## 1. Autonomous State Agency for Public Services

## Source details

**Canonical URL:** [1. Autonomous State Agency for Public Services](https://www.imf.org/-/media/files/publications/cr/2022/english/1smrea2022001.pdf)

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### Context and recent macroeconomic developments
- San Marino’s economy "remarkably resilient post-pandemic" but "real income remains well below pre-Global Financial Crisis levels."
- Growth and buffers:
  - Growth projected at "8.3 percent for 2021" and continued strong performance until August 2022.
  - Entry to international capital markets in early 2021 "increased policy and macroeconomic buffers to healthy levels."
- External shocks:
  - Russia’s invasion of Ukraine amplified shocks to food and fuel prices, tightened financial conditions, and increased global uncertainty.

### Labor market and wages
- Aggregate outcomes:
  - Employment reached "the highest level since 2012", unemployment fell to "5.3 percent by mid-2022."
  - Employment growth led by manufacturing and retail; job losses in the financial sector and construction.
- Collective Wage Bargaining Agreement 2021–23:
  - Covers "6,500 workers of the industrial sector representing one third of private sector employment."
  - Wage increases: "5.4 percent over 2022-23 (1.5 percent from 1 June 2022, 1.5 percent from 1 August 2022, and 2.4 percent from January 2023)."
  - "In addition to 0.6 percent wage increase in 2021 adding up to a total increase of 6 percent over three years."
  - Craft sector (800 workers) agreed to a similar contract.

### Energy shock, tariffs, and the role of AASS
- Magnitude and instruments:
  - Faced "an unprecedented energy price shock" after the Ukraine war, "albeit milder than neighbors."
  - Electricity retail price increase of "25–40 percent at the beginning of the year."
  - Early wholesale futures lock-ins for 2022 and hedged prices for 2023 "significantly below recent market levels."
  - Gas: six-year import contract with Enel fixed prices "at around €44 per MWh for 45 MW of supply at end-February."
  - Energy component of gas tariffs increased between "70–150 percent."
- Tariff differentiation and support:
  - Increases differentiated by households versus firms, installed capacity and consumption levels.
  - Targeted compensation of subsidies and payment delays approved "at an estimated cost of 0.1 percent of GDP."
- Fiscal support and AASS financials:
  - Regulatory authority reduced the full increase requested by AASS; "The total loss will be around 0.6 percent of GDP in 2022."
  - AASS supplies multiple utilities and "engages in energy trading to stabilize domestic prices."
  - Liquid buffers: "reaching €52 million in May 2022 or 3.3 percent of GDP."
  - Electricity hedging and tariff adjustment:
    - Hedging covers this year and next at prices "significantly below current market levels."
    - "a hike in tariffs of around 50 percent will be required to ensure cost recovery at AASS."
  - With these operations and given current market prices, "losses around 4-5 percent of GDP for the economy have been avoided."
  - Gas distribution: tariff adjustments should ensure profits until 2027; contract cap around 80 percent of average past consumption may not cover all winter consumption.

### Inflation, real incomes, and consumption
- Inflation:
  - Headline inflation reached "6 percent in June" with core inflation below "3 percent."
  - Inflation expected to peak in late 2022: "6.9 percent in 2022" and decline thereafter.
  - Electricity prices will increase significantly in January, around "50 percent."
- Terms-of-trade and consumption:
  - Increased energy imports represented "a negative terms of trade shock with an annualized impact of around 5 percent of GDP."
  - Real income erosion caused non-fuel consumption to fall "by 10 percent in first half of 2022."
- Nominal wage growth constrained; labor market tightness eased by elastic supply of cross-border workers.

### External sector and reserves
- Trade and tourism:
  - Manufacturing exports are "55 percent higher, in nominal terms, than pre-pandemic levels."
  - Tourist arrivals in 2021 rebounded sharply, supporting consumption.
  - Direct exposure to Russia and Ukraine is minimal; direct impact "has been very limited."
- International reserves:
  - End-2021: "€843 million (57 percent of GDP)."
  - By May 2022: reserves declined to "€651 million" as banks reduced deposits at the Central Bank of San Marino (CBSM).

### Fiscal position, financing, and debt dynamics
- Recent fiscal balances and adjustments:
  - 2021 primary balance (net of bank support): "-2.3 percent of GDP", worse than 2010–19 average "-0.3 percent of GDP."
  - Authorities accelerated transfers owed to the pension fund from previous years ("2 percent of GDP") scheduled over the next 9 years.
  - Primary balance net of bank support and one-offs projected to improve by "0.6 percent of GDP in 2022."
  - Exceptional higher-than-expected tax revenues "by 1.5 percent of GDP" accommodated temporary energy-related spending "0.5 percent of GDP" and one-off purchase of office space "1 percent of GDP."
- Financing actions in 2022:
  - Issued one-year bonds for "€50 million" (of which "€20 million were purchased by the pension fund").
  - Planned loans "for €20 million from domestic banks."
  - After amortizing "€74 million", cash balances remain unchanged above "2 months of spending."
  - Converted "€55 million of short-term government-guaranteed BNS IOUs" into government long-term bonds—with a "17 percent haircut in present value terms."
- Debt levels and composition:
  - Debt-to-GDP projected to marginally fall in 2022 to "84 percent."
  - At end-2021, "8 percent of public debt with variable interest rate."
  - Central Government selected indicators (Percent of GDP series preserved exactly as reported for 2019–2022):
    - Revenues: "22.3 21.6 21.9 20.0 21.5"
    - Tax revenue: "16.1 14.5 17.0 16.0 17.2"
    - Nontax revenue: "6.2 7.1 4.9 4.0 4.3"
    - Expenditures: "22.4 59.2 39.4 23.4 24.8"
    - Primary expenditure net of bank support: "19.8 22.4 24.2 21.1 22.7"
    - Interest payments: "0.3 1.0 2.0 1.7 1.5"
    - Bank support: "2.3 35.8 13.0 10.6 0.6"
    - Overall balance: "-0.1 -37.6 -17.4 -3.4 -3.3"
    - Primary balance net of bank support: "2.6 -0.8 -2.3 -1.7 -1.2"
    - Primary balance net of bank support and one-offs: "-0.6 -3.0 -1.8 -1.7 -1.2"
    - Public debt: "57.4 71.6 85.1 ... 83.7"
- Selected financing table (Millions of euros, figures preserved):
  - Financing needs: "126"
    - Primary Deficit: "28"
    - Interest Payments: "24"
    - Amortization: "74" (of which BNS bond "55")
  - Financing sources: "126"
    - Loans-Banks: "20"
    - Domestic bonds: "104" (Short term (Market): "50"; Long term: BNS bond conversion "54")
    - Asset recovery and other financing: "9"
    - Deposits (-=accumulation): "-7"
- Outstanding July 2022 bond breakdown (selected table entries preserved):
  - Total Bonds (I+II): "72.7 54.7" (percent of GDP columns preserved)
  - I. External bonds: "21.5 21.4"
  - II. Domestic bonds (a+b): "51.2 33.4"
  - a. Market bonds: "11.9 10.9"
  - b. Nonmarketable bonds: "39.3 22.4"
  - Perpetual Bond - CRSM: "28.7 13.9 1.75"
  - BNS bond 2024: "3.5 3.3 0.25 52"
  - BNS bond 2026: "5.9 5.2 0.35 74"

### Banking sector, liquidity, and financial soundness
- Profitability and capitalization:
  - Banks’ capitalization and profitability improved in 2021; "for the first time in 12 years, profits of the banking system were positive, albeit still very low."
- Liquidity and reserves:
  - By May 2022, banks reduced deposits at CBSM, contributing to decline in international reserves from "€843 million" at end-2021 to "€651 million."
- Key vulnerabilities and indicators:
  - NPLs remain exceptionally high (around "60 percent of loans" historically; Table shows 2022 NPLs "56.3" for percent).
  - Losses accrued in Q1 2022; cost cuts stalled and pressure emerged from trading activity in a context of falling bond values.
  - Banks allowed to transfer part of trading book into investment portfolio retroactively to January 2022.
  - Deposits reversed a long-term declining trend with "4 percent year-on-year growth until March."
  - Credit growth subdued; greater lending from foreign banks met increased demand.
- Insurance sector:
  - Compagnia Sammarinese di Assicurazioni placed under extraordinary administration and taken over by the remaining insurer at no fiscal cost.
  - Insurance sector size: "5.7 percent of financial system assets, or 18 percent of GDP."
- Financial soundness indicators (selected exact figures preserved):
  - Capital adequacy ratio (2022): "13.2"
  - Capital to assets (2022): "5.0"
  - NPLs to total loans (2022): "56.3"
  - NPL coverage ratio (2022): "67.0"
  - ROA (2022): "0.0"
  - ROE (2022): "-0.2"
  - Liquid assets to total assets (2022): "26.8"
  - Loans to deposits (2022): "68.2"
  - Banking system assets (2022, millions of euros): "4,217.3"
  - Banking system assets as percent of GDP (2022): "266.4"

### Outlook and risks
- Activity outlook:
  - Activity expected to soften due to real income erosion, tightening financial conditions and global uncertainty.
  - Manufacturing most exposed to energy crisis; domestic consumption will suffer further while tourism remains resilient.
  - Current account will deteriorate as manufacturing exports weaken; higher global interest rates (San Marino is a net creditor) can somewhat mitigate CA deterioration but may cause capital outflows and lower international reserves.
- Key projections and series preserved exactly (selected table excerpts):
  - Real GDP growth series (selected): "8.3 3.5 0.2 1.0 1.3 1.3 1.3" (2021–2027 entries preserved in context)
  - Inflation - avg series (selected): "2.1 6.9 4.5 1.5 1.7 1.6 1.3 1.2 1.3"
  - Current account balance series (selected): "4.5 1.3 0.7 0.9 1.0 1.3 1.3 1.1 0.9"
  - Public debt series (selected): "86.3 83.7 94.6 84.5 84.1 83.3 82.5"
- Risks highlighted:
  - Energy supply disruptions: extreme full shutoff case could require curtailing "15 percent" of demand; Italy’s GDP losses "2–5 percent of GDP" imply impact on San Marino of "1.5-4  percent of GDP."
  - Rollover risk of the Eurobond maturing in early 2024 for about "20 percent of GDP."
  - Elevated risks from high global inflation and tightened global financial conditions.
- Debt and financing outlook:
  - Public debt projected to remain around current levels until 2024 then start declining; debt-to-GDP temporarily spikes in 2023 due to early issuance of a new Eurobond and declines when repaid in 2024.
  - Over medium-term and absent fiscal adjustment, central government deficit remains high; debt reaches around "83 percent of GDP in 2027."

### Policy discussions — Response to high energy prices and climate
- Measures taken:
  - Electricity: one-year future market contract and partial pass-through of new import prices to consumers by reducing previous large margins at AASS.
  - Gas: new long-term fixed price gas contract (signed late-February "at one-fourth of July’s spot price"); consumers isolated pre-contract by maintaining old tariffs and incurring temporary AASS losses; subsequently tariffs adjusted above cost-recovery given new import prices.
- Recommendations:
  - Adjust tariffs to ensure cost recovery; tariffs remain significantly below regional peers.
  - Beyond 2023, gradually adjust tariffs to new long-term equilibrium; provide targeted and temporary support to vulnerable groups.
  - Careful consideration before indexing tariffs to wholesale prices to avoid transferring volatility to consumers.
  - Develop a comprehensive emergency plan for gas disruptions with rationing strategy (could include auction mechanism) and consider securing gas storage even at high cost.
  - Accelerate energy transition while ensuring affordability and security; land constraints hinder renewable expansion; enhance energy efficiency through taxation, below Italy.

### Policy discussions — Fiscal reforms to secure sustainability
- Fiscal objective recommended:
  - Target a primary balance (net of bank support) for the central government of around "2.5 percent of GDP within three years."
  - Further consolidation efforts estimated at "about 2 percent of GDP" accounting for current plans.
  - Pension reform to stabilize pension system’s deficit (net of government transfers) at "2.5 percent of GDP over the medium-term."
- Potential measures and yields (values preserved):
  - Tax increases "2.2"
  - Reducing income tax rebates "1"
  - VAT "0.6"
  - Expanding excises "0.1"
  - Wealth tax "0.5"
  - Spending cut "1"
  - Reduction in transfers to other government units "1"
  - Total yield "3.2"
- Medium-term fiscal indicators (selected exact sequences preserved):
  - CG: Primary Balance net of bank support "-1.2 0.5 0.8 2.5 2.5 2.0 1.7"
  - Pension Fund Balance net of government transfers "[b] -4.1 -2.8 -3.1 -2.5 -2.5 0.4 0.6"
  - Consolidated Primary Balance "1/-2.8 0.1 0.1 2.5 2.5 2.4 2.4"
- Recommended reform priorities:
  - Mobilize revenue by improving income tax efficiency and introducing a VAT; broaden base by reducing allowances and incentives.
  - Expand excise duties as fuel prices decline to raise revenue and address environmental externalities.
  - Improve public spending efficiency via spending reviews, accounting and transparency reforms.
  - Better target social programs through income and wealth indicators to yield savings without worsening social outcomes.
  - Implement pension reform (Box 4 elements) including: increase quota from 100 to 103; gradual increase of 3 percentage points on employees’ contribution rate for pillar one; pension based on 30 years of work-career instead of last 20 years; amendments to benefits calculation; increase in solidarity contributions; flexibility for part-time work after retirement.
    - Current contributions: employees pay "16.1 percent" and employers pay "5.4 percent."

### Policy discussions — Banking system reforms and AMC
- AMC and calendar provisioning:
  - AMC objective: purchase exceptionally high NPLs; calendar provisioning to introduce automatic gradual provisioning increases expected in "June 2023."
  - Governance and incentive schemes of the AMC remain key; servicer IGRC rules established; three international firms shortlisted as arrangers.
  - Draft regulation on supervisory treatment of AMC bonds:
    - Zero risk weight for senior guaranteed bonds.
    - Three times larger risk weight factor for junior bonds than existing NPLs, becoming progressively higher.
- Bank capitalization and prudential measures:
  - Faster strengthening of private banks’ capitalization warranted; majority of private banks have low and fragile profitability.
  - Banks should inject fresh capital; deficiencies should prompt strengthened supervisory corrective measures.
  - Transfer pricing of NPLs: NPLs should be transferred at real value by an internationally recognized appraiser; if transferred at book value, supervisory safeguards needed (lower bound of provisioning) to prevent artificial capital improvements.
  - Incentives: banks delaying NPL transfers should face higher capital requirements and more aggressive calendar provisioning.
- CRSM capital quality:
  - Gradual conversion of the perpetual bond into tradable bonds recommended to boost capital quality and liquidity.
  - Further measures needed to achieve healthy profitability: improve underwriting standards, rationalize branch network and personnel costs; potential dividends should be used for recapitalization.
- CBSM liquidity and LOLR capability:
  - Protect LOLR capability; avoid further reductions in reserves.
  - Policy recommendations: increase reserve requirements, increase government deposits, build buffers given energy-related risks.
  - Gradual application of pension fund asset diversification abroad to avoid immediate liquidity outflows ahead of the Eurobond rollover.
- Transparency and reporting:
  - Losses on bond holdings should be fully disclosed; transfer of trading to investment portfolio is not justified and should be avoided unless transparently reported.
- AML/CFT:
  - Continue progress on AML/CFT implementation per MONEYVAL findings; increase FIA resources and expedite transposition of EU AML directive.

### Policy discussions — Fiscal policy, debt management, and structural reforms
- Fiscal stance and recommended consolidation:
  - With higher energy prices and tightening conditions, priority is to build fiscal and financial buffers while accelerating reforms.
  - Rollover of the Eurobond maturing in 2024 remains a risk; opportunistic early rollover recommended whenever market conditions are favorable.
  - Authorities should save revenue over-performance this year to build government deposits and resist spending pressures.
  - Fiscal consolidation target: "A fiscal adjustment by the central government of 2 percent of GDP over the next three years to reach a central government primary balance of 2.5 percent of GDP complemented by pension reform."
- Debt management and market development:
  - Develop comprehensive debt management strategy, strengthen debt office, publish MTDS and annual debt report, consolidate issuance on few maturities, maintain deposits of at least "2 months of spending (about 4 percent of GDP)" on average, consider increasing liquidity ahead of Eurobond rollover.
  - Conversion of ex-BNS uninsured depositors’ bonds will help develop the domestic debt market and reduce taxpayer burden.
- Structural reforms to support private sector-led growth:
  - Labor market reform: reskilling, reintegration of long-term unemployed, loans for higher education, support female employment, facilitate hiring of cross-border workers.
  - Economic integration: complete EU association agreement technical work by end-2023 to foster financial, trade, and labor integration.
  - Improve business climate and insolvency framework; labor market reform under parliamentary discussion expected to be approved this year.

### Debt management specifics and simulated strategies
- Debt stock and characteristics:
  - Public debt: "€969 million in 2020 (72 percent of GDP); €1,276 million in 2021 (86 percent of GDP); €1,326 million in 2022 (84 percent of GDP)."
  - Public debt composition (2021): External 350 / 27.5; Eurobonds 340 / 26.7; Domestic 925 / 72.5; Total 1,276 / 100.0; nonmarket¹ 760 / 60.1.
  - Present value discount rate: "3.5 percent (based on the yield of 30 year government Italian bond)."
- Outstanding July 2022 (selected exact figures, Millions of euros):
  - Total Bonds (I+II) Outstanding 1150.7; Present Value 866.6.
  - I. External bonds Outstanding 340.0; Present Value 338.4; Eurobond 2024 interest rate "3.25".
  - II. Domestic bonds Outstanding 810.7; Present Value 528.2.
    - Market bonds Outstanding 187.8; Present Value 173.1.
    - Nonmarketable bonds Outstanding 622.9; Present Value 355.2.
      - Perpetual Bond - CRSM Outstanding 455.0; Present Value 220.0; interest "1.75".
      - BNS bond 2024 Outstanding 56.0; Present Value 52.5; interest "0.25".
      - BNS bond 2026 Outstanding 92.9; Present Value 82.2; interest "0.35".
  - Creditor breakdown (Jul-2022, Million euros): Total "811" (Nonmarket "605"; Market "207"); Banks "547" (Nonmarket "456"; Market "91"); Others "264" (Nonmarket "149"; Market "115").
- MTDS simulation strategies (parameters and exact inputs preserved):
  - Eurobond volumes (S1–S4): "€340, €500, €250, €340"
  - Eurobond interest rates (S1–S4): "5.75%, 5.00%, 5.75%, 5.75%"
  - Domestic 1-year bond share (S1–S4): "40%, 40%, 40%, 0%"; interest rate "1%" (all).
  - Domestic 5-year bond share (S1–S4): "60%, 60%, 60%, 100%"; interest rate "3.75%" (all).
  - Adverse shocks: "500-basis points shock to international borrowing", "400 basis points shock in domestic borrowing."
  - Main simulation finding: strategies have similar funding costs; higher reliance on external funding implies greater risks; domestic funding seems less vulnerable in the simulation.

### Debt sustainability and stress tests
- Baseline projections and sensitivities (selected exact excerpts preserved):
  - Baseline: public debt projected around "83 percent of GDP by end of forecast horizon."
  - Gross financing needs: "around 9½ percent of GDP in 2023, jumping to about 30 percent of GDP mostly due to amortization of the Eurobond in 2024."
  - Baseline assumes Eurobond rolled over with new issuance featuring "5-year maturity and a coupon of about 6 percent."
  - Sensitivity: If Eurobond interest is "8 percent", debt-to-GDP increases by "1.5 percent relative to baseline to reach 84 percent of GDP in 2027."
- Stress-test outcomes (selected scenarios and exact outcomes preserved):
  - Real growth shock: Real GDP to around "-4 percent in 2023–24"; primary balance deteriorates to "-3.5 percent by 2024"; debt increases to "100 percent of GDP."
  - Combined macro-fiscal shock: includes growth shock, interest rate shock ("increase in spreads by 300 basis points") and partial failure of planned adjustment; debt increases to "105 percent of GDP by 2023."
  - Contingent liability shock: calibrated AMC cost "about 15 percent of GDP" plus tax credits "9 percent of GDP"; debt goes above "117 percent of GDP by 2023."
- Recommended actions from stress-test implications:
  - Rebuild fiscal buffers through "a more ambitious fiscal consolidation" targeting "primary surplus (net of bank support) of 2.5 percent of GDP."
  - Maintain higher short-term liquidity buffers; diversify financing and develop domestic bond market.
  - Improve debt management capacity and strengthen the banking system to reduce fiscal risks.

### Annex highlights — Labor market rebound and public debt management
- Labor market (Annex V):
  - Employment rebound persisted in H1 2022; private sector employment back to pre-pandemic levels; reliance on cross-border workers increased.
  - Collective bargaining agreement increases pay by "5.4 percent over 2022–23" plus "0.6 percent in 2021" totaling "6 percent" over three years.
  - Labor reform proposal includes reskilling, reintegration, inclusion of frontier workers in unions, shorter fixed-term tenure (from 18 to 12 months), and annual reporting to the council.
- Public debt management (Annex VI):
  - MTDS objectives: meet financing needs at lowest cost while reducing refinancing risk and developing a liquid domestic market; focus new issuances on few maturities.
  - Domestic bond market status (July 2022): total issued domestic bonds "€811 million (53 percent of GDP)", most nonmarketable.
  - Policy recommendations: publish MTDS and annual borrowing plan, convert nonmarketable bonds into marketable bonds gradually, keep instruments simple and remunerated above CBSM remuneration, diversify investors, strengthen debt office capacity, and prioritize a debt operation to secure Eurobond rollover in 2024 (early issuance or IFI funding; build government deposits).

*International Monetary Fund — Staff assessment and policy recommendations based on the source PDF chapter.*

### 1. Autonomous State Agency for Public Services  __________________________________________________6

### 1. Autonomous State Agency for Public Services  __________________________________________________6

### Context and recent macroeconomic developments
- San Marino’s economy has been "remarkably resilient post-pandemic" but "real income remains well below pre-Global Financial Crisis levels."
- Growth projected at "8.3 percent for 2021" and continued strong performance until August 2022.
- Entry to international capital markets in early 2021 "increased policy and macroeconomic buffers to healthy levels."
- Russia’s invasion of Ukraine amplified shocks to food and fuel prices, tightened financial conditions, and increased global uncertainty.

### Labor market and wages
- Employment reached "the highest level since 2012", with the unemployment rate falling to "5.3 percent by mid-2022."
- Employment growth led by manufacturing and retail; job losses occurred in the financial sector and construction.
- Collective Wage Bargaining Agreement 2021–23 (Box 2):
  - The 2022–23 contract covers "6,500 workers of the industrial sector representing one third of private sector employment."
  - The contract provides for "an increase in wages of 5.4 percent over 2022-23 (1.5 percent from 1 June 2022, 1.5 percent from 1 August 2022, and 2.4 percent from January 2023)."
  - This is "in addition to 0.6 percent wage increase in 2021 adding up to a total increase of 6 percent over three years."
  - The craft sector (800 workers) agreed to a similar contract.

### Energy shock, tariffs, and the role of AASS
- San Marino faced "an unprecedented energy price shock" after Russia’s invasion of Ukraine, "albeit milder than neighbors."
- Electricity:
  - A retail price increase of "25–40 percent at the beginning of the year" accommodated part of the import price shock.
  - San Marino secured early wholesale futures market lock-ins for 2022 and hedged prices for 2023 "significantly below recent market levels."
- Gas:
  - A six-year import contract with Enel fixed prices "at around €44 per MWh for 45 MW of supply at end-February."
  - The energy component of gas tariffs increased between "70–150 percent."
- Tariff differentiation and targeted support:
  - Tariff increases were differentiated for households relative to firms and by installed capacity and consumption levels.
  - A targeted compensation of subsidies and payment delays was approved "at an estimated cost of 0.1 percent of GDP."
- Fiscal support and AASS losses:
  - The regulatory authority reduced the full increase requested by AASS.
  - "The total loss will be around 0.6 percent of GDP in 2022."
- AASS (Box 1) description and financials:
  - AASS supplies electricity, natural gas, water distribution, sewerage, garbage collection, urban hygiene, public transportation, and engages in energy trading to stabilize domestic prices.
  - "Large profits since 2015 have allowed AASS to build significant liquid buffers, reaching €52 million in May 2022 or 3.3 percent of GDP."
  - Gas: Tariff adjustments should ensure profits in gas distribution until 2027; contract quantity cap around 80 percent of average past consumption may not cover all winter consumption.
  - Electricity: Hedging covers this year and next at prices "significantly below current market levels"; "a hike in tariffs of around 50 percent will be required to ensure cost recovery at AASS."
  - With these operations and given current market prices, "losses around 4-5 percent of GDP for the economy have been avoided."

### Inflation, real incomes, and consumption
- Headline inflation reached "6 percent in June" with core inflation below "3 percent."
- Nominal wage growth constrained; labor market tightness eased by elastic supply of cross-border workers.
- Increased energy imports represented "a negative terms of trade shock with an annualized impact of around 5 percent of GDP."
- Real income erosion caused non-fuel consumption to fall "by 10 percent in first half of 2022."

### External sector and reserves
- Manufacturing exports are "55 percent higher, in nominal terms, than pre-pandemic levels."
- Tourist arrivals in 2021 rebounded sharply, supporting consumption.
- Direct exposure to Russia and Ukraine is minimal; direct impact of the war "has been very limited."
- International reserves:
  - End-2021: "€843 million (57 percent of GDP)."
  - By May 2022: reserves declined to "€651 million" as banks reduced deposits at the Central Bank of San Marino (CBSM).

### Fiscal position, financing, and debt dynamics
- 2021 primary balance (net of bank support) reached "-2.3 percent of GDP", worse than the 2010–19 average of "-0.3 percent of GDP."
- Authorities accelerated transfers owed to the pension fund from previous years ("2 percent of GDP") scheduled over the next 9 years.
- The primary balance net of bank support and one-offs is projected to improve by "0.6 percent of GDP in 2022."
- Exceptional higher-than-expected tax revenues "by 1.5 percent of GDP" accommodated:
  - Temporary energy-related spending "0.5 percent of GDP."
  - One-off purchase of office space "1 percent of GDP."
- Government funding and debt actions in 2022:
  - Issued one-year bonds for "€50 million" (of which "€20 million were purchased by the pension fund" and the rest by banks).
  - Planned loans "for €20 million from domestic banks."
  - After amortizing "€74 million", cash balances remain unchanged above "2 months of spending."
  - Converted "€55 million of short-term government-guaranteed BNS IOUs" into government long-term bonds—with a "17 percent haircut in present value terms."
- Debt dynamics:
  - Debt-to-GDP projected to marginally fall in 2022 to "84 percent."
  - At end-2021, "8 percent of public debt with variable interest rate" indicating low sensitivity to interest rate volatility.
- Central Government selected fiscal indicators excerpt (Percent of GDP):
  - Revenues: "22.3 21.6 21.9 20.0 21.5" for 2019–2022 (table formatting preserved in source).
  - Tax revenue: "16.1 14.5 17.0 16.0 17.2"
  - Nontax revenue: "6.2 7.1 4.9 4.0 4.3"
  - Expenditures: "22.4 59.2 39.4 23.4 24.8"
  - Primary expenditure net of bank support: "19.8 22.4 24.2 21.1 22.7"
  - Interest payments: "0.3 1.0 2.0 1.7 1.5"
  - Bank support: "2.3 35.8 13.0 10.6 0.6"
  - Overall balance: "-0.1 -37.6 -17.4 -3.4 -3.3"
  - Primary balance net of bank support: "2.6 -0.8 -2.3 -1.7 -1.2"
  - Primary balance net of bank support and one-offs: "-0.6 -3.0 -1.8 -1.7 -1.2"
  - Public debt: "57.4 71.6 85.1 ... 83.7"
- Government bonds and funding structure (selected figures):
  - Financing needs: "126" (Millions of euros)
    - Primary Deficit: "28"
    - Interest Payments: "24"
    - Amortization: "74" (of which BNS bond "55")
  - Financing sources: "126"
    - Loans-Banks: "20"
    - Domestic bonds: "104" (Short term (Market): "50"; Long term: BNS bond conversion "54")
    - Asset recovery and other financing: "9"
    - Deposits (-=accumulation): "-7"
  - Outstanding July 2022: (table shows total bonds and breakdown)
    - Total Bonds (I+II): "72.7 54.7" (Percent of GDP columns preserved)
    - I. External bonds: "21.5 21.4"
    - II. Domestic bonds (a+b): "51.2 33.4"
    - a. Market bonds: "11.9 10.9"
    - b. Nonmarketable bonds: "39.3 22.4"
    - Perpetual Bond - CRSM: "28.7 13.9 1.75"
    - BNS bond 2024: "3.5 3.3 0.25 52" (presented in source table format)
    - BNS bond 2026: "5.9 5.2 0.35 74"

### Banking sector
- Banks’ capitalization and profitability improved in 2021; "for the first time in 12 years, profits of the banking system were positive, albeit still very low."
- By May 2022, banks reduced deposits at CBSM, contributing to a decline in international reserves from "€843 million" at end-2021 to "€651 million."

*REPUBLIC OF SAN MARINO — INTERNATIONAL MONETARY FUND.*

### 3.5 percent (based on the yield of 30 year government Italian bond).

### 1smrea2022001 - 3.5 percent (based on the yield of 30 year government Italian bond).

### Liquidity buffers and financial sector developments
- Decentralized liquidity buffer definition: includes cash, deposits and loans available within 7 days, and securities that can be readily converted to cash but does not include deposits at CBSM and Sammarinese banks.
- Charted indicators (labels preserved):  
  - Decentralized liquidity buffer  
  - Gross international reserves (CBSM)  
  - Government deposits (months of spending, lhs)
- Banking sector key points:
  - NPLs remain exceptionally high (around 60 percent of loans).
  - Losses accrued in the first quarter of 2022; cost cuts stalled in 2022 and pressure emerged from trading activity in a context of falling bond values.
  - Banks were allowed to transfer part of the trading book portfolio into investment portfolio retroactively to January 2022.
  - Deposits reversed a long-term declining trend with a 4 percent year-on-year growth until March (deposits in foreign banks have grown even more).
  - Credit growth continued to be subdued as banks strive to increase capitalization ratios and increased demand for credit is met by greater lending from foreign banks.
- Insurance sector note:
  - Compagnia Sammarinese di Assicurazioni was put under extraordinary administration and its payments suspended; it was taken over by the remaining insurance company at no fiscal cost.
  - Insurance sector size: 5.7 percent of financial system assets, or 18 percent of GDP.

*Source: CBSM, MoF and IMF staff.*

### Outlook and risks
- Activity outlook:
  - Activity is expected to soften in the year due to real income erosion, tightening financial conditions and growing global uncertainty.
  - Manufacturing is most exposed to the energy crisis; domestic consumption will suffer further as real incomes decline and uncertainty grows, while tourism remains resilient.
  - Current account will deteriorate as manufacturing exports weaken; higher global interest rates (San Marino is a net creditor) can somewhat mitigate CA deterioration but may cause capital outflows and lower international reserves.
- Inflation and growth projections and related figures (as presented):
  - Table line (labels preserved):  
    Real GDP growth8.33.50.21.01.35.53.81.51.31.3  
    Inflation - avg 2.16.94.51.51.71.61.31.21.31.3  
    Nominal GDP growth9.27.22.42.73.17.15.32.72.62.7  
    Current account balance4.51.30.70.91.01.31.31.11.30.9  
    Primary balance net of bank support-2.3-1.2-0.70.20.5-2.60.30.90.80.7  
    of which transfers to AASS...-0.50.00.00.0...............  
    Public debt86.383.794.684.584.194.391.790.689.689.0
  - Inflation expected to peak in late 2022 and decline next year: inflation at 6.9 percent in 2022; electricity prices will increase significantly in January, around 50 percent.
- Debt and financing:
  - Public debt projected to remain around current levels until 2024 and then start declining; debt-to-GDP will temporarily spike in 2023 due to early issuance of a new Eurobond and decline when the Eurobond is repaid in 2024.
  - Over the medium-term and absent fiscal adjustment, central government deficit remains high; debt reaches around 83 percent of GDP in 2027 (annex IV reference in source).
- Key risks highlighted:
  - Energy supply disruptions: in an extreme full shutoff case it is estimated that 15 percent of demand would have to be curtailed; losses to Italy’s GDP estimated to range from 2–5 percent of GDP, resulting in an impact on San Marino of 1.5-4  percent of GDP.
  - Rollover risk of the Eurobond maturing in early 2024 for about 20 percent of GDP.
  - Elevated risks from high global inflation and tightened global financial conditions.

### Fiscal stance and vulnerabilities
- Without fiscal adjustment, fiscal position remains vulnerable; primary balance net of bank support projected to improve only marginally in 2023.
- Drivers of projected improvement:
  - Cautious indexation of public wages and pensions below the increase in the GDP deflator and in line with private sector wage agreements (0.4 percent of GDP savings).
  - Lack of one-off expenses.
  - With full pass-through of energy prices, no energy subsidies are projected next year.
  - Pension reform expected to be approved this year will reduce social security deficits and delay higher transfers from the central government over the next decade.
- Banking implications of higher rates and energy prices:
  - Higher energy prices likely to increase NPLs.
  - Higher interest rates will cause some losses on fixed income portfolio (five times higher than banks’ capital) once recognized, increasing capitalization needs.
  - Higher market rates are consistent with higher net interest margins, increasing structural profitability going forward.

### Policy discussions — Response to high energy prices and climate
- Measures already taken:
  - Electricity: one-year future market contract and partial pass-through of new import prices to consumers by reducing previous large margins at AASS.
  - Gas: new long-term fixed price gas contract (signed at late-February at one-fourth of July’s spot price) while isolating consumers from volatile spot prices pre-contract by maintaining old tariffs and incurring temporary losses in AASS; subsequently tariffs adjusted above cost-recovery given new import prices.
- Recommendations and considerations:
  - Authorities are rightly adjusting tariffs to ensure cost recovery; tariffs remain significantly below regional peers.
  - Beyond 2023, tariffs should gradually adjust to new long-term equilibrium; targeted and temporary support should be provided to vulnerable groups.
  - Plans to index tariffs to wholesale prices should be carefully considered to avoid excess transfer of risks and volatility to consumers.
  - Given large impact of potential gas supply disruptions, authorities are developing a comprehensive emergency plan and enhancing coordination with Italy; plan should incorporate a rationing strategy (could include an auction mechanism) and securing adequate gas storage should be considered even at high cost.
  - Accelerate energy transition while ensuring affordability and security; land constraints are an obstacle to renewable expansion; further progress on energy efficiency could be enhanced through taxation, below Italy.

### Policy discussions — Fiscal reforms to secure sustainability
- Fiscal objective recommended:
  - Target a primary balance (net of bank support) for the central government of around 2.5 p ercent of GDP within three years.
  - Accounting for current revenue and expenditure plans, further consolidation efforts are about 2 percent of GDP.
  - Pension reform to stabilize the pension system’s deficit (net of government transfers) at 2.5 percent of GDP over the medium-term.
- Measures that could help achieve the recommended primary balance (table values preserved):
  - Tax increases2.2
  - Reducing income tax rebates1
  - VAT0.6
  - Expanding excises0.1
  - Wealth tax0.5
  - Spending cut1
  - Reduction in transfers to other government units1
  - Total yield3.2
- Medium-term fiscal indicators and targets (values preserved):
  - CG: Primary Balance net of bank support-1.20.50.82.52.52.01.7  
  - CG: Primary Balance net of transfer to the Pension Fund [a]1.33.03.25.05.02.01.8  
  - Pension Fund Balance net of government transfers [b]-4.1-2.8-3.1-2.5-2.50.40.6  
  - Consolidated Primary Balance 1/-2.80.10.12.52.52.42.4
- Recommended reform priorities:
  - Mobilize revenue by improving efficiency of the income tax and introducing a VAT; planned income tax amendments would broaden the base by reducing tax allowances and incentives for businesses.
  - Consider expanding the use of excise duty as fuel prices decline to generate revenue and address environmental externalities.
  - Improve public spending efficiency through spending reviews, improved accounting, reporting, and transparency as part of comprehensive public financial management reform.
  - Better targeting of social programs through income and wealth indicators to yield savings without worsening social outcomes.
  - Implement pension reform (Box 4 elements): increase quota from 100 to 103; gradual increase of 3 percentage points on employees’ contribution rate for pillar one; pension based on 30 years of work-career instead of last 20 years; amendments to benefits calculation; increase in solidarity contributions; greater flexibility to work part-time after retirement.
    - Current contributions: employees pay 16.1 percent and employers pay 5.4 percent contributions.
- Other fiscal framework measures:
  - Build a medium-term fiscal strategy including a credible and comprehensive medium-term fiscal consolidation plan.
  - Maintain government liquidity: maintain deposits of at least 2 months of spending (about 4 percent of GDP) on average; consider increasing liquidity ahead of the Eurobond rollover in 2024.
  - Institutionalize public debt management: strengthen debt office, develop debt management strategy to minimize rollover risks while minimizing financial costs; balance international and domestic market issuances; consolidate government bond issuance on a few maturities (at most three); publish a medium-term debt strategy document and an annual debt report.

### Policy discussions — Banking system reforms (introductory note in source)
- The source continues with section C. Reforms to Strengthen the Banking System (content beyond provided excerpt).

*Source: IMF staff estimates based on Sammarinese authorities.*

### 36.      An ambitious strategy to reduce NPLs, including an Asset Management Company

### 36.      An ambitious strategy to reduce NPLs, including an Asset Management Company

### Asset Management Company (AMC) and calendar provisioning
- AMC’s key objective is to purchase exceptionally high nonperforming loans (NPLs).
- Calendar provisioning will involve automatic gradual provisioning increases for NPLs and is expected to be introduced in June 2023.
- Governance and incentive schemes of the AMC remain key.
- A new decree has established rules governing the servicer IGRC (Istituto per la gestione e il recupero dei crediti).
- Three reputable international firms have been shortlisted as arrangers.
- A new draft regulation on the supervisory treatment of AMC bonds:
  - establishes zero risk weight for senior guaranteed bonds;
  - establishes a three times larger risk weight factor for junior bonds than existing NPLs, becoming progressively higher over time.

### Bank capitalization and supervisory measures
- A faster pace of strengthening private banks’ capitalization is warranted.
- Capitalization in private banks remains mixed; the majority of private banks feature low and fragile profitability.
- Banks need to resort to more aggressive injections of fresh capital as the key tool to address gaps.
- Deficiencies in capital strengthening plans or further delays in their implementation should be met with strengthened use of supervisory corrective measures.
- Any undercapitalization that could arise should be promptly addressed with credible capitalization plans.

### Transfer pricing of NPLs and prudential treatment of AMC bonds
- NPLs should be transferred at real value as determined by an internationally recognized appraiser.
- If transferred at book value, as per the current legislation, and depending on the share of NPLs exchanged for senior bonds (determined by the market), current supervisory guidelines could allow the transfer of NPLs to result in a reduction of banks’ risk-weighted assets and artificially higher capital ratios.
- Staff recommends complementing the proposed prudential treatment with a lower bound of provisioning to eliminate this possibility and ensure the offloading of NPLs results in further reductions to banks’ capitalization.
- To incentivize banks:
  - banks that delay NPL transfers should be subject to higher capital requirements and significantly more aggressive calendar provisioning;
  - the expected delay in implementing calendar provisioning should be avoided.
- Improving the insolvency regime to complement reforms implemented last year remains a priority.

### CRSM capital quality
- To boost the quality of CRSM’s capital, the perpetual bond should be gradually converted into tradable bonds.
- The recapitalization through a perpetual bond was an important first step but the bond is illiquid.
- A strong capital position will require a gradual transformation into a marketable, liquid, domestic debt instrument consistent with a broader public sector debt management strategy.
- To achieve healthy profitability, significant measures are still required, including:
  - further improving underwriting standards;
  - rationalization of the branch network and personnel costs.
- Potential dividends should be used for further recapitalization of the bank.

### CBSM liquidity and lender of last resort (LOLR) capability
- The CBSM’s LOLR capability should be further protected.
- Recent reduction in reserves was expected given higher interest rates in Europe, but further reductions should be avoided so that the LOLR capacity of the CBSM remains sufficient in a euroized economy.
- Policy recommendations:
  - Reserve requirements should be increased to lock in a higher level of deposits.
  - There is room for government deposits to be increased further.
  - New sources of risks associated with energy developments reinforce the need for buffers.
- Recent rules allowing diversification of pension fund assets abroad can cause a potential outflow that would reduce further the liquidity of the overall system; this flexibility should be applied gradually at predetermined dates, backloading the liberalization after the Eurobond rollover.

### Transparency and reporting of losses on bond holdings
- Losses on bond holdings should be fully disclosed to ensure transparency.
- The measure to transfer financial instruments to banks’ investment portfolios is not justified and should be avoided because it creates uncertainty about the losses incurred by banks and their current degree of undercapitalization.
- The plan to transparently report the transfer of assets from the trading to the investment portfolio that is held until maturity is welcome.

### AML/CFT framework
- San Marino should continue to make progress in strengthening implementation of the AML/CFT framework.
- The 2021 AML/CFT assessment report by MONEYVAL indicated satisfying levels of effectiveness in many areas and identified remaining challenges that need to be addressed.
- FIA’s resources should be increased to enhance supervision of (and thus compliance by) the financial and DNFBP sector, including for sanctions compliance (also in relation to the war in Ukraine).
- Authorities are in the process of transposing the EU AML directive into the domestic legal framework to improve technical compliance; these efforts should be expedited.

### Fiscal policy, debt management, and structural reforms
- With higher energy prices, tightening financial conditions, and growing global uncertainty, priority should be to build fiscal and financial buffers while accelerating the reform agenda.
- The rollover of the Eurobond maturing in 2024 remains a risk; authorities should opportunistically rollover the Eurobond starting early next year whenever market conditions are favorable.
- Given the deteriorating outlook, authorities should save revenue over-performance this year to build up government deposits while resisting spending pressures.
- Fiscal consolidation target:
  - A fiscal adjustment by the central government of 2 percent of GDP over the next three years to reach a central government primary balance of 2.5 percent of GDP complemented by pension reform.
- Policy recommendations:
  - Revenues: The proposed income tax law amendments should be promptly approved and be more ambitious in reducing exemptions and loopholes. Introduce the VAT.
  - Spending: Public sector wage and pension increases in line with recently agreed private sector collective bargaining agreements could contain expenditure permanently and support needed fiscal consolidation in the near term.
  - Pensions: The proposed pension reform stabilizes the system’s deficit over the next decade, but further recalibration of pension spending will be needed to ensure long-term sustainability; the approval of this reform cannot be delayed given increasing deficits of the Social Security.
- There is a need to develop a comprehensive debt management strategy to support debt sustainability and help develop a domestic debt market over the medium-term; conversion of ex-BNS uninsured depositors’ bonds will help develop the domestic debt market and reduce the burden on taxpayers.

### Structural reforms to support private sector-led growth
- Structural reforms remain critical to increase potential growth:
  - Labor Market Reform (Annex V): facilitate reskilling and reintegration of long term unemployed, provide loans to facilitate higher education, and support female employment; facilitate hiring of cross border workers to meet demand in a tight labor market.
  - Economic integration: authorities are stepping up efforts to complete the EU association agreement technical work by end-2023; the agreement will support domestic reforms and unlock growth by fostering financial, trade, and labor integration.
- Authorities expect the labor market reform under parliamentary discussion to be approved this year.
- Labor market reform should make permanent the recent liberalization of cross-border workers and increase flexibility of temporary employment.
- Plans to improve the business climate are critical and further efforts are needed to improve an outdated insolvency framework.

_International Monetary Fund — Staff assessment and policy recommendations based on the source PDF chapter._

### 56.      It is recommended that the next Article IV consultation takes place on the standard

### 1smrea2022001 - 56.      It is recommended that the next Article IV consultation takes place on the standard 

### Macroeconomic developments
- Real GDP is estimated to have rebounded in 2021; projections for 2021 and 2022 are shown in figures.
- Employment: robust growth in employment and low unemployment rate.
- Cross-border workers: hiring of cross-border workers continued increasing; employment in tourism-related sectors gained momentum.
- Inflation:
  - Overall inflation has picked up recently.
  - Core inflation has also picked up, though it remains at moderate levels.
- Sources cited: World Economic Outlook, Sammarinese authorities, and IMF staff.

### High-frequency indicators
- Manufacturing activity has remained strong.
- Financial services: financial services start growing.
- Number of active enterprises: gaining momentum.
- PMI: Purchasing Managers' Index (PMI) stays high (PMI series shown with +50 expansion threshold).
- Tourism: visitors and hotel stays show tourism is back up to pre-covid levels (index Jan-2019=100, 3-month average).
- Durable consumption: housing construction approvals and registration of 4-wheel vehicles indicate durable consumption remains subdued.

### Fiscal developments
- Primary deficits persist while indebtedness remains high.
- Interest payments: higher interest payments, especially relative to government revenues.
- Government revenue and expenditure (2022 context):
  - Euro Area Average government revenue 42.42% (percent of GDP).
  - Euro Area Average government expenditure 46.62% (percent of GDP).
  - Euro Area Average interest payment (2022) 1.21% (percent of GDP).
  - Interest Payment (2022) for San Marino shown relative to peers.
- Government debt:
  - Time series of government debt (percent of GDP) indicating high levels for San Marino relative to Italy.

### Monetary and banking developments
- Banking system assets have stabilized.
- Deposits: deposits recovering since the Eurobond issuance improved system liquidity.
- Bank credit remains subdued despite strong growth in some metrics; liquidity recovering.
- Profitability has returned.
- Nonperforming loans (NPLs) remain extraordinarily high.

### Selected economic and social indicators (Table 1 highlights)
- GDP per capita (2020): 45,641 U.S. dollars
- Life expectancy at birth (2018): 86.6 years
- Population (2020): 33,574 persons
- Literacy, adult (2015): 96 percent
- Real GDP (percent change): 2019 2.1; 2020 -6.7; 2021 8.3; 2022 3.5; 2023 0.2; 2024 1.0; 2025 1.3; 2026 1.3; 2027 1.3
- Employment (percent change): 2019 2.6; 2020 -0.5; 2021 1.4; 2022 1.5; 2023 0.8; 2024 0.6; 2025 0.7; 2026 0.7; 2027 0.3
- Unemployment rate (average; percent): 2019 7.7; 2020 7.3; 2021 5.8; 2022 5.4; 2023 5.0; 2024 5.1; 2025 5.1; 2026 5.1; 2027 5.1
- Inflation rate (average; percent): 2019 1.0; 2020 0.2; 2021 2.1; 2022 6.9; 2023 4.5; 2024 1.5; 2025 1.7; 2026 1.9; 2027 1.8
- Nominal GDP (millions of euros): 2019 1,444; 2020 1,352; 2021 1,477; 2022 1,583; 2023 1,621; 2024 1,665; 2025 1,716; 2026 1,771; 2027 1,827

### Public finances and budgetary central government (Tables 2a & 2b highlights)
- Revenue (millions of euros): 2019 322.5; 2020 291.9; 2021 324.3; 2022 340.6; 2023 336.8; 2024 348.7; 2025 359.9; 2026 371.7; 2027 383.9
- Taxes (millions of euros): 2019 232.8; 2020 195.8; 2021 251.2; 2022 272.6; 2023 265.1; 2024 272.9; 2025 281.8; 2026 291.1; 2027 300.8
  - Income Taxes (millions of euros): 2019 131.8; 2020 119.4; 2021 141.8; 2022 149.3; 2023 139.9; 2024 143.7; 2025 148.1; 2026 152.8; 2027 157.7
  - Non-income taxes (millions of euros): 2019 100.9; 2020 76.4; 2021 109.4; 2022 123.2; 2023 125.1; 2024 129.3; 2025 133.7; 2026 138.3; 2027 143.1
- Expenditure (millions of euros): 2019 324.1; 2020 800.3; 2021 581.8; 2022 392.3; 2023 388.9; 2024 407.4; 2025 410.8; 2026 420.4; 2027 431.8
  - Current Expenditure (millions of euros): 2019 304.0; 2020 795.9; 2021 580.2; 2022 379.2; 2023 387.9; 2024 406.3; 2025 409.6; 2026 419.1; 2027 430.4
  - Interest (millions of euros): 2019 5.0; 2020 12.9; 2021 29.9; 2022 23.7; 2023 25.6; 2024 47.3; 2025 44.0; 2026 45.3; 2027 47.0
  - Bank Support (millions of euros): 2019 33.5; 2020 484.5; 2021 193.7; 2022 9.5; 2023 15.6; 2024 15.4; 2025 15.3; 2026 15.0; 2027 14.8
- Overall Balance (millions of euros): 2019 -1.6; 2020 -508.4; 2021 -257.6; 2022 -51.7; 2023 -52.1; 2024 -58.7; 2025 -50.9; 2026 -48.7; 2027 -47.9
- Primary Balance (millions of euros): 2019 3.4; 2020 -495.5; 2021 -227.6; 2022 -28.0; 2023 -26.5; 2024 -11.4; 2025 -6.9; 2026 -3.4; 2027 -0.9
- Primary Balance net of bank support (millions of euros): 2019 36.9; 2020 -11.0; 2021 -33.9; 2022 -18.4; 2023 -11.0; 2024 4.0; 2025 8.4; 2026 11.6; 2027 14.0
- Public debt (official, millions of euros): 2019 373.9; 2020 969.0; 2021 987.7; 2022 1,092.7; 2023 1,300.4; 2024 1,174.5; 2025 1,209.9; 2026 1,242.5; 2027 1,273.8
- Public debt (consolidated, millions of euros): 2019 828.9; 2020 969.0; 2021 1,275.7; 2022 1,325.7; 2023 1,533.4; 2024 1,407.5; 2025 1,442.9; 2026 1,475.5; 2027 1,506.8
- Notes:
  - For the central government.
  - Debt statistics have been corrected for 2014-21.
  - Consolidated figures include Social Security Fund and BNS debt.
  - Bank support from 2022 are transfers to the Pension Fund related to BCIS bailout.

### Balance of payments (Table 3 highlights)
- Current account balance (percent of GDP): 2019 2.0; 2020 2.8; 2021 4.5; 2022 1.3; 2023 0.7; 2024 0.9; 2025 1.0; 2026 1.1; 2027 1.1
- Exports (percent of GDP): 2019 159.5; 2020 157.9; 2021 178.1; 2022 183.1; 2023 181.6; 2024 181.0; 2025 180.8; 2026 180.4; 2027 180.2
- Imports (percent of GDP): 2019 148.2; 2020 144.5; 2021 162.5; 2022 172.1; 2023 172.0; 2024 171.6; 2025 171.1; 2026 170.9; 2027 170.7
- Gross international reserves (millions of euros): 2019 420.8; 2020 636.8; 2021 844.1; 2022 652.1; 2023 632.1; 2024 622.1; 2025 622.1; 2026 622.1; 2027 622.1
- GIR in months of imports: 2019 2.4; 2020 3.9; 2021 4.2; 2022 2.9; 2023 2.7; 2024 2.6; 2025 2.5; 2026 2.5; 2027 2.4

### Financial soundness indicators (Table 4 highlights)
- Capital adequacy ratios (Regulatory capital to risk-weighted assets): 2016 11.5; 2017 13.7; 2018 12.3; 2019 9.5; 2020 10.7; 2021 14.4; 2022 13.2
- Capital to assets: 2016 6.2; 2017 6.5; 2018 6.2; 2019 4.2; 2020 4.0; 2021 5.1; 2022 5.0
- Nonperforming loans to total loans: 2016 47.1; 2017 51.6; 2018 50.7; 2019 58.9; 2020 61.1; 2021 59.0; 2022 56.3
- NPL coverage ratio: 2016 26.1; 2017 56.0; 2018 58.2; 2019 63.6; 2020 64.4; 2021 65.0; 2022 67.0
- Return on assets (ROA): 2016 -3.4; 2017 -0.7; 2018 -1.3; 2019 -4.3; 2020 -0.4; 2021 0.3; 2022 0.0
- Return on equity (ROE): 2016 -44.8; 2017 -10.3; 2018 -17.2; 2019 -74.6; 2020 -7.7; 2021 3.8; 2022 -0.2
- Liquid assets to total assets: 2016 20.7; 2017 15.7; 2018 15.2; 2019 18.0; 2020 19.2; 2021 27.3; 2022 26.8
- Loans to deposits: 2016 153.8; 2017 141.4; 2018 125.6; 2019 124.1; 2020 108.4; 2021 71.3; 2022 68.2
- Banking system assets (millions of euros): 2016 5,328.8; 2017 4,795.3; 2018 4,616.6; 2019 4,213.1; 2020 4,191.1; 2021 4,143.7; 2022 4,217.3
- Banking system assets as percent of GDP: 2016 401.7; 2017 354.4; 2018 329.4; 2019 291.8; 2020 309.9; 2021 280.5; 2022 266.4

### Depository corporations survey (Table 5 highlights)
- Net foreign assets (millions of euros): 2016 2,134.4; 2017 1,865.5; 2018 1,749.7; 2019 1,782.6; 2020 1,767.5; 2021 2,153.8
- Claims on private sector (millions of euros): 2016 1,468.5; 2017 1,481.0; 2018 1,381.7; 2019 1,394.8; 2020 1,338.2; 2021 1,193.2
- Broad money (millions of euros): 2016 3,069.7; 2017 2,667.9; 2018 2,624.4; 2019 2,523.4; 2020 2,617.0; 2021 2,738.7
- Transferable deposits (millions of euros): 2016 1,371.9; 2017 1,364.2; 2018 1,415.3; 2019 1,483.8; 2020 1,622.5; 2021 1,811.6
- Other deposits (millions of euros): 2016 1,697.8; 2017 1,303.7; 2018 1,209.2; 2019 1,039.7; 2020 994.5; 2021 927.1
- Notes:
  - Monetary statistics revised in September 2022.

### Risk Assessment Matrix — Key risks and policy responses
- High risk: Intensifying spillovers from Russia’s war on Ukraine.
  - Impact: Further sanctions and uncertainties exacerbate trade and financial disruptions and commodity price volatility; Europe among worst hit.
  - Policy responses:
    - Prepare plans to ensure consumer tariffs reflect cost to ensure a rational use of energy.
    - Prepare temporary programs for low-income households.
    - Implement a temporary price stabilization mechanism.
- Medium risk: De-anchoring of inflation expectations and stagflation.
  - Impact: Supply shocks to food and energy increase headline and core inflation, risk of wage-price spiral; tighter monetary policy could weaken global demand and cause EMDE depreciations and sovereign defaults.
- High risk: Market sentiment shock related to San Marino’s large rollover need in 2024 (sub-investment grade).
  - Impact: Spike in yields and risk premia could significantly increase interest burden, deteriorate fiscal accounts, and complicate Eurobond rollover.
  - Policy responses:
    - Enhance credibility by accelerating structural, fiscal, and financial sector reforms to reduce vulnerabilities and strengthen fiscal sustainability.
    - Maintain high liquid buffers and explore alternative options to obtain external financing.
- High risk: Abrupt slowdown or recession linked to gas shutoff by Russia.
  - Impact: Acute gas shortages triggering EU recession.
  - Medium-level consequence: Euro Area recession could reduce San Marino exports significantly, impacting fiscal accounts; could also result in less aggressive interest rate hikes facilitating Eurobond rollover in 2024.
  - Policy responses:
    - Enhance credibility by accelerating structural, fiscal, and financial sector reforms to reduce vulnerabilities and strengthen fiscal sustainability.
    - Provide limited and temporary support to mitigate the impact on vulnerable households and viable businesses.
- High risk: Slow fiscal consolidation and delays in implementing fiscal reforms due to lack of political capital and social consensus.
  - Impact: Lack of clear fiscal consolidation path can challenge Eurobond rollover.

*Source: Sammarinese authorities and IMF staff (content unit 1smrea2022001).*

### 2024. In the medium term, high level of

### 1smrea2022001 - 2024. In the medium term, high level of

### Fiscal vulnerabilities and policy recommendations
- Findings:
  - "In the medium term, high level of public debt and a narrow tax base will increase vulnerabilities and limit the government’s ability to respond to shocks. It will also crowd out productive spending, thus undermining growth."
  - Public debt increased to €1,276 million in 2021 (86 percent of GDP) and edged up by €50 million in 2022 to reach €1,326 million (84 percent of GDP).
  - Acceleration in nominal GDP allowed debt to decline from 86 to 84 percent of GDP between 2021 and end-July 2022.
  - The consolidated coverage for debt sustainability analysis includes the consolidated government, the pension fund, and the former BNS.
  - Pension funds’ assets projected to decline from 28 to 22 percent of GDP by 2027 under the baseline.
  - Central government primary balance projected to improve to -2.8 percent of GDP in 2022 from -16.4 percent in 2021 as bank support declines; consolidated primary balance improves to about 0.2 percent by 2027.
- Policy recommendations:
  - Advance fiscal reforms, develop debt management capacity, and establish a Treasury department.
  - Diversify financing options; and seek technical support as needed.
  - The government are amending the income tax law to reduce loopholes.
  - A pension reform draft has been prepared and being discussed by the authorities.
  - The debt office has been strengthened with permanent staff and issued domestic bonds in 2022.

### Banking sector repair, risks, and recommendations
- Findings:
  - Slow banking system repair. Limited progress addressing further recapitalization needs and cleaning up bank balance sheets.
  - Slow improvement of profitability because of wage rigidity and greater competition from Italian banks.
  - Bank capitalization and profitability improved but significant challenges remain.
  - Subdued credit growth and delays in an ambitious strategy to reduce NPLs, including an Asset Management Company (AMC) and the introduction of calendar provisioning.
  - Only 8 percent of public debt is at variable interest rates and at the end of 2021, 60 percent of the debt was nonmarketable with low interest rates and long-term maturities.
  - The maturity of the Eurobond in February 2024 will increase overall gross financing needs to 30 percent of GDP.
- Risks:
  - "Insufficient implementation of measures to restructure the banking sector will lead to a deterioration of confidence, financial outflows, liquidity pressures in the banking system, and retrenchment of credit with adverse growth implications."
- Policy recommendations:
  - Extend central bank power and tools for tackling failing banks.
  - Apply bank resolution tools and liquidity safeguards on an “as needed” basis.
  - Accelerate implementation of a financial sector strategy.
  - Set AMC following best international practices (recommended previously).

### External sector assessment and competitiveness
- Findings:
  - "The external position of the Republic of San Marino in 2021 was moderately weaker than implied by fundamentals and desirable policy settings."
  - Current Account (CA) surplus expanded from 2.8 percent to 4.5 percent of GDP in 2021.
  - Exports and imports grew about 22 percent in 2021, reflecting recovery in manufacturing and tourism.
  - Gross international reserves (GIR) increased from €637 to €843 million between 2020 and 2021; GIR reached about 101 percent of the team-ARA metric.
  - Net international investment position (IIP) remained high at 268 percent of GDP in 2021, possibly overstating true IIP because a large share of bank-loans to nonresidents are NPLs.
  - San Marino’s export market share has been stable for almost a decade after a large decline following the Global Financial Crisis; competitiveness remains a key challenge.
- Model-based estimates and interpretation:
  - Current account approach (EBA-lite): 2021 CA norm about 11.1 percent of GDP; adjusted CA 5.0 percent; CA gap -6.1 percent of GDP; implied REER gap 8.4 percent.
  - REER index model: REER appears overvalued by 2.4 percent (corresponding to a CA gap of -1.8 percent).
  - Staff assess external position as moderately weaker than implied by fundamentals, basing assessment on the IREER model which points to a moderate overvaluation.
- External risks:
  - Deterioration in the global external context (higher energy prices, faster global monetary tightening) implies significant risks for 2023–24: reduced CA surplus, potential capital outflows, higher rollover risk for external debt.

### Debt profile, financing needs, and medium-term projections
- Public debt and structure:
  - Public debt: €969 million in 2020 (72 percent of GDP); €1,276 million in 2021 (86 percent of GDP); €1,326 million in 2022 (84 percent of GDP).
  - Public debt composition (2021, Million euros / Percent): External 350 / 27.5; External loans 100 / 8.0; Eurobonds 340 / 26.7; Domestic 925 / 72.5; Dom. loans 74 / 5.8; Dom. Bonds: Market 84 / 6.6; Dom. Bonds: Perpetual bonds 456 / 35.7; Payable accounts 24 / 1.9; BNS-Bonds 204 / 16.0; BNS others 84 / 6.6; Total 1,276 / 100.0; of which nonmarket¹ 760 / 60.1.
  - Note: Nonmarketable debt includes CRSM’s perpetual bond with 1.75 percent coupon, BNS bonds with 0.1 percent coupon, and other accounts payable.
- Financing developments:
  - Government issued €50 million of domestic bonds at 0.8 percent with one-year maturity in 2022 and plans to borrow €20 million more from domestic banks at 10-year maturity by end-2022.
  - €55 million of bonds from BNS (maturing in 2022) were converted into government bonds with a 1 percent interest and a 10-year maturity.
  - Refinancing the Eurobond maturing in February 2024 will require external funding; the Eurobond amortization contributes to a jump in gross financing needs.
- Debt Sustainability Analysis (baseline and sensitivities):
  - Baseline projection: public debt projected to be around 83 percent of GDP by the end of the forecast horizon.
  - Real GDP growth projection (percent): 2022A4 -6.7 8.3 3.5 0.2 1.0 1.3 1.3 (table shows series for years 2020–2026; preserve exact series as presented).
  - GDP deflator change (percent): 2022A4 0.4 0.9 3.5 2.2 1.6 1.8 1.9.
  - Primary deficit (percent of GDP): 2022A4 38.1 16.4 2.8 1.6 0.4 -0.1 -0.2.
  - Implicit interest rates (percent): 2022A4 1.5 3.4 1.9 1.9 2.0 2.7 2.7.
  - Gross financing needs: around 9½ percent of GDP in 2023, jumping to about 30 percent of GDP mostly due to amortization of the Eurobond in 2024.
  - Baseline assumes the Eurobond is rolled over with a new issuance featuring 5-year maturity and a coupon of about 6 percent (compared with 5 percent assumed in the 2021 DSA).
  - Sensitivity: If the interest rate on the Eurobond is 8 percent, debt-to-GDP would increase by 1.5 percent relative to the baseline to reach 84 percent of GDP in 2027.
  - Baseline assumes market conditions allow an early issuance of the new Eurobond in 2023 with a buyback of about half of the Eurobond maturing in 2024; debt-to-GDP will go above 94 percent and then decline to the baseline path when the other half of the Eurobond is repaid in 2024.
- Key risks highlighted:
  - Large gross financing needs, uncertainty over the impact of the energy crisis and future growth, and rollover risks related to the Eurobond are significant threats to the baseline declining debt path.
  - While only 8 percent of debt is at variable rates, vulnerability to rollover risk in the near term is high given concentration of maturities and large amortizations.

*IMF staff report excerpt (Republic of San Marino, 2022).*

### 7.      Under most alternative scenarios, debt dynamics deteriorate. While the level of public

### 1smrea2022001 - 7.      Under most alternative scenarios, debt dynamics deteriorate. While the level of public

### Debt dynamics under baseline and alternative scenarios
- Under the baseline, "debt dynamics under the baseline are favorable" though "the level of public debt will be elevated."
- Historical scenario: produces "explosive debt dynamics" driven by extensive past bank support (including gradual recognition of CRSM legacy losses now fully incorporated into debt) and "lackluster growth experienced over the last decade," which led to "large and sustained deficits over the years."
- Constant primary balance scenario: produces "explosive debt dynamics" because it "does not account for improvements due to the pension reform in the next years."

### Standardized stress tests and scenario outcomes
- Overall: "standardized stress tests reveal that the baseline path of public debt is not robust to moderate shocks" and "public debt dynamics are sensitive to shocks to growth, materialization of contingent liabilities and combined macro-fiscal shocks."
- Real growth shock:
  - Assumption: "Real GDP growth is assumed to decline by one standard deviation declining to around -4 percent in 2023–24."
  - Primary balance: "deteriorates therefore to -3.5 percent by 2024 (from a -3.1 percent in the baseline)."
  - Debt outcome: "debt increasing to 100 percent of GDP by then and marginally declining afterwards."
- Combined macro-fiscal shock:
  - Components: the above growth shock, an interest rate shock ("increase in spreads by 300 basis points") and a primary balance shock ("failure to achieve half of the planned adjustment under the baseline").
  - Debt outcome: "increase in the level of public debt to 105 percent of GDP by 2023 that remain high."
- Contingent liability customized shock:
  - Assumptions: "potential risks associated with the implementation of the AMC, calibrated to cost about 15 percent of GDP, and the use of tax credits, which could cost an additional 9 percent of GDP."
  - Debt outcome: "public debt goes above 1 17 percent of GDP by 2023 and then marginally declines." 

### Stress-test detail (selected baseline & stress assumptions reported)
- Baseline macro assumptions (selected):
  - Real GDP growth: "3.5 0.2 1.0 1.3 1.3 1.3" (2022–2027 sequence shown in figures)
  - Inflation (GDP deflator): "3.5 2.2 1.6 1.8 1.9 1.8"
  - Primary balance (baseline sequence excerpt): "-2.8 -1.6 -0.4 0.1 0.2 0.1"
  - Effective interest rate (baseline sequence excerpt): "1.9 1.9 2.8 2.8 2.8 2.7"
- Real GDP growth under the Real GDP growth shock (figure IV.4): "3.5 -4.3 -3.5 1.3 1.3 1.3"
- Primary balance under the Real GDP growth shock (figure IV.4): "-2.8 -3.2 -3.5 0.1 0.2 0.1"
- Effective interest rate under the Combined Shock (figure IV.4): "1.9 1.9 3.9 4.3 4.4 4.7"
- Primary balance under the Contingent Liability Shock (figure IV.4): "-2.8 -24.2 -0.4 0.1 0.2 0.1"

### Recommended fiscal and debt-management policy actions
- Rebuild fiscal buffers through "a more ambitious fiscal consolidation" with a target: "primary surplus (net of bank support) of 2.5 percent of GDP."
- Timing and implementation:
  - "Implementing fiscal reforms cannot be further delayed, as they take time to be implemented and deliver."
  - "It is key to take advantage of the high inflation context that facilitates the consolidation of spending."
- Liquidity and market development:
  - "Maintaining higher short-term liquidity buffers is priority."
  - "The government should diversify by developing the domestic bond market."
- Institutional strengthening:
  - "Improving debt management capacity and strengthening the banking system to reduce fiscal risks remain essential."

### External debt trajectory and caveats
- Level: "San Marino’s gross external debt stood at 96 percent of GDP in 2021."
- Projection: "with continued capital outflows, including from the banking system, gross external debt is projected to remain on a downward trajectory over the medium term, reaching a level of 78 percent of GDP by 2027."
- Main component: "deposit liabilities of deposit-taking corporations accounted for the largest component."
- Risks to the baseline: "All else equal, lower growth, a deterioration in the current account, and a slower price growth relative to that in key trading partners (real exchange rate depreciation) would result in a higher trajectory of external debt relative to the baseline."
- Data caveats: analysis "is subject to several caveats reflecting data limitations including lack of FDI liabilities and the short external sector historical data."

### Selected numeric indicators from debt sustainability tables and figures (preserved exactly as shown)
- Gross public debt (figure IV.1 nominal sequence snippet): "28.2 71.6 86.3 83.7 94.6 84.5 84.1 83.3 82.5"
- Public gross financing needs sequence excerpt (figure IV.1): "3.6 4.0 4.3 9.3 8.9 18.0 21.1 6.6 11.7 9.3"
- Real GDP growth (figure IV.1 sequence): "-0.9 -6.7 8.3 3.5 0.2 1.0 1.3 1.3 1.3"
- Primary deficit (figure IV.1 sequence): "2.6 38.1 16.4 2.8 1.6 0.4 -0.1 -0.2 -0.1"
- Automatic debt dynamics contribution (figure IV.1 sequence): "0.1 4.9 -4.0 -4.3 -0.4 0.1 -0.3 -0.3 -0.3 -5.4"
- Gross external debt (Table IV.1 baseline and projection excerpt): "69.0 73.6 96.1 88.8 84.7 83.0 81.5 79.9 78.4"
- Change in external debt (Table IV.1): "-7.5 4.6 22.5 -7.3 -4.1 -1.6 -1.6 -1.6 -1.5"
- Identified external debt-creating flows (Table IV.1): "0.7 -5.7 -2.2 -6.5 -3.7 -1.8 -1.8 -1.8 -1.8"
- Current account deficit, excluding interest payments (Table IV.1): "-2.9 -3.7 -6.4 -2.9 -2.7 -2.9 -2.9 -2.9 -2.9"
- Exports and imports (Table IV.1 excerpts):
  - Exports: "159.5 157.9 178.1 179.7 172.2 170.9 170.7 170.4 170.1"
  - Imports: "148.2 144.5 162.5 168.8 163.1 162.0 161.6 161.3 161.2"
- Automatic debt dynamics (Table IV.1 row 9 sequence): "3.1 -2.1 3.9 -3.8 -1.2 0.8 0.9 0.9 0.9"
- External debt-to-exports ratio (Table IV.1 excerpt): "43.2 46.6 53.9 49.4 49.2 48.6 47.7 46.9 46.1"
- Gross external financing need (in billions of US dollars, Table IV.1): "0.5 0.5 0.5 0.6 0.5 0.5 0.7 0.6 0.6"
- Key macro assumptions (Table IV.1 selected sequences):
  - Real GDP growth: "1.7 2.0 -6.5 -2.0 4.6 5.5 3.7 1.5 1.3 1.3 1.3"
  - Nominal external interest rate: "1.1 1.3 2.9 1.5 0.8 1.6 2.3 2.5 2.4 2.4 2.4"

*Source: IMF staff.*

### Annex V. Post-COVID Labor Market Rebound and Trends

### Annex V. Post-COVID Labor Market Rebound and Trends

### Labor Market Trends and Composition
- San Marino’s employment gained momentum after the pandemic; year-on-year growth in employment declined across all sectors and gender due to covid, but the overall rebound has been persistent for both male and female workers in the first half of 2022.
- Private sector employment growth is back to pre-pandemic levels; public employment growth is at best sluggish.
- With a tight labor market in 2022, reliance on cross-border workers increased significantly:
  - Domestic unemployment rate is at its lowest level in the last decade with very high labor force participation rate.
  - Difficulty finding resident workers led to lifting restrictions on cross-border workers introduced during covid, increasing year-on-year growth in employment of cross-border workers to an unprecedented level.
  - Liberalization of frontier workers is expected to continue unless domestic unemployment rate increases beyond a pre-decided threshold.
- Youth unemployment developments:
  - Youth have benefitted with a relatively higher decline in the unemployment rate since 2021.
  - Sectoral asymmetry in employment rebound—with higher momentum gained by manufacturing, hospitality, and retail trade—drives age-biased patterns and distinct seasonality of youth unemployment (increases in employment during the summer).
- Wage guarantee fund burden reduced back to pre-pandemic levels; supplemental wage scheme expenditures are no longer needed consistent with labor market recovery.

### New Collective Bargaining Agreement and Wage Dynamics
- Overall wage bill is rapidly growing, especially in manufacturing; the booming labor market and increasing inflation have put upward pressure on the wage bill.
- A new collective wage bargaining agreement for 2021–23 was recently approved:
  - Provides for an increase in paycheck of 5.4 percent over 2022–23:
    - 1.5 percent from 1 June 2022
    - 1.5 percent from 1 August 2022
    - 2.4 percent from January 2023
  - In addition to 0.6 percent increase in 2021, aggregating the total increase over three years to 6 percent.
  - The agreement spans one third of all private sector employees.
- The report notes these “prudent wage increases” combined with the labor reform proposal should help moderate wage dynamics.

### Box V.1 — Key Measures of Labor Market Reform Proposal (2022)
- Consolidates all labor market legislations and decrees under one umbrella reform.
- Job initiation and intermediation carried out by ULPA-CFP (Office of employment and active policies and the professional training center); Labor Commission oversees labor market dynamics.
- Key measures include:
  - Incentives to facilitate reskilling from sectors in difficulty.
  - Reintegration of long term unemployed; job placement of people without professional experience; active insertion of new professions and employees; encourage female employment.
  - Inclusion of frontier workers in labor unions CGIL and CSDL.
  - Provision of temporary workers by a “contracting company” for a “user company” with fair treatment in salary, issuance of license to work, and appropriate insurance.
  - Decrease in the tenure of fixed term hiring from 18 to 12 months — automatic conversion to open ended employment at the end of the tenure unless firm chooses to end the contact at 10 days’ notice.
  - Annual reporting by the commission to the great and general council on the state of employment.

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### Annex VI. Improving Public Debt Management

### Debt Management in Small Economies — Key Observations
- Public debt management should ensure that the government’s medium-term financing needs are met at the lowest possible cost and with a prudent degree of risk; it should be anchored in a medium-term debt strategy (MTDS) and factor in short-term cash management.
- A MTDS captures preferences on cost-risk trade-offs and informs how to meet financing requirements while considering constraints and risks (currency, short-term and variable interest rate borrowing, uncertainty regarding cash flows).
- Small countries face additional constraints:
  - Less diversified economies, smaller base of domestic savings, less developed financial systems, higher vulnerability to shocks.
  - Higher transaction costs and limited human capital constrain debt management capacity.
- Domestic vs. external funding trade-offs:
  - International bond issuances can provide longer-term funding but often demand large volumes (at least €500 million) and have bullet amortizations that create refinancing challenges and high transaction costs.
  - Domestic shallow markets tend to demand short-term securities, creating large rollover needs; issuing internationally has been used by some small economies to diversify and extend maturities.
- Developing a domestic bond market is important: it suits small issuance needs and can reduce debt service costs over the medium-term as liquidity premia decline.

### Zooming into San Marino — Current Situation and Key Figures
- Sammarinese MTDS objectives: meet financing needs at lowest possible cost over the medium-term; reduce refinancing risk; develop a liquid domestic bond market; keep access to international capital markets; focus new issuances on fewer maturities (2 or 3).
- Domestic bond market status (July 2022):
  - Total issued domestic bonds accounted for €811 million (53 percent of GDP), most of which were nonmarketable (CRSM perpetual bonds, CBSM or former BNS bonds).
  - Banks’ exposure to the government was €547 million (10 percent of banks’ assets).
  - Banks could expand government bond holdings; with banking system growth in line with medium term nominal GDP (3.3 percent), banks would have new loanable funds for about €50 million per year.
  - Given high-risk aversion, banks can allocate about € 20-30 million per year to buy government bonds while keeping the risk of crowding out private credit contained.
  - Converting nonmarketable bonds into marketable bonds could support liquidity; reopening existing long-term bonds recommended.

- Selected debt stock and bond details (Outstanding July 2022; Present Value¹ July 2022):
  - Total Bonds (I+II): Outstanding 1150.7 (Million euros); Present Value 866.6 (Million euros).
  - I. External bonds: Outstanding 340.0; Present Value 338.4; Eurobond 2024 interest rate 3.25; issuance date 24-Feb-2021; maturity 24-Feb-2024.
  - II. Domestic bonds (a+b): Outstanding 810.7; Present Value 528.2.
    - a. Market bonds: Outstanding 187.8; Present Value 173.1.
      - Bond 2026 (DD n.17/2016): Outstanding 40.0; Present Value 40.7; interest Euribor+1.5²; original maturity 10?; issuance 23-Mar-2016; maturity 23-Mar-2026.
      - Bond 2026 (DD n.55/2016): Outstanding 10.0; Present Value 10.2; interest Euribor+1.5²; original maturity 10?; issuance 31-May-2016; maturity 31-May-2026.
      - Bond 2029 (DD n.153/2019): Outstanding 34.0; Present Value 30.9; interest 2.00; issuance 29-Nov-2019; maturity 29-Nov-2029.
      - Bond 2023 (DD n.61/2022): Outstanding 50.0; Present Value 48.70; interest 0.80; issuance 02-Jun-2022; maturity 02-Jun-2023.
      - Bond 2032-BNS conversion (DD n.94/2022): Outstanding 53.8; Present Value 42.6; interest 1.00; issuance 21-Jul-2022; maturity 21-Jul-2032.
    - b. Nonmarketable bonds: Outstanding 622.9; Present Value 355.2.
      - Perpetual Bond - CRSM: Outstanding 455.0; Present Value 220.0; interest 1.75.
      - Perpetual Bond - CBSM³: Outstanding 19.0; Present Value 0.5; interest 0.10.
      - Bonds former BNS: Outstanding 148.9; Present Value 134.7.
        - BNS bond 2024: Outstanding 56.0; Present Value 52.5; interest 0.25; issuance 22-Jul-2019; maturity 20-Jul-2024.
        - BNS bond 2026: Outstanding 92.9; Present Value 82.2; interest 0.35; issuance 22-Jul-2019; maturity 20-Jul-2026.
      - Memoradum BNS bonds 2022 (pre-conversion to Bond 2032-BNS): Outstanding 55.0; Present Value 5.0.
  - ¹ Present value is discounted at 3.5 percent based on the yield of the 30 year Italian government bond.
  - ² Maximum 4.5 percent.
  - ³ Accounted in present value in the stock of debt as it does not amortize and interest payments is almost zero. Nominal value of the bond is 19 millions.

- Creditor breakdown (Gov. Domestic Bonds - Jul-2022, Million euros):
  - Total: 811 (Nonmarket 605; Market 207)
  - Banks: 547 (Nonmarket 456; Market 91)
  - Others: 264 (Nonmarket 149; Market 115)

### Policy Recommendations and Actions to Develop Debt Management
- Develop and publish a medium-term debt strategy (MTDS).
- Publish an annual borrowing plan and issuance calendar and adhere to it to enhance predictability and transparency.
- Publish a public debt report and improve presentation and frequency of debt information updates.
- Keep simplicity and standardization of instruments.
- Ensure instruments are remunerated above the CBSM remuneration and have zero risk weight for domestic supervision purposes.
- Diversify investors.
- Convert nonmarketable bonds into marketable bonds gradually to build domestic market liquidity and reopen existing long-term bonds.
- Continue strengthening the debt office capacity: ensure continuous training, enhanced risk analysis, and maintain simple risk monitoring given limited staff.
- Near-term priority: a debt management operation to ensure smooth rollover of the Eurobond in 2024:
  - Options include early issuance of a new Eurobond or securing funding from international financial institutions (IFI) and domestic markets in advance.
  - Building up government deposits is critical to mitigate rollover risk.

*Source: Annex V and Annex VI, “Post-COVID Labor Market Rebound and Trends” / “Improving Public Debt Management.”*

### 16.      The main strategies will differ based on the degree of reliance on international

### 16.      The main strategies will differ based on the degree of reliance on international markets and development of the domestic market

### Debt management strategies simulated
- Four strategies are simulated using the IMF-World Bank template on medium term debt strategies (Balibek and others (2019)).
- Strategy parameters (as presented):
  - External
    - Eurobond Volume (€ million): Strategy 1: 340; Strategy 2: 500; Strategy 3: 250; Strategy 4: 340
    - Eurobond Interest: Strategy 1: 5.75%; Strategy 2: 5.00%; Strategy 3: 5.75%; Strategy 4: 5.75%
  - Domestic
    - 1-year bond
      - Share in domestic issuance: Strategy 1: 40%; Strategy 2: 40%; Strategy 3: 40%; Strategy 4: 0%
      - Interest rate: Strategy 1: 1%; Strategy 2: 1%; Strategy 3: 1%; Strategy 4: 1%
    - 5-year bond
      - Share in domestic issuance: Strategy 1: 60%; Strategy 2: 60%; Strategy 3: 60%; Strategy 4: 100%
      - Interest rate: Strategy 1: 3.75%; Strategy 2: 3.75%; Strategy 3: 3.75%; Strategy 4: 3.75%

### Description of each simulated strategy
- Strategy 1 (S1)
  - Combined approach: roll over existing Eurobond with a new Eurobond for €340 million at 5.75 percent interest and issue domestically to cover remaining gross financing needs.
  - Domestic funding distributed: 40% 1-year bonds, 60% 5-year bonds.
- Strategy 2 (S2)
  - Replicates S1 but assumes a new Eurobond of €500 million at 5.00 percent interest.
  - Rationale: the higher volume is assumed to allow reducing interest rates by about 70 basis points (See Hardy 2022).
- Strategy 3 (S3)
  - Replicates S1 but assumes a new Eurobond of €250 million.
- Strategy 4 (S4)
  - Replicates S1 but assumes all domestic funding is at 5-year maturity (i.e., 0% 1-year share, 100% 5-year share).

### Simulation design and adverse shock scenario
- The simulations compare funding cost and risk trade-offs across the four strategies.
- Adverse scenario shocks applied:
  - 500-basis points shock to interest rate on international borrowing.
  - 400 basis points shock in domestic borrowing.
- Outcome metrics examined include ratios of debt and interest payments to GDP and changes in those indicators under the adverse shock.

### Main simulation findings
- The strategies have similar funding costs.
- Higher reliance on external funding implies greater risks.
- The results highlight that domestic funding seems less vulnerable to shocks in this simulated environment.

### Key quantitative inputs and assumptions preserved exactly
- Eurobond Volumes: €340, €500, €250, €340 (for S1–S4 respectively).
- Eurobond Interest rates: 5.75%, 5.00%, 5.75%, 5.75% (for S1–S4 respectively).
- Domestic 1-year bond shares: 40%, 40%, 40%, 0% (for S1–S4 respectively).
- Domestic 1-year interest rates: 1% (for all strategies).
- Domestic 5-year bond shares: 60%, 60%, 60%, 100% (for S1–S4 respectively).
- Domestic 5-year interest rates: 3.75% (for all strategies).
- Adverse scenario shocks: 500-basis points (international), 400 basis points (domestic).

*Source: REPUBLIC OF SAN MARINO — Staff Report for the 2022 Article IV Consultation — Informational Annex (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1smrea2022001.pdf_