loans; recuperation of mortgage interest payments from non-vulnerable households over remaining maturity to ensure NPV neutrality.
    - Maximum duration initially up to 6 months (until end-September 2020), extended to 9 months (to end-December 2020 and later to end-June 2021); possibility of further extension for viable firms case-by-case introduced Feb 2021.
    - Timing: Apr 20 – Jun 21.
  - Capital relief: Deactivation of 0.5 percent CCyB that was to become effective in June 2020; repeated extension of CCyB suspension to at least 2022Q1.
    - Timing: Mar 20-Mar 22.
  - Dividend ban: ESRB/ECB recommendation applied to institutions under NBB supervision. In force until end-2020, then extended to end September 2021.
    - Timing: Jul 20-Sep 21.
  - Short-selling ban on shares traded on Euronext Brussels.
    - Timing: Mar-May 20.
- Other:
  - Moratorium on bankruptcy proceedings during first and second lockdowns; moratorium on government claims (tax and SSC).
    - Timing: Apr-Jun 20 & Nov 20-Jan 21; Apr 20-Jun 21.

*Sources: Authorities.*

### Annex III. External Sector Assessment — Overall Assessment and Key Findings

### Overall Assessment and Policy Priorities
- Overall Assessment: The external position in 2020 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Near-term priority: Mitigation of the health and economic impact of COVID-19, avoiding premature unwinding of policy support.
- Medium-term priorities: Strengthen competitiveness by addressing structural challenges—including labor and product market reforms and reforms to foster green, digital, and inclusive growth—and rebuild fiscal space to bring the external position more in line with fundamentals.

### Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP declined from 51 percent of GDP at end-2019 to 45 percent at end-2020, driven by valuation changes, to just below its five-year average of 48 percent.
  - Gross foreign assets reached 467 percent of GDP in 2020 (up 22 percentage points from 2019 despite a modest decline in nominal terms), inflated by intragroup corporate treasury activities.
  - Gross foreign assets of the banking sector: 81 percent of GDP at end-2020 (well below pre-GFC peak >200 percent).
  - External public debt increased to 75 percent of GDP in 2020, up from 64 percent in 2019; predominantly denominated in euros.
  - TARGET2 balances averaged −€49.6 billion (−11 percent of GDP) in 2020, up from −€27.4 billion in 2019.
- Assessment:
  - Large gross international asset and liability positions are inflated by corporate treasury units, which do not appear to create macro-relevant mismatches.
  - Based on projected CA and growth paths, the NIIP-to-GDP ratio is expected to decline.
  - The large and positive NIIP and its trajectory do not raise sustainability concerns.
- 2020 (% GDP) key figures:
  - NIIP: 45.1
  - Gross Assets: 466.7
  - Debt Assets: 172.8
  - Gross Liab.: 421.6
  - Debt Liab.: 195.0

### Current Account
- Background:
  - CA averaged 0.4 percent of GDP over 2015–19; on a downward but volatile path since a 2015 peak of 1.4 percent.
  - In 2020 the CA turned into a deficit of 0.2 percent of GDP from a surplus of 0.3 percent in 2019.
    - Drivers: deterioration in net current transfers (0.3 percent of GDP) linked to a higher EU contribution; modest decline in the trade balance (0.2 percent of GDP).
    - Trade decline reflected a decline in net exports of goods in volume terms, partially offset by improvements in terms of trade (energy prices) and services balance (travel and transportation).
  - For 2021 the CA deficit is projected to widen further as import growth is expected to outpace export growth.
- Assessment:
  - EBA model estimates yield a CA gap of −1.5 percent of GDP for 2020, based on a cyclically adjusted CA balance of −0.1 percent of GDP.
  - Adjustment for transitory COVID-19 effects on the CA of −0.3 percent of GDP (−0.4 percent for travel services; 0.1 and −0.1 percent for household consumption shift and medical goods trade, respectively) brings the gap to −1.8 percent of GDP relative to an estimated norm of 1.4 percent of GDP.
  - This is within IMF staff’s estimated CA gap range of between −2.8 and −0.8 percent of GDP.
- 2020 (% GDP) key figures:
  - CA: -0.2
  - Cycl. Adj. CA: -0.1
  - EBA Norm: 1.4
  - EBA Gap: -1.5
  - COVID-19 Adj.: -0.3
  - Staff Gap: -1.8

### Real Exchange Rate (REER)
- Background:
  - After depreciating in 2019 by about 2 percent (NEER depreciated by 1.1 percent), ULC- and CPI-based REER appreciated by 3 and 1.4 percent, respectively, relative to the 2019 average.
  - Cumulative appreciation of ULC- and CPI-based REER over past five years: 6 and 7 percent, reversing depreciation in 2014–15.
  - By end-July 2021 relative to 2020 average: ULC-based REER depreciated by 0.9 percent and CPI-based REER remained unchanged.
- Assessment:
  - IMF staff CA gap implies a REER gap of 4.3 percent in 2020 (using estimated elasticity of 0.42).
  - EBA model estimates point to a REER overvaluation between 9.6 and 18.2 percent (CPI-based REER).
  - IMF staff assesses REER overvaluation in the range of 1.8 to 6.8 percent, with midpoint of 4.3 percent.
  - Note on error bands: range for CA gap (-2.8 to -0.8 percent) with mid-point -1.6 percent and estimated semi-elasticity of CA to REER of 0.42.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Gross financial outflows and inflows were higher pre-GFC as banks expanded cross-border operations; flows have shrunk and become more volatile as banks deleveraged.
  - Short-term external debt accounted for 25 percent of gross external debt in 2020.
  - Capital account is open.
- Assessment:
  - Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities.
  - Large and positive NIIP reduces vulnerabilities associated with high external public debt.

### FX Intervention and Reserves Level
- Background:
  - The euro has the status of a global reserve currency.
- Assessment:
  - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating.

*Source: IMF staff; Annexes I–III of the IMF country materials provided.*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Global Risks
- Global resurgence of the Covid-19 pandemic.
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: High
  - Impact description: Renewed Covid-19 outbreaks and associated containment measures would disrupt economic activity, leading to lower GDP growth, rising unemployment as well as liquidity and solvency pressures among firms.
  - Policy response:
    - Focus public health measures on containing renewed pandemic flare-ups and immunity by widespread vaccination.
    - Use available fiscal space for targeted measures for affected households and corporations to relieve liquidity and solvency challenges yet without preventing resource reallocation through efficient bankruptcy proceedings and re-skilling of the workforce.

- Disorderly transformations (post-Covid structural reallocation impeded).
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: Medium
  - Impact description: Long-standing labor and product market rigidities may hamper resource reallocation and structural transformation in the wake of the Covid-19 pandemic, sapping potential growth and exacerbating existing inequalities. The small open economy may suffer from disintegration of global value chains.
  - Policy response:
    - Transition from broad-based to targeted support measures for vulnerable households and challenged yet viable corporations in need of assistance.
    - Accelerate structural reform efforts to ensure rapid and efficient resource reallocation and foster economic dynamism.

- De-anchoring of inflation expectations in the U.S.
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: High
  - Impact description: A fast recovery in demand (supported by excess private savings and stimulus policies), combined with Covid-19-related supply constraints, could lead to sustained above-target inflation readings and a de-anchoring of expectations. The Fed may signal a need to tighten earlier than expected, prompting a front-loaded tightening of financial conditions and higher risk premia, including for credit, equities, and emerging and frontier market currencies. The public and nonfinancial private sectors are highly indebted; a front-loaded tightening would further constrain narrowed fiscal policy space and put pressure on leveraged borrowers with possible negative repercussions for macroeconomic and financial stability.
  - Policy response:
    - Pursue fiscal consolidation once the health emergency subsides and the recovery is secured to sustainably steer public debt onto a downward path.
    - Make use of available financial sector buffers to resolve non-performing exposures and grant flexibility to allow creditor support to viable but temporarily challenged borrowers within established supervisory and regulatory frameworks.

Note on RAM methodology (as provided):
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 per cent, “medium” a probability between 10 and 30 per cent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

### Belgium-Specific Risks
- Political uncertainty and fragmentation slowing recovery and delaying reforms.
  - Relative Likelihood: Medium
  - Time Horizon: ST, MT
  - Expected Impact: High
  - Impact description: Prolonged inaction in policy areas demanding near-term attention may dampen economic output, weaken competitiveness, aggravate social frictions, and undermine fiscal sustainability.
  - Policy response:
    - Develop and build consensus around policies furthering Belgium’s economic potential and addressing its long-term challenges, also by involving affected stakeholders at an early stage.
    - Strive for an efficient co-ordination across governing bodies in order to achieve desired policy outcomes in an expedient and effective manner.

- Early withdrawal of fiscal policy support.
  - Relative Likelihood: Medium
  - Time Horizon: MT
  - Expected Impact: Medium
  - Impact description: Non-financial corporates would face elevated liquidity and solvency challenges, particularly among industries worst affected by the pandemic. Widespread layoffs may depress household incomes, aggravating social disparities.
  - Policy response:
    - Allow for a well-timed withdrawal of support measures.
    - Adjust policies based on pandemic and economic developments.
    - Target assistance to households and firms most severely affected by the crisis.

- Prolonged low-growth and low-inflation environment with persistent very low interest rates.
  - Relative Likelihood: Medium
  - Time Horizon: MT
  - Expected Impact: High
  - Impact description: Continued low interest rates could encourage search-for-yield behavior. Particularly real estate valuations appear elevated. A downturn in residential and/or commercial property markets in combination with leveraged balance sheets could adversely affect financial and macroeconomic stability.
  - Policy response:
    - Adapt and deploy the macroprudential toolkit to address emerging vulnerabilities.
    - Consider a further strengthening of bank buffers against real estate-related exposures.
    - Monitor banks and non-bank financial intermediaries for excessive risk-taking and consider appropriate policy action where needed.

- Cases of money laundering or other illicit activities affecting Belgium’s financial center reputation.
  - Relative Likelihood: Low
  - Time Horizon: MT
  - Expected Impact: High
  - Impact description: Litigation costs and associated penalties may undermine the viability of individual financial institutions with potential wider financial stability and reputational consequences.
  - Policy response:
    - Build on progress with enhancing the anti-corruption and AML/CFT frameworks to further strengthen the protection of financial institutions against illicit activities.

*BELGIUM — INTERNATIONAL MONETARY FUND 43–44*

### Annex V (Beginning): Debt Sustainability Analysis — Key Findings from opening paragraphs
- Overall assessment:
  - Public debt sustainability risks have increased over the past year under Staff’s baseline scenario, given higher levels of debt and gross financing needs. Factors mitigating these risks include an extended maturity profile, active debt management to smooth long-term debt redemptions, and a relatively-stable domestic (and euro-resident) investor base.
- High-level conclusions:
  - Public debt sustainability risks have increased and remain high over the medium term.
    - The fiscal response and output contraction led to a 16-percentage point increase in the debt ratio to 114 percent of GDP in 2020.
    - Debt is projected to remain on an upward path over the medium term, reaching 121 percent in 2026, even as the economy regains its footing, the output gap closes, and interest rates remain low.
    - Gross financing needs are expected to be 18.2 percent of GDP in 2021 and remain around that level over the medium term.
    - The debt path is especially sensitive to a real interest rate shock, and to a lesser extent, a real growth shock, as well as to combined shocks (macro-fiscal shock, contingent liability shock affecting growth).
  - Low interest rates have mitigated sustainability concerns related to Belgium’s high debt level.
    - Government gross debt increased significantly after 2007. After peaking at 107 percent of GDP in 2014, debt declined to 98 percent in 2019, supported by a favorable interest-growth differential.
    - Average bond yields declined from a peak of 5.6 percent in 2000 to 0.2 percent in 2019 and turned negative in 2020 (-0.1 percent).
    - The weighted average maturity of debt increased to 10.4, while the effective interest rate declined by 4.4 ppts to 1.7 percent.
    - Around 85 percent of the debt is owed by the federal government, all denominated in euros.
    - Some 44 percent of debt is held by domestic investors, just below the 5-year average, of which less than a third by banks (about 6 percent of assets).
- Baseline scenario and realism of projections — macro and fiscal assumptions:
  - Macroeconomic assumptions:
    - Growth rebounds to 5.4 percent this year and gradually returns to 1.3 percent over the medium term, in line with potential growth, while the output gap closes in 2026.
    - Output would remain some 1.4 percent below pre-crisis projections in 2025.
    - Inflation picks up sharply this year and stabilizes at close to 2 percent in the medium term.
  - Fiscal assumptions:
    - The baseline assumes current policies, incorporating measures in the 2021 medium-term budget that are sufficiently specified, as well as recovery plan spending (RRF-and non-RRF-funded).
    - The fiscal deficit narrows to 7.1 percent in 2021 due to the unwinding of support and lower effect of automatic stabilizers as the economy recovers, as well as lower interest spending.
    - After further narrowing to 4.5 percent in 2022, the deficit widens again over the medium term.
    - With the output gap near zero from 2023, the structural deficit moves in step.
    - The primary deficit widens to 4 percent by 2026, well-above its debt-stabilizing level of...

*BELGIUM — INTERNATIONAL MONETARY FUND 45*

### 1.5 percent and the pre-crisis projection of 1.4 percent (2025).

### Belgium: Public Sector Debt Sustainability Analysis — Baseline and Stress Tests (2021)

### Debt projections and gross financing needs
- Nominal gross public debt:
  - 2019: 103.7 percent of GDP
  - 2020: 98.1 percent of GDP
  - 2021: 114.1 percent of GDP (est.)
  - 2022: 113.6 percent of GDP (projection)
  - 2023: 113.1 percent of GDP (projection)
  - 2024: 114.2 percent of GDP (projection)
  - 2025: 116.2 percent of GDP (projection)
  - 2026: 118.3 percent of GDP (projection)
  - Medium-term projection headline: debt projected to decrease to 113.6 percent in 2021 before increasing to 120.5 percent in the medium term.
- Effective interest rate:
  - Projected to decline over the projection horizon; benchmark 10-year sovereign bond yield projected to gradually increase to 1.7 percent in 2026 while the effective rate continues to decline as maturing debt is refinanced at lower rates.
- Public gross financing needs:
  - 2019: 12.3 percent of GDP
  - 2020: 14.3 percent of GDP
  - 2021: 21.4 percent of GDP (est.)
  - Projection horizon average: gross financing needs average 19 percent of GDP.
  - Gross financing needs are just below benchmark of 20 percent of GDP except for 2024 when it is breached.
- Identified debt-creating flows (cumulative contributions and key components):
  - Change in gross public sector debt cumulative (2019–2026 shown): e.g., change in gross public sector debt in 2021: 16.1 (percent of GDP change for that year shown in table).
  - Primary deficit contributions (selected years): 2019: 0.1; 2020: 0.2; 2021: 7.7; 2022: 5.7; 2023: 3.3; 2024: 3.7; 2025: 4.0; 2026: 4.1 (percent of GDP per year). Cumulative primary deficits over projections: 25.1 (percent of GDP).
- Composition of public debt:
  - Share held by foreigners: 56 percent of total (noted as relatively high).
  - Public debt held by non-residents: 56 percent.
  - External financing requirement: 86 percent of GDP in 2020 (significantly above upper threshold).
  - Average debt maturities: noted as the second-longest in the Euro Area (quantitative maturity series shown in figures by short-term vs medium/long-term).

### Realism of baseline assumptions and forecast track record
- Forecast errors (median, 2011–2019):
  - Real GDP growth median forecast error: -0.04 percent.
  - Primary balance median forecast error: -0.31 percent (percent of GDP).
  - Inflation (GDP deflator) median forecast error: -0.15 percent.
- Cyclically-adjusted primary balance (CAPB) adjustments:
  - Largest 3-year adjustment in CAPB in projection horizon: 2.3 percent of GDP in 2023 (below threshold of 3 percent of GDP).
  - 3-year average level of CAPB: percentile rank indicates Belgium at 91% for having a 3-year average CAPB level greater than 3.5 percent of GDP (figure note).
- Underlying macro assumptions (selected):
  - Real GDP growth (baseline): 2021: 5.4; 2022: 3.1; 2023: 1.8; 2024: 1.4; 2025: 1.3; 2026: 1.3 (in percent).
  - Inflation (GDP deflator): 2021: 2.2; 2022: 2.1; 2023: 1.8; 2024: 1.8; 2025: 1.8; 2026: 1.7 (in percent).
  - Primary balance (baseline): 2021: -5.7; 2022: -3.3; 2023: -3.7; 2024: -4.0; 2025: -4.1; 2026: -4.3 (percent of GDP).
  - Effective interest rate (baseline): 2021: 1.6; 2022: 1.3; 2023: 1.1; 2024: 1.1; 2025: 1.1; 2026: 1.1 (in percent).

### Heat map and vulnerabilities
- Debt level vulnerability:
  - Debt burden benchmark of 85 percent breached under all scenarios — risk from the debt level is high.
- Gross financing needs benchmark:
  - Gross financing needs are just below the 20 percent of GDP benchmark in most years; breached in 2024.
- External vulnerabilities:
  - External financing requirement: 86 percent of GDP in 2020 (upper threshold significantly exceeded).
  - Public debt held by non-residents: 56 percent (relatively high; upper threshold comparisons in figure).
- Market perception indicators (selected):
  - Long-term bond spread over German bonds (10Y bonds): 28 basis points (period average noted).
  - 5Y CDS: 12 basis points (noted in table).
- Stress in predictive densities:
  - Figures display percentile bands (10th–90th) for gross nominal public debt trajectories under baseline and restricted/unrestricted distributions for shocks.

### Stress test scenarios and quantitative outcomes
- Growth shock:
  - Shock calibration: real GDP growth reduced by one standard deviation (measured over 2010-19 instead of 2011-20) in 2022–23, i.e., 0.7 percentage points each year relative to baseline.
  - Inflation response: assumed decline in inflation of 0.25 percentage points per 1 percentage point decrease in GDP growth.
  - Outcome: increase in debt-to-GDP ratio reaches 3.1 percentage points in 2023 and remains broadly constant thereafter.
- Interest rate shock:
  - Shock calibration: increase in interest rates by 266 basis points (calibrated on the difference between the maximum real effective interest rate observed in 2011-20 and the average over the projection horizon) starting in 2022.
  - Outcome: debt-to-GDP ratio increases more rapidly, reaching 124 percent in 2026 (similar to growth shock). Gross financing needs are 2 percentage points of GDP higher in 2026 relative to baseline.
- Exchange rate shock:
  - Shock calibration: 13 percent depreciation in the real exchange rate in 2021.
  - Outcome: no material effect as virtually all debt is denominated in euro.
- Primary balance shock:
  - Shock calibration: cumulative 0.8 percentage points of GDP deterioration in the primary balance in 2022–23 (one standard deviation measured over 2010-19).
  - Outcome: modest increase in the debt-to-GDP ratio of 1.2 percentage points.
- Combined macro-fiscal scenario:
  - Aggregates shocks to real growth, interest rate, exchange rate, and primary balance while avoiding double-counting.
  - Outcome: Debt and gross financing needs reach 127.6 (+7.1) and 22.1 (+2.4) percent of GDP in 2026 (parentheses show increase relative to baseline).
- Contingent liability shock:
  - Shock calibration: non-interest expenditures in 2022 increase by the equivalent of 10 percent of banking sector assets, and growth slows by 1 standard deviation for two years (2022–23).
  - Outcome: Debt increases to 135.9 percent of GDP in 2022 and reaches 147 percent in 2026.

### Key stress-test figures (selected snapshots)
- Combined shock (2026): debt-to-GDP = 127.6 percent; public gross financing needs = 22.1 percent of GDP.
- Contingent liability shock (2026): gross nominal public debt = 147 percent of GDP.
- Interest rate shock (2026): debt-to-GDP = 124 percent; gross financing needs +2 percentage points relative to baseline in 2026.
- Growth shock (2023): debt-to-GDP increases by 3.1 percentage points relative to baseline.

### Policy implications and recommendations (as reflected in the source)
- Return to sustainable public finances:
  - Authorities committed to a return to sustainable public finances; timing and intensity of consolidation should account for possible targeted support and structural needs.
  - Coalition agreement envisages an annual structural improvement contingent on output gap size.
- Fiscal policy and expenditure management:
  - Increase employment rate (pension and labor market reforms) to contain aging costs and create fiscal space for green and digital investment.
  - Increased use of spending reviews; High Council of Finance working on spending reviews and an expenditure rule for the Federal government; Flemish government to introduce spending reviews and an expenditure rule.
  - Belgian Debt Agency actively managing debt; long average debt maturities mitigate budgetary impact of interest rate increases.
- Investment and reform priorities:
  - Boost public investment to 3.5 percent of GDP by 2025 and to 4 percent of GDP by 2030.
  - Recovery and Resilience Plan: €5.9 bn (1.3 percent of 2020 GDP) with 50 percent allocated to green economy and 27 percent to digitalization.
  - Implement structural reforms, including comprehensive pension reform and Global Tax Reform preparation.
- Labor market and pensions:
  - Raise employment rate to 80 percent by 2030; broad labor market reform in concertation with social partners, including measures to curb increase in long-term illness and strengthen job reallocation.
  - RRP allocates 450 million EUR to training and integration for vulnerable groups.
- Financial sector resilience:
  - Maintain sufficient capital and loss-absorbing capacity at subsidiary level; monitor residential and commercial real estate risks; continue macroprudential measures where needed.
  - Strengthen AML/CFT efforts; authorities increased AML resources at NBB.
- Tax reform and compliance:
  - Simplify and increase fairness of the tax system; reduce tax expenditures; broaden tax base to lower personal income tax rates and reduce labor tax wedge.
  - Recent measures: tax on securities accounts; company car in-kind benefits apply to zero emission vehicles from 2026.
  - Federal government’s comprehensive annual plan to combat tax and social fraud with 29 action points; plans to undertake an RA Tax Gap Analysis in coordination with staff.
- Climate transition:
  - Federal coalition endorses the Green Deal; adapt 2030 Climate and Energy Plan in coordination with regions; commitment to phase out nuclear energy.
  - RRP contributes 50 percent of allocation to green transition (of €5.9 bn).
  - Consider recommendations for increased carbon taxation within Global Tax Reform.

*Italic: Source — IMF staff report excerpts and figures from the Public Sector Debt Sustainability Analysis for Belgium (Staff Report for the 2021 Article IV Consultation; informational annex; as of August 04, 2021).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1belea2021001.pdf_