## 1itaea2024001

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---

### Context and structural backdrop
- By Q1:2024, real GDP had risen to more than 4½ percent above its pre-COVID level and exceeded the level that prevailed 15 years ago prior to the global financial crisis (GFC).
- Recovery drivers: robust expansion of services (including tourism) and tax credit-boosted construction (Superbonus), despite subdued manufacturing, especially in energy-intensive segments.
- Policy supports: fiscal, monetary, and financial policies helped avoid a double-dip recession post-GFC but could overstate underlying resilience while keeping public debt very high.
- Demographic and productivity headwinds:
  - Secular decline in fertility since the 1960s, with a collapse in births since the GFC, expected to accelerate decline in the national working-age population.
  - Low employment and labor force participation rates—particularly of women—and weak educational outcomes risk amplifying skill and labor shortages.
  - Labor productivity has stalled in recent decades, complicating adaptation to geoeconomic fragmentation and rapid diffusion of artificial intelligence.

### Recent developments and macro dynamics
- Growth and components:
  - Activity expanded by 0.9 percent in 2023 and 0.7 percent (year-on-year) in Q1:2024, down from 4 percent in 2022.
  - Private consumption growth decelerated to 1.2 percent in 2023.
  - Gross fixed capital formation (GFCF) slowed to a 1 percent contribution to growth in 2023.
  - Drawdown of inventories subtracted 1.3 percentage points from growth in 2023.
- Inflation and prices:
  - Harmonized inflation fell to 0.9 percent (year-on-year) in June 2024 (0.2 percent month-on-month).
  - Core inflation reached 2.1 percent (year-on-year).
  - The GDP deflator accelerated to 5.3 percent in 2023, moderating to 2.5 percent year-on-year in Q1:2024.
- Labor market:
  - Employment rate rose to an all-time high of 62¼ percent.
  - Recruiting difficulties impacted 45 percent of business revenue in 2023 (up 4 percentage points from a year earlier).
  - Foreign workers accounted for nearly 20 percent of new hires (survey respondents).
  - Subsidized hiring and permanent-contract conversions cost 1¼ percent of GDP annually and benefit 10 percent of total employment, mainly in the South.
  - Cuts in social contributions and income taxes for lower-income workers carry an annual fiscal cost of ¾ percent of GDP.
- External sector:
  - Energy import bill dropped by 2½ percent of GDP in 2023, improving the current account by 2 percentage points to a surplus of ½ percent of GDP.
  - Income payments rose by 1 percentage point owing to higher interest expenditure on the Bank of Italy’s Target 2 liabilities.
  - Target 2 liabilities dropped by 9 percent of GDP during 2023 and early 2024, returning to 25 percent of GDP.
  - Staff assesses the external position in 2023 to have been weaker than the level implied by medium-term fundamentals and desirable policies.
- Financial conditions and credit:
  - Financial conditions eased but remain tight by historical standards.
  - Bank credit to the private sector fell markedly; loans to nonfinancial corporates dropped by 10 percent from their August 2022 peak.
  - The negative BIS credit gap, which had narrowed during pandemic and energy-shock support, is now rewidening.
  - Private sector indebtedness has declined and remains low relative to the EU average, offset by a larger increase in public sector debt.

### The Superbonus, NRRP, and investment dynamics
- Superbonus effects:
  - Generous Superbonus tax credits materially boosted residential renovation investment and contributed to recent investment growth.
  - A May 2024 law abolishing transferability and invoice discounting of new housing tax credits is expected to bring an early end to demand for the scheme, pulling renovation spending forward and avoiding a large dip in growth in subsequent years.
- NRRP and investment composition:
  - NRRP-related investment in equipment, machinery, and non-residential construction has a larger multiplier than the Superbonus and is expected to broadly offset the drop in Superbonus-related residential investment as NRRP ramps up.

### Outlook and scenarios
- Baseline growth projections:
  - Growth is projected to ease to 0.7 percent in 2024, pick up to 0.9 percent in 2025, and moderate to 0.6 percent in 2026.
  - A temporary dip to 0.4 percent is anticipated for 2027 on completion of the NRRP the previous year; thereafter growth expected to return to potential of 0.8 percent.
- Inflation and wages:
  - Headline inflation projected to fall to 1.3 percent, on average, in 2024 and return to the 2 percent target in 2025.
  - Employment costs forecast to grow more briskly on faster increases in negotiated wages; firms expected to absorb much of the increase from expanded profits.
- Upside scenarios:
  - Stronger-than-forecast growth if NRRP implementation crowds in additional private investment.
  - Higher-than-anticipated tourism demand.
- Downside risks (external and domestic):
  - Intensification of regional conflicts, commodity price volatility, spillovers from slowdowns in major trading partners, deepening geoeconomic fragmentation, extreme climate events, higher-than-expected interest rates, incomplete NRRP spending, and still-large fiscal deficits with high-and-rising public debt.

### Fiscal background, projections, and uncertainty
- 2020–23 performance:
  - Primary deficits averaged 4.8 percent of GDP during 2020-23 versus a pre-COVID average primary surplus of 1.5 percent of GDP.
  - Public debt ratio declined by 18 percentage points from a peak of 155 percent of GDP in 2020 to 137.3 percent in 2023.
  - Cumulative take-up of Superbonus exceeded €200 billion (10 percent of GDP); cumulative €30 billion in other tax credits to support purchases of capital goods by firms.
- Tax-credit accounting note:
  - Debt reduction would be nearly halved if approved tax credits had been simultaneously reflected in debt.
  - New law: Superbonus tax credits issued since the beginning of 2024 must be claimed in equal annual installments over 10 years, slowing the increase in debt.
- Staff baseline fiscal assumptions and uncertainty:
  - Staff assumes reversal of cuts to employees’ income tax and social security contributions introduced in H2:2023 as currently legislated for 2025-27.
  - Ongoing claims of some 240 billion euros of tax credits concentrated during 2024-27 contribute to resumption of an upward trajectory of public debt from 2024.
- Selected fiscal projection figures (percent of GDP), overall balance (2023–2027):
  - Authorities (Unchanged policies): -7.4, -4.3, -4.6, -4.0, -3.2.
  - Authorities (Current legislation): -7.4, -4.3, -3.7, -3.0, -2.2.
  - Staff baseline overall balance: -7.4, -4.6, -4.1, -3.7, -3.3.
- Public debt projections (percent of GDP):
  - Authorities (Current legislation): 137.3, 137.8, 138.9, 139.8, 139.6 for 2023–2027.
  - Staff baseline: 137.3, 139.1, 140.6, 142.1, 143.6 for 2023–2027.
- Staff sovereign stress assessment:
  - Overall risk of sovereign stress under the baseline: moderate once mitigating factors are considered; fiscal space judged at risk.
  - Mechanical signal for the medium-term horizon: high.
  - Risks high at the long horizon due to aging-related costs and shrinking working-age population.

### Fiscal policy recommendations and priorities
- Urgency and target:
  - A primary surplus of around 3 percent of GDP is needed to ensure a gradually declining debt ratio.
  - Frontloading adjustment to reach close to that goal by 2025-26 is advised to limit the cost to growth.
- Near-term actions to limit growth costs:
  - Faster roll back of inefficient and temporary measures, including terminating remaining grants for housing renovation, measures to compensate for high inflation and hiring subsidies.
  - Save upwardly-revised forecasted tax revenues.
  - Simultaneous ramp up of NRRP-related spending (loan-financed component) and use of currently supportive external environment to cushion impact on activity.
  - Allow automatic stabilizers to operate while continuing consolidation and structural reforms.
- Longer-term priorities and reallocations:
  - Replace short-term wage support with productivity-boosting measures; redirect fiscal resources toward education and skill upgrading.
  - Control pension spending pressures:
    - Continued phasing in of a notional defined-contribution scheme and increasing statutory retirement age (currently 67) in line with life expectancy.
    - Temporary cuts to indexation of high pensions will yield cumulative savings relative to a counterfactual.
    - Pension spending still expected to rise by about 2 percentage points of GDP over the next decade, peaking in the late 2030s before declining rapidly.
  - Reform the tax system:
    - Italy’s tax expenditures cost around 6-7 percent of GDP in foregone annual revenue.
    - Update real estate valuations in the cadastre and expand property tax to primary residences.
    - Continue improving tax compliance and avoid repeated tax amnesties.
  - Strengthen oversight and control of tax credits:
    - Replace automatic authorization with a fiscal gatekeeper that evaluates and authorizes individual requests within program ceilings.
    - Enable real-time monitoring of tax credit take-up and rescind approvals if ex-post compliance with program goals is not fully met.
    - Establish such a system for tax credits for green and digital investments (Transition 5.0) prior to launch.
  - Public guarantees:
    - Publicly-guaranteed loans should not substitute for on-budget spending.
    - Loan guarantees should be prudently managed, centrally monitored, and fully accounted within the medium-term fiscal framework.
    - Keep the stock of outstanding loan guarantees on a firm downward path from the exceptional crisis-period level.

### Financial sector resilience and macroprudential stance
- Key indicators and developments:
  - Banks’ net interest income and profits rose to very high levels on rapid pass-through of policy rates to loan rates.
  - NPL ratio dropped sharply over the past decade; rose marginally in 2023 mainly due to decline in loan stock.
  - Around half the €200 billion of COVID-era loan guarantees issued by end-2022 had been repaid by late-2023.
  - Banks have repaid nearly 90 percent of their pandemic-era borrowing from the ECB (TLTROs).
  - Share of Italian public securities in banks' total assets declined to 9.3 percent in April 2024.
  - BdI announced activation of a releasable systemic risk buffer (SyRB) to reach 1 percent of domestic credit and counterparty risks, phased in during 2024-25.
- Staff recommendations:
  - Use current high bank profits to create macroprudential space; require banks to lock in modest part of capital headroom.
  - Ensure loan classification under IFRS9 is forward looking; discourage replacing borrower default probability with that of guarantor.
  - Ensure adequate long-term liabilities in funding mix.
  - Strengthen mechanisms for debt workouts, disposals, and speed up judicial procedures to reduce NPL warehousing and improve recovery rates.
  - Focus continued supervisory attention on less significant banks (LSIs); encourage consolidation or mutual cooperation where appropriate.

### NRRP execution, successor program, and structural policy priorities
- NRRP progress and composition:
  - NRRP backed by 9 percent of GDP in EU funding; Italy received around €100 billion by end-2023, half its total allocation.
  - Spending of disbursed funds has picked up; some 2.2 percent of GDP has been spent so far.
  - Calls for tender published for about two thirds of projects by value requiring tenders; work initiated on about half.
  - Mid-2026 deadline for large projects is challenging due to administrative capacity, permitting, and skilled labor shortages; some 10 percent of projects assessed as having severe delays.
- Strategic priorities for successor plan:
  - Key research and innovation; education system reform; improving the business climate; infrastructure priorities to improve transport connectivity and make Italy a renewable-energy hub from North Africa.
- Staff structural recommendations:
  - Shift policy focus from near-term demand stimulus to market-friendly support for medium- and long-term growth.
  - Prioritize education reform, skill upgrading, diffusion of frontier technologies, and closing investment gaps.
  - Deepen capital markets, attract new financing forms, and complement bank credit and retained earnings with additional external financing for micro and small firms.
  - Limit industrial policy to targeted, time-bound interventions with rigorous cost-benefit analysis; guide privatization by efficiency considerations.

### Demographics, female labor participation, and work-family compatibility
- Background:
  - Italy lags peers in fertility and female labor force participation with a stark North-South difference.
  - Number of births at a historic low; motherhood imposes a large career cost on women (motherhood earnings penalty of 50 percent on average).
  - Public childcare availability—especially for very young children—well below the EU average; Barcelona target of 33 percent coverage for early childhood services not met in Southern provinces even after NRRP.
- Staff recommendations:
  - Expand public childcare facilities and ensure opening times compatible with regular working hours.
  - Remedy shortages in childcare positions in the South and increase elder care support.
  - Remove policy-induced disincentives to formal female employment (e.g., tax credits for dependent spouses, minimum pension contribution requirements that penalize employment gaps).
  - Make parental leave benefits more gender neutral.
  - Use micro level surveys to identify binding constraints and improve targeting of fiscal transfers and tax incentives (currently about 1 percent of GDP).

### Box: The Tale of the Superbonus — key findings and impacts
- Superbonus 110 scheme (introduced 2020) allowed households to claim a tax credit of 110 percent on expenses for retrofitting properties.
- Design issues that raised fiscal cost and lowered economic benefit:
  - 110 percent subsidy rate led to over-invoicing and cooperative rent seeking.
  - Transferability and invoice discounting enabled households with liquidity constraints to benefit but large discounts reduced funds available for renovations.
  - Inadequate oversight and control: authorization largely automatic, limited monitoring, data lag, and fraud with credits granted without supporting renovations.
- Fiscal cost and take-up:
  - Total take-up reached nearly €220 billion (about 10½ percent of GDP) as of Q1:2024, far above initial estimate of €33 billion.
  - Real value of fiscal resources expended for housing tax credits (adjusted for the increase in the GDP deflator) was around €190 billion, implying a real fiscal multiplier of ¼ -⅓.
  - Real gross value added in construction increased by a cumulative €50 billion during H1:2021 and Q1:2024 relative 2019.
- Policy changes:
  - Subsidy rate on new take-up lowered to 70 percent in 2024, with a planned reduction to 65 percent in 2025; the scheme is currently scheduled to end thereafter.
  - May 2024 law abolished transferability and invoice discounting of new tax credits, imposed restrictions on existing credits, and extended claim period from 4-5 years to 10 years.

### Risk assessment highlights (Annex I and Annex II key figures)
- Global and domestic risks with Relative Likelihood = High include Commodity price volatility, Intensification of regional conflicts, and Deepening geoeconomic fragmentation.
- Public debt trajectory (percent of GDP) — baseline (Annex II):
  - Actual 2023: 137.3; 2024: 139.1; 2025: 140.6; 2026: 142.1; 2027: 143.5; 2028: 143.8; 2029: 143.8; 2030: 143.6; 2031: 143.4; 2032: 143.5; 2033: 143.7.
- Memo items:
  - Real GDP growth (percent): 2023: 0.9; 2024: 0.7; 2025: 0.9; 2026: 0.6; 2027: 0.4; 2028–2032: 0.8 (each year listed).
  - Inflation (GDP deflator; percent): 2023: 5.3; 2024: 2.4; 2025: 2.1; 2026: 2.0; 2027–2032: 2.0 (each year listed).
  - Effective interest rate (percent): 2023: 2.9; 2024: 3.2; 2025: 3.2; 2026: 3.4; 2027: 3.6; 2028: 3.7; 2029: 3.8; 2030: 3.8; 2031: 3.8; 2032: 3.9; 2033: 4.0.
- Gross financing needs (percent of GDP): 2023: 27.0; 2024: 22.5; 2025: 22.3; 2026: 22.7; 2027: 18.1; 2028: 18.8; 2029: 20.5; 2030: 21.7; 2031: 24.1; 2032: 23.4; 2033: 23.2.

### Data adequacy and implementation progress
- Data adequacy: "The data provided to the Fund is adequate for surveillance."
- NRRP implementation status:
  - All milestones and targets up to and including those for 2023 have been successfully met; 2024 objectives are on track.
  - Italy received around €100 billion by end-2023, half its total allocation.
  - Some procedural improvements: centralization of authority, streamlining of tendering procedures, RePower EU revision strengthened anti-fraud controls.
- Implementation of key 2020 FSAP recommendations:
  - BdI strengthened Pillar 2 Guidance for LSIs; P2G more than doubled over 2020-2022.
  - Legal and procedural reforms in insolvency and out-of-court workouts introduced (e.g., Decree law 118/2021; legislative decree 14/2019).
  - Macroprudential toolkit expanded; legislative Decree 207/2023 established national macroprudential authority in force since 11th of January 2024.
  - On 26 April 2024, BdI announced activation of a SyRB equal to 1.0 per cent of domestic exposures weighted for credit and counterparty risks.

### Authorities’ views and priorities
- Authorities see growth prospects more positive than staff forecasts (Finance Ministry: 1.0 percent in 2024, 1.2 percent in 2025, 1.1 percent in 2026).
- Authorities view Italy’s external position as broadly in line with fundamentals and desirable policies and note NIIP moved to a 7 percent of GDP net creditor position.
- Government intends to present a Medium-Term Fiscal Structural Plan aligned with the European Commission reference trajectory and new EU fiscal rules, keeping public investment at least at the level delivered by the NRRP.
- Authorities emphasize balancing the pace of adjustment with preserving room for growth-enhancing investments and reforms; they consider a more gradual consolidation over 4-7 years to reach a primary surplus around 3 percent of GDP as adequate.

*Source: IMF staff report content unit 1itaea2024001.*

### 1. The Tale of the Superbonus—Four Years After ________________________________________________ 30

### 1. The Tale of the Superbonus—Four Years After

### Context and structural backdrop
- By Q1:2024, real GDP had risen to more than 4½ percent above its pre-COVID level and exceeded the level that prevailed 15 years ago prior to the global financial crisis (GFC).
- Recovery drivers: robust expansion of services (including tourism) and tax credit-boosted construction (Superbonus), despite subdued manufacturing, especially in energy-intensive segments.
- Policy supports: fiscal, monetary, and financial policies helped avoid a double-dip recession post-GFC but could overstate underlying resilience while keeping public debt very high.
- Demographic and productivity headwinds:
  - A secular decline in fertility since the 1960s, with a collapse in births since the GFC, is expected to accelerate the decline in the national working-age population.
  - Low employment and labor force participation rates—particularly of women—and weak educational outcomes risk amplifying skill and labor shortages.
  - Labor productivity has stalled in recent decades, complicating adaptation to geoeconomic fragmentation and rapid diffusion of artificial intelligence.

### Recent developments and macro dynamics
- Growth and components:
  - Activity expanded by 0.9 percent in 2023 and 0.7 percent (year-on-year) in Q1:2024, down from 4 percent in 2022.
  - Private consumption growth decelerated to 1.2 percent in 2023, supported by strong job growth, a decline in the saving rate, and tax and social security cuts.
  - Gross fixed capital formation (GFCF) slowed to a 1 percent contribution to growth in 2023, with earlier boosts from Superbonus tax credits, tax credit-financed equipment purchases, and increased NRRP utilization.
  - Drawdown of inventories subtracted 1.3 percentage points from growth in 2023.
- Inflation and prices:
  - Harmonized inflation fell to 0.9 percent (year-on-year) in June 2024 (0.2 percent month-on-month) driven by energy deflation.
  - Core inflation reached 2.1 percent (year-on-year).
  - The GDP deflator accelerated to 5.3 percent in 2023, moderating to 2.5 percent year-on-year in Q1:2024.
- Labor market:
  - Employment rose with real activity, raising the employment rate to an all-time high of 62¼ percent and lowering unemployment and inactivity rates, though inactivity remains well above EU averages.
  - Employment gains concentrated in labor-intensive services and Superbonus/NRRP-boosted construction.
  - Recruiting difficulties impacted 45 percent of business revenue in 2023 (up 4 percentage points from a year earlier).
  - Foreign workers accounted for nearly 20 percent of new hires (survey respondents).
  - Subsidized hiring and permanent-contract conversions cost 1¼ percent of GDP annually and benefit 10 percent of total employment, mainly in the South.
  - Cuts in social contributions and income taxes for lower-income workers carry an annual fiscal cost of ¾ percent of GDP.
  - Negative wage gaps with other large euro area countries have widened since the turn of the century.
- External sector:
  - A 2½ percent of GDP drop in the energy import bill in 2023 led to a 2 percentage point improvement in the current account, which reached a surplus of ½ percent of GDP.
  - Income payments rose by 1 percentage point owing to higher interest expenditure on the Bank of Italy’s Target 2 liabilities.
  - Target 2 liabilities dropped by 9 percent of GDP during 2023 and early 2024, returning to a pre-pandemic level of 25 percent of GDP.
  - Staff assesses the external position in 2023 to have been weaker than the level implied by medium-term fundamentals and desirable policies.
- Financial conditions and credit:
  - Financial conditions have eased but remain tight by historical standards.
  - Sovereign yields and bank loan rates rose sharply with global monetary tightening; spreads over German bunds eased in 2024 on renewed retail and nonresident demand.
  - Bank credit to the private sector fell markedly; loans to nonfinancial corporates dropped by 10 percent from their August 2022 peak.
  - The negative BIS credit gap, which had narrowed during pandemic and energy-shock support, is now rewidening.
  - Private sector indebtedness has declined and remains low relative to the EU average, offset by a larger increase in public sector debt.

### The Superbonus, NRRP, and investment dynamics
- Superbonus effects:
  - Generous Superbonus tax credits materially boosted residential renovation investment and contributed to recent investment growth.
  - A May 2024 law abolishing transferability and invoice discounting of new housing tax credits is expected to bring an early end to demand for the scheme, pulling renovation spending forward and avoiding a large dip in growth in subsequent years.
- NRRP and investment composition:
  - NRRP-related investment in equipment, machinery, and non-residential construction has a larger multiplier than the Superbonus and is expected to broadly offset the drop in Superbonus-related residential investment as NRRP ramps up.

### Outlook and risks
- Growth projections:
  - Growth is projected to ease to 0.7 percent in 2024, pick up to 0.9 percent in 2025, and moderate to 0.6 percent in 2026.
  - A temporary dip in growth to 0.4 percent is anticipated for 2027 on completion of the NRRP the previous year, though the new EU governance requirement that nationally-financed public investment be maintained will limit the drop.
  - Thereafter, growth is expected to return to its potential of 0.8 percent as headwinds from the shrinking working-age population are largely offset by continued absorption of foreign workers.
- Inflation and wages:
  - Headline inflation is projected to fall to 1.3 percent, on average, in 2024 and return to the 2 percent target in 2025.
  - Employment costs are forecast to grow more briskly on faster increases in negotiated wages, partly compensating for the expiration of temporary budget-financed cuts in social security contributions and income taxes.
  - Firms are expected to absorb much of the increase in employment costs from expanded profits, keeping core inflation and the GDP deflator on a generally declining path.

*Source: IMF staff summary of "1. The Tale of the Superbonus—Four Years After."*

### 9.      While positive surprises could materialize, growth risks are tilted to the downside

### 9.      While positive surprises could materialize, growth risks are tilted to the downside

### Growth outlook and risks
- Upside scenarios:
  - Stronger-than-forecast growth if successful implementation of the NRRP crowds in additional private investment.
  - Higher-than-anticipated tourism demand.
- Downside external risks:
  - Intensification of regional conflicts generating new supply shocks and commodity price volatility that limited fiscal space may be unable to accommodate.
  - Spillovers from sharp slowdowns in major trading partners.
  - Deepening geoeconomic fragmentation.
  - Extreme climate events.
  - Increased policy uncertainty from recent and upcoming elections in the EU and at global levels.
  - Significantly higher-than-expected interest rates weakening business confidence and triggering repricing of Italian government bonds, reviving sovereign-bank-corporate linkage concerns.
- Downside domestic risks:
  - Inability to complete NRRP spending and effectively implement reforms.
  - Still-large fiscal deficits and high-and-rising public debt eroding investor confidence and further weakening public finances.

### Authorities’ views on growth and external position
- Growth prospects:
  - Authorities see prospects as more positive than staff.
  - Finance Ministry forecasts: 1.0 percent in 2024, 1.2 percent in 2025, and 1.1 percent in 2026.
  - Bank of Italy forecast for 2024: 0.6 percent (0.8 percent without calendar-day adjustment—the basis for the Ministry’s forecast).
  - Authorities expect continued momentum after Superbonus and NRRP conclusions as previously crowded-out projects are implemented and public investment remains high.
  - Labor force participation has been raised by policies, but population aging will drag on employment and reduce potential growth from the current 1.2 percent.
- External position:
  - Authorities view Italy’s external position as broadly in line with fundamentals and desirable policies.
  - They dispute staff assessments on technical grounds: (i) the steadily-increasing current account norm; and (ii) insufficient account of changes in investment income and NRRP-related capital grants.
  - Italy’s NIIP moved from a net external liability position of 20 percent of GDP (post-GFC) to a 7 percent of GDP net creditor position.

### Fiscal background and recent developments
- 2020–23 fiscal performance:
  - Primary deficits averaged 4.8 percent of GDP during 2020-23 versus a pre-COVID average primary surplus of 1.5 percent of GDP.
  - Tax collections rose by nearly 1 percent of GDP from improved tax compliance.
  - Public debt ratio declined by 18 percentage points from a peak of 155 percent of GDP in 2020.
- 2023 specifics:
  - Headline deficit decreased to 7.4 percent of GDP from 8.6 percent in the previous year.
  - Capital transfers ballooned to 5.6 percent of GDP (from a pre-COVID average of 0.7 percent and 4.6 percent in 2022), dominated by the Superbonus and other housing tax credits.
  - Cumulative take-up of Superbonus exceeded €200 billion (10 percent of GDP).
  - Cumulative €30 billion in other tax credits to support purchases of capital goods by firms.
- Tax-credit accounting note:
  - Debt reduction would be nearly halved if approved tax credits had been simultaneously reflected in debt.
  - Based on new law, Superbonus tax credits issued since the beginning of 2024 must be claimed in equal annual installments over 10 years, slowing the increase in debt.

### Staff baseline projections and fiscal uncertainty
- Sources of fiscal uncertainty:
  - New EU fiscal framework effective from 2025; updated fiscal plans for 2025-29 expected only in late September.
  - Law tightening restrictions on Superbonus tax credits (approved end-May, 2024) may still allow transferability of some tax credits.
- Staff baseline assumptions:
  - Further fiscal consolidation in 2024 mainly due to a drop in demand for new tax credits and termination of remaining energy measures, partly offset by a higher interest bill and increased NRRP loan-financed public investment.
  - For 2025-27, staff assumes reversal of cuts to employees’ income tax and social security contributions introduced in H2:2023 as currently legislated.
  - Forecast path converges over time to the “unchanged policies” scenario given uncertainty about authorities’ medium-term plans.
  - Ongoing claims of some 240 billion euros of tax credits concentrated during 2024-27 contribute to resumption of an upward trajectory of public debt from 2024.
- Selected fiscal projection figures (percent of GDP):
  - Overall balance (Authorities, Unchanged policies): -7.4, -4.3, -4.6, -4.0, -3.2 for 2023–2027.
  - Overall balance (Authorities, Current legislation): -7.4, -4.3, -3.7, -3.0, -2.2 for 2023–2027.
  - Staff baseline overall balance: -7.4, -4.6, -4.1, -3.7, -3.3 for 2023–2027.
  - Primary balance (Authorities, Current legislation implied): 1/-3.6, -0.4, -0.6, 0.1, 1.2 (note: 1/ "Unchanged policies, implied" are calculated using the overall balance under "unchanged policies" and interest payments from the "current legislation.")
  - Primary balance (Authorities, Current legislation): -3.6, -0.4, 0.3, 1.1, 2.2 for 2023–2027.
  - Primary balance (Staff baseline): -3.6, -0.3, 0.3, 0.8, 1.2 for 2023–2027.
  - Public debt (Authorities, Current legislation): 137.3, 137.8, 138.9, 139.8, 139.6 for 2023–2027.
  - Public debt (Staff baseline): 137.3, 139.1, 140.6, 142.1, 143.6 for 2023–2027.

### Staff assessment of sovereign stress and fiscal space
- Risk assessment:
  - Staff assesses Italy’s overall risk of sovereign stress under the baseline as moderate once mitigating factors are considered, and judges fiscal space is at risk.
  - Mechanical signal for the medium-term horizon is high due to a high and rising public debt path, high terminal ratio, and sizable gross financing needs.
  - Risks are high at the long horizon because public debt is expected to increase sharply with aging-related costs amid a shrinking working age population.
- Mitigating factors:
  - (i) ECB’s toolkit against unwarranted, disorderly market dynamics.
  - (ii) Relatively long average maturity of government debt.
  - (iii) Ongoing retail appetite for government bonds.
  - (iv) Possible further upward revisions to historical national accounts.
- Change from 2023 Article IV report:
  - Higher deficits and larger stock-flow adjustments owing to greater uptake of various tax credits have raised the debt path and lifted the medium-term mechanical signal from moderate to high.

### Fiscal policy recommendations and priorities
- Urgency and target:
  - High medium- and long-term sovereign debt risks make fiscal adjustment pressing.
  - A primary surplus of around 3 percent of GDP is needed to ensure a gradually declining debt ratio.
  - Frontloading adjustment to reach close to that goal by 2025-26 is advised to limit the cost to growth.
- Recommended near-term actions to limit growth costs:
  - Faster roll back of inefficient and temporary measures, including terminating remaining grants for housing renovation, measures to compensate for high inflation and hiring subsidies.
  - Save upwardly-revised forecasted tax revenues.
  - Simultaneous ramp up of NRRP-related spending (loan-financed component) and use of currently supportive external environment to cushion impact on activity.
  - Allow automatic stabilizers to operate while continuing consolidation and structural reforms.
- Longer-term priorities and reallocations (examples and rationale):
  - Replace short-term wage support with productivity-boosting measures; redirect fiscal resources toward education and skill upgrading.
  - Control pension spending pressures:
    - Continued phasing in of a notional defined-contribution scheme and increasing statutory retirement age (currently 67) in line with life expectancy.
    - Temporary cuts to indexation of high pensions will yield cumulative savings relative to a counterfactual.
    - Pension spending still expected to rise by about 2 percentage points of GDP over the next decade, peaking in the late 2030s before declining rapidly.
    - Avoid actuarially-costly early retirement schemes and large supplements to low pensions based on self-declarations.
  - Reform the tax system:
    - Italy’s tax expenditures cost around 6-7 percent of GDP in foregone annual revenue.
    - Rationalizing tax expenditures would broaden the base, increase progressivity, reduce complexity, and could allow some lowering of tax rates while reinforcing revenue collection.
    - Update real estate valuations in the cadastre and expand property tax to primary residences.
    - Continue improving tax compliance and avoid repeated tax amnesties.
  - Strengthen oversight and control of tax credits:
    - Replace automatic authorization with a fiscal gatekeeper that evaluates and authorizes individual requests within program ceilings.
    - Enable real-time monitoring of tax credit take-up and rescind approvals if ex-post compliance with program goals is not fully met.
    - Establish such a system for tax credits for green and digital investments (Transition 5.0) prior to launch.
- Public guarantees and loan guarantees:
  - Publicly-guaranteed loans should not substitute for on-budget spending.
  - Loan guarantees should be prudently managed, centrally monitored, and take full account of contingent liabilities within the medium-term fiscal framework.
  - Keep the stock of outstanding loan guarantees on a firm downward path from the exceptional crisis-period level.

### Medium-term budgeting and fiscal governance
- Current practice issues:
  - Year-by-year use of incremental fiscal space from nominal GDP growth encourages spending rather than saving overperformance and does not treat fiscal policy as a strategic development tool.
- Recommended reforms:
  - Adopt a fully-fledged multi-year fiscal plan as required under the new EU governance framework to reconcile medium-term priorities with available resources.
  - Use realistic macroeconomic and fiscal forecasts and implement robust monitoring and control systems to limit deviations from agreed medium-term targets.
  - Align spending responsibilities with funding availability at the subnational level.
  - Ensure public sector wage bill management and careful treatment of publicly-guaranteed loans within the fiscal framework.

_Italic: Source — 1itaea2024001 - 9.      While positive surprises could materialize, growth risks are tilted to the downside_

### 18.      Fiscal policy should strike an appropriate balance between the pace of adjustment and

### 18.      Fiscal policy should strike an appropriate balance between the pace of adjustment and 

### Fiscal policy stance and public debt
- Italy has a good track record of running high primary surpluses and—excluding claims of Superbonus tax credits—the debt ratio will be kept on a rapid downward path.
- The Superbonus has had a severe although temporary effect on public finances; its impact on the cash borrowing requirement will fade away after 2027.
- Most temporary crisis support measures have been withdrawn.
- Recommendation: Reducing public debt more gradually than proposed by staff, to reach a primary surplus of around 3 percent of GDP in 4-7 years under the new EU governance framework, is adequate.
- Rationale:
  - Based on past experience, faster adjustment could have sizable costs for activity, even with the growth boost from NRRP investments and reforms.
  - More gradual adjustment would allow policymakers time to identify priorities and weigh choices.
  - The pace of consolidation to be delivered in the new plan and the medium term approach built into the new European Economic Governance Framework will soon establish a virtuous cycle of lower debt and lower borrowing costs.
- Fiscal space and efficiency:
  - Scope exists to improve spending efficiency and further narrow remaining tax gaps.
  - Any future reduction in tax rates will be compensated by broadening the tax base.
  - Reducing the stock of contingent liabilities close to pre-pandemic levels will de-risk the public sector while also creating room to crowd in new private financing to boost investment and growth.

### Protecting financial sector resilience — Background and indicators
- Financial soundness indicators continued to improve in 2023 despite the higher interest rates.
- Banks’ net interest income and profits rose to very high levels on the rapid pass-through of policy rates to loan rates but with more limited transmission to rates paid on overnight deposits, which comprise the majority of bank funding.
- Risk-weighted assets (RWAs) have declined on the decrease in loans and transfer of credit risk through public loan guarantees, lifting the CET1 ratio despite only a modest increase in capital.
- All banks opted to accumulate non-distributable reserves (included in CET1 capital) instead of paying the extraordinary tax on net interest income.
- Nonperforming loan (NPL) ratio:
  - Dropped sharply over the past decade on sales of bad loans, remains low but has risen mainly on account of the decline in the loan stock.
  - Inflows of new NPLs picked up marginally from low levels in 2023, with default rates on loans covered by COVID guarantees rising more steeply but remaining in the low single digits.
- COVID-era guarantees and borrowing:
  - Around half the €200 billion of COVID-era loan guarantees issued by end-2022 had been repaid by late-2023, but the outstanding stock of guarantees has decreased only marginally owing to the granting of sizable new guarantees.
  - The approved ceiling on the stock of guarantees remains very high, providing ample room for future issuance.
  - Banks have so far repaid nearly 90 percent of their pandemic-era borrowing from the ECB (TLTROs).
- Liquidity and sovereign exposure:
  - System-wide liquidity indicators remain well above regulatory floors and banks maintain large unused collateral eligible for ECB financing.
  - The share of Italian public securities in banks' total assets continued to decline, reaching 9.3 percent in April 2024.
- Real estate prices: Prices of residential and commercial real estate have been broadly stable, with no indications of overvaluation.
- Macroprudential buffer:
  - The BdI recently announced the activation of a releasable systemic risk buffer (SyRB), applicable to all banks, to be phased in in two steps during 2024-25 and reaching 1 percent of domestic credit and counterparty risks.

### Protecting financial sector resilience — Staff’s views and risks
- Overall assessment: Adjustment to tighter financial conditions has proceeded smoothly and the Italian banking system appears sound overall, but the maturing tightening cycle and waning effects of exceptional support measures keep stability risks elevated.
- Borrower condition:
  - Borrowers exited the recent pandemic and energy price shocks in a generally healthy financial condition, owing to past deleveraging and temporary income support and policies to encourage banks to lend.
  - Transmission of previous monetary policy tightening to the real economy is not yet complete; existing mortgages continue to reprice upward given the large share of fixed-rate loans at longer maturities.
  - Some firms have repaid loans ahead of schedule given the high cost of loan-financed cash buffers, but many firms with the financial capacity to do so are most likely to have already repaid early.
- Risks related to guarantees:
  - If lending standards remain restrictive, borrowers could find it challenging to refinance maturing guaranteed loans.
  - With coverage rates of up to 80 percent on new guaranteed loans, and with the ceiling on total guarantees kept high, adverse selection is a risk, especially if maturing guarantees are rolled over into new guarantees.
- Expected developments:
  - Some future deterioration in loan quality can be expected, albeit from the current strong level.
  - Higher expected loan-loss provisions combined with the potential drag on banks’ net interest income from the shift to more expensive funding would reduce banks’ profitability.

### Macroprudential and resolution recommendations
- Use current high bank profits to create macroprudential space; BdI’s decision to require all banks to lock in a modest part of their existing capital headroom will strengthen resilience and provide room for credit provision in adverse shocks without imposing a significant drag on current lending activity.
- Assessment of recent measures:
  - The reserve accumulation option under the excess profit tax on banks led to an increase in capital equal to 0.5 percent of RWA, but it was not calibrated to target systemic or individual bank risk and—because non-distributable reserves are fungible with other capital—it need not reduce future capital distribution.
  - The recent increase in the capital buffer requirement for “other systemically important institutions” and the decision to activate a releasable SyRB applicable to all banks are welcome measures.
- Accounting and risk measurement:
  - Loan classification under the IFRS9 standard should be sufficiently forward looking.
  - The practice of replacing the borrower’s default probability with that of the guarantor should be discouraged.
- Funding and liquidity:
  - Ensuring that banks’ funding mix includes adequate long-term liabilities would help to limit liquidity risk.
- Debt workouts and disposals:
  - Strengthening mechanisms for debt workouts and disposals remains crucial to prevent buildup of nonperforming exposures and reduce borrowers’ burden from legacy debt.
  - Debt resolution and insolvency procedures should be less time consuming and costly.
  - As required under Italy’s NRRP, time to conclude court cases should be considerably shortened by streamlining and digitalizing procedures and adding support staff to reduce the burden on judges.
  - Faster case turnover and higher recovery rates would raise absorptive capacity of secondary-market buyers of nonperforming exposures, reduce warehousing of legacy claims, and speed up the cleansing of stressed borrowers’ accounts.
  - Any scheme allowing borrowers to buy back at a lower price their previously-sold bad loans risks undermining the secondary market and eroding payment discipline.
- Focus on less significant banks (LSIs):
  - Continuing to focus on the weaker segment of less significant banks remains a priority.
  - BdI’s strengthened supervisory and regulatory oversight of smaller banks is welcome.
  - Some small banks have structural weaknesses limiting scale economies or modernization.
  - Further consolidation or mutual cooperation in key areas, such as digitalization, could reinforce efficiency and resilience provided it is driven by business synergies and does not increase sectoral and geographical concentrations.

### Authorities’ views on financial stability
- Authorities consider that risks to financial stability have declined somewhat over the past year, reflecting the narrowing of spreads on government bonds and the stability of the macroeconomy.
- Financial stress conditions are at a 15-year low, although geopolitical tensions and potential interest rate volatility caused by the persistently high public debt-to-GDP ratio pose risks.
- Firms’ liquidity buffers remain about 50 percent larger than in 2019 and household indebtedness relative to disposable income has moderated.
- Expectations:
  - The loan default rate for firms is expected to step up relative to the very-low levels prevailing in 2023, while the rate for households is expected to remain low—well-below the peak following the sovereign debt crisis.
  - With the financial condition of the banking system remaining sound, banks are expected to easily absorb an increase in NPLs.
- Smaller banks: While a few LSIs with traditional business models continue to exhibit idiosyncratic weaknesses, supervisory actions have intensified, leading to lower NPLs and strengthened capital and liquidity.
- The decision to gradually activate a SyRB will strengthen resilience against a wide range of adverse events while releasability of the buffer will allow banks to absorb potential losses and continue to finance the economy.

### Structural policies for sustained growth — NRRP implementation and challenges
- The investments and reforms in the NRRP are a key step in shifting potential growth to a higher gear.
- Recent contributions to growth:
  - Total factor productivity contributed 0.3 percentage points on average to annual real GDP growth during the past 10 years.
  - More recently the capital stock has risen marginally; employment has made the largest contribution to growth in recent years, reinforcing stagnation of labor productivity.
- NRRP funding and use:
  - The NRRP is a post-COVID program of reforms and investments backed by 9 percent of GDP in EU funding.
  - Implementation is proceeding mostly in accordance with recent revisions, and Italy has received around €100 billion by end-2023, half its total allocation.
  - Spending of disbursed funds has picked up from a low level because:
    - Many mainly small, slow-moving projects were replaced with large industrial green and energy security investments;
    - About 1 percent of GDP was shifted from public investment to tax credits for private investment;
    - Centralization of authority and streamlining of tendering procedures have increased.
  - Some 2.2 percent of GDP has been spent so far and calls for tender have been published for about two thirds of projects by value requiring tenders, with work initiated on about half.
- Deadlines and bottlenecks:
  - The mid-2026 deadline for completing large investment projects (high-speed rail, digital connectivity, upgrading electricity infrastructure) is challenging due to bottlenecks from administrative capacity, permitting, and skilled labor shortages.
  - Some 10 percent of projects are assessed as having severe delays.
- Reforms underway: Reforms of civil and criminal justice, public administration, competition policy, and tax administration are underway.
  - The average duration and case backlog of judicial proceedings have decreased; digitalization of public administration is ongoing; the digital platform for public procurement is operational; and some barriers to entry in the private sector are being addressed.

### Structural policies — Staff’s views and recommendations
- Shift in policy focus:
  - The current policy focus on near-term demand stimulus should be replaced with an agenda prioritizing market-friendly support to medium- and long-term growth.
  - Fiscal resources would be most effectively used for education reform, skill upgrading and closing investment gaps to permanently increase living standards and GDP.
- NRRP execution and successor program:
  - Timely and effective execution of the NRRP is critical, but should not compromise transparency and the financial integrity of public funds.
  - Building on the NRRP, a successor program of comprehensive structural reforms and investments is needed to continue addressing long-standing productivity challenges and investment gaps, and facilitate the green and digital transitions beyond 2026.
- Priority areas:
  - Critical public infrastructure, education reform, and diffusion of frontier technologies.
  - Improving the business environment through reduced barriers to entry and greater policy certainty as regards taxation, climate policies, and the legal framework.
  - Continued efforts to address transnational aspects of corruption, with some areas requiring further improvement.
- Capital markets and financing:
  - Italy should deepen its capital markets and attract new forms of financing to support modernization of the corporate sector.
  - Large private sector investment needs stem from an aging capital stock and the need to close climate and digital infrastructure gaps.
  - Micro and small firms account for 80 percent of employment and 70 percent of value added; prevalence of older business owners with no identified successor poses a significant risk to continuity.
  - Reliance on retained earnings and bank credit should be complemented by alternative forms of external financing to support scaling up and business continuity of small firms.
  - Private initiatives include small-scale equity injections with passive investors and combining financing with bringing in new company management.
  - Italy would benefit from a deepening of the EU capital markets union and the Single Market.
- Industrial policy guidance:
  - Recourse to industrial policies should be limited and targeted where externalities or market failures prevent effective market solutions.
  - Such policies should be time bound, underpinned by rigorous cost-benefit analysis, and avoid discriminatory measures that could distort trade and investment decisions.
  - Privatization decisions should be guided by efficiency rather than financing needs.

*Source: IMF staff report (content unit 1itaea2024001).*

### 29.      Execution of the revised NRRP is advancing well and will bring permanent benefits for

### 1itaea2024001 - 29.      Execution of the revised NRRP is advancing well and will bring permanent benefits for

### NRRP execution and strategic priorities
- All milestones and targets up to and including those for 2023 have been successfully met, and 2024 objectives are on track.
- The RePower EU revision addressed main implementation bottlenecks and strengthened anti-fraud controls.
- Contracts for large investment projects have been awarded while reforms remain on track.
- Investment additionality in Italy’s Plan is seen by the EC as greater than in other countries’ Plans.
- Network of Technology Transfer Agencies and NRRP investments are promoting diffusion of advanced technologies across firms and encouraging cooperation between universities, research centers, and businesses.
- Preparation of a successor plan is underway, to focus on:
  - key research and innovation,
  - education system reform,
  - improving the business climate,
  - infrastructure priorities to improve transport connectivity within the country and make Italy a hub for renewable energy from North Africa.
- Preserving Italy as an important manufacturing country in Europe is essential for economic security; industrial policy should support the green and digital transitions and foster research and innovation.

*Key policy point*
- Industrial policies should be strategic, target externalities or market failures, and avoid favoring domestic suppliers.

### Fertility and female labor force participation — background
- Italy lags most peer countries in fertility and female labor force participation, with a stark North-South difference.
- Number of births has fallen to a historic low after a more-than-decade-long decline; driven by rising number of women in successive cohorts who have no children and smaller family sizes among those with children.
- Low—and falling—births alongside subdued female labor force participation foreshadow accelerated population decline and a drag on economic growth.
- Motherhood imposes a major cost on women’s careers in Italy because of insufficient affordable childcare, especially for very young children—well below the EU average—reducing compatibility between work and family.
- A motherhood earnings penalty of 50 percent on average exists, largely owing to reduced working hours.
- The current effective retirement wage for women–65 years–is a year higher than for men, which can force working women to continue to work later to satisfy minimum pension contribution requirements.
- Constraints are more acute in the South: lower formal female labor force participation, lower family incomes, and substantially fewer publicly-provided early childcare and after-school programs, partly owing to lower tax collections and high informality.
- Barcelona target: EU Member States should achieve a coverage rate for early childhood services of at least 33 percent; none of the provinces in the South would reach that threshold even after the NRRP.

### Staff’s views and recommendations on work-family compatibility
- Improving compatibility of work and family life is needed to raise Italy’s effective labor supply in the near term and future decades.
- Considerable scope exists to raise female labor force participation (including in the formal sector) and to slow the drop in the birth rate.
- Parents need adequate time and financial resources, and publicly-provided childcare must be readily accessible during standard working hours to limit the earnings penalty for working mothers.
- Fiscal transfers and tax incentives (currently about 1 percent of GDP) should be well-targeted to avoid wasteful and ineffective measures.
- Recommended actions:
  - Expand public childcare facilities (NRRP expansion welcome), ensure opening times compatible with regular working hours, and identify adequate public funding for needed staffing.
  - Remedy remaining shortages in childcare positions in the South even after NRRP completion.
  - Increase elder care support given the rapidly-aging population.
  - Remove policy-induced disincentives to female employment in the formal sector, including tax credits for dependent spouses and minimum pension contribution requirements that penalize employment gaps.
  - Make parental leave benefits more gender neutral.
  - Break the vicious cycle in the South of informality-led lower tax collections to reverse under-provision of childcare and after-school programs.
  - Use micro level surveys to better identify binding constraints for individual families to improve targeting and cost-effectiveness of benefits.

### Authorities’ views and measures adopted
- Means-tested vouchers to help pay for kindergarten have been introduced.
- Duration and compensation of parental leave have been raised.
- From this year, working mothers in full-time employment with at least two children will be fully exempted from social security contributions until the younger child reaches 10 years; for those with three or more children the exemption continues until the youngest child turns 18.
- National-level increases in public nursery and childcare places envisaged in the NRRP fully meet the EU targets.
- Micro level surveys are being introduced to identify binding constraints and improve targeting.
- Comprehensive policies to boost female labor participation will be strengthened.
- Current tax treatment of dual-income households provides a safety net for vulnerable families despite possible work disincentives.
- Targeted measures have been adopted to increase formal female participation in the South.

### Staff appraisal — macroeconomic and fiscal outlook
- The Italian economy achieved a strong cyclical recovery; output and employment increased to well above pre-pandemic levels.
- Growth strong in market services and residential construction; energy-intensive activities subdued due to still-elevated energy prices.
- Disinflation is proceeding smoothly as energy prices fall from extreme highs.
- The growth stimulus from housing tax credits has been modest relative to the large fiscal resources expended.
- Private sector deleveraging and liquidity buffers helped absorb rapid monetary tightening; decrease in private debt matched by higher public sector indebtedness.
- Sovereign debt risks are moderate overall, but high at medium- and long-term horizons.
- The external position in 2023 was weaker than warranted by medium-term fundamentals.
- Economy’s capacity to sustain growth affected by weak productivity, demographic decline, and transition difficulties (climate, digital, geopolitical).

*Growth projection and risks*
- Steady growth of around ¾ percent is forecast for 2024-26 as acceleration of NRRP-related spending supplants housing construction financed with tax credits.
- Rising real incomes and some loosening of monetary policy are expected to support growth.
- Inflation is projected to temporarily undershoot the 2 percent target this year, but return to target from 2025 despite a pickup in wage growth.
- Downside risks include intensifying conflicts, deepening geoeconomic fragmentation, significantly higher-than-expected interest rates, spillovers from policy uncertainty related to elections in the EU, incomplete NRRP execution, and erosion of investor confidence due to still-high fiscal deficits.

*Fiscal recommendations*
- Fiscal adjustment needed to moderate risks from high public debt, make room for productivity-enhancing spending, and absorb potential shocks.
- Despite large fiscal deficits, public debt ratio moderated on unprecedented nominal GDP growth driven by one-off spike in the deflator and deferred recording of tax credit liabilities.
- Faster-than-planned fiscal adjustment warranted to lower the debt ratio with high confidence and reduce financing risks.
- Specific targets and measures:
  - A primary surplus of around 3 percent of GDP by 2025-26 can be achieved by curtailing inefficient or temporary measures and saving fiscal overperformance.
  - Further savings will be needed to make room for productivity-enhancing investments and to absorb aging-related spending pressures.
  - Adjustment should be grounded in a medium-term budget.
  - Short-term wage support should be replaced with policies that raise productivity.
  - Tax reform should broaden the base, increase progressivity, reduce highly preferential treatment of self-employment income and real estate, and reinforce revenue collection.
  - Oversight and control of tax credits should be strengthened.
  - Pension spending further streamlined.
  - Volume of publicly-guaranteed loans gradually returned to their pre-pandemic level.

### Financial sector and macroprudential stance
- Economy absorbed tighter financial conditions well; past deleveraging and crisis-era supportive policies reinforced loan quality.
- Asymmetric pass-through of higher policy rates to lending and deposit rates has created exceptional bank profits.
- Stability risks could increase if real interest rates remain elevated, borrowers draw down liquidity buffers, lending standards stay restrictive, and competition for funding with the public sector narrows banks’ interest margins.
- Decision to require banks to preserve part of their capital headroom by introducing a releasable buffer is welcome.
- Priorities: ensure forward-looking loan classification, stable funding sources, close monitoring of weaker small banks.
- Continue strengthening mechanisms for debt workouts and loan disposals to deepen the secondary loan market while avoiding schemes allowing borrowers to buy back bad loans at a discount relative to the initial transfer price.

### Productivity, labor supply, and successor program
- Stagnant productivity and intensifying shortages of skilled labor highlight the need for modernizing investments and reforms while boosting effective labor supply.
- Closing investment gaps and upskilling workers should proceed alongside raising participation, especially of women.
- Full implementation of the NRRP is essential while protecting transparency and integrity of public funds.
- A comprehensive multi-year successor program focusing on reforms to education, improving the business environment, and encouraging diffusion of frontier technologies is needed to facilitate green and digital transitions and underpin the medium-term fiscal plan.
- Recommended labor market actions reiterated:
  - Expand available public childcare facilities,
  - Ensure opening times compatible with regular working hours,
  - Secure adequate public funding for staffing, including by reducing informal employment.

### Box: The Tale of the Superbonus — key findings and impacts
- Superbonus 110 scheme introduced in 2020 (with the Façade Bonus) to support construction recovery and improve energy efficiency and earthquake resilience.
- The program allowed households to claim a tax credit of 110 percent on expenses for retrofitting properties.
- Design features that increased fiscal cost and reduced economic benefit:
  - 110 percent subsidy rate eliminated usual buyer-seller conflict and led to over-invoicing and cooperative rent seeking.
  - Transferability and invoice discounting of tax credits enabled households with liquidity constraints to benefit, but large discounts reduced funds available for renovations.
  - Inadequate oversight and control: authorization largely automatic, limited monitoring, data available with a lag, fraud occurred with tax credits granted without supporting renovations.
- Fiscal cost and take-up:
  - Total take-up has reached nearly €220 billion (about 10½ percent of GDP) as of Q1:2024, far above the initial estimate of €33 billion.
  - To rein in demand, a law passed in May 2024 abolished transferability and invoice discounting of new tax credits, imposed transferability and use restrictions on existing tax credits, and extended the period during which new tax credits must be claimed from 4-5 years to 10 years.
  - Some transferability of the seismic bonus remains.
- Economic and social benefits limited relative to fiscal cost:
  - Only 4 percent of housing units benefited; tax credits heavily skewed toward single-family homes owned by wealthier households.
  - Real gross domestic value added in construction increased by a cumulative €50 billion during H1:2021 and Q1:2024 relative 2019.
  - Real value of fiscal resources expended for housing tax credits (adjusted for the increase in the GDP deflator) was around €190 billion, implying a real fiscal multiplier of ¼ -⅓.
  - Low multiplier consistent with leakages from high import content, price discounts on credit transfers, high price markups, low renovation additionality, displacement of other construction activity, and misuse of public funds; price increases accounted for about one-third of additional nominal construction output.
- Policy changes:
  - Subsidy rate on new take-up was lowered to 70 percent in 2024, with a planned reduction to 65 percent in 2025, after which the scheme is currently scheduled to end.

*Italicized source attribution: IMF staff report content provided in the supplied document.*

### Box 2. Geoeconomic Fragmentation: What’s at Stake for Italy’s Trade and Economy

### Box 2. Geoeconomic Fragmentation: What’s at Stake for Italy’s Trade and Economy

### Trade exposure and geopolitical alignment
- Italy is highly open to international trade, with most transactions with geopolitically-aligned countries—those that voted in favor of the 2022 UN Resolution on Ukraine (“in favor” bloc)—and, in particular, with other EU27 countries.
- A sizable share of Italy’s trade is with countries that voted against, abstained or were absent (AAA bloc), notably China and Russia.
- In addition to direct bilateral trade, Italy is well integrated into global value chains (GVCs): more than half of foreign value-added embedded in Italy’s exports is sourced from “in favor” countries, while a quarter originates from the AAA bloc.

### GVC exposure and manufacturing reliance
- On the sourcing side, non-EU foreign inputs scaled by Italy’s manufacturing value added amounted to around 26 percent in 2019.
- Dependence on the AAA bloc increased steadily before easing back to around 8 percent since 2016.
- As regards final demand, Italy’s dependence on the AAA bloc rose steadily to 9 percent in 2019.

### Fragile supply characteristics of traded goods
- "Fragile" supply goods are defined by high centrality of exporters and low potential to substitute a supplier.
- Around half of Italy’s imports of intermediate goods from outside the EU are classified as “fragile.”
- Of those fragile intermediates, some 56 percent are sourced from countries in the AAA bloc.
- This AAA-dependent share for Italy is considerably higher than the EU-average of 40 percent.
- Just over half of fragile intermediates imported by Italy from the AAA bloc are raw materials (including mineral fuels and oils, aluminum and rare-earth minerals).

### Sectoral and regional impacts of supply disruption
- Supply disruption of foreign goods has highly uneven effects across Italy’s output sectors and regions.
- Bank of Italy (2023) estimates of a shut off of imports of fragile intermediates show:
  - Value added of the wearing apparel sector would drop by almost 11 percent.
  - Output in the domestic appliance, other textile, pharmaceutical, and computer, electronic and optical products industries would decrease by more than 8 percent.
- Effects would be more concentrated in the manufacturing-intensive regions of Marche and Tuscany.

### Firm-level responses and adaptation strategies
- According to a 2023 Bank of Italy survey, manufacturing firms have adopted strategies to improve supply-chain security, including diversifying source countries, nearshoring and friendshoring.
- Actions to reduce direct dependence on suppliers in China were more common among companies that imported critical products: 30 percent (critical-product importers) versus 14 percent (other companies).
- The most frequently adopted measure was to source from another European country.
- Firms will also have to navigate fragmentation-induced expansions in activity and employment in some sectors alongside contraction in others.

*Prepared by Magali Pinat. Based on Baba, Lan, Mineshima, Misch, Pinat, Shahmoradi, Yao and van Elkan (2023) “Geoeconomic Fragmentation: What’s at Stake for the EU”, IMF Working Paper No. 2023/245.*

### Box 3. Voluntary Assessment of Transnational Aspects of Corruption

### Box 3. Voluntary Assessment of Transnational Aspects of Corruption

### Overview
- Italy volunteered to have its legal and institutional frameworks assessed in the context of bilateral surveillance for purposes of determining whether it: (a) criminalizes and prosecutes the bribery of foreign public officials; and (b) has an effective AML/CFT system that is designed to prevent foreign officials from concealing the proceeds of corruption.1/
- Information relating to supply-side corruption in this section of the Report is based on information and data provided by Italy. The IMF staff has provided additional views and information. The information in this report has not been verified by the WGB or the OECD Secretariat, and does not prejudice the WGB’s monitoring of the implementation of the OECD Anti-Bribery Convention.2/

### Findings on foreign bribery and corporate risk
- Italy has taken several steps to fight against foreign bribery considering the moderate level of risks in this regard, but further efforts are needed.
- Out of the 500 largest multinational enterprises (MNE) in the world, three are headquartered in Italy and the FDI scale is moderate.3/
- Italian companies, including SMEs and SOEs, which are also internationally active, are at risk of committing foreign bribery.
- In the Phase 4 evaluation in 2022, the OECD Working Group on Bribery commended Italy for:
  - strengthening relevant legislative framework;
  - significant level of enforcement of the foreign bribery offence.
- Further progress was noted in:
  - digitalizing the judiciary;
  - enhancing mutual legal assistance and extradition;
  - promoting cooperation between tax and law enforcement authorities.
- The authorities reported that the EU Whistleblowing Directive was transposed into the law in March 2023 and several guidelines were issued to facilitate whistleblower protection in both the public and private sectors.

### AML/CFT, laundering of foreign proceeds, and implementation gaps
- Italy’s exposure to laundering of foreign proceeds of corruption (i.e., facilitation) is limited and it made significant efforts to strengthen the effectiveness of its anti-money laundering framework.
- Going forward, Italy could enhance further the implementation of measures most relevant to detect and deter proceeds of corruption from abroad by focusing on:
  - ensuring compliance with requirements for foreign politically exposed persons;
  - bolstering the availability and easy access to accurate beneficial ownership information;
  - enforcing against laundering by foreign officials and recovering their ill-gotten proceeds.

### Remaining weaknesses and recommended actions
- Authorities should continue their efforts to implement the OECD Phase 4 recommendations, including:
  - addressing high number of dismissals in foreign bribery cases;
  - increasing the corporate fines;
  - raising awareness;
  - developing a comprehensive national strategy to fight foreign bribery.

*Source: Box 3. Voluntary Assessment of Transnational Aspects of Corruption.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Global Risks — Overview and Impact
- Commodity price volatility
  - Relative Likelihood: High
  - Impact If Realized: High: "Italy is a large commodity importer, including of energy products. Supply disruptions and/or price spikes could have significant effects on business profitability and output, real incomes and the current account."
  - Policy Responses:
    - "Allow domestic commodity prices to increase in order to encourage conservation, while providing well-targeted support to vulnerable households and firms."
    - "Encourage inventory accumulation and more efficient consumption."

- Intensification of regional conflicts
  - Relative Likelihood: High
  - Impact If Realized: Medium: "Remaining direct trade and transit links to conflict regions are limited. However, conflict escalations could raise the cost of international trade and slow just-in-time manufacturing. Defense needs could increase. An increase in refugees would further stretch domestic absorption capacity."
  - Policy Responses:
    - "Consider strategies to increase resilience to supply shocks, such as increasing inventories and diversifying suppliers of critical commodities."
    - "Improve the integration of refugees into the domestic economy, which could help to alleviate rising worker shortages due to population aging."

- Deepening geoeconomic fragmentation
  - Relative Likelihood: High
  - Impact If Realized: Medium: "While Italy’s trade is mainly with EU members and other countries that share similar geopolitical views, it has a diverse set of global trade partners. Both exports and imports to and from Asia have risen in recent years. Where feasible, some Italian firms have begun to reconfigure their supply chains to reduce the risk of disruption to critical products, including through reshoring and diversifying suppliers. Related uncertainty could affect firms that are dependent on foreign inputs and/or sell to foreign markets."
  - Policy Responses:
    - "Protect and deepen the EU’s Single Market by strengthening EU integration including in the areas of taxation, state aid, and completing the banking and capital markets unions."
    - "Continue support for openness of trade and investment and for the efficient functioning of a multilateral rules-based trading system."
    - "Targeted de-risking is preferable to decoupling, taking pre-emptive action to mitigate areas of high risk as a form of self insurance that warrants the additional upfront economic cost."

- Abrupt global slowdown
  - Relative Likelihood: Medium
  - Impact If Realized: Medium/High: "A slowdown in Italy’s major regional or global trading partners could significantly weaken growth, which in recent years has been supported by robust exports of goods and tourism services."
  - Policy Responses:
    - "Allow automatic fiscal stabilizers to operate."
    - "Continue to implement long-term growth enhancing investments and reforms."

- Monetary policy miscalibration
  - Relative Likelihood: Medium
  - Impact If Realized: Medium/High: "An excessively tight monetary policy could cause a sharp upward repricing of market interest rates. This would raise borrowing costs for the private and public sectors. The anticipated weakening of loan quality could intensify, accompanied by further contraction of credit. Bankruptcies and insolvencies could pick up. Public debt dynamics would deteriorate."
  - Policy Responses:
    - "Greater retention by banks of their recent high profits, supported by activation of a releasable Systemic Risk buffer, would enable banks to better absorb a weakening of loan quality without the need to reduce lending."
    - "Closely monitor banks’ loan classification practices, including for publicly-guaranteed loans."
    - "Formulate and implement a credible medium-term fiscal consolidation path that embeds structural reforms and productivity-boosting investments."

- Cyberthreats
  - Relative Likelihood: Medium
  - Impact If Realized: High/Medium: "While the digitalization in Italy is still at an early stage, cyberattacks could still impair the functioning of the financial system, public services, and the economy. Italy is vulnerable to cyber risk, and a major ransomware attack affected 1,300 public administration bodies in December 2023."
  - Policy Responses:
    - "Raise awareness and enhance monitoring of cyberattacks."
    - "Urge businesses and institutions to have robust cyber defenses and business continuity plan."
    - "As per the FSAP recommendation, strengthen the Bank of Italy’s monitoring and oversight of the financial sector’s IT resilience and cyber risk defenses."

- Systemic financial instability
  - Relative Likelihood: Medium
  - Impact If Realized: High: "Sharply higher sovereign borrowing costs and a shift in risk sentiment would cause repricing of government, bank and NFC bonds, curtail credit activity and strain leveraged corporates and households. Loan quality would deteriorate. Insolvencies increase, resulting in rapid deterioration of bank balance sheets and profitability. An increase in sovereign borrowing costs would cause a further deterioration in public debt dynamics."
  - Policy Responses:
    - "Formulate and implement a credible medium-term fiscal consolidation path that embeds structural reforms and productivity-boosting investments."
    - "Greater retention by banks of their recent high profits, supported by activation of a releasable Systemic Risk buffer, would enable banks to better absorb a weakening of loan quality without the need to reduce lending. Rely on bank resolution systems to address unsound banks."
    - "Closely monitor banks’ loan classification practices, including for publicly-guaranteed loans."

- Sovereign debt distress
  - Relative Likelihood: Medium
  - Impact If Realized: High: (same text as systemic financial instability regarding repricing, credit curtailment, loan quality deterioration, insolvencies, and public debt dynamics)
  - Policy Responses:
    - "Formulate and implement a credible medium-term fiscal consolidation path that embeds structural reforms and productivity-boosting investments."
    - "Greater retention by banks of their recent high profits, supported by activation of a releasable Systemic Risk buffer, would enable banks to better absorb a weakening of loan quality without the need to reduce lending. Rely on bank resolution systems to address unsound banks."
    - "Closely monitor banks’ loan classification practices, including for publicly-guaranteed loans."

- Extreme climate events
  - Relative Likelihood: Medium
  - Impact If Realized: Medium: "Climate-related losses could reduce real GDP and increase fiscal costs. EU members may receive migrants from economies facing severe climate disruptions."
  - Policy Responses:
    - "Leverage EU funds to make infrastructure more resilient to natural disasters."
    - "Work with EU partners on region-wide response to migration."

### Domestic Risks — Overview and Impact
- Inefficient or partial absorption of NextGenerationEU resources
  - Relative Likelihood: Medium
  - Impact If Realized: High: "High quality public investment, together with comprehensive structural reforms in the NRRP are needed to raise output, support the green and digital transitions and boost potential growth by enhancing the productive capacity of the economy."
  - Policy Responses:
    - "Ensure full implementation of the Plan by leveraging efficiency gains and increased digital capacity brought by various reforms."
    - "Ensure transparency and financial integrity of the use of public funds."

- Ineffective tax reform
  - Relative Likelihood: High
  - Impact If Realized: High: "Relying on a supply-side response from tax cuts to boost revenue could disappoint, raising concerns about fiscal sustainability and causing borrowing costs to rise. Reducing progressivity would further raise inequality and    raise the need for costly social transfers."
  - Policy Responses:
    - "Ensure reforms are guided by the principles of reducing complexity and broadening the tax base to promote vertical and horizontal equity, while also bolstering revenue."
    - "Reduce tax expenditures and continue to strengthen tax compliance."

- Failure to put public debt firmly on a downward path
  - Relative Likelihood: Medium
  - Impact If Realized: High: "With already elevated public debt and gross financing needs, any macro-financial shock would increase Italy’s already high borrowing costs, potentially triggering the need for a sharp fiscal adjustment. It could also lead to financing constraints for banks and a credit crunch."
  - Policy Responses:
    - "Implement an ambitious fiscal adjustment starting in 2024."
    - "Incorporate comprehensive fiscal and structural reforms to secure a stable source of revenues and lift potential growth."

### Risk Assessment Notes
- "The Risk Assessment Matrix shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more)."

*Source: Annex I. Risk Assessment Matrix (content unit: 1itaea2024001).*

### Annex II. Figure 3. Italy: Baseline Scenario

### Annex II. Figure 3. Italy: Baseline Scenario

### Public debt trajectory (percent of GDP)
- Actual 2023: 137.3
- 2024: 139.1
- 2025: 140.6
- 2026: 142.1
- 2027: 143.5
- 2028: 143.8
- 2029: 143.8
- 2030: 143.6
- 2031: 143.4
- 2032: 143.5
- 2033: 143.7

### Change in public debt and identified flows (percent of GDP)
- Change in public debt:
  - 2023: -3.2
  - 2024: 1.8
  - 2025: 1.4
  - 2026: 1.5
  - 2027: 1.5
  - 2028: 0.3
  - 2029: 0.0
  - 2030: -0.2
  - 2031: -0.2
  - 2032: 0.1
  - 2033: 0.3
- Contribution of identified flows (same as above):
  - 2023: -2.7
  - 2024: 1.8
  - 2025: 1.4
  - 2026: 1.5
  - 2027: 1.5
  - 2028: 0.3
  - 2029: 0.0
  - 2030: -0.2
  - 2031: -0.2
  - 2032: 0.1
  - 2033: 0.3

### Primary balance and fiscal components (percent of GDP)
- Primary deficit (primary balance):
  - 2023: 3.6
  - 2024: 0.3
  - 2025: -0.3
  - 2026: -0.8
  - 2027: -1.2
  - 2028: -1.4
  - 2029: -1.6
  - 2030: -1.8
  - 2031: -1.7
  - 2032: -1.6
  - 2033: -1.5
- Noninterest revenues:
  - 2023: 47.8
  - 2024: 46.8
  - 2025: 47.1
  - 2026: 46.9
  - 2027: 46.2
  - 2028: 46.2
  - 2029: 46.2
  - 2030: 46.2
  - 2031: 46.2
  - 2032: 46.1
  - 2033: 46.1
- Noninterest expenditures:
  - 2023: 51.4
  - 2024: 47.1
  - 2025: 46.8
  - 2026: 46.0
  - 2027: 45.0
  - 2028: 44.8
  - 2029: 44.6
  - 2030: 44.4
  - 2031: 44.4
  - 2032: 44.5
  - 2033: 44.6

### Automatic debt dynamics and real rates (percent of GDP / percent)
- Automatic debt dynamics:
  - 2023: -4.5
  - 2024: 0.1
  - 2025: 0.3
  - 2026: 1.0
  - 2027: 1.7
  - 2028: 1.3
  - 2029: 1.5
  - 2030: 1.5
  - 2031: 1.5
  - 2032: 1.6
  - 2033: 1.7
- Real interest rate and relative inflation (identical rows in source):
  - 2023: -3.2
  - 2024: 1.1
  - 2025: 1.5
  - 2026: 1.9
  - 2027: 2.2
  - 2028: 2.4
  - 2029: 2.6
  - 2030: 2.6
  - 2031: 2.5
  - 2032: 2.7
  - 2033: 2.8
- Relative inflation:
  - 2023–2033: 0.0 (each year)

### Real growth and other identified flows
- Real growth rate (percent):
  - Memo line shows: 0.9, 0.7, 0.9, 0.6, 0.4, 0.8, 0.8, 0.8, 0.8, 0.8 (presented in the memo block as "Real GDP growth (percent)")
  - Additional real growth entries in main table: -1.3, -1.0, -1.2, -0.9, -0.5, -1.1, -1.1
  - Additional "a." row: -1.1, -1.1, -1.1, -1.1
- Real exchange rate:
  - 2023: 0.0 (followed by ellipses in source)
- Other identified flows:
  - 2023: -1.8
  - 2024: 1.5
  - 2025: 1.4
  - 2026: 1.4
  - 2027: 1.0
  - 2028: 0.5
  - 2029: 0.1
  - 2030: 0.1
  - 2031: 0.1
  - 2032: 0.1
  - 2033: 0.1
- Contingent liabilities:
  - 2023–2033: 0.0 (each year)
- (minus) Interest Revenues:
  - 2023: -0.2
  - 2024: -0.1
  - 2025: -0.1
  - 2026: -0.1
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.1
  - 2030: -0.1
  - 2031: -0.1
  - 2032: -0.1
  - 2033: -0.1
- Other transactions 1/:
  - 2023: -1.7
  - 2024: 1.6
  - 2025: 1.6
  - 2026: 1.5
  - 2027: 1.1
  - 2028: 0.6
  - 2029: 0.2
  - 2030: 0.2
  - 2031: 0.2
  - 2032: 0.2
  - 2033: 0.2
- Contribution of residual:
  - 2023: -0.5
  - 2024–2033: 0.0 (each year)

### Gross financing needs and debt service (percent of GDP)
- Gross financing needs:
  - 2023: 27.0
  - 2024: 22.5
  - 2025: 22.3
  - 2026: 22.7
  - 2027: 18.1
  - 2028: 18.8
  - 2029: 20.5
  - 2030: 21.7
  - 2031: 24.1
  - 2032: 23.4
  - 2033: 23.2
- Of which: debt service:
  - 2023: 23.6
  - 2024: 22.4
  - 2025: 23.0
  - 2026: 23.2
  - 2027: 19.5
  - 2028: 20.4
  - 2029: 22.3
  - 2030: 23.6
  - 2031: 25.7
  - 2032: 24.3
  - 2033: 24.9
- Local currency debt service:
  - 2023: 23.4
  - 2024: 22.2
  - 2025: 22.7
  - 2026: 23.2
  - 2027: 19.5
  - 2028: 20.4
  - 2029: 22.3
  - 2030: 23.6
  - 2031: 25.7
  - 2032: 24.2
  - 2033: 24.8
- Foreign currency debt service:
  - 2023: 0.2
  - 2024–2030: 0.0 (each year)
  - 2031: 0.0
  - 2032: 0.1
  - 2033: 0.0

### Memo items (percent and percent of GDP)
- Real GDP growth (percent):
  - 2023: 0.9
  - 2024: 0.7
  - 2025: 0.9
  - 2026: 0.6
  - 2027: 0.4
  - 2028: 0.8
  - 2029: 0.8
  - 2030: 0.8
  - 2031: 0.8
  - 2032: 0.8
- Inflation (GDP deflator; percent):
  - 2023: 5.3
  - 2024: 2.4
  - 2025: 2.1
  - 2026: 2.0
  - 2027: 2.0
  - 2028: 2.0
  - 2029: 2.0
  - 2030: 2.0
  - 2031: 2.0
  - 2032: 2.0
- Nominal GDP growth (percent):
  - 2023: 6.2
  - 2024: 3.2
  - 2025: 3.0
  - 2026: 2.7
  - 2027: 2.4
  - 2028: 2.8
  - 2029: 2.8
  - 2030: 2.8
  - 2031: 2.8
  - 2032: 2.8
- Effective interest rate (percent):
  - 2023: 2.9
  - 2024: 3.2
  - 2025: 3.2
  - 2026: 3.4
  - 2027: 3.6
  - 2028: 3.7
  - 2029: 3.8
  - 2030: 3.8
  - 2031: 3.8
  - 2032: 3.9
  - 2033: 4.0

### Key analytical commentary from source (verbatim terminology and emphasis)
- "Italy's public debt is projected to stay at high levels due to positive interest-growth differentials and stock-flow adjustments (claims of tax credits already granted), while the projected improvements in the primary balance will provide some offset over the medium-term."
- "Primary surpluses are expected to moderate beyond 2030 with an influx of new retirees partly under the legacy defined-benefit pension system and, which will increase age-related expenditures."
- Footnote: "1/ These transactions include claims of tax credits that increase the borrowing requirement but whose effect on the primary balance was incurred in 2023 and earlier years."

*Source: IMF staff estimates and projections.*

### Annex V. Data Issues

### Annex V. Data Issues

### Data Adequacy Assessment: summary ratings and rationale
- Annex V. Table 1. Italy: Data Adequacy Assessment for Surveillance
- Overall conclusions reported in the text:
  - "The data provided to the Fund is adequate for surveillance."
  - "The data provided to the Fund has some shortcomings that somewhat hamper surveillance."
  - "The data provided to the Fund has serious shortcomings that significantly hamper surveillance."
- Rationale for staff assessment:
  - "Data provision is adequate for surveillance. Italy’s economic and financial statistics are comprehensive, generally of high quality, and are provided to the Fund in a comprehensive manner."
  - "The authorities regularly publish a full range of economic and financial data, as well as a calendar of dates for the main statistical releases."
  - "Italy is also subject to the statistical requirements of Eurostat and the European Central Bank, including the timeliness and reporting standards, and it has adopted the European System of Accounts 2010."
  - "Italy has completed the core requirements in relation to the Data Gaps Initiative 2 recommendations for which data templates have been defined, including on data to better monitor risks in the financial sector as well as on data to measure vulnerabilities, interconnectedness, and spillovers."
  - "Further improvements should be considered regarding changes in inventories in the quarterly national accounts, which are currently derived as a residual and lumped together with the statistical discrepancy."
  - "Recent differences between CPI and GDP deflator reflect the large terms-of-trade energy shock, which positively impacted the CPI by increasing prices of goods that contain energy, but did not affect the GDP deflator, which captures only prices of domestic value added."
- Granularity:
  - "Granularity 3/ — A" (note: top and bottom cells for granularity described in footnote 3/)

### Detailed questionnaire results and sectoral ratings
- Annex V. Table 2. Italy: Data Standards Initiative — sectoral cells and ratings as presented:
  - National Accounts
  - Prices
  - Government Finance Statistics
  - External Sector Statistics
  - Monetary and Financial Statistics
  - Inter-sectoral Consistency
  - Median Rating
  - AAAAAAA
- Data quality characteristic headings and associated cell values as shown:
  - Coverage: BAAAA
  - Consistency: BAAA
  - Frequency and Timeliness: AA
  - Consistency (second line): AA
  - (additional Frequency and Timeliness line): AAAAA
  - Further Frequency and Timeliness cells: A, B, C, D
- Footnotes and assessment methodology:
  - 1/ "The overall data adequacy assessment is based on staff's assessment of the adequacy of the country’s data for conducting analysis and formulating policy advice, and takes into consideration country-specific characteristics."
  - 2/ "The overall questionnaire assessment and the assessments for individual sectors reported in the heatmap are based on a standardized questionnaire and scoring system (see IMF Review of the Framework for Data Adequacy Assessment for Surveillance, January 2024, Appendix I)."
  - 3/ "The top cell for "Granularity" of Government Finance Statistics shows staff's assessment of the granularity of the reported government operations data, while the bottom cell shows that of public debt statistics. The top cell for "Granularity" of Monetary and Financial Statistics shows staff's assessment of the granularity of the reported Monetary and Financial Statistics data, while the bottom cell shows that of the Financial Soundness indicators."
- Specific text conclusions shown in the annex:
  - "The data provided to the Fund is adequate for surveillance."
  - "The data provided to the Fund has some shortcomings but is broadly adequate for surveillance."

### Data gaps, other issues, and changes since last consultation
- Use of data and/or estimates different from official statistics in the Article IV consultation: "N/A"
- Other data gaps (text verbatim):
  - "Publicly-available data on execution of Next Generation EU investments is limited, and the reporting is not done in national accounts terms."
  - "Italy has made some progress on addressing the data gaps identified under Data Gaps Initiative 3: some greenhouse gas emissions and energy accounts are now available; and work is progressing on the remaining twelve recommendations which cover climate; financial innovation; household distribution, and data sharing."
- Changes since the last Article IV consultation: "N/A"
- Corrective actions and capacity development priorities: "N/A"

### Data provision and dissemination practices
- Italy adheres to the Special Data Dissemination Standard (SDDS) Plus since February 2015 and publishes the data on its National Summary Data Page.
- "The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board (https://dsbb.imf.org/)."

### Annex V. Table 3: Table of Common Indicators Required for Surveillance (selection of displayed items)
- As of June 10, 2024
- Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Expected Frequency / Italy⁸ / Expected Timeliness / Italy⁸ (table headings preserved)
- Several table entries as presented:
  - 10-Jun-24 10-Jun-24 DDDD...D
  - Apr-24 May-24 MMMM 1W NLT 1W
  - May-24 Jun-24 MMMM 2W NLT 1W
  - May-24 Jun-24 MMMM 1M 1M
  - May-24 Jun-24 MMMM 2W NLT 1W
  - May-24 Jun-24 MMMM 1M 1M
  - 10-Jun-24 10-Jun-24 DDDD......
  - May-24 May-24 MMMM 1M 2W
  - 2023Q4 Apr-24 A/ QA/ QA/ Q Q 2Q/ 12M 4M
  - Apr-24 Jun-24 MMMM 1M 30D
  - 2023Q4 Apr-24 QQQQ 1Q N LT 1Q
  - Mar-24 May-24 MMQM 1Q 1M
  - Mar-24 May-24 MMMM 8W NLT 7W
  - 2024Q1 May-24 A/ QA/ QQQ 1Q 10W
  - 2023Q4 Mar-24 QQQQ 1Q 1Q
  - 2023Q4 Mar-24 QQQQ 1Q 85D
- Data categories listed in the table:
  - Exchange Rates
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Reserve/Base Money
  - Broad Money
  - Central Bank Balance Sheet (Including currency and maturity composition.)
  - Consolidated Balance Sheet of the Banking System
  - Interest Rates (Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.)
  - Consumer Price Index
  - Revenue, Expenditure, Balance and Composition of Financing ‒ General Government
  - Revenue, Expenditure, Balance and Composition of Financing ‒ Central Government (Foreign, domestic bank, and domestic nonbank financing.)
  - International Investment Position
  - Stocks of Central Government and Central Government-Guaranteed Debt
  - External Current Account Balance
  - Exports and Imports of Goods and Services
  - GDP/GNP
  - Gross External Debt
- Footnotes included in table:
  - 1 Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions.
  - 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - 5 Including currency and maturity composition.
  - 6 Frequency and timeliness codes explained: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual.; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; and ("NLT") not later than;.
  - 7 "Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus. Any flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected."
  - 8 "Based on the information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board (https://dsbb.imf.org/). For those countries that do not participate in the Data Standards Initiatives, as well as those that do have a National Data Summary Page, the entries are shown as "...""

*Source: Annex V. Data Issues (Italy), as presented in the supplied PDF content.*

### Annex VI. Implementation of Key 2020 FSAP Recommendations

### Annex VI. Implementation of Key 2020 FSAP Recommendations

### Bank Supervision and Regulation and NPL Resolution
- Capital adequacy and Pillar 2 Guidance (P2G)
  - Banca d’Italia (BdI) introduced a new approach to determine the Pillar 2 Guidance (P2G) for less significant institutions (LSI) linking P2G buckets strongly to supervisory stress test results and ICAAP internal stress tests, aligned with CRR/CRD, EBA Guidelines on SREP, and SSM methodology.
  - "As a result, over the period 2020-2022 the P2G more than doubled, reflecting a strengthening of the capital amount of the banks to cover stress scenarios."
  - The increased P2G level was confirmed by SREP 2023 capital decisions.

- Escalation and early intervention
  - BdI has increasingly adopted early intervention measures and launched horizontal analyses post-pandemic focusing on (i) business model sustainability; (ii) credit risk; (iii) turnaround costs.
  - Aggregated findings used to prioritize and cluster banks by riskiness; a limited number of small banks identified with serious weaknesses—some resolved via M&A or capital strengthening; at least one case had an early intervention measure adopted.
  - BdI implemented an Early Intervention framework supported by an IT tool for automatic detection of potential financial deteriorations of LSIs.
  - In December 2023 the ECB adopted new Joint Supervisory Standards (JSS) on crisis management for LSIs; BdI co-chaired the drafting Working Group and incorporated best practices. Periodic operational and strategic meetings occur between ECB and BdI to analyze LSI crisis cases.

- Thematic inspections, governance and fit & proper (FAP)
  - BdI performed off-site and on-site deep dives and thematic reviews on governance, credit risk, business models, and IT outsourcing.
  - A thematic review on governance systems of LSIs led to benchmarking and recommendations; related guidance published to LSIs in November 2022.
  - Follow-up: inspections on IT outsourcers (two providers in 2020; in 2024 follow-ups on two IT providers; inspections covering a third IT provider, two credit collection providers, one compliance provider, one risk management services provider).
  - FAP assessments: Ministerial Decree no. 169/2020 introduced suitability requirements; BdI launched benchmarking on FAP cycles 2021 and 2022. Document published in November 2023: (i) promoted best practices and remediation of recurring weaknesses; (ii) required entities to develop FAP assessment policies to be adopted as early as 2024. Intense supervisory dialogue followed.

- Credit risk, loan classification, provisioning, and NPL management
  - BdI continued scrutiny of loan classification and provisioning practices, with horizontal and bank-specific analyses of NPL reduction plans and UTP portfolios.
  - A horizontal analysis of management of unlikely to pay exposures produced best practices guidance.
  - BdI intensified supervisory action toward servicing entities and issued a communication in November 2021 highlighting sector risks and recommending controls for servicing business.
  - OSI methodology improved during 2022 to better reflect IFRS9 and securitization best practices.
  - In September 2023 BdI issued a letter to LSIs emphasizing potential impacts from geopolitical/economic tensions and requiring prudent credit risk classification and provisioning.

- SSM approach extension and P2R/P2G add-ons
  - EBA Guidelines on NPE management (EBA/GL/2018/06) replaced previous national GL; only a small number of banks now subject to stricter monitoring.
  - Current SREP methodology defines proxies to calculate a P2R and a P2G add-on to cover under-provisioning risk, considering severity, vintage, IFRS staging, and secured/unsecured status.
  - For SREP 2023 BdI fully adopted the ECB LSI SREP methodology for Italian LSIs while providing additional Centrale dei Rischi information.
  - ECB is coordinating an SSM-level impact assessment on extending the SSM approach; further developments await completion of that analysis.

- Powers for removal of authorization and winding-up
  - For banks: Ministry involvement in initiation of resolution/liquidation occurs only upon BdI proposal and is argued not to affect BdI operational independence; Minister may accept or refuse BdI proposals but institutional features act as a responsibility-sharing mechanism.
  - For insurers: under Art. 240 of the Italian Insurance Code, withdrawal of authorization is by decree of the Minister of Economic Development upon IVASS proposal; immediate compulsory winding up follows withdrawal for all classes. No legislative initiatives in progress to alter this framework.

- Governance of banks and insurers (suitability of major shareholders and corporate officers)
  - Decree setting suitability requirements for banks’ board members and key function holders entered into force on January 30, 2020 (ministerial decree no. 169/2020). BdI regulation on suitability adopted May 4, 2021.
  - Competent units and BdI drafted a new regulation to review the decree on suitability of major shareholders; text under government evaluation.
  - IVASS provided technical contribution to MISE for FAP regulation for insurance corporate officers (art. 76 Italian Insurance Code) and proposed coordinated drafting with MEF for qualifying shareholders (art. 77 Italian Insurance Code).
  - Following public consultation, draft regulation on suitability of major shareholders remains under government evaluation to reflect comments received and amendments in national criminal procedural law.

### Macroprudential Policies and Framework
- National macroprudential authority
  - Legislative Decree 207/2023 aimed at establishing the national macroprudential authority (drafted according to Law 127/2022, Art. 6) was issued in December 2023 and is in force since 11th of January 2024.
  - Competent authorities involved: MEF, IVASS, BdI, CONSOB.

- Toolkit enhancements
  - In February 2022 the Systemic Risk Buffer (SyRB) and borrower-based measures were incorporated into BdI’s macroprudential toolkit via revision of Circular n. 285.
  - On 26 April 2024, BdI announced activation of a systemic risk buffer equal to 1.0 per cent of domestic exposures weighted for credit and counterparty credit risks, for all banks and banking groups authorized in Italy.

- Sovereign-bank nexus
  - No additional national prudential policies planned to moderate sovereign-bank nexus beyond regular monitoring; BdI view that such national actions are not advisable in the euro area/EU context.

### Insolvency Framework
- Legal and procedural reforms
  - Decree law 118/2021 (August 2021) introduced out-of-court negotiated workout for resolving firms’ crises.
  - Legislative decree 14/2019 (bankruptcy code), as amended, entered into force July 15, 2022 to implement the EU preventive restructuring directive.
  - Since January 2022, art. 35-ter of law 233/2021 mandates professional courses for judges handling bankruptcy to enhance technical specialization, particularly in smaller courts.
  - New Insolvency Code strengthened bankruptcy professionals’ appointment and training requirements, relaxed the early warning mechanism (making it voluntary), and provides a wide range of restructuring tools including “composizione negoziata”.
  - Post-entry-into-force monitoring and feedback collection from judges, lawyers, and professionals are ongoing. Government may recast the Insolvency Code within two years; work underway to improve procedural clarity and efficiency.

### Reinforcing Crisis Management and Safety Nets
- Loss-absorbing capacity, MREL, and resolution planning
  - Resolution plans drafted for all Italian LSIs, updated annually or every 2 years.
  - Binding MREL targets set in line with BRRD2 equal to loss absorption amounts when liquidation is preferred and including recapitalization amounts and market confidence charges when resolution is preferred. Transitional periods or phase-ins can be applied to allow compliance.
  - For LSIs whose failure could pose systemic risks, resolution identified as preferred strategy and resolvability assessments expanded consistent with EBA Guidelines and SRB policy; banks were given a three years phase-in period to complete analysis and remedial steps.
  - Comprehensive Manual for crisis management and resolution finalized November 2020 and periodically updated.
  - 2021: BdI participation in an EU-level dry-run to enhance crisis preparedness and test Resolution College procedures.
  - 2023: dry-run exercise related to a fictitious LSI coordinated with SRB and other authorities to test cooperation and access conditions to the Single Resolution Fund.
  - Early 2024: further internal testing for SRB resolution scheme implementation for a mock significant institution.

- Deposit Guarantee Schemes (DGS), FITD, and funding/backstops
  - FITD promoted and BdI approved a by-law amendment strengthening independence of the DGS Chair and introducing independence for one Board member; further increases in DGS Board independence to be discussed.
  - Decree of the Italian Minister of Finance n. 169/2020 envisages fit and proper requirements (including independence) for DGS in line with proportionality.
  - Current funding target level 0,8% of covered deposits is the DGSD minimum requirement.
  - FITD has a funding agreement (€ 3,5 bn) with a pool of major banks activatable if available financial means are insufficient.
  - A credit line agreement for the FGDCC has been finalized with the two "parent companies" of the two cooperative banking groups and the "managing institution" of the Institutional Protection Scheme to strengthen financing capacity and funding adequacy.
  - BdI disagrees with a blanket avoidance of using DGS resources for failure prevention; in Italy preventive interventions over the last 20 years have been successful and are consistent with EU legislation and IADI Core Principles. BdI supports preventive intervention only when strong prospects for successful rehabilitation and long-term viability exist; FITD’s 2021 by-law amendment moved in this direction.

### Selected Macroeconomic and Fiscal Findings (from accompanying material)
- Debt and fiscal outlook
  - In 2023, the debt-to-GDP ratio declined for the third straight year, falling to 137.3 percent, down by 3.2 percentage points from the previous year and by around 18 percentage points compared to 2020.
  - Superbonus: authorities introduced measures to phase out and restrict use; take-up foreseen to sharply decline in 2024 and 2025; Superbonus will expire in December 2025 and its impact on cash borrowing requirement will fade away after 2027.

- External position and growth
  - Authorities note Italy shifted from net external liability position of 20 percent of GDP (post-GFC) to a 7 percent of GDP net creditor position.
  - Authorities emphasize resilience post-Covid and energy shocks, favorable goods export performance, and labor market improvements: participation rate reached its highest level since the inception of the series in late 2023; unemployment at historically low levels.

- Fund relations and macro data
  - Membership: Joined March 27, 1947; Article VIII.
  - Quota: 15,070.00 SDR Million; Fund holdings of currency 11,106.85 SDR Million; Reserve Tranche Position 3,963.23 SDR Million.
  - SDR Department holdings: 22,033.45 SDR Million; Net cumulative allocation 21,020.03 SDR Million.
  - Projected charges/interest: 0.16 (SDR million) for 2024, 2025, 2026, 2027.
  - Article IV consultations: Italy on standard 12-month cycle; previous discussions May 8–23, 2023; staff report (IMF Country Report No. 23/273) discussed July 20, 2023.

*Source: Annex VI. Implementation of Key 2020 FSAP Recommendations (prepared based on information provided by the Italian authorities).*

### 4.3 percent in 2024 to 2.2 in 2027. In line with the new EU fiscal rules, the Government

### 1itaea2024001 - 4.3 percent in 2024 to 2.2 in 2027. In line with the new EU fiscal rules, the Government

### Fiscal policy, adjustment, and debt sustainability
- The Government is discussing the policy fiscal adjustment with the European Commission and will publish it after the summer.
- The policy scenario to be agreed with the European Commission will be compliant with the EU rules and will commit to a fiscal path which will ensure debt sustainability.
- Budget decisions will be guided by the principles of prudence and realism, balancing:
  - the pace of adjustment, and
  - the need to preserve room for growth-enhancing investments and reforms.
- Based on previous experience, an adjustment more rapid than the one consistent with the new fiscal rules could have sizable costs for activity.
- Composition priorities:
  - improve spending efficiency,
  - further reduce the tax gap,
  - continue the fight against tax evasion (which marked an historical record in 2023 and keeps contributing to increase revenues).
- Authorities concur with staff’s overall assessment on debt sustainability, and note that the Sovereign Risk and Debt Sustainability Analysis (SRDSA) does not take into account compliance with the EU rules—an element highly valued by financial markets.
- Numerical trajectories and targets mentioned:
  - "4.3 percent in 2024 to 2.2 in 2027." (policy context for adjustment)
  - The Government will present a Medium-Term Fiscal Structural Plan aligned with the reference trajectory issued by the European Commission, in line with the requirements of the new EU fiscal rules.
  - The forthcoming seven years plan will require, as per new fiscal rules, to keep the public investment to GDP ratio at least at the level delivered by the NRRP.

### Financial sector and stability
- Financial market conditions continue to improve and risks to financial stability are on a declining path despite high geopolitical tensions.
- The financial stress conditions index has reached 15-year lows, supported by favorable performance of equity, corporate bond, and government securities markets.
- Households:
  - Financial situation overall sound.
  - Share of financially fragile households is set to remain stable at 2.2% in 2024.
  - Households’ indebtedness is low from a historical perspective and lower compared to other jurisdictions.
- Credit and loan dynamics:
  - Cost on new loans has decreased for both households and firms.
  - Loan default rate is projected to remain well below levels seen in previous crisis periods for both households and firms.
- Firms:
  - Resilient, robust financial structure, and high profitability.
- Government interventions:
  - Adopted several measures to mitigate recent crises.
  - Intervention via guaranteed loans played a crucial role in limiting deterioration of creditworthiness.
  - Authorities committed to continue gradually phasing out existing guarantee schemes.
- Banks and supervision:
  - Reforms after the GFC strengthened banks’ ability to handle subsequent crises.
  - Banks’ financial condition remains sound; profitability has increased significantly and is set to remain high in the current year.
  - Liquidity position is strong and well above regulatory requirements.
  - Improvement in credit quality led to a sharp decline of the net NPL ratio from 9.8% in 2015 to 1.4% in 2023.
  - Bank of Italy has strengthened supervisory and regulatory oversight of smaller banks, in line with the 2020 Financial Sector Assessment Program recommendations.
  - In April the Bank of Italy announced activation of a systemic risk buffer (SyRB) equal to 1.0% of all domestic exposures weighted for credit and counterparty risks.
    - The SyRB is a flexible instrument that addresses systemic risks not covered by other measures and can be released immediately in case of shocks.
    - Creation of the buffer will strengthen the capacity of the Italian banking system to deal with possible adverse events, even those unrelated to the economic-financial cycle.
    - The Bank of Italy will re-evaluate the level of the buffer every two years, or sooner if circumstances so require.

### Structural policies and the NRRP
- The growth-enhancing reform and investment agenda of the NRRP will be key in lifting productivity.
- NRRP efforts towards the green and digital transitions will continue within the context of the Medium-Term Fiscal Structural Plan under discussion with the European Commission.
- The forthcoming seven years plan will:
  - keep the public investment to GDP ratio at least at the level delivered by the NRRP,
  - focus on research and innovation, education, business climate and infrastructures, including those connecting to North Africa.
- Implementation and governance:
  - Italy is performing well on the NRRP and has put in place measures to accelerate implementation, including strengthening governance and funding mechanisms and simplifying administrative procedures.
  - Key reforms underpinned by the Plan—reforms of civil and criminal justice, public administration, competition policy, and tax administration—are well advanced and already bringing tangible results (example: significant reduction in average duration and case backlog of judicial proceedings).
  - Authorities remain firmly committed to ensure transparency and financial integrity of NRRP funds; the revised Plan enhanced anti-fraud controls.
- Social objectives:
  - One main goal of the NRRP and the Government’s agenda is to raise female labor force participation and the birth rate.
  - Measures include increasing childcare facilities and full exemption from social security contributions for working mothers with at least two children.

### Conclusions and policy stance
- Italy has recovered well from the sequential Covid and energy price shocks, showing remarkable resilience amid geopolitical and economic instability.
- Growth momentum is expected to continue, while projections of the authorities are informed by caution and prudence.
- Italy is fully committed to pursue a fiscal consolidation strategy aimed at reducing public debt while preserving room for growth-enhancing investments and reforms.
- Authorities will present a Medium-Term Fiscal Structural Plan aligned with the European Commission reference trajectory and the new EU fiscal rules.
- The Italian banking system’s financial situation remains sound, strengthened by post-GFC regulatory reforms and rigorous supervision.
- The recently established SyRB is expected to further strengthen the banking system’s capacity to deal with possible adverse events.
- Authorities remain fully committed to implement a growth-enhancing reform and investment agenda, speeding efforts for full and timely implementation of the NRRP and preparing a successor Plan within the Medium-Term Fiscal Structural Plan.

*Source: IMF staff summary from the provided content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1itaea2024001.pdf_