## 1belea2023004

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### Macroeconomic developments: recent performance and outlook
- Growth:
  - 2022: 3.0 percent.
  - 2023Q1: 0.4 percent q/q; 2023Q2: 0.3 percent q/q; 2023Q3: 0.5 percent q/q.
  - IMF projections:
    - 2023: 1.4 percent
    - 2024: 1.0 percent
    - Medium term: return to 1.2-1.3 percent potential rate
- Output gap and demand:
  - Output gap (percent): 1.7 -4.7 0.0 1.2 0.8 0.3 0.1 0.1 0.0 0.0 (2019–28 series)
  - Household saving ratio (selected series): 12.4 20.4 17.2 12.9 13.9 14.4 14.7 14.8 15.0 15.2 (2019–28)
- Labor market:
  - Unemployment rate (percent): 5.4 5.6 6.3 5.6 5.6 5.6 5.5 5.5 5.4 5.4 (2019–28)
  - Employment rose notably; vacancy rates among highest in the euro area.
  - Structural rigidities: insufficient net income gains to incentivize employment, skill mismatches, low interregional mobility.
- External sector:
  - Current account: deficit of 1.0 percent of GDP in 2022; 0.3 percent of GDP in 2023H1.
  - Projection: CA deficit expected to narrow marginally in 2023 and return to small surpluses in the medium term.

### Inflation, wages, and competitiveness
- Headline inflation:
  - Peak: 13.1 percent y/y in October 2022.
  - October 2023: -1.7 percent y/y.
  - IMF headline inflation projections:
    - 2023: 2.5 percent
    - 2024: 4.4 percent (increase mostly due to fading effects from energy price support measures)
- Core inflation:
  - Peak: 8.6 percent y/y in March 2023.
  - September 2023: 6.7 percent y/y.
- Wage dynamics and indexation:
  - Near-universal wage and social benefit indexation transmitted inflation rapidly to wages.
  - Nominal unit labor costs soared as productivity growth stayed sluggish.
  - Wage growth in key export markets narrowed the hourly nominal wage gap but it remains notably above pre-energy price shock levels.
- Price expectations and profitability:
  - Price expectations by consumers and businesses have come down.
  - Corporate profit margins have started to contract, limiting wage-price spiral risk.

### Credit, financial sector, and FSAP stress-test findings
- Credit growth:
  - Household credit growth: 2.7 percent y/y in August 2023 (down from 5-7 percent).
  - Corporate credit growth: 3.6 percent y/y.
- Banking sector:
  - Bank profitability and capital adequacy increased since the pandemic; provisioning remained limited despite rising risks.
  - Repricing of assets outpaced that of deposits, boosting net interest income.
  - Liquidity buffers remain well above regulatory thresholds despite deposit outflows and ECB liquidity repayments.
  - Belgium’s one-year state bond (August 2023) raised €22 billion, largely from household saving accounts.
- Real estate and mortgages:
  - Real estate cycle moderated valuations; banks’ exposure to RRE and CRE among highest in the euro area.
  - Most mortgages are fixed-rate and fully amortizing.
- FSAP stress tests (summary):
  - All seven systemic institutions (90 percent of banking sector assets) meet minimum capital requirements under stress scenarios.
  - Some banks would need to tap capital conservation or other buffers; some liquidity cushions need reinforcement.
  - Insurers: quality of capital should be gradually strengthened.
  - Investment funds: resilient to large redemptions.
  - Domestic interconnectedness modest; significant cross-border exposures to other EU countries and the United Kingdom heighten external shock vulnerabilities.
- Macroprudential actions:
  - NBB activated CCyB at 0.5 percent (effective April 1, 2024) and 1 percent (effective October 1, 2024).
  - SSyRB recalibrated from 9 percent to 6 percent from April 1, 2024.
  - Buffer adjustments will add €1.6 billion in capital to absorb unexpected losses.
  - Recommendation: do not lower SSyRB below 6 percent until housing outlook clearer.

### Fiscal developments, risks, and consolidation needs
- Recent fiscal performance:
  - General government deficit:
    - 2022: 3.5 percent of GDP (implied from text)
    - 2023: likely to rise to 4.5 percent of GDP
  - 2024 Draft Budget Plan (DBP): overall deficit of 4.6 percent of GDP (€27.5 billion); IMF staff projects 4.4 percent of GDP for 2024.
  - Regions and communities aggregated deficit: 1.5 percent of GDP, 0.4 percent above target.
- Debt dynamics and projections (selected figures):
  - Debt-to-GDP:
    - 2021-22: eased by 7.5 ppts to 104 percent of GDP.
    - Projected under unchanged policies: about 113 percent of GDP in 2028; near 124 percent of GDP by 2032.
    - Long-run baseline without adjustment: approach 147 percent of GDP by 2041 (under unchanged policies scenario).
  - Gross government debt (2019–28 series): 97.6 111.8 108.0 104.3 105.5 104.7 106.4 108.6 111.1 113.4
  - Interest burden and financing:
    - 10-year bond yield monthly average: 1.8 percent in 2022; 3.5 percent in October 2023.
    - Long-term benchmark 10-year bond yield projected to average 4 percent by 2028 (a rise of 230 bps from 2022 average).
    - Effective rate expected to rise to 2.4. percent in 2028 (increase of 91 bps from 1.5 percent in 2022).
    - Debt service costs: 14 percent of GDP in 2022; 18 percent of GDP in 2028.
    - Gross financing needs: 16 percent of GDP in 2022; around 21 percent of GDP in 2028.
- Need for consolidation:
  - Objective: reach structural balance by 2030.
  - Staff recommended adjustment (Adjustment 1):
    - Structural primary adjustment relative to baseline:
      - 0.6 ppt (or more) in 2024.
      - 0.8 ppt per year (or more) during 2025-30.
    - Cumulative adjustment: 5.6 ppts of GDP.
    - Fiscal path under Adjustment 1:
      - Overall fiscal deficit around 4 percent of GDP in 2024.
      - 3 percent of GDP in 2025.
      - 2½ percent of GDP in 2026.
    - Debt-to-GDP would decline towards 60 percent in the early 2040s.
    - Growth impact: about 0.2 ppt lower annually than baseline absent structural reforms (fiscal multiplier of 0.25).
  - Alternative scenarios:
    - Adjustment 2 (4-year, 2025-28): 0.9 percent of GDP annual adjustment; cumulative 4.2 ppts; debt 86 percent in 2038.
    - Adjustment 3 (7-year, 2025-31 with reforms/investments): 0.5 percent of GDP annual adjustment; cumulative 4.4 ppts; debt 83 percent in 2041.
- Fiscal composition and drivers:
  - Revenue (percent of GDP series): 49.9 49.9 49.5 49.6 50.5 51.3 51.1 51.0 51.0 51.2 (2019–28)
  - Expenditure (percent of GDP series): 51.9 58.8 54.8 53.2 55.0 55.7 55.8 55.9 56.4 56.6 (2019–28)
  - Social benefits: 24.5 27.8 25.9 25.3 26.5 26.8 27.1 27.2 27.2 27.3 (2019–28)
  - Aging pressures: adds 0.3 ppt of GDP per year; fiscal cost of aging projected to increase by 4.2 ppts of GDP during 2022-70 (1.8 ppts in 2022-28).
  - Structural deficits in 2024-25 are expected to remain about 2 ppts larger than pre-pandemic projections.

### Fiscal reform priorities and recommended measures
- General approach:
  - Prioritize expenditure-led consolidation focusing on spending rationalization and efficiency given limited room to raise tax revenue.
  - Preserve high-return public investment; avoid ad-hoc measures; adopt a multi-year consolidation plan.
- Pensions:
  - July 2023 reform estimated saving: 0.5 percent of GDP by 2070.
  - Measures include limiting civil servants’ pension indexation mechanism to 0.3 percent of total pensions per year, canceling planned minimum pension increase in phase 4, one-off bonuses to disincentivize early retirement, reducing gender pension gap, raising special social security contribution from 3 percent to 6 percent for very high supplementary pensions.
  - Effective retirement age: 60.9 years for men in 2020 vs 63.8 years average in the OECD.
- Healthcare:
  - Efficiency gains through preventive care, hospital organization reform, greater use of generic drugs.
  - If health spending efficiency matched EU/OECD average, same healthy life expectancy could be achieved at 20-30 percent lower cost.
- Tax policy and administration:
  - 2022 tax reform blueprint: modernize and simplify tax system, reduce tax expenditures, increase employment by lowering labor tax burden.
  - Desirable measures: gradually reduce or eliminate VAT rate differentials with cushioning for low-income households; harmonize capital taxation across income sources.
  - TADAT finds a well-rounded tax administration; targeted compliance improvements in the “professional and managerial services sector” could reduce the VAT compliance gap estimated at 2 percent of GDP.
- Fiscal federalism:
  - Include regions and communities in consolidation plans; apply strict spending limits at all government levels; adopt strategic multi-annual fiscal framework with spending and tax expenditure reviews.

### External Sector Assessment (Annex I) — key facts and diagnostics
- External position:
  - 2022 NIIP: 58 percent of GDP.
  - Gross assets: 420 percent of GDP; Gross liabilities: 362 percent of GDP.
  - Key 2022 external stats: Net exports of mineral fuels: net imports increased to 4.1 percent of GDP (€23 billion) in 2022; net exports of pharmaceuticals: 3.5 percent of GDP in 2022 (down from 4.4 ppt in 2021).
- Current account diagnostics:
  - 2022 CA: -1.0 percent of GDP.
  - Cyclically adjusted CA (2022): 0.8 percent of GDP.
  - EBA Norm (2022): 2.8 percent of GDP; EBA Gap: −2.0 percent of GDP.
  - Staff Gap: –2.1 percent of GDP (within staff range –2.5 to –1.7 percent).
- Real exchange rate:
  - CPI-based REER: cumulatively appreciated 7 percent between end-2015 and 2021; depreciated by 0.4 percent in 2022.
  - ULC-based REER appreciated 0.9 percent y/y in 2022 and by 7.7 percent in December 2022 from February 2020 trough.
  - REER overvaluation per staff: range 2.3 to 3.4 percent (midpoint 2.9 percent) using CA-gap elasticity 0.72; EBA models suggest larger overvaluations.
- Assessment and policy implications:
  - Belgium’s large positive NIIP cushions vulnerabilities; rebuilding fiscal buffers and structural reforms (wage indexation, labor and product markets) would help align external position with fundamentals.

### Financial sector policy, supervision, and crisis preparedness (selected recommendations)
- Supervision and macroprudential framework:
  - Strengthen corporate governance oversight and internal capital targets monitoring.
  - Enhance NBB–FSMA collaboration, data sharing and integration of conduct/consumer protection into prudential supervision.
  - Remove requirement for formal government approval of macroprudential measures for instruments foreseen in CRD/CRR; ideally grant NBB full power to set macroprudential policy with consultative role for Ministry of Finance.
- Crisis management and resolution:
  - Finalize national resolution handbook and rules of procedure for NBB Resolution Board; ensure operational readiness of resolution plans.
  - Reinforce ELA framework and enhance deposit insurance fund by segregating it from the national budget and increasing its target level.
- Systemic risk and stress testing:
  - Strengthen NBB’s systemic risk assessment framework and stress-testing capabilities; FSMA to develop investment fund stress-test framework and improve data sharing.
- Specific FSAP recommendations (selected):
  - Provide guidance for consistent valuation of mortgage loans (NBB, MT).
  - Increase insurers’ resilience by reducing reliance on lower tier capital and implementing liquidity stress tests (NBB, MT/NT).
  - Enhance AML/CFT supervision and sanctions framework; NBB to join national TF committee (I).

### Structural reforms to increase potential growth and support green transition
- Labor market:
  - Employment rate below peers; target: 80 percent employment by 2030.
  - Reforms: widen net income gap between non-work and work, reduce skills mismatches, increase interregional mobility, promote inclusion of foreign-born workers (women, low-skilled, older workers, people with disabilities).
- Product markets and productivity:
  - Product market regulation more restrictive than peers; retail and professional occupations particularly restrictive.
  - Potential steady-state TFP gains:
    - Aligning with average European advanced economy: about 3½ percent increase in TFP.
    - Aligning with top three performers: about 7½ percent increase in TFP.
  - Recommended measures: reduce administrative burden, one-stop shop for firms, liberalize professional services, reassess pharmacy outlet restrictions, strengthen regulator independence in network sectors.
- Energy and climate:
  - NECP: emissions from non-ETS activities projected to decline by 43 percent by 2030 (EU target 47 percent).
  - Policies: extend nuclear reactors’ life by 10 years, invest in renewable energy and LNG, improve federal-regional coordination, complement EU ETS expansion with national measures (higher carbon taxation, reduce fossil fuel subsidies, sectoral feebates, price floors/ceilings), use part of carbon revenues to protect vulnerable households.

### Risks, uncertainties, and authorities’ views
- Key risks:
  - Geopolitical escalation disrupting trade and finance.
  - Monetary and financial tightening more persistent than expected.
  - Heterogeneity across financial intermediaries raising confidence risk.
  - Wage-indexation could amplify inflation if central bank response insufficient.
  - Protracted government formation after June 2024 elections delaying reforms.
- Authorities’ stance:
  - Concur consolidation is needed; favor step-by-step approach.
  - Emphasize preserving high-return public investment, tax shift away from labor must be coordinated, and the need to avoid post-election political standstill.
  - Authorities committed to strengthening financial resilience and considering FSAP recommendations; welcome preserving deposit insurance improvements and fast pay-out targets.

*Source: IMF staff report content (1belea2023004).*

### 1. Macroeconomic Developments  _______________________________________________________________ 25

### 1. Macroeconomic Developments

### Context and Recent Developments
- Growth was robust in 2022, at 3.0 percent, supported by strong and timely policies cushioning energy price pressures and measures to enhance energy security.
- Growth decelerated in 2023H1, reaching 0.4 and 0.3 percent q/q in 2023Q1 and Q2, respectively, before rebounding to 0.5 percent q/q in Q3.
- Consumer purchasing power was sustained by near-universal wage and social benefit indexation and a robust labor market; pandemic-related supports (household excess savings, dissipation of supply-chain constraints) provided additional support.

### Inflation Developments and Price Expectations
- Headline inflation peaked at 13.1 percent y/y in October 2022 and fell to -1.7 percent y/y in October 2023 as energy prices declined.
- Core inflation moderated only slowly, from a peak of 8.6 percent y/y in March 2023 to 6.7 percent y/y in September 2023.
- Government support measures helped keep energy prices in check but boosted demand.
- Price expectations by consumers and businesses have come down; corporate profit margins have started to contract, limiting the risk of a wage-price spiral.

### Credit and Financial Sector Developments
- Household credit growth slowed to 2.7 percent y/y in August 2023, down from 5-7 percent in recent years, due to higher mortgage rates and stricter lending standards.
- Corporate credit growth slowed to 3.6 percent y/y, remaining near its pre-pandemic range.
- Bank profitability and capital adequacy have increased since the pandemic; provisioning has remained limited despite rising risks.
- Repricing of assets outpaced that of deposits, boosting net interest income.
- The government launched a one-year bond in August 2023 offering a net yield slightly above prevailing saving rates and favorable taxation, raising €22 billion, largely originating from about €300 billion in household saving accounts.
- Despite deposit outflows and repayments of ECB liquidity, banks’ liquidity buffers remain well above regulatory thresholds.
- Insurance sector is profitable and solvent; investment funds show a comfortable degree of resilience.
- The real estate cycle has turned orderly, moderating valuations but increasing risks from sizeable financial sector exposures.

### Labor Market Developments and Competitiveness
- Unemployment has returned close to historic lows; vacancy rates have remained among the highest in the euro area.
- Employment has risen notably, driven by increasing labor force participation.
- Structural rigidities (insufficient net income gains to incentivize employment, skill mismatches, low interregional mobility) have limited stronger employment expansion.
- Indexation transmitted inflation rapidly to wages while productivity growth stayed sluggish, causing nominal unit labor costs to soar.
- Accelerating wage growth in key export markets (France, Germany, the Netherlands) has started to narrow the hourly nominal wage gap, but it remains notably above its pre-energy price shock level.

### External Sector Developments
- The current account (CA) deteriorated to a deficit of 1.0 percent of GDP in 2022, reflecting elevated fiscal deficits, loss of wage competitiveness, high fuel imports, and lower COVID vaccine exports.
- The CA deficit was 0.3 percent of GDP in 2023H1.
- In 2023, exports growth declined more than imports reflecting weaker external demand; energy imports eased with lower prices.

### Fiscal Developments
- The general government deficit is likely to rise to 4.5 percent of GDP in 2023 from 3.5 percent in 2022, mainly due to higher interest costs and rising permanent current expenditure (indexation effects on wages and social benefits, and aging-related outlays).
- In 2021-22, strong growth and high inflation helped ease the debt ratio by 7.5 ppts of GDP to 104 percent of GDP.
- Public debt is well above pre-pandemic levels and expected to increase again from 2023 given a wider deficit and slowing nominal growth.
- Government bond yields returned to levels prevailing before the ECB’s launch of public-sector bond-purchase programs in 2014; spreads have remained contained.
- The one-year state bond issued in 2023 met about one-quarter of 2023 gross financing needs.
- Belgium's overall risk of sovereign stress is assessed as moderate, contingent on sustaining fiscal adjustments and supported by high-quality debt management (debt stock refinancing at low rates in 2017-21 and the longest average residual maturity among euro area peers).

### Outlook and Projections
- Growth projections:
  - 2023: 1.4 percent
  - 2024: 1.0 percent
  - Medium term: return to 1.2-1.3 percent potential rate
- Inflation projections:
  - 2023 headline inflation: 2.5 percent
  - 2024 headline inflation: 4.4 percent (increase mostly due to fading effects from energy price support measures)
- Fiscal outlook under unchanged policies:
  - Fiscal deficit around 5½ percent of GDP over the medium term (compared with 2 percent in 2019)
  - Debt projected to rise to about 113 percent of GDP in 2028, surpassing the 2019 level by 16 ppts
- External outlook:
  - CA deficit expected to narrow marginally in 2023 from 1.0 percent in 2022, returning to small surpluses in the medium term as energy prices ease, external demand recovers and competitiveness improves.

### Risks and Uncertainty
- Key upside risks to downside outcomes include:
  - Escalating geopolitical tensions with disruptions to trade and financial flows could dampen activity and reignite inflationary pressures.
  - Monetary and financial conditions may tighten more or for longer than expected, challenging financial sector resilience and reducing consumption and investment.
  - Heterogeneity across financial intermediaries could increase vulnerability to confidence effects at times of stress.
  - Insufficient central bank responses to renewed price pressures would increase the risk of a wage-price spiral, given wage indexation.
  - A protracted government formation after the June 2024 elections could delay fiscal adjustment and reforms, increase risk premia, and worsen debt dynamics.
- Authorities noted concerns about volatile oil and gas prices, risks of higher interest rates and spreads in the euro area, the protective role of automatic wage indexation, and the challenge that wage growth has been higher than productivity growth while wage rigidities impede job filling.

### Policy Discussions and Focus
- Consultation prioritized:
  - Achieving sustained fiscal consolidation to restore macroeconomic buffers.
  - Measures to buttress financial sector resilience amid tighter global financial conditions.
  - Structural policies to foster the green transition and increase potential growth.
- Rationale: The pandemic and energy crisis left Belgium with higher debt and structural deficits; an aging population and the energy transition exert additional pressure on public finances; persistently-high core inflation calls for tighter fiscal stance to complement monetary tightening.

*Source: 1. Macroeconomic Developments (BELGIUM, INTERNATIONAL MONETARY FUND).*

### 13.      Fiscal consolidation is needed to

### 13.      Fiscal consolidation is needed to 

### Need for consolidation: objectives and rationale
- Preserve Belgium’s social model characterized by high redistribution and wide-reaching safety nets reflected in high fiscal revenue and expenditure-to-GDP ratios.
- Reduce debt, rebuild buffers eroded by the pandemic and energy crisis, and lower inflation by supporting monetary policy.
- Address structural deficits, rising public debt, and aging-related pressures on social programs.
- Mitigate risks that entrenched inflation could force greater monetary tightening, push the economy into recession, and necessitate new fiscal stimulus in the absence of fiscal space.
- Note: The looser cyclically-adjusted primary balance in 2023 suggests fiscal policy likely contributed to core inflation.

### Fiscal position, drivers, and outlook
- Structural deficits in 2024-25 are expected to remain about 2 ppts larger than pre-pandemic projections.
- Aging adds spending pressure of 0.3 ppt of GDP per year.
- Higher debt and interest rates raise annual borrowing costs by close to 1 percent of GDP.
- Primary current expenditure increases driven by growth in social benefits and public wages (inflation indexation and permanent discretionary measures from COVID-19).
- Social benefits and public wage bill increases relative to pre-pandemic forecast: about 3 ppts and 0.6 ppt of GDP, respectively, by 2028.
- Belgium’s social benefits spending was 5.2 ppts of GDP higher than the average of EU advanced economies in 2021.

### 2024 Draft Budget Plan (DBP) and fiscal stance
- DBP foresees an overall deficit of 4.6 percent of GDP (€27.5 billion) in 2024, 0.4 ppt of GDP higher than the stability program target of 4.2 percent of GDP (€25 billion).
- IMF staff projections (based on updated GDP data) foresee an overall deficit in 2024 at 4.4 percent of GDP, a marginal reduction of 0.1 ppt from 2023, resulting in a too-loose fiscal stance.
- Expected aggregated deficit of regional and community governments: 1.5 percent of GDP, 0.4 percent above target.
- Federal adjustments are partly ad-hoc and may not structurally improve the fiscal position.

### Recommended fiscal adjustment path and macro impact
- Objective: reach structural balance by 2030 (Belgium’s medium-term objective) to place debt on a downward trajectory.
- Required structural primary adjustment relative to baseline:
  - 0.6 ppt (or more) in 2024
  - 0.8 ppt per year (or more) during 2025-30
- Cumulative adjustment would amount to 5.6 ppts of GDP, offsetting estimated increase in aging outlays of 4 ppts of GDP (2022-41).
- Under this adjustment path:
  - Overall fiscal deficit around 4 percent of GDP in 2024, 3 percent of GDP in 2025, and 2½ percent of GDP in 2026.
  - Debt-to-GDP ratio would steadily decline towards 60 percent of GDP in the early 2040s.
  - Growth would be about 0.2 ppt lower than baseline annually, absent structural reforms to increase productivity.
- Emphasis on frontloaded consolidation to help reduce high core inflation and create space for higher investments boosting potential growth.
- Need for a multi-year consolidation plan avoiding ad-hoc year-to-year spending reductions.

### Focus of consolidation: spending rationalization and efficiency
- Given high taxation, limited room to mobilize additional tax revenue; consolidation should primarily focus on reducing spending and increasing efficiency.
- Preserve high-return public investment while targeting efficiency gains in social benefits and the public wage bill.
- Review automatic-indexation mechanisms; even a temporary pause could dampen wage-price spiral pressures.
- Efficiency observation: If Belgium’s health spending were as efficient as EU or OECD average, the same healthy life expectancy could be achieved at a 20-30 percent lower cost.

### Fiscal reforms and policy measures
- Pensions:
  - Pension reforms in 2020 and 2022 increased projected deficits through 2022-70; offsetting increases is key for EC NGEU funding.
  - Reform agreement of July 2023 estimated saving of 0.5 percent of GDP by 2070, broadly offsetting net increase in total cost from 2020-22 benefit reforms.
  - About 80 percent of the saving comes from limiting the mechanism that allows civil servants’ pensions to rise along with wages of active civil servants to 0.3 percent of total pensions of the civil service scheme per year.
  - Other measures: cancel increase in minimum pensions planned in phase 4; introduce one-off bonuses to disincentivize early retirement; reduce gender pension gap; raise special social security contribution from 3 percent to 6 percent for very high supplementary pensions.
  - Effective retirement age: 60.9 years for men in 2020 vs 63.8 years average in the OECD.
- Healthcare:
  - Large potential efficiency gains through preventive care, hospital organization reform, and greater use of generic drugs.
  - Health spending efficiency gap implies potential 20-30 percent lower cost for same healthy life expectancy if aligned with EU/OECD averages.
  - Projected fiscal cost of aging includes rising health and long-term care expenditures under reference and health risk scenarios.
- Tax policy:
  - 2022 tax reform blueprint aims to modernize and simplify the tax system, reduce tax expenditures, and increase employment by reducing tax burden on labor.
  - Key reforms should proceed in the next legislature; coordination with social security reforms essential.
  - Desirable measures: gradually reduce or eliminate VAT rate differentials with cushioning for low-income households; harmonize capital taxation across income sources especially real estate and capital gains.
  - Reform should be at least budget neutral and, ideally, deficit reducing.
- Revenue administration:
  - TADAT assessment: Belgium has a well-rounded tax administration and uses withholding regimes effectively.
  - Further vigilance needed for compliance with on-time filing and payment by business taxpayers.
  - Targeted compliance improvement in the “professional and managerial services sector” could reduce the VAT compliance gap estimated by the 2023 FAD analysis to be 2 percent of GDP.

### Fiscal federalism and coordination
- Substantial decentralization with devolution of expenditures outpacing revenue; regions and communities’ aggregated deficit reached 0.9 percent of GDP in 2022 and comprised a quarter of the general government deficit.
- Limited fiscal coordination across federal entities due to complex expenditure assignments, lack of hierarchy, and absence of an accountability mechanism.
- Recommendations:
  - Include region and community levels in general government consolidation plans.
  - Apply strict spending limits at all levels of government.
  - Adopt a strategic multi-annual fiscal framework with systematic spending and tax expenditure reviews integrated into the budget process.

### Authorities’ views
- Authorities concur consolidation is needed and favor a step-by-step approach.
- Federal government has delivered strong consolidation efforts for 2024; continuing efforts step by step in 2025-26 combined with regional adjustments would meet stability program targets.
- Financing risk has remained low due to Belgium’s positive net international investment position and ability to tap domestic savings.
- Authorities emphasize avoiding post-election political standstill that would delay reforms; expect new EU governance framework to inform consolidation path.
- Authorities called for coordination to ensure a tax shift away from labor does not negatively impact the budget.

### Preserving financial sector resilience (overview)
- Systemic risks from cooling real estate markets, rising interest rates, and weaker economic activity.
- Real estate and mortgage lending:
  - Belgian banks’ exposure to residential (RRE) and commercial real estate (CRE) among the highest in the euro area; key driver of losses in FSAP adverse scenario.
  - Property accounts for nearly a fifth of insurers’ investments.
  - Mitigating factors: less dynamic market developments relative to peers, widespread use of fixed-rate and fully amortizing RRE mortgages, strong household financial positions, relatively low CRE vacancy rates.
- Interest rate risk:
  - Rapid deposit repricing could sap profitability and weaken financial stability.
  - Political proposals for rule-based compensation of the entire stock of savings deposits (~a fourth of total liabilities) could exacerbate risk.
  - Phase-out of ECB’s favorably-priced liquidity facilities in June 2023 is raising funding costs.
- Corporate credit risk:
  - Corporate indebtedness moderate when excluding related-entity lending.
  - Pockets of vulnerability may emerge among firms with weaker profitability and debt-servicing capacity.
  - 2021 corporate accounts show interest coverage ratios at comfortable levels for most firms; banks’ loan exposure to weaker sectors appears relatively limited.

*Source: IMF staff report chapter "13.      Fiscal consolidation is needed to" (Belgium).*

### 23.      FSAP stress tests show a high degree of financial sector resilience, albeit with some

### FSAP stress tests show a high degree of financial sector resilience, albeit with some heterogeneity across institutions.

### Financial sector resilience and stress-test findings
- All seven systemic institutions considered (90 percent of banking sector assets) meet minimum capital requirements under stress scenarios, including in the event of a forced sale of held-to-maturity bond portfolios under severe liquidity pressure.
- Solvency and liquidity buffers of bank and nonbank financial intermediaries are sufficient to withstand plausible adverse conditions, though there is heterogeneity across institutions.
- Some banks would need to tap into their capital conservation and other-systemically-important-institution buffers; liquidity cushions need reinforcement for some banks.
- For insurers, the quality of capital should be gradually strengthened.
- Investment funds are resilient to large redemptions.
- Domestic interconnectedness of financial intermediaries is modest and direct contagion risks are low.
- Significant cross-border exposures by banks, particularly to other EU countries and the United Kingdom, heighten vulnerabilities to external shocks.

### Macroprudential policy actions and implications
- The NBB activated the counter-cyclical capital buffer (CCyB), at rates of 0.5 percent and 1 percent effective from April 1, 2024 and October 1, 2024, respectively.
- The sectoral systemic risk buffer (SSyRB) maintained against risks from residential mortgages will be recalibrated from 9 percent to 6 percent from April 1, 2024.
- Banks were encouraged to lengthen new mortgage maturities to ease the debt servicing burden of households and pre-empt borrower distress.
- Buffer adjustments will add €1.6 billion in capital to absorb unexpected losses from a broader deterioration in the macro-financial environment while also preserving the ability to cushion losses from a steep housing market correction.
- Recommendation: It would not be advisable to lower the SSyRB below 6 percent until the housing market outlook is clearer.
- The NBB should remain vigilant to potential unexpected procyclical effects of macroprudential tightening; this risk is mitigated by high bank capital and profitability.

### Financial policy framework — strengths and recommended enhancements
- Supervision
  - Further improvements possible in corporate governance framework of banks and monitoring of bank internal capital targets.
  - Strengthen collaboration between the NBB and the Financial Services and Markets Authority (FSMA) through greater information sharing and incorporation of consumer protection and conduct information into prudential supervision.
  - Enhance the regulatory and supervisory framework for the insurance sector; closely monitor large exposures to real estate and mortgages, mortgage loan quantity and quality, and ensure prudent valuation by insurers.
  - Finalize legal framework for public-private partnerships for natural catastrophe risk to enhance climate resiliency.
  - Enhance the AML/CFT sanction and supervisory framework (including over payment institutions).
- Macroprudential policy
  - Near-term strengthening: remove requirement for formal government approval of macroprudential measures at least for instruments foreseen in the Capital Requirements Directive and Regulation.
  - Ideally, grant the NBB full power to set macroprudential policy while retaining a consultative role for the Ministry of Finance.
- Crisis management and resolution
  - Finalize the national resolution handbook with attention to tools outside preferred resolution strategies.
  - Ensure operational readiness of resolution plans and greater internal coordination.
  - Reinforce the emergency liquidity assistance framework to enhance readiness to provide emergency liquidity for bank resolution.
  - Prompt passage of the draft law to enhance the deposit insurance fund by separating it from the national budget and increasing its target level should remain a priority.
- Systemic risk assessment
  - Strengthen the NBB’s systemic risk assessment framework for setting macroprudential policy and implement technical improvements to enhance stress testing.
  - Develop the FSMA’s approach to assessing investment funds’ structural vulnerabilities.

### Authorities’ views
- Authorities shared staff’s view on systemic risks and agreed that financial intermediaries are resilient to severe macroeconomic shocks, with heterogeneity and the need to monitor individual institutions’ liquidity needs despite ample system-wide liquidity.
- Authorities emphasized commitment to strengthening financial sector resilience and broadly agreed with staff recommendations, noting data sharing arrangements between the NBB and FSMA and support for granting the NBB macroprudential powers without formal government approval.
- Recognized priorities: strengthening crisis arrangements, operational readiness of resolution plans, the deposit insurance fund, the ELA framework, and improving stress testing and assessment of systemic risks to investment funds.

### Increasing potential growth and advancing green transition — key findings and recommendations
- Labor market
  - Belgium’s employment rate is lower than in peer countries; authorities have an ambitious 80 percent employment target by 2030.
  - Some social benefits limit incentives to find jobs; with low unemployment and high vacancies (especially in Flanders), raising participation and productivity and increasing interregional mobility are needed.
  - Continue labor market, tax and social benefit reforms to widen the net income gap between non-work and work; reduce skills mismatches; increase job-market flexibility; promote inclusion of foreign-born workers, particularly women, low-skilled workers, older workers, and people with disabilities.
- Product markets
  - Product markets remain more restrictive than in peer economies despite recent reforms; retail sector and professional occupations are particularly restrictive.
  - Further product market reforms could lift productivity and potential output; aligning Belgium’s business environment with the average in European advanced economies or the three best-performing peers could lift the level of total factor productivity in the steady state by about 3½ percent and 7½ percent, respectively.
- Energy and climate
  - The energy crisis accelerated the green transition and diversification; long-term declines in greenhouse gas emissions and carbon intensity driven by power and manufacturing sectors under the EU ETS.
  - Extension of two nuclear reactors’ life by 10 years, investment in renewable energy and LNG capacity will help lower Belgium’s carbon footprint and support energy security.
  - Under Belgium’s updated Energy and Climate Plan (NECP), emissions from activities not included in the ETS would decline by 43 percent, compared to a EU target of 47 percent in 2030.
  - NECP lacks consolidation of climate measures across federal and regional entities and agreement on federal-regional burden sharing remains elusive.
  - Recommendation: Step up efforts and improve federal-regional coordination; complement the expected EU ETS expansion to buildings, road transport and small industry (expected by 2027) with national measures including higher carbon taxation, reduction of fossil fuel subsidies, sectoral feebates, and price floors/ceilings; use part of carbon taxation revenues to protect vulnerable households.

### Staff appraisal — fiscal and structural policy priorities
- Macroeconomic context
  - The economy and financial sector have demonstrated resilience, but face cyclical and structural challenges: slowing growth, high core inflation, higher public debt and structural fiscal deficits, aging population, and low productivity and labor participation.
  - Risks include geopolitical fragmentation, global financing conditions, and the domestic political cycle.
- Fiscal policy
  - Fiscal adjustment is needed to preserve Belgium’s social model, lower inflation, reduce debt, and rebuild buffers.
  - The 2024 budget plan will only marginally lower the fiscal deficit, as regions and communities are not on track to meet targets set in Belgium’s stability program.
  - Recommendation: A tighter fiscal stance with a prolonged and, ideally, front-loaded fiscal adjustment is needed to offset aging outlays and put public debt on a downward trajectory; consolidation should focus on rationalizing spending and increasing efficiency at all government levels.
  - Room for mobilizing additional tax revenue appears limited given high taxation; efficiency-enhancing tax reforms should proceed while preserving high-return public investment.
- Fiscal reforms
  - Key areas: tax policy, pensions, and healthcare.
  - Tax reforms should improve labor force participation and fairness; strengthen tax administration.
  - Pension and healthcare reforms are needed for sustainability; seek efficiency gains in healthcare (preventive care, hospital organization, promoting generic drugs).
  - Enhance fiscal coordination among federal entities; include fiscal adjustment at region and community levels with strict spending limits.
- Financial policy and structural reforms
  - With rising systemic risks from cooling real estate markets, higher interest rates, and weaker activity, policies should preserve resilience and build buffers.
  - Continue strengthening supervision, crisis management and resolution preparedness, the macroprudential framework, and systemic risk assessment.
  - Structural reforms (labor, product markets, green transition) are critical to lift productivity and potential growth, mitigate fiscal consolidation impacts, and improve competitiveness; complement EU ETS expansion by 2027 with national measures to ensure emissions reductions.

*Source: 1belea2023004.*

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

### 1belea2023004 - 39.

### Macroeconomic developments
- The economy "has performed robustly through a series of shocks" while "keeping labor markets at historically tight levels."
- Inflationary pressures have translated into "a strong bout of wage and social benefit indexation," "preserving household purchasing power, but eroding external competitiveness."
- Corporate profit margins "have started to contract" as "labor cost increases have eaten into profitability."
- Key projections and indicators (2019–28) from Table 1 (Real economy, Employment, Prices, Public finance, External Sector):
  - Real GDP: 2.2 -5.3 6.9 3.0 1.4 1.0 1.2 1.2 1.2 1.3
  - Domestic demand: 1.9 -6.2 6.1 2.9 2.4 1.3 1.5 1.6 1.6 1.7
  - Private consumption: 1.7 -8.2 6.3 3.2 1.3 0.9 1.6 1.6 1.6 1.6
  - Unemployment rate (in percent): 5.4 5.6 6.3 5.6 5.6 5.6 5.5 5.5 5.4 5.4
  - Consumer prices: 1.3 0.4 3.2 0.3 2.5 4.4 2.0 1.8 1.8 2.0
  - Core CPI: 1.5 1.4 1.3 4.0 6.1 3.5 2.3 2.0 2.0 2.0
  - GDP deflator: 1.8 1.6 3.2 5.9 3.8 3.3 2.0 1.8 1.8 1.9
  - Household saving ratio: 12.4 20.4 17.2 12.9 13.9 14.4 14.7 14.8 15.0 15.2
  - Potential output growth: 1.3 1.0 1.9 1.8 1.8 1.5 1.4 1.3 1.3 1.3
- Output gap (in percent): 1.7 -4.7 0.0 1.2 0.8 0.3 0.1 0.1 0.0 0.0

### Financial sector developments
- "Following brisk housing market activity in recent years, mortgage debt has steadily increased" and the "aggregate household debt burden" is described as "elevated."
- Housing and mortgage features:
  - "More moderate housing valuation and affordability metrics than in other European countries" provide some comfort.
  - There is "a prevalence of fixed rate, fully amortizing mortgages."
- Commercial real estate: "activity in commercial real estate markets remains robust" despite cooling from 2020 highs; vacancy rates have declined from pandemic peaks, particularly in the office segment.
- Financial indicators (from consolidated balance sheet and banking sector tables):
  - Net financial worth (2013–2022 trend): -88.0 -95.7 -92.5 -90.8 -85.1 -83.9 -84.4 -100.5 -90.2 -72.1
  - Financial assets (2013–2022 trend): 30.8 35.1 34.0 37.0 35.7 34.6 36.1 40.1 38.3 31.1
  - Liabilities (2013–2022 trend): 118.8 130.8 126.5 127.8 120.9 118.5 120.5 140.6 128.5 103.2

### External sector developments
- "The current account swung to a deficit with a sharp deterioration of the trade balance in the energy crisis" and this was "partly offset by a small income surplus due to a net inflow of investment income."
- Drivers of the trade deterioration: "Increase in net imports of mineral fuels and decline in pharmaceutical exports" and "the return of transport/travel to pre-pandemic trends worsened the services balance."
- Net international investment position remains "sizable."
- Exchange rate dynamics: "real effective rates appreciated reflecting higher inflation and labor market effects."
- Selected external numbers (Table 1 and Table 2):
  - Current account (percent of GDP): 0.1 1.4 1.3 -1.0 -0.9 -0.3 0.2 0.5 0.7 0.9
  - Trade balance on goods and services: 0.6 2.0 1.8 -1.6 -1.4 -0.9 -0.4 -0.2 0.0 0.1
  - Exports of goods and services (percent of GDP): 82.4 78.6 87.9 95.7 85.6 83.6 84.1 84.7 85.9 87.3
  - Imports of goods and services (percent of GDP): -81.8 -76.6 -86.2 -97.4 -87.0 -84.5 -84.5 -85.0 -86.0 -87.2
  - Net International Investment Position (Table 2 memorandum): 40.9 47.3 67.7 57.7

### Fiscal developments
- "Fiscal response during the pandemic and the energy crisis eroded buffers."
- "Revenues have recovered with output and higher prices" but "high spending continued to drive deficits." Stability programs’ fiscal targets have been missed.
- Belgium "is among the most indebted euro-area countries" and "expenditure-led consolidation is needed."
- Key fiscal figures (Table 1, Table 3):
  - Revenue (percent of GDP): 49.9 49.9 49.5 49.6 50.5 51.3 51.1 51.0 51.0 51.2
  - Expenditure (percent of GDP): 51.9 58.8 54.8 53.2 55.0 55.7 55.8 55.9 56.4 56.6
  - General government balance (percent of GDP): -2.0 -8.9 -5.4 -3.5 -4.5 -4.4 -4.7 -4.9 -5.3 -5.4
  - Structural balance (percent of potential GDP): -2.9 -6.4 -5.2 -4.1 -4.6 -4.4 -4.7 -4.9 -5.3 -5.5
  - Primary balance (percent of GDP): 0.0 -6.9 -3.7 -2.0 -2.7 -2.4 -2.4 -2.5 -2.7 -2.7
  - Gross government debt (percent of GDP): 97.6 111.8 108.0 104.3 105.5 104.7 106.4 108.6 111.1 113.4
- Fiscal composition highlights:
  - Social benefits (percent of GDP): 24.5 27.8 25.9 25.3 26.5 26.8 27.1 27.2 27.2 27.3
  - Compensation of employees (percent of GDP): 12.3 13.1 12.3 12.3 12.8 12.9 12.9 12.9 12.9 12.9
  - Interest (percent of GDP): 2.0 1.9 1.7 1.5 1.8 2.0 2.2 2.3 2.6 2.7

### Regional economic performance
- "The Flemish economy rebounded more strongly," while "unemployment rates are higher in Brussels and Wallonia."
- Labor market and fiscal regional points:
  - Large gaps in activity rates across regions despite recent faster rise in Brussels.
  - The fiscal deficit of regions and communities is "decreasing but remains higher than pre-pandemic" and "increasing debt burden" at subnational level.
  - Rising interest rates "would impact on the sustainability of regional finances."
- Regional data highlights and trends (graphs and tables):
  - Real GDP growth (2005–23 proj.) shows divergence by region with Flemish Region outperforming Brussels-Capital and Walloon Region.
  - Unemployment rates (15–64 years) and labor force participation (15–64 years) show persistent regional differences.
  - Debt outstanding held by communities and regions (percent of GDP) exhibits an increasing trend in recent years.

### Structural reforms
- Belgium "lags peers in activating labor," and "reaching the authorities’ 80 percent employment target requires closing regional and gender gaps."
- Labor market tightness and shortages:
  - "Labor shortage remains a challenge, especially in Flanders."
  - Job vacancy rates and employment rate by region and gender signal the need for targeted activation policies.
- Business environment and productivity:
  - "Bankruptcies are returning to pre-pandemic levels."
  - "Public investment is expected to gradually increase; the Flemish community received a large part of the RRF grant."
  - "Product market regulation is more restrictive than in peers, suggesting scope for reform to bolster productivity."

### Key policy implications and priorities (implied by findings)
- Contain inflationary wage–indexation spirals to preserve competitiveness while protecting vulnerable incomes.
- Restore fiscal buffers through expenditure-led consolidation given high public debt and missed stability program targets.
- Strengthen housing market monitoring given elevated household debt and rising mortgage exposure.
- Address regional and gender disparities in labor market participation to meet the 80 percent employment objective.
- Advance product market and regulatory reforms to bolster productivity and medium-term potential growth.

*Italic: Source — IMF staff report content (figures and tables) from the provided content unit.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- Belgium’s external position in 2022 was weaker than the level implied by medium-term fundamentals and desirable policies.
- The current account (CA) balance deteriorated to -1.0 percent of GDP in 2022, as the goods balance swung to deficit due largely to higher fuel imports reflecting price surges and lower vaccine exports.
- Outlook: the CA deficit is expected to narrow marginally in 2023 and return to small surpluses in the medium term as energy prices ease, external demand recovers, and competitiveness improves.
- The outlook is highly uncertain.

### Potential Policy Responses
- Outlays on energy bill support and other expenses related to spillovers from Russia’s war in Ukraine have delayed fiscal and external adjustments.
- Given the elevated fiscal deficit and public debt and aging-related spending pressures, near- and medium-term policies should focus on:
  - Rebuilding fiscal buffers through a credible, expenditure-led consolidation that also creates space to support green and digital transformation through higher investment.
  - Strengthening competitiveness through structural reforms, including of the wage indexation system, social benefits, and the labor and product markets.
  - Actions to foster green, digital, and inclusive growth.
- These steps are expected to bring the external position closer in line with medium-term fundamentals and desirable policy settings.

### Foreign Asset and Liability Position and Trajectory
Background and recent developments:
- The net international investment position (NIIP) decreased to 58 percent of GDP in 2022 from 68 percent in 2021.
- Gross foreign assets went down 49 ppt of GDP from 2021 while gross foreign liabilities declined by 38 ppt of GDP.
- Net portfolio investment declined to 36 percent of GDP (down 7 ppt of GDP from 2021) due largely to valuation changes reflecting poorly performing equity markets and sharply lower bond prices from the rise in interest rates.
- Net direct investment increased to 27 percent of GDP (up 0.4 ppt of GDP) reflecting a larger decline in liabilities than assets.
- Net other investment liabilities increased by 37 percent to a high of 13 percent of GDP in 2022, as cessation of payouts to the Bank of Russia due to sanctions remain outstanding as interbank debt.
- Belgium’s large creditor position is underpinned by sizable net household financial wealth.
- Gross foreign assets of the banking sector continued to decline, to 70 percent of GDP at end-2022, well below the pre–GFC peak of more than 200 percent following a decade of consolidation and deleveraging.
- External public debt—mainly denominated in euros—continued to decline, to 53 percent of GDP in 2022 from 67 percent of GDP in 2021, a reversal following a sharp increase to 75 percent of GDP in 2020 due to financing needs of the fiscal response to the pandemic and a decline of nominal GDP.

Assessment:
- Based on the projected CA deficit 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.
- Belgium’s large gross international asset and liability positions are elevated by the presence of corporate treasury units, which do not appear to create macro-relevant mismatches.

Key statistics (2022, % GDP):
- NIIP: 58
- Gross Assets: 420
- Debt Assets: 141
- Gross Liab.: 362
- Debt Liab.: 156

### Current Account
Background and recent developments:
- The CA balance averaged 0.5 percent of GDP over 2016-21.
- Volatility in the trade and primary income balances is driven in part by sizable operations of multinationals and large revisions.
- In 2022, the CA balance swung to a deficit of 1.0 percent of GDP from a surplus of 1.3 percent of GDP in 2021, driven by a sharp deterioration of the trade balance.
- Net imports of fuels and related materials increased to 4.1 percent of GDP (€23 billion) in 2022, one ppt higher than in 2021, reflecting surges in energy prices.
- Net exports of pharmaceutical products declined to 3.5 percent of GDP in 2022 (from 4.4 ppt GDP in 2021), reflecting a slowdown in shipment of coronavirus vaccines.
- Income and current transfers balances remained broadly stable at 1.5 percent and -0.9 percent of GDP, respectively, in 2022.
- The cyclically adjusted CA in 2022 is projected at 0.8 percent of GDP, with a cyclical contribution of -1.8 percent of GDP largely due to the deterioration in the commodity terms of trade (-1.5 percent).

Assessment:
- EBA model estimates for 2022 yield a CA gap of –2.0 percent of GDP, based on a cyclically-adjusted CA balance of 0.8 percent of GDP, relative to an estimated norm of 2.8 percent of GDP.
- Adjustment for transitory COVID-19 effects on the CA is 0 percent of GDP: -0.2 percent of GDP for travel services (including tourism), and 0.1 percent of GDP for transport.
- This is within a range estimated by IMF staff for the CA gap of between –2.5 and –1.7 percent of GDP, applying the standard error of the CA norm estimated at ±0.4 percent of GDP.

Key statistics (2022, % GDP):
- CA: -1.0
- Cycl. Adj. CA: 0.8
- EBA Norm: 2.8
- EBA Gap: −2.0
- COVID-19 Adj.: 0.0
- Staff Gap: –2.1

### Real Exchange Rate
Background and recent developments:
- After a cumulative appreciation of the CPI-based REER by 7 percent between end 2015-2021, it depreciated by 0.4 percent in 2022, largely mirroring the depreciation of NEER.
- The ULC-based REER appreciated by 0.9 percent (y/y) in 2022, and by 7.7 percent in December 2022 from the trough in February 2020, reflecting higher wage increases due to automatic wage indexation in Belgium.

Assessment:
- Based on the staff-assessed CA gap range, the REER is overvalued in the range of 2.3 to 3.4 percent, with a midpoint of 2.9 percent (applying an estimated elasticity of the CA balance to the REER of 0.72).
- EBA model estimates point to a REER overvaluation of 16.9 percent based on the CPI-based REER index and 31.3 percent by the REER level models.

### Capital and Financial Accounts: Flows and Policy Measures
Background and recent developments:
- The BOP financial account was negative in 2022 with flows of foreign liabilities exceeding flows of foreign assets by about €5 billion (1.0 percent of GDP).
- The portfolio investment balance was about €0.8 billion (0.1 percent of GDP).
- The direct investment balance was €13 billion (2.3 percent of GDP) and was offset by a large negative balance in other investment of €23 billion (4.1 percent of GDP) stemming from a sharp rise in foreign debts of commercial banks to Russia.
- Short-term external debt increased marginally to 31 percent of gross external debt in 2022 (from an average of 27 percent in 2017-2021).
- The capital account is open.

Assessment:
- Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities.
- The large, positive NIIP reduces the 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.

_Italic: Source: IMF staff; Annex I. External Sector Assessment (Belgium)._

### 1.      The structural deterioration in the

### 1.      The structural deterioration in the fiscal position and rising debt call for a sustained consolidation to rebuild buffers

### Fiscal outlook and key projections
- Under staff’s baseline where no further adjustment would be made, the general government structural deficits are expected to remain elevated over the medium term and beyond, driven by recent structural spending increases and anticipated higher aging-related expenditures.
- The fiscal cost of aging is projected to increase by 4.2 percentage points of GDP during 2022-70, of which 1.8 ppts of GDP in 2022-28 (FPB July 2023).
- With unchanged policies:
  - The fiscal deficit would increase from 5½ percent of GDP in 2028 to 7½ percent of GDP in 2041.
  - The primary deficit would be 2.3 ppts of GDP larger than the debt stabilizing primary balance of -0.4 percent of GDP in 2028.
  - Gross public debt would approach 147 percent of GDP in 2041.
- Covid-19 related structural spending increases include permanent increases in healthcare and investment triggered by the pandemic.
- Social benefits costs are projected to increase from 25.7 percent of GDP in 2022, to 30.1 percent of GDP by 2050, before a slight decrease between 2050 and 2070 to 29.9 percent of GDP (FPB Study Committee on Ageing-Annual Report -July 2023).
  - Healthcare and pensions spending will each increase by 1.1 ppts of GDP in 2022-28.
  - The increase in pension expenditure reflects increase in minimum pensions in 2021 and 2024, tempered by the increase in statutory retirement age in 2025.
  - Unemployment benefits and expenditure on childcare and other social spendings provide some offsets on the budgetary costs of aging.

### Authorities’ planned adjustment and limitations
- Per the 2023–26 stability program, the authorities envisage a fiscal balance improvement of 2.2 ppts of GDP over 2024-26, bringing the fiscal deficit just below 3 percent of GDP in 2026 and the primary deficit to 0.5 percent of GDP, but gross public debt, at 108 percent of GDP, will continue to rise.
- The government implemented budgetary efforts (a deficit reduction assuming no other policy changes) of 1.9 percent of GDP in 2021-24, including:
  - Annual fixed components: 0.2 percent of GDP each year.
  - Variable components: 0.3, 0.3, 0.6 percent of GDP in 2022-24 based on the level and growth of output.
- More ambitious plans were overtaken by events in 2022 (war in Ukraine, energy crisis).

### Staff recommended adjustment (Adjustment 1) and alternative scenarios
- A more ambitious, upfront adjustment to reach structural balance by 2030 (T+7, the previous EU medium-term objective, MTO) is proposed to place debt solidly on a downward trajectory.
- Adjustment 1 (staff recommended—MTO):
  - Structural primary adjustment measured as the deviation of the change of the structural primary balance from its change under the baseline:
    - Reduced by 0.6 ppt per year (or more) in 2024.
    - Reduced by 0.8 ppt per year (or more) during 2025-30.
  - Fiscal deficit path consistent with achievement:
    - About 4 percent of GDP in 2024.
    - About 3 percent of GDP in 2025.
    - About 2½ percent of GDP in 2026.
    - Achieving a balance in 2030.
  - Cumulative adjustment would amount to 5.6 ppts of GDP, more than offsetting the estimated increase in aging outlays of 4 ppts of GDP (2022-41).
  - Debt-GDP ratio declining steadily towards 60 percent of GDP in early 2040s.
  - Growth would be about 0.2 ppt lower than in the baseline, absent structural reforms to increase productivity (based on a fiscal multiplier of 0.25).
- Adjustment scenario 2 (4-year adjustment, 2025-28):
  - Required annual adjustment: 0.9 percent of GDP.
  - Cumulative adjustment effort: 4.2 ppts of GDP.
  - Reduces the debt-GDP ratio to 86 percent 10-year after in 2038.
- Adjustment scenario 3 (7-year adjustment, 2025-31, with reforms and public investments):
  - Annual adjustment effort: 0.5 percent of GDP.
  - Cumulative effort: 4.4 ppts of GDP spread over 3 more years.
  - 10-year debt trajectory reaching 83 percent of GDP in 2041.
- Staff’s recommended adjustment path (Adjustment 1) would bring public debt closer to the 60 percent of GDP debt threshold.

### Comparison with EC proposed fiscal framework and staff encouragement
- Under the proposed EC risk-based surveillance framework for high-debt EU members (public debt above 60 percent of GDP or fiscal deficit exceeding 3 percent of GDP), the fiscal adjustment would include:
  - (a) The fiscal deficit remains or is brought and maintained below 3 percent of GDP (deficit criterion).
  - (b) Debt at the end of the adjustment period is lower than debt in 2024 and continues on a downward path or stays at prudent levels for 10 years (debt criterion).
  - (c) A minimum fiscal adjustment of 0.5 percent of GDP per year is to be implemented so long as the deficit remains above 3 percent of GDP.
  - (d) The average net expenditure growth is less than the medium-term nominal output growth (expenditure criterion).
- Staff would strongly encourage achieving a structural primary adjustment (the deviation of the change of the structural primary balance from its change under the baseline) of 0.6 percent of GDP (or more) in 2024—the year before the start of the new EU fiscal framework.
- EC country-specific recommendations (May 24, 2023) limit the nominal increase in nationally-financed net primary expenditure in 2024 to 2 percent to ensure prudent fiscal policy.

### Debt sustainability, financing costs, and baseline macro assumptions
- Background and debt path:
  - Public debt expected to rise from 104 percent of GDP in 2022.
  - General government debt: 112 percent of GDP in 2020 (pandemic), then fell to 104 percent of GDP in 2022.
  - Under current policies, projection: 113 percent of GDP in 2028 and near 124 percent of GDP by 2032.
- Interest rates and financing needs:
  - Belgium’s 10-year bond yield rose from average 1.8 percent in 2022 to a monthly average of 3.5 percent in October 2023.
  - Risk premia (spreads over German bond yields) averaged 66 bps in January-October in 2023, up from 56 bps in 2022.
  - Long-term interest rates (benchmark 10-year bond yield) are projected to increase to 4 percent (average) by 2028, a rise of 230 bps from 2022 (average).
  - The effective rate is expected to gradually rise to 2.4. percent in 2028, an increase of 91 bps, from the historical low of 1.5 percent in 2022.
  - Debt service costs would rise from 14 percent of GDP in 2022 to 18 percent of GDP in 2028.
  - Gross financing needs are expected to increase from 16 percent of GDP in 2022 to around 21 percent of GDP in 2028.
- Baseline macro assumptions:
  - Growth projected to slightly slow to 1.0 percent of GDP in 2024 from 1.4 percent in 2023; expected to gradually recover to 1.2 percent potential over the medium term.
  - Headline inflation projected to increase to 4.4 percent in 2024 from 2.5 percent in 2023 before gradually declining and stabilizing just below 2 percent in the medium term.
- Baseline fiscal assumptions:
  - Overall fiscal deficit: 4.5 percent of GDP in 2023, widens to about 5.5 percent of GDP in 2028.
  - Aging assumed to add +0.3 ppt of GDP per year to deficits in the medium term.
  - Primary deficit remains elevated at 2.7 percent of GDP in 2028, well above its debt-stabilizing level of -0.4 percent and the pre-crisis projection of -1.4 percent (2025).

### Risk assessment and mitigating factors
- Belgium’s risk of sovereign distress is assessed as moderate.
- Mitigating factors:
  - Extended debt maturity profile: weighted-average maturity doubled to 10.9 years in 2022.
  - Large and stable domestic (and euro-resident) investor base.
  - About 83 percent of the public debt are claims on the federal government and all debt is denominated in euros.
  - Close to 45 percent of debt is held by residents, of which close to one-half by the central bank in 2022.
  - Scope for financing needs to be absorbed by domestic or wider euro-area financial institutions in time of stress.
- DSA and sustainability notes:
  - The mechanical signal indicates debt non-stabilization in the baseline: "Debt stabilization in the baseline No."
  - Commentary: Rising outstanding public debt, persistently elevated primary deficits, and rising interest costs with large financing needs imply moderate medium-term risk. Tailwinds from favorable debt dynamics will dissipate, requiring larger effort to stabilize debt while investment needs for green and digital transformation rise.

### Public debt structure and disclosure
- Consolidated gross debt of the federal government amounted to 83 percent of total public debt or 86 percent of GDP as of end-2022.
- Public debt is predominantly in domestic currency and marketable.
- The share held by the central bank increased to 20 percent of outstanding debt in 2022.
- Public debt is predominantly long-term, with an average maturity of 10.4 years in 2022.
- All public debt is governed by domestic law.

### Key recommendations from the 2023 FSAP (selected)
- Systemic risk assessment
  - Further strengthen the NBB’s Stress Testing Framework by integrating individual models, incorporating the IFRS 9 Approach into Credit Risk Modeling, and adopting advanced analytical methods to monitor ALM risks. (NBB, MT)
  - The NBB and the FSMA to establish a formal agreement for sharing data on investment funds’ portfolio holdings and supervisory data; FSMA to develop and adapt a stress test framework for the investment funds sector and integrate it into the NBB’s systemic risk assessment. (FSMA, NBB, C, MT)
  - Increase insurers’ resilience against macro-financial shocks by reducing dependence on lower tier capital and implementing liquidity stress tests and scenario analysis. (NBB, MT, NT)
- Macroprudential policy
  - In the medium-term, align the powers of the NBB to set macroprudential policy at the national level with its financial stability mandate by giving it full discretion over activation and calibration of all capital- and borrower-based instruments, without the need for government approval. In the near-term, activation and calibration of capital-based measures under CRD/CRR should be at the sole discretion of the NBB at the national level, without government approval. (Government, MT, NT)
  - For instruments requiring government intervention, strengthen accountability by publishing the factors weighing on policy considerations and decisions. (NBB, Government, NT)
  - Strengthen the NBB’s systemic risk assessment framework by closing data gaps and integrating data and quantitative tools with instrument design. (NBB, MT)
- Banking regulation and supervision
  - Strengthen banks’ corporate governance framework and supervisory expectations, in particular the supervisory function of the board. (NBB, NT)
  - Harmonize and ensure risk sensitivity of internal supervisory decision-making processes across departments. (NBB, NT)
  - Maintain adequate prudential supervisory staffing for LSI supervision; structurally collect consumer protection and conduct information to feed into the SREP and monitor banks’ own capital targets systematically. (NBB, NT)
- Insurance regulation and supervision
  - Finalise the legal framework of the natural catastrophe public-private partnership to enhance predictability of natural disaster related insurance cover. (MoF, NT)

*Source: IMF staff report (selected chapter and annexes).*

### 11. Provide guidance for the consistent valuation of mortgage loans.

### 11. Provide guidance for the consistent valuation of mortgage loans.

### Key recommendations (supervisory and market infrastructure)
- Recommendation 11: "Provide guidance for the consistent valuation of mortgage loans." Addressee: NBB. Timing: MT.
- Recommendation 12: "Contact third country supervisors to assess the basis for sharing and collecting information." Addressee: NBB. Timing: NT.
- Recommendation 13: "Engage Government to obtain legal powers to introduce regular complaints reporting by insurers." Addressees: Government/FSMA. Timing: I.
- Euroclear Bank (EB) recommendations:
  - 14: "EB should undertake substantial efforts to continue to improve the comprehensiveness and sufficiency of its IT and information security risk management, including cyber security risk, and more clearly and thoroughly defining and steering the management of these risks at the level of the Board as a top priority." Addressee: EB. Timing: NT.
  - 15: "Beyond relying on direct participant disclosure, EB should develop capacity for increasing the transparency with respect to the business of its direct participants’ clients." Addressee: EB. Timing: NT.
  - 16: "EB should put in place more robust testing of procedures related to business continuity and participant default procedures, including through simulation exercises." Addressee: EB. Timing: NT.

### Crisis management and financial safety net recommendations
- 17: "Finalize the Rules of Procedure of the NBB Resolution Board, giving also attention to its capacity as a crisis management committee. Finalize the national resolution handbook, with attention also to the resolution tools that are not part of the preferred resolution strategies, as well as the resolution powers." Addressee: NBB. Timing: I.
- 18: "Strengthen NBB’s internal coordination and cooperation for crisis management by establishing an interdepartmental cooperation mechanism with representatives from relevant departments at technical level for the NBB and prepare two bilateral cooperation agreements between the Resolution Unit and the Financial Stability and Supervisory Departments respectively." Addressee: NBB. Timing: I.
- 19: "Enhance the ELA framework by: i) seeking cooperation arrangements with other relevant National Central Banks for ELA involving a cross-border banking group; ii) developing policies to assess the prospective solvency and document the lines of action and responsibility of each actor in the event of ELA in resolution, subject to a credible resolution strategy; and iii) preparing internal planning and documenting how the NBB would consider ELA to NBFIs." Addressee: NBB. Timing: NT, I, NT.
- 20: "Enhance the Deposit Insurance System by: i) ensuring operational readiness to meet the target of 7 working days for pay-outs; ii) segregating the DIS fund from the national budget, increasing its target level and operationalizing the public backstop. Once segregated, develop an investment policy for the DIS Fund aligned with best international practices; and iii) start working on the operationalization of the paybox plus mandate." Addressee: Guarantee Fund. Timing: I, I, NT.

### Financial integrity recommendations
- 21: "Amend regulatory framework to make the NBB a member of the national committee on TF." Addressee: Relevant ministers. Timing: I.
- 22: "NBB to increase resources for AML/CFT supervision, enhance the sanctions framework and its implementation, and continue to exercise enhanced supervision over the payment institutions sector." Addressee: NBB. Timing: I.

### Annex VII — Avenues for Product Market Reform and Implications for Productivity: Introduction and context
- Belgium’s productivity performance:
  - "Belgium’s productivity growth has lagged the euro area average, leaving productivity levels below neighboring countries."
  - Belgium improved its position in the European Innovation Scoreboard during "2016-23" and is now among the best performers.
  - Despite innovation strengths, "productivity growth has remained below the euro area average over the past two decades."
- Policy context:
  - Labor supply constraints from population aging and rising capital costs imply productivity gains are needed to lift potential output.
  - Product market reform is identified as an avenue to increase total factor productivity (TFP).

### Product market diagnostic (OECD framework results and sector specifics)
- Method and indicators:
  - OECD product market regulation scores range from "0 (best) to 6 (worst)."
  - Belgium’s economy-wide indicator (2018 vintage) scored only "slightly better than the three worst-performing advanced European economies."
- Positive features:
  - "Distortive public ownership of firms is less widespread than in peers."
  - "Barriers to trade and investment are low."
- Weaknesses and sector highlights:
  - "Administrative burden on startups and barriers in service and network sectors are relatively high."
  - Retail sector and "professional occupations stand out as particularly restrictive."
  - Network industries: overall "largely in line with the average" but parts (air, rail, telecommunication) are strictly regulated and sometimes oligopolistic or monopolistic.
  - Professional services: "even more" stringent than other areas; exception: "civil engineers who face little occupational restrictions."
  - Retail: "product market constraints in the retail sector are among the tightest" in the group of European advanced economies, including "retail sale of medicines."

### Root causes and specific frictions
- State involvement and price controls:
  - "Based on HICP weights, about 12 percent of prices in Belgium were at least partially administered by the government in 2023."
  - "Nearly half of services prices were either regulated by the government or indexed to inflation in 2016."
- Administrative complexity and licensing:
  - A "sizeable number of permits and licenses required to open a business" creates barriers to entry.
  - Professional services face "rigid entry requirements, and strict conduct rules," affecting ownership, pricing, and advertising.
- Retail constraints:
  - Onerous regulations affect "opening hours, the establishment of new outlets, or the staffing of existing stores."
  - Pharmacies face "geographical restrictions on outlets" and limited ability of alternative providers to sell non-prescription medicines.

### Reform scope, recent measures, and potential gains
- Recent reforms and limited momentum:
  - Some changes since 2019: "law regulating accounting services was modified in 2019 so the profession can be joined after obtaining several years of relevant work experience, rather than by passing an examination only," and "the percentage of accountants required as directors or shareholders of an accounting firm has been reduced."
  - Measures in the Recovery and Resilience Plan (RRP) (submitted April 2021) such as "digitalizing and simplifying administrative procedures" are "estimated to have an only limited positive impact on product market efficiency."
- Potential impact of selected reforms:
  - Bringing product market regulation "in line with the average European advanced economy" could improve the OECD economy-wide indicator by "about a quarter."
  - Bringing it "in line with the top three performers" could improve the indicator by "more than half."
  - Empirical mapping to TFP: liberalizing Belgian product markets to the "average European advanced economy" could improve the level of total factor productivity by "about 3½ percent" in steady state; aligning with the "best three countries" could yield "around 7½ percent" in steady state.

### Policy recommendations to improve product market efficiency
- Improve transparency and regulatory communication:
  - "Establishing a repository of laws and regulations that are subject to near-term enactment, modification, reform or repeal."
  - "Strong(er) reliance on plain language" and a "publicly accessible registry of contacts" to strengthen transparency of interactions between public officials and lobby groups.
- Reduce administrative burden and streamline licensing:
  - "Keep a regular count of the number of permits needed to set up or run a company" to identify redundant procedures.
  - Create "a one-stop shop for entrepreneurs" to obtain guidance and documents to establish a firm.
- Liberalize professional services:
  - Continue and broaden "pathways to obtain employment" by recognizing "necessary work experience instead of exclusively relying on passing an entry examination."
  - Weaken or abolish rules preventing outside firm ownership (e.g., "requiring voting rights and ownership in a law firm being held by lawyers"), loosen "legally binding membership in a professional organization," and review "regulations granting exclusivity rights or placing limitations on advertising, pricing or inter-professional co-operation."
- Strengthen competition in network sectors and retail:
  - "Ensure greater independence of regulators from the industry" and "guarantee the administrative and analytical capacity to address market distortions."
  - Retail: liberalize "licensing, staffing or opening hours" to foster competition, innovation, and efficiency.
  - Pharmacies: reassess "geographical restrictions on outlets" and the limited ability of alternative providers to sell non-prescription medicines to improve access and price competition.

*Source: 1belea2023004 - 11. Provide guidance for the consistent valuation of mortgage loans.*

### References

### References

### Key citations
- Bouis, R. and R. Duval (2011): “Raising Potential Growth After the Crisis: A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond”, OECD Economics Department Working Papers No. 835, January.
- Bourlès, R., Cette, C., Lopez, J., Mairesse, J. and G. Nicoletti (2013): “Do Product Market Regulations in Upstream Sectors Curb Productivity Growth? Panel Data Evidence for OECD Countries”, The Review of Economics and Statistics, Volume 95, Issue 5, pp. 1750-1768, December.
- Hollanders, H. (2023): “European Innovation Scoreboard 2023 Methodology Report”, European Commission, June.
- Hollanders, H., Es-Sadki, N. and A. Khalilova (2023): “European Innovation Scoreboard 2023 Country Profile Belgium”, European Commission, June.
- Jonckheere, J. and H. Zimmer (2017): “Services Inflation: The Belgian Exception", NBB Economic Review, Issue 1, pp. 93-109, June.
- OECD (2022): “Assessment of the Links between the European National Recovery and Resilience Plans and the OECD Product Market Regulation Indicators”, June.
- Vitale, C., Bitetti, R., Wanner, I., Danitz, E. And C. Moiso: “The 2018 Edition of the OECD PMR Indicators and Database: Methodological Improvements and Policy Insights”, OECD Economics Department Working Papers No. 1604, April.

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### FUND RELATIONS (As of September, 2023)

### Membership Status
- Joined December 27, 1945; Article VIII.

### General Resources Account
- Quota: 6,410.70 SDR Million — 100.00 percent of Quota
- IMF’s Holdings of Currency (Holdings Rate): 4,636.66 SDR Million — 72.33 percent of Quota
- Reserve Tranche Position: 1,774.06 SDR Million — 27.67 percent of Quota
- Lending to the Fund: New Arrangements to Borrow 23.11 SDR Million

### SDR Department
- Net Cumulative Allocation: 10,467.71 SDR Million — 100.00 percent of Allocation
- Holdings: 10,855.65 SDR Million — 103.71 percent of Allocation

### Outstanding Purchases and Loans
- None

### Latest Financial Arrangements
- Stand-By: Date of Expiration Jun 19, 1952 to Jun 18, 1957 — Amount Approved 50.00 (SDR Million) — Amount Drawn 50.00 (SDR Million)

### Overdue Obligations and Projected Payments to Fund
- Forthcoming (SDR Million; based on existing use of resources and present holdings of SDRs):
  - 2023 Principal: (none listed)
  - 2023 Charges/Interest: -4.00
  - 2024 Charges/Interest: -15.89
  - 2025 Charges/Interest: -15.87
  - 2026 Charges/Interest: -15.88
  - 2027 Charges/Interest: -15.88
  - Total (per year shown): 2023 -4.00; 2024 -15.89; 2025 -15.87; 2026 -15.88; 2027 -15.88

### Implementation of HIPC Initiative
- Not applicable

### Safeguards Assessments
- Not applicable

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### Exchange Rate Arrangements
- The exchange rate arrangement of the euro area is free floating.
- Belgium participates in a currency union (EMU) with 19 other members of the EU and has no separate legal tender.
- The euro, the common currency, floats freely and independently against other currencies.
- Belgium has accepted the obligations under Article VIII, Section 2(a), 3, and 4 of the IMF’s Articles of Agreement, and maintains an exchange system free of multiple currency practices and restrictions on the making of payment and transfers for current international transactions, except for restrictions maintained solely for security reasons, which have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51).

---

### Last Article IV Consultation
- The last Article IV consultation was concluded on February 27, 2023.
- Belgium is on the standard 12-month consultation cycle.

---

### Capacity Development (CD)
- Since the 2022 Article IV consultation, the authorities undertook the IMF’s tax administration diagnostic assessment tool (TADAT) to have a baseline of revenue administration and government arrangements, and to inform further reforms.
- Belgium is an important financial supporter of IMF externally-financed capacity development (technical assistance and training), including country-specific and regional projects as well as IMF multi-partner CD vehicles (regional and thematic trust funds and CD centers).
- Belgium has also been a financial supporter of other IMF initiatives, including for low-income countries via the Poverty Reduction and Growth Trust and for debt relief.

---

### Financial Sector Assessment Program (FSAP) Participation
- Belgium: 2023 Financial System Stability Assessment
- The FSAP missions were held during March and June 2023.
- The findings were discussed with the authorities during the FSAP concluding meeting in June and the Article IV consultation in October.

*Prepared by: IMF European Department*

### 2023. They are being presented to the Executive Board for discussion alongside the Article IV staff

### Belgium: FSAP and Article IV material (December 6, 2023)

### Anti‑Money Laundering/Combating the Financing of Terrorism (AML/CFT)
- Belgium underwent a mutual evaluation of its AML/CFT regime by the Financial Action Task Force (FATF) in 2015.
- The FATF 2015 report noted that Belgium "has the core elements of a sound AML/CFT regime, although some elements are not yet fully in line with the 2012 FATF Recommendations."
- Following adoption of the mutual evaluation report, Belgium was placed in enhanced follow-up process.
- The latest report in September 2018 (third enhanced follow-up) noted progress in strengthening the framework, while indicating continued efforts are needed to fully implement the FATF Standard, including Recommendations 13 and 14 on corresponding banking, and money and value transfer services.
- The NBB has expanded its AML/CFT supervision and preparations are underway for the NBB to join the national committee on combating terrorist financing, in line with the Fund’s recommendation.

### Statistical Issues and Data Adequacy (as of November 3, 2023)
- General: Belgium’s economic and financial statistics are adequate for surveillance. The National Bank of Belgium (NBB) regularly publishes a full range of economic and financial data and provides calendar dates of main statistical releases.
- National Accounts:
  - Belgium adopted ESA 2010 in 2014; revisions released in September 2014 to comply with EUROSTAT requirements.
  - The NBB compiles national accounts; quarterly accounts are published within a lag of three months.
  - Shortcomings mainly related to export and import deflators, which are based on unit values rather than prices collected directly from exporters and importers.
- Price Statistics:
  - Consumer price index and industrial producer price index compiled according to best practices and published monthly.
  - Producer price indexes for services activities are disseminated quarterly.
- Government Finance Statistics:
  - Belgium compiles and publishes a complete set of general government accounts on an accrual basis (ESA 2010).
  - The NBB publishes annual and quarterly data on general government revenue, expenditure, net lending/borrowing; transactions in financial assets and liabilities and a financial balance sheet; and details on the consolidated gross debt.
- Monetary and Financial Statistics:
  - Data available in standardized report forms - SRF 1SR for central bank, SRF 2SR for other depository corporations.
  - Data disseminated monthly through the International Financial Statistics.
  - NBB reports some key series of the Financial Access Survey (FAS), including mobile and internet banking information.
- Financial Sector Surveillance:
  - Belgium reports FSIs to STA quarterly, including 16 core FSIs and eight encouraged FSIs for deposit takers, and nine encouraged FSIs for other sectors.

### Data Standards and Quality
- Belgium adheres to the IMF’s Special Data Dissemination Standard (SDDS) Plus since January 26, 2023, and publishes the data on its National Summary Data Page.
- The latest Annual Observance Report is available on the Dissemination Standards Bulletin Board.

### Key Publicly Accessible Websites (listed in source)
- NBB.Stat, http://stat.nbb.be/?lang=en
- National Statistics Institute, www.statbel.fgov.be
- National Bank of Belgium, www.nbb.be
- Federal Planning Bureau, www.plan.be
- High Council of Finance, https://www.highcounciloffinance.be
- Central Economic Council, www.ccecrb.fgov.be

### Table of Common Indicators Required for Surveillance (As of November 3, 2023) — selected latest observations and timing
- Exchange Rates: Date of latest observation: Nov. 2023; Date received: Nov. 2023; Frequency of Data/Reporting/Publication: D D D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation: Sep. 2023; Date received: Oct. 2023; Frequency: M M M
- International Investment Position: Date of latest observation: Q2:2023; Date received: Sep. 2023; Frequency: Q Q Q
- Reserve/Base Money: Sep. 2023 / Oct. 2023 / M M M
- Broad Money: Sep. 2023 / Oct. 2023 / M M M
- Central Bank Balance Sheet: Sep. 2023 / Oct. 2023 / M M M
- Consolidated Balance Sheet of the Banking System: Sep. 2023 / Oct. 2023 / M M M
- Interest Rates: Nov. 2023 / Nov. 2023 / D D D
- Consumer Price Index: Oct. 2023 / Nov. 2023 / M M M
- Revenue, Expenditure, Balance and Composition of Financing — General Government: Q2:2023 / Sep. 2023 / Q Q Q
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Sep. 2023 / Oct. 2023 / M M M
- Stock of Central Government Debt: Sep. 2023 / Oct. 2023 / M M M
- External Current Account Balance: Jun. 2023 / Sep. 2023 / M M M
- Exports and Imports of Goods and Services: Jun. 2023 / Sep.2023 / M M M
- GDP/GNP: Q3:2023 / Oct. 2023 / Q Q Q
- Gross External Debt: Q2:2023 / Sep. 2023 / Q Q Q

### Authorities’ Statement (Mr. Luc Dresse and Mr. Stijn Verhelst) — December 6, 2023

Growth and Inflation
- Belgian authorities note that growth and inflation performance in Belgium are expected to be better in 2023 than the euro area average, with output close to the pre-pandemic trend.
- European Commission Autumn 2023 forecast projects growth in Belgium to be 1.4% of GDP, compared to 1.2% of GDP for the euro area as a whole.
- European Commission expects inflation in Belgium to be 2.4% in 2023, among the lowest in the euro area.
- Authorities acknowledge resilience during COVID-19 and energy crises but note this resilience "came at a fiscal cost."

FSAP and Financial Sector Issues
- Authorities value FSAPs and will take FSAP recommendations into account.
- Recent global financial stress (sharp rise in interest rates, events in US regional banks, Credit Suisse) underscores need to improve resilience, regulation, supervision, and crisis management.
- Belgium’s financial sector profile: systemically important domestically owned banks, subsidiaries of foreign banks, integrated financial institutions, and important FMIs including Euroclear and Swift.
- Concerns about potential dilution of the Basel III framework and the incompleteness of the banking union; importance of maintaining sufficient capital and liquidity in systemically important subsidiaries until a common deposit insurance scheme, a fiscal backstop, and burden-sharing mechanism are in place.
- FSAP stress tests: confirm robustness of Belgian banks, insurers, and investment funds; main contagion risks stem from abroad.
- Banks: CET1 levels on average above European peers.
- Insurance sector: solvency coverage ratio more than twice regulatory requirements.
- Investment funds: widespread use of liquidity management tools and sufficient highly liquid assets to meet investors’ redemptions in a stress situation.
- NBB and FSMA have expanded data sharing; FSMA will implement staff’s recommendation to conduct its own liquidity stress tests for investment funds.
- NBB tightened macroprudential stance in July 2023 to bolster banking sector resilience; monitors commercial and residential real estate risks.
- Most mortgages in Belgium are at fixed rates.
- Authorities will consider FSAP recommendations regarding institutional framework for macroprudential policy; current macroprudential setup has allowed for effective decision-making with close NBB–federal government cooperation.
- Belgium has strengthened recovery and resolution framework and deposit insurance; Federal Parliament approved a law in mid-November 2023 improving various aspects of deposit insurance, including faster payouts.
- Euroclear Bank: authorities welcome finding of effective regulation, supervision and oversight against CPSS-IOSCO Principles for Financial Market Infrastructures; action plans will be followed up closely.
- Authorities will vigilantly monitor cyber risk and the impact of international sanctions and countermeasures imposed by Russia, and consider policies regarding frozen and immobilized Russian assets and interrelated windfall profits in coordination with European and international partners.

Fiscal Policy
- Authorities agree further sustained fiscal consolidation is needed. Pandemic and energy-related support measures will be fully unwound by end-2023.
- Federal government implemented consolidation measures amounting to € 1.2 billion to reduce the deficit in 2024, in line with the 2023-2026 stability program, although regional and community budgetary deficit is above the target.
- Authorities remain committed to achieving a nominal budget deficit below 3% of GDP by the end of 2026, as set out in the stability program.
- Continued step-by-step consolidation over 2025-2026, together with fiscal adjustments in federated entities, will be required; administrations taking office after the June 2024 elections will specify and implement measures.
- Staff’s recommendation for a balanced budget in the medium term is likely to be stricter than required under the new EU economic governance framework; authorities will engage with European partners and the Fund on medium-term objectives.
- Authorities fully agree that high-return public investment should be preserved; rising costs of aging will be taken into account.
- Revenue mobilization and spending efficiency are priorities; Belgium benefited from an IMF TADAT assessment which provided insights and opportunities for improvements.
- Authorities appreciate staff input on the tax reform blueprint prepared by the Minister of Finance; staff work will be relevant for the next federal government.
- Spending reviews: at the federal level, 2023 reviews include asylum and migration, cybersecurity, and justice; regions and communities are developing similar exercises and will continue spending reviews.
- Debt management: consistently prudent strategy mitigates financing risk amid rising interest rates.
  - Average maturity of federal government debt remains above ten years, with weighted average yield of around 1.8%.
  - In September 2023, Belgian retail investors subscribed for €22 billion to a one-year state bond; this operation stimulated higher returns on bank savings accounts and term deposits without disrupting the overall Belgian Debt Agency strategy.

Structural Policies
- Authorities agree reforms to product and labor markets will help address challenges.
- Measures to increase labor market flexibility, making it more attractive for employees and retirees to supplement income with additional salaried work; back-to-work programs enhanced.
- Federal government measures in July 2023 to reduce pension-related expenses include capping the increase in pensions for public sector employees.
- Authorities continue to monitor costs of aging and will take additional reforms where needed.
- Climate neutrality commitment by 2050:
  - Federal government has taken steps to stimulate green investments by companies since the Article IV mission.
  - Investments in offshore wind energy and coordination across government levels continue.
  - Agreed 10-year extension of operations of a portion of Belgium’s nuclear reactors strengthens energy security.
- European Recovery and Resilience Facility (RRF): modified plan endorsed by European Commission worth €5.3 billion in grants and loans, with 51% of available funds allocated to measures that support climate objectives; plan also emphasizes digital preparedness and social investments.

Next Steps
- Important events in the first half of 2024: elections and the Presidency of the Council of the EU.
- Government formations after the June 2024 elections will define priorities across government levels; elections held at federal and subnational level.
- As President of the Council of the EU in the first half of 2024, Belgium aims to focus on fostering the green and digital transition, promoting the EU’s open strategic autonomy and global competitiveness, and concluding key policy processes before the European Parliament elections of June 2024, including the Union’s economic governance review.
- Authorities look forward to continuing interaction with Fund staff.

*Source: Content unit 1belea2023004 (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023004.pdf_