## 1itaea2025001-source-pdf ## Source details **Canonical URL:** [1itaea2025001-source-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf.json) --- ### Context and structural constraints - Italy’s output in 2024 surpassed pre-pandemic levels by 6 percent; employment reached an all-time high. - NRRP and fiscal consolidation supported growth and market confidence; fiscal position improved with a primary surplus in 2024. - Structural constraints: - Weak productivity growth and slow innovation. - Shortage of high-skilled workers. - Female labor force participation at 58.4 percent (below EU average). - Real GDP per capita growth lags peers. - Demographics: UN low-fertility projections imply the old-age dependency ratio could increase from 39 to 70 people aged 65+ per 100 working-age people (aged 15–64) during 2024–50. - Significant North–South regional disparities; high reliance on imported energy. ### Recent real sector, labor, and inflation developments - Real sector - Real GDP growth: 0.7 percent in 2024; growth in 2025Q1: 0.7 percent year-on-year. - NRRP-related infrastructure investment was a key growth driver. - Household precautionary savings weighed on private consumption and imports; tourism supported exports. - Industrial production recovered in early 2025; H2 2024 showed weakness. - Labor market - Employment rate: record 62.7 percent in April 2025; employment rate 62.9 percent in May 2025 (authorities’ national statistic). - Employment gains strongest among workers aged 50+; youth unemployment (ages 15–24) contributed to a youth unemployment rate of 19.2 percent. - Fixed-rate mortgages: 72 percent of outstanding mortgages as of December 2024. - Employment growth (Table 1): 2024: 1.5; 2025: 0.9; 2026: -0.4; 2027: -0.5; 2028: -0.5; 2029: -0.5; 2030: -0.7. - Inflation and wages - Headline inflation: below 1 percent for most of 2024; 1.7 percent year-on-year in June 2025. - Core inflation: around 2 percent. - GDP deflator: 2.1 percent in 2024; eased further in 2025Q1. - Hourly compensation (industry incl. construction): 2024: 2.9; 2025: 2.3; 2026: 1.3 (percent, Table 1). - Wage growth indicators: hourly compensation increased by around 3 percent in 2024; Bank of Italy wage tracker averaged 4.3 percent in 2024. ### External sector and external position - Current account: surplus of 1.1 percent of GDP in 2024; staff projects 0.9 (2025), 0.8 (2026), rising to 1.8 percent of GDP by 2030 (Table 1). - Export structure and regional differences - Exports ≈ 30 percent of GDP. - Major export shares: Machinery and equipment: 16 percent; Textile, apparels and leather products: 10 percent; Basic and fabricated metals: 10 percent; Transport equipment: close to 9.5 percent. - Northern Italy accounts for close to 90 percent of Italy’s exports. - Exports as share of value-added (2023): Northern Italy: 40 percent; Southern Italy: 16 percent. - Southern Italy more concentrated: coke and refined petroleum: 20 percent of regional exports; food, beverages, and tobacco: 15 percent; transport equipment: 13 percent (South) vs 9 percent (North). - Both regions: United States, Germany, and France each take around 10 percent of regional exports. - Net international investment position: strengthened to 15.3 percent of GDP at end-2024. - Staff assessment: external position in 2024 weaker than implied by medium-term fundamentals and desirable policies; policy advice includes continued fiscal consolidation and productivity-boosting reforms. ### Credit, financial sector, and market developments - Credit - Private sector credit growth gradually improved; household credit growth turned positive, especially new mortgages. - Decline in credit to firms eased; credit gap remained negative (filtering-dependent). - Corporate leverage fell to a 20-year low. - Housing and markets - Residential property prices: +4.5 percent year-on-year in 2024Q4. - Spreads over Germany 10-year sovereign bonds narrowed to below 100 basis points as of late June 2025. - Italian long-term yields eased since early-2025 spike; as of June 2025 broadly in line with assumptions in the authorities’ October 2024 MTFSP. - Financial soundness (Table 5) - Regulatory capital to risk-weighted assets: 2024Q2: 19.9. - Nonperforming loans to gross loans: 2024Q2: 2.8 (2023: 2.7). - Return on equity: 2023: 12.1; 2024Q2: 6.6. - Liquidity coverage ratio: 2024Q2: 173.9. - Macroprudential measures - Systemic Risk Buffer (SyRB): activated at 1.0 percent on 26 April 2024 with phase-in; banks required to set aside 0.5 percent by December 31, 2024, and remaining 0.5 percent by June 30, 2025. - Countercyclical capital buffer (CCyB) maintained at zero. ### Public finances, NRRP implementation, and debt outlook - 2024 fiscal outturn - Headline deficit: shrank to 3.4 percent of GDP in 2024. - Primary balance: surplus of 0.4 percent of GDP in 2024 (versus euro area average primary deficit of 1.5 percent of GDP). - Public investment: +14.5 percent in real terms in 2024 due to NRRP infrastructure investments. - Public-sector guarantees stock: ~€294 billion (13.4 percent of GDP) at end-2024. - Public debt ratio: 135.3 percent of GDP at end-2024. - NRRP status (end-2024 / end-March 2025) - 54 percent of NRRP milestones and targets achieved by end-2024. - Nearly two-thirds of allocated funds received (€122.1 billion). - Nearly half of 292 thousand NRRP projects completed. - Only 57 percent of disbursed funds had been spent by end-March 2025. - Authorities’ medium-term fiscal plan (MTFSP) - Gradual 7-year fiscal adjustment; overall deficit projected to narrow to below 2 percent of GDP by 2029. - Primary surplus projected to reach 2.4 percent of GDP by 2029. - 2025 projection: primary balance to increase to 0.7 percent of GDP; net expenditure growth expected at 1.3 percent. - Main 2025 deficit-expanding measures: IRPEF reforms and tax deductions amounting to €18 billion annually; IRPEF bracket reduction from four to three made permanent. - Staff baseline fiscal projections (selected) - Overall balance (Staff baseline, percent of GDP): -3.4 (2024), -3.3 (2025), -2.8 (2026), -2.7 (2027), -2.4 (2028), -2.4 (2029), -2.5 (2030). - Primary balance (Staff baseline, percent of GDP): 0.4 (2024), 0.7 (2025), 1.2 (2026), 1.5 (2027), 1.9 (2028), 1.9 (2029), 2.0 (2030). - Public debt (Staff baseline, percent of GDP): 135.3 (2024), 136.9 (2025), 138.4 (2026), 138.5 (2027), 138.0 (2028), 137.5 (2029), 137.2 (2030). ### Outlook and key projections (Table 1 highlights) - Growth projections (real GDP, annual percent): 2024: 0.7; 2025: 0.5; 2026: 0.8; 2027: 0.6; 2028: 0.7; 2029: 0.7; 2030: 0.7. - Nominal GDP (billions of euros): 2024: 2,192; 2025: 2,250; 2026: 2,313; 2027: 2,373; 2028: 2,437; 2029: 2,503; 2030: 2,571. - Consumer prices (percent): 2024: 1.1; 2025: 1.7; 2026–2030: 2.0 each year. - Current account balance (percent of GDP): 2024: 1.1; 2025: 0.9; 2026: 0.8; 2027: 1.2; 2028: 1.4; 2029: 1.6; 2030: 1.8. ### Risks and Annex I highlights - Key global risks (relative likelihood / impact): Trade policy and investment shocks — High / Medium; Sovereign debt distress — High / High; Deepening geoeconomic fragmentation — High / Medium; Cyberthreats — High / High/Medium. - Domestic risks: Inefficient or partial NRRP implementation — Medium / High; Ineffective tax reform — High / High; Failure to put public debt on a downward path — Medium / High. - DSA summary (baseline public debt trajectory, percent of GDP): 2024: 135.3; 2025: 136.9; 2026: 138.4; 2027: 138.5; 2028: 138.0; 2029: 137.5; 2030: 137.2; 2034: 138.3. - Gross financing needs and debt service (baseline): gross financing needs 2024: 24.1 percent of GDP; debt service (percent of GDP) 2026: 29.3; 2027: 28.3. ### Staff fiscal recommendations and adjustment path - Priority: maintain strong fiscal discipline to reduce vulnerabilities from high public debt and gross financing needs. - Recommended path: - Bring the primary surplus to 3 percent of GDP by 2027. - Cumulative adjustment of around 2.6 percentage points of GDP during 2024–27. - Additional fiscal adjustment of 1.5 percentage points of GDP beyond existing consolidation, spread evenly across 2025 and 2026 with ¾ percentage point of GDP adjustment in each year. - Rationale: - Bolster market confidence, build buffers, and limit future adjustment needs given potential worsening of the interest rate–growth differential. - Ramp-up of NRRP spending early would cushion economic impact of fiscal consolidation. - Fiscal options: - Rationalize tax expenditures (currently at 6 percent of GDP). - Eliminate preferential flat-tax for self-employment income. - Replace hiring subsidies with productivity-boosting measures; update cadastre to align taxable values with market values. - Any new spending must be fully compensated; automatic stabilizers should be the primary counter-cyclical tool in adverse shocks. ### Growth-enhancing reforms, productivity, and NRRP implementation - Long-term growth constrained by demographics and productivity; medium-term growth around 0.7 percent under moderate capital deepening and NRRP implementation assumptions. - NRRP window: deadline mid-2026 for milestones and targets; some spending expected in 2027; two thirds of reforms-related milestones achieved by end-2024; only 10 percent of investment-related milestones achieved by end-2024. - R&D and ICT investment gaps (2023 figures) - R&D: 1.3 percent of GDP (EU average: 2.2 percent). - ICT investment: 2.3 percent of GDP. - Policy priorities to lift potential growth: - Boost human capital and skills; increase labor supply and female participation (e.g., expand childcare, remove disincentives). - Revive private-sector dynamism: continue insolvency reform, eliminate size-based tax incentives, deepen capital markets, broaden access to risk capital. - Industrial policy to be targeted, time-bound, and coordinated at EU level. - Climate and energy security recommendations: - Accelerate permitting for renewables, expand energy storage, deepen electricity market integration. - National plans (NECP and National Climate Change Adaptation Plan) to guide implementation. ### Financial sector recommendations and supervisory priorities - Maintain CCyB at zero; SyRB increase to 1 percent is welcome. - Monitor loan quality, especially for firms exposed to potential tariffs; supervise LSIs with targeted inspections and corrective measures. - Strengthen operational risk management and governance including IT and cyber risk; integrate cyber risk into governance frameworks. - NBFI: monitor vulnerabilities, assess Italian insurance guarantee scheme for life sector, plan stress tests, and enhance prudential tools. ### Authorities’ views (summarized) - Authorities broadly agree on resilience and reform progress; project real GDP growth at 0.6 percent in 2025 and 0.8 percent in 2026. - Authorities project MTFSP path and consider external position broadly in line with fundamentals (disagree with staff external norm assessment). - Authorities emphasize strengthened fiscal position, NRRP performance, and banking sector robustness; favor compensating any defense or new spending with savings. - Authorities question some IMF demographic and TFP assumptions and offer to share additional information to refine projections. _Italic: IMF staff report — 1. Regional Differences in Trade Structure and Exposures (chapter content)._ ### 1. Regional Differences in Trade Structure and Exposures _______________________________________ 12 ### 1. Regional Differences in Trade Structure and Exposures ### Context - Italy’s economy has shown notable resilience amid increased global uncertainty: output in 2024 surpassed pre-pandemic levels by 6 percent and employment reached an all-time high. - Permanent jobs have increased, particularly in Italy’s southern regions, improving employment quality. - Combined impact of the National Recovery and Resilience Plan (NRRP) and fiscal consolidation supported growth and market confidence. - Fiscal position turned out better than expected in 2024, with the government recording a primary surplus. - Global trade uncertainty has increased markedly, posing new challenges for an export-dependent economy; Italy’s diversified set of exports is a cushioning factor. - Structural constraints have become pressing: - Weak productivity growth and slow innovation. - Shortage of high-skilled workers. - Female labor force participation below EU average. - Real GDP per capita growth has fallen behind peer economies. - Demographic headwinds: UN low-fertility projections imply the old-age dependency ratio could increase from 39 to 70 people aged 65+ per 100 working-age people (aged 15–64) during 2024–50. - Significant regional disparities persist, with higher poverty and labor inactivity in the South versus the North. - High reliance on imported energy undermines energy security. ### Recent Developments — Real Sector - Real GDP expanded by 0.7 percent in 2024 (second consecutive year), with weakness in H2 2024. - NRRP-related infrastructure investment was a key growth driver and partially offset slower residential activity as Superbonus spending was curtailed. - Household precautionary savings weighed on private consumption and imports; tourism supported export growth. - Growth in 2025Q1 was 0.7 percent year-on-year, supported by investment and private consumption. - Industrial production recovered in early 2025. - Cautious household and firm sentiment amid heightened trade policy uncertainty. ### Labor Market Developments - Employment rate reached a record 62.7 percent in April 2025. - Rise in permanent contracts attributed to past labor market reforms and incentives for permanent hiring. - Employment gains strongest among workers aged 50+; employment declined slightly for ages 15–24, contributing to a youth unemployment rate of 19.2 percent. - Female labor force participation edged up to 58.4 percent but remains well below the EU average. - Decline in vacancies, particularly in manufacturing, signals potential cooling in labor demand. - Wage growth in 2024: hourly compensation increased by around 3 percent; Bank of Italy wage tracker averaged 4.3 percent in 2024. - Real disposable incomes held up relatively well reflecting earlier cuts in social security contributions and income taxes for lower-income workers. ### Inflation and Wage Developments - Headline inflation remained below 1 percent for most of 2024 due to negative base effects from prior energy price increases and broad-based disinflation. - Headline inflation reached 1.7 percent (year-on-year) in June 2025 amid a rebound in regulated energy prices and a pickup in food price inflation. - Core inflation has remained relatively sticky at around 2 percent. - GDP deflator moderated to 2.1 percent in 2024 and eased further in 2025Q1, reflecting a decline in unit profits—the first since 2017—as firms partly absorbed rising wage costs that outpaced weak labor productivity growth. - Households and firms expect moderate price growth over the next 12 months ranging from 1.7 to 2.9 percent. ### External Sector Developments - Current account turned to a surplus of 1.1 percent of GDP in 2024. - Export dynamics in 2024: pick-up in consumer goods exports and strong tourism contribution; weak exports of capital and intermediate goods led to broadly unchanged overall export values in 2024. - Imports declined, largely due to a decline in the energy import bill amid lower prices. - Early 2025 saw a 1.6 pickup in export values, indicating signs of frontloading of exports amid increased trade policy uncertainty. - Net international investment position strengthened to 15.3 percent of GDP at end-2024. - Target-2 liabilities declined, partly reflecting increased holdings of sovereign debt securities by non-residents. - Staff assessment: external position in 2024 is weaker than the level implied by medium-term fundamentals and desirable policies; main policy recommendations include continued fiscal consolidation and productivity-boosting reforms. ### Credit and Financial Sector Developments - Private sector credit growth gradually improved, though overall credit extension remains subdued. - ECB monetary policy easing led to lower lending rates for new and existing loans; prevalence of adjustable-rate loans among firms contributed to existing loan rate declines. - Household credit growth turned positive, particularly for new mortgages. - Residential property prices increased by 4.5 percent year-on-year in 2024Q4. - Decline in credit to firms eased; the credit gap remained negative (credit gap estimates vary by filtering approach). - Corporate leverage fell to a 20-year low. - Household mortgages mostly fixed-rate: 72 percent of outstanding mortgages as of December 2024. - Financial market volatility in early 2025 has largely subsided: - Spreads relative to Germany 10-year sovereign bonds narrowed to below 100 basis points as of late June 2025. - Italian long-term yields eased since their early-2025 spike and, as of June 2025, are broadly in line with those assumed in the authorities’ October 2024 Medium-Term Fiscal-Structural Plan (MTFSP). ### Public Finances and NRRP Implementation - Headline fiscal deficit shrank to 3.4 percent of GDP in 2024 (more than half reduction). - This was close to 1 percentage point of GDP better than the authorities’ initial deficit target of 4.3 percent of GDP (April 2024 DEF) and about ½ percentage point of GDP better than projected in the MTFSP. - Primary balance turned to a surplus of 0.4 percent of GDP in 2024, versus an average euro area primary deficit of 1.5 percent of GDP. - Public investment rose by 14.5 percent in real terms in 2024 on NRRP-related infrastructure investments. - Better-than-expected outturn supported by improved revenue collection from a strong labor market and increased tax compliance; lower spending on housing-related tax credits also played a role. - Public sector debt ratio ended 2024 at 135.3 percent of GDP, about 2½ percentage points of GDP lower than projected in April 2024 budget (owing to national accounts revisions and over-performance), but slightly higher than in 2023 due to previously-issued housing-related tax credits being claimed. - Public-sector guarantees stock declined slightly but remained elevated at about €294 billion (13.4 percent of GDP) at end-2024. - Sovereign-bank nexus has moderated with increased household demand for domestic government bonds and reduced Italian bank holdings, reflecting geographical diversification of sovereign portfolios. - NRRP status at end-2024: - 54 percent of NRRP milestones and targets achieved. - Nearly two-thirds of allocated funds received (€122.1 billion), ranking among EU’s top NRRP performers. - Reforms advancing in justice, public administration, competition, and taxation; marked progress in reducing court backlogs and improving tax compliance. - Nearly half of 292 thousand NRRP projects completed (mostly tax credits for home renovations and digitalization and investments in rail and school infrastructure). - Only 57 percent of disbursed funds had been spent by end-March 2025. - Authorities substituted some delayed projects and shifted about 1 percent of GDP in grants and loans intended for financing public investment to tax credits to support private investment. - Decree laws introduced to strengthen local administrative capacity and ease liquidity constraints. ### Outlook and Risks - Near-term growth outlook weighed down by uncertainty; NGEU-related spending acceleration provides offsets. - Projections: - Growth projected to moderate to 0.5 percent in 2025. - Temporary increase to 0.8 percent in 2026 when most NRRP infrastructure investments are due and higher investment in Germany expected to support external demand. - Headline inflation expected to average 1.7 percent in 2025 on lower energy prices and moderate wage growth, before converging to the ECB’s 2 percent target in 2026. - Key downside risk: uncertainty regarding potential new tariffs and global trade policy that would likely drag on exports despite Italy’s diversified product range and export destinations. *Source: IMF staff report — 1. Regional Differences in Trade Structure and Exposures (chapter content).* ### 12. Longer-term growth prospects are constrained by structural rigidities and adverse ### 12. Longer-term growth prospects are constrained by structural rigidities and adverse ### Growth prospects and demographic constraints - Labor’s effective contribution to growth is projected to decline steadily amid population aging absent significant productivity-enhancing and employment-boosting measures. - Assuming a moderate increase in capital deepening and modest productivity gains from full implementation of the NRRP, Italy’s medium-term growth rate is projected at around 0.7 percent. - Beyond the medium-term, the drag from the declining working-age population is expected to intensify and further constrain potential growth. - Reference to more detailed analysis: Selected Issues Paper, “Potential Growth—Adjusting to Aging,” and 2023 Selected Issues paper, “Population Aging in Italy: Economic Challenges and Options for Overcoming the Demographic Drag.” ### Real GDP growth forecast (contributions) - Forecast periods shown: 2024, 2025, 2026, 2027 with contributions by: - Private consumption - Public consumption - Gross fixed capital formation - Net exports - Changes in inventories - GDP (aggregate) - Sources cited: ISTAT and IMF staff calculations. ### Outlook uncertainty and risks - Uncertainty around the outlook is high; risks are to the downside. - Upside drivers (if realized): global growth acceleration, stronger-than-expected productivity gains from public investments and reforms, and deeper EU integration—these could boost investment, exports, and productivity. - Downside risks include: - Escalating trade tensions and additional tariffs reducing external demand and private investment. - Intensification of regional conflicts raising commodity prices and eroding business profits and real incomes. - Geopolitical and geoeconomic pressures increasing public spending needs and further straining high public debt. - Higher interest rates worsening financing conditions, growth, and public debt dynamics, reviving concerns about the sovereign-bank-corporate nexus. - Macro-critical climate events such as extreme weather-related disasters reducing economic growth and constraining fiscal space. - Pervasive and disruptive cyberthreats as digitalization unfolds, particularly for the financial system. - Domestic risk: inefficient or delayed implementation of the NRRP or tax reform could result in lower-than-expected growth and weaker fiscal consolidation. - Footnote data point: According to the European Investment Bank (EIB) Survey, 71 percent of Italian firms have adopted advanced digital technologies in 2024, which is ranked in the middle among EU countries. ### Authorities’ views - Authorities broadly agreed with staff’s assessment of the outlook and risks. - They highlighted resilience from a recovery in industrial production and construction, improved business sentiment, and a robust labor market. - Authorities project real GDP growth at 0.6 percent in 2025, rising to 0.8 percent in 2026. - They view medium-term productivity gains from NRRP implementation as supporting a gradual improvement of TFP growth over the longer term to help offset demographic pressures. - On inflation, authorities expect the disinflationary trend to continue, supported by declining energy prices and contained wage pressures. - External position: authorities view the external position as broadly in line with fundamentals and desirable policies; they disagree with staff’s external sector assessment on technical grounds and consider the estimated current account norm too high. - They point to the current account surplus and strengthening NIIP—now at 15.3 percent of GDP—and argue that a sizable further improvement in the current account is unwarranted given investment needs. - They note sensitivity of the norm to population projections and the composition of the external balance sheet (a larger share of debt liabilities than debt assets). ### Regional differences in trade structure and exposures (Box 1 highlights) - Italy’s overall exports amount to around 30 percent of GDP. - Major export categories and shares: - Machinery and equipment: 16 percent - Textile, apparels and leather products: 10 percent - Basic and fabricated metals: 10 percent - Transport equipment: close to 9.5 percent - Northern Italy accounts for close to 90 percent of Italy’s exports. - Exports as share of value-added (2023): - Northern Italy: 40 percent of its value-added - Southern Italy: 16 percent of its value-added - Northern Italy: - Export basket relatively well-diversified but tilted toward industries with higher trade elasticities (e.g., machinery and equipment, 18 percent of regional exports; basic and fabricated metals, 11 percent). - More exposed to Asia in addition to the EU, reflecting a manufacturing-heavy composition. - Southern Italy: - Exports concentrated in fewer industries, notably coke and refined petroleum (20 percent of regional exports) and food, beverages, and tobacco (15 percent). - Transport equipment accounts for 13 percent of exports in the South (9 percent in the North) and has relatively high trade elasticity. - Pharmaceuticals account for a relatively large share of Southern Italy’s exports (elasticity estimates unavailable). - Exports from Southern Italy are 50 percent more concentrated (less diversified) than those from Northern Italy. - More exposed to the non-EU European market and North Africa (Switzerland: 11 percent of regional exports in 2024; North Africa: 6 percent of regional exports in the South; 1.8 percent in the North). - Both regions display high geographical export diversification; the United States, Germany, and France each take around 10 percent of regional exports. ### Fiscal policy, debt outlook, and staff assessment - Authorities’ medium-term fiscal plan: - Gradual 7-year fiscal adjustment outlined in the inaugural MTFSP and the 2025 Public Finance Document (DFP). - Overall fiscal deficit projected to narrow to below 2 percent of GDP by 2029. - Primary surplus projected to reach 2.4 percent of GDP by 2029, each improving by about ½ percentage point of GDP annually on average. - In 2025, the primary balance is projected to increase to 0.7 percent of GDP, aided by an improvement in the structural primary balance of about ½ percentage point of GDP as required under the Excessive Deficit Procedure (EDP). - Growth in net expenditure is expected at 1.3 percent, as agreed with the European Commission. - Authorities project public debt to peak in 2026—due to sizable stock-flow adjustments related to claims of housing-related tax credits. - Staff baseline projections (select figures shown in the source): - Overall balance (Staff baseline): -3.4 (2024), -3.3 (2025), -2.8 (2026), -2.7 (2027), -2.4 (2028), -2.4 (2029), -2.5 (2030) (Percent of GDP) - Primary balance (Staff baseline): 0.4 (2024), 0.7 (2025), 1.2 (2026), 1.5 (2027), 1.9 (2028), 1.9 (2029), 2.0 (2030) (Percent of GDP) - Public debt (Staff baseline): 135.3 (2024), 136.9 (2025), 138.4 (2026), 138.5 (2027), 138.0 (2028), 137.5 (2029), 137.2 (2030) (Percent of GDP) - Memo: Annual net expenditure growth (MTFSP, percent): -1.9 (2024), 1.3 (2025), 1.6 (2026), 1.9 (2027), 1.7 (2028), 1.5 (2029) - Public debt (Staff baseline, 2024SR): 139.1, 140.6, 142.1, 143.6, 143.9, 143.9, 143.7 (Percent of GDP) - Staff notes key measures underpinning the authorities’ medium-term adjustment path remain to be identified; absent identification, staff assumes the primary surplus will peak at 2 percent of GDP and the overall deficit stabilizes at 2.5 percent of GDP by 2030, with public debt remaining elevated. - Staff assessment of sovereign debt risks: overall sovereign debt risks are moderate, fiscal space is at risk. - Mechanical signals for the medium- and long-term horizons are high due to still-elevated and rising public debt burden and sizable gross financing needs. - Mitigating factors include: (i) potential ECB support against unwarranted, disorderly market dynamics; (ii) relatively long average debt maturity; (iii) continued healthy retail appetite for government bonds; (iv) reduced sovereign-bank linkages. ### Staff policy recommendations and fiscal adjustment path - Priority: maintain strong fiscal discipline to reduce vulnerabilities from high public debt and sizable gross financing needs. - Staff recommends: - Implement additional measures in the near term to bring the primary surplus to 3 percent of GDP by 2027 to ensure Italy’s debt ratio is on a declining path starting 2027, as envisaged in the authorities’ fiscal plan. - This corresponds to a cumulative adjustment of around 2.6 percentage points of GDP during 2024–27. - Considering consolidation efforts of around 1.1 percentage points of GDP already embedded in staff’s baseline, an additional fiscal adjustment of 1.5 percentage points of GDP is required. - The additional adjustment should be evenly spread between 2025 and 2026, with ¾ percentage point of GDP adjustment in each of the two years. - Rationale: - The recommended path would bolster market confidence, help build buffers against adverse shocks, and further underpin external and domestic stability. - Timely adjustment would entail less overall adjustment over the medium-term than a more gradual one given a worsening interest rate-growth differential. - Early adjustment is less challenging than a delayed one amid rising spending pressures from population aging and investment needs. - Simultaneous ramp-up of NRRP-related spending during early adjustment would cushion any potential economic impact. - Note on 2024 overperformance and 2025 budget measures: - The main deficit-expanding measures in the 2025 budget are the personal income tax (IRPEF) reforms and tax deductions for employment income, amounting to €18 billion annually. - The 2025 budget made permanent the IRPEF changes introduced in the 2024 budget, including the reduction in the number of tax brackets from four to three by merging the first two brackets and the reduction of the tax wedge for low- and middle-income employees. - The cut in social security contribution was replaced by a tax relief (or a negative income tax for low-income taxpayers), thereby avoiding negative impact on social security accounts. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf* ### 20. Several options are available for achieving the recommended fiscal adjustment while ### Several options are available for achieving the recommended fiscal adjustment while limiting the growth impact and improving distributional consequences ### Fiscal adjustment options and revenue measures - Further savings can be achieved in taxation and subsidies, including continued reforms on tax evasion and tax compliance. - Rationalizing tax expenditures (currently at 6 percent of GDP) and strengthening oversight and control would: - broaden the tax base, - reduce complexity, - bolster revenue. - Eliminating the preferential flat-tax rate for income on self-employment would: - help address equity concerns, - prevent revenue loss. - Replace hiring subsidies with productivity-boosting measures given a still-robust labor market and high corporate profits; focus on education and skill-upgrading. - Updating the cadastre register (not comprehensively revised since the 1980s) would: - yield higher revenues, - improve equity by reducing the gap between taxable values and market values, particularly for higher-market-value properties. - These measures are expected to have limited effect on economic activity while rebalancing policies toward more inclusive outcomes. ### Medium-term debt reduction and fiscal strategy - Maintain a primary surplus of 3 percent of GDP to place debt firmly on a downward trajectory. - Fiscal efforts required over the medium and longer terms to offset: - expected worsening of Italy’s interest rate-growth differential, - rising spending pressures, - and to create room for growth-enhancing measures. - Pension-related spending: - currently above 15 percent of GDP, higher than the EU-average of 13 percent of GDP. - Over the next decade, population aging is expected to lift pension-related costs to a peak of around 17 percent of GDP, despite the introduction of a notional defined contribution scheme and indexation of the statutory retirement age to life expectancy. - Recent tightening of requirements for temporary early retirement schemes is welcome; new costly early retirement schemes should be avoided. - Raising the effective retirement age to narrow the gap with the statutory age would boost labor supply. - Improve cost-effectiveness of spending given demographic shifts: - greater demand for public services for older cohorts in health and long-term care, - need for adequate and well-targeted spending for younger cohorts for skill-upgrading. - Scope to improve per-recipient spending through digitalization and repurposing existing facilities and public sector workers. - Enhance transparency of the medium-term fiscal plan (MTFSP): - establish robust monitoring and control systems to minimize adverse deviations from agreed medium-term targets set on net expenditure, - continue comprehensive reporting on fiscal balances and public debt ratios. - Monitor risks related to contingent liabilities: - stock of public guarantees is gradually declining but remains sizable, - prudent management, centralized monitoring, and adequate provisioning needed, - reducing guarantees to pre-pandemic levels would help de-risk the public sector, - refrain from using new publicly-guaranteed loans as a substitute for on-budget spending, - continue close monitoring of exposures for existing guarantees to limit potential spillovers. ### Growth-enhancing reforms, scenarios, and debt dynamics - Productivity-enhancing reforms combined with fiscal consolidation facilitate a more precipitous decline in the debt ratio and can alleviate fiscal adjustment needs. - Scenario outcomes: - If staff’s recommended fiscal path is combined with reforms that lift annual growth by 0.3 percentage point above the baseline growth projection, the cumulative debt reduction would be 2 percentage points of GDP higher by 2030. - Alternatively, the higher growth path would allow additional adjustment of ½ percentage point of GDP in 2025 and 2026 (compared to ¾ percentage point of GDP without the growth boost), permitting a narrower primary surplus of 2.5 percent of GDP (instead of 3 percent of GDP) from 2027 onwards. - Note on assumptions for recommended scenario: - the primary balance adjustment during 2025-26 is higher by 0.75 percentage points of GDP in 2025, compared to the baseline adjustment, reaching the primary surplus of 3 percent of GDP in 2027. - the real GDP growth for the recommended paths assume a fiscal multiplier of 0.3, based on possible savings measures with limited growth impact. - the dotted lines in the analysis assume real GDP growth is higher than those used for the recommended scenario (solid red) by 0.3 percentage point each year, starting 2026. - there is no feedback assumed from public debt levels to interest rates. ### Constraints on new spending and handling adverse shocks - Any new spending measures (e.g., for defense) should be fully compensated with savings elsewhere. - If increased spending is decided, it should be fully compensated by additional efforts to increase revenues and/or reduced spending elsewhere; tax reforms should broaden the tax base while increasing efficiency and equity. - A net deficit increase would: - raise overall debt, - possibly delay the turning point of the debt ratio, - increase risks of higher borrowing costs with possible spillovers to the private sector. - In the event of adverse shocks, automatic stabilizers should remain the primary counter-cyclical response: - given limited at-risk fiscal space, debt-reducing efforts combined with growth-enhancing reforms should continue even under all-but-the-most-severe adverse macroeconomic shocks, - automatic stabilizers are the main tool to provide temporary relief, - adequate social safety nets are crucial, - any additional support measures should be budget neutral, temporary, and well-targeted to the most vulnerable households and viable firms, - NRRP-related spending should not be re-purposed for counter-cyclical support. ### Authorities’ fiscal views - Authorities highlighted Italy’s strengthened fiscal position and commitment to the EU-agreed fiscal path. - Stronger-than-expected performance in 2024 largely reflects structural gains in tax collection—driven by improved compliance and a broader tax base. - Authorities committed to: - meeting this year’s net expenditure growth target of 1.3 percent, - returning the overall fiscal deficit to below 3 percent of GDP by end-2026, - further gradual but firm deficit reduction. - On defense expenditure and contingent liabilities: - increases in defense expenditure should be largely offset by reductions in other spending items, exploiting synergies in security and infrastructure investment, - in an adverse economic scenario, meeting net expenditure targets would take priority by allowing automatic stabilizers to fully operate instead of discretionary deficit-widening measures, - prudent provisions for contingent liabilities have been made; banks have followed cautious lending practices, - authorities see a potential role for public guarantees to crowd in new private financing to boost investment and address market failures, while acknowledging the benefits of reducing the stock of contingent liabilities close to pre-pandemic levels. ### Financial sector soundness and risks - Banking system soundness has strengthened with adequate capital and ample liquidity buffers. - Profitability is high; several major banks reported record profits driven by higher net interest income, fee revenue, and reduced loan loss provisions. - Potential profit erosion from continued monetary easing could be partly offset by increased fee income. - Asset quality is sound: - Nonperforming loans (NPLs) remained low and stable at 2.7 percent of gross loans as of 2024Q4, slightly above the euro area average of 1.9 percent. - Net NPL ratio for significant institutions (SIs) held steady and in line with the euro area average of 1.1 percent. - Ratio declined slightly to 2 percent for less significant institutions (LSIs) with traditional business models. - The share of stage 2 loans fell below 10 percent of total performing loans, with a higher ratio for LSIs. - Risk-weighted assets have edged down but remain elevated; asset quality could deteriorate, particularly for loans to firms exposed to potential tariffs. - Macroprudential policy: - increase of the Systemic Risk Buffer (SyRB) to 1 percent is welcome (introduced in 2024 and implemented gradually, with banks required to set aside 0.5 percent by December 31, 2024, and the remaining 0.5 percent by June 30, 2025). - maintaining the countercyclical capital buffer (CCyB) at zero remains consistent with the negative credit-to-GDP gap. - Broader macro-financial linkages to monitor: - sovereign-bank linkages remain sizable despite decline in aggregate banking sector exposure to the Italian sovereign, - recent pick-up in new mortgage loans increases household exposure to real estate developments; house prices have increased somewhat but price-to-rent and price-to-income ratios remain low, - tariff shocks may adversely affect firms directly and indirectly, deteriorating loan quality and bank balance sheets. - LSIs vulnerabilities and supervisory priorities: - pockets of vulnerabilities exist among some LSIs, - enhance oversight of LSIs via targeted inspections, in-depth reviews of credit risk management practices, and continued monitoring of NPLs, - adopt corrective measures when necessary for imprudent risk management, insufficient provisioning, or undue forbearance, - strengthen regulations on operational risk management and governance, including detailed requirements and enhanced supervisory capacity for IT and cyber risk, - consider timely escalation of corrective measures and measures to achieve consolidation or orderly wind-downs when necessary. - NBFI sector: - NBFI-related risks to financial stability are moderate, - substantial rebound in life premium income in 2024 mitigated liquidity risks in the life insurance sector, - despite the rebound, return on equity has continued to decline; only a few insurers temporarily suspended the impact of unrealized capital losses on annual profitability, - assess effectiveness of the 2024 budget law establishing the Italian insurance guarantee scheme for the life sector, - monitor vulnerabilities in the NBFI sector and conduct credit risk scenario analysis, - enhance NBFI-specific prudential tools and plan stress tests, - closely monitor non-bank exposures to sovereign entities, particularly in the insurance sector. - AML/CFT progress: - updated National Risk Assessment (NRA) adopted in November 2024, - new directorate within the Ministry of Economy and Finance established to regulate and supervise non-financial obliged entities, - Bank of Italy bolstered AML/CFT supervision, including cross-border risks and alignment with EU Directives, - progress on risks from crypto-asset service providers with a new licensing, supervision, and sanction regime. ### Authorities’ financial sector views - Authorities broadly agreed that financial system soundness has improved due to effective supervision and close monitoring. - Highlighted banking sector robustness: high profitability, sound asset quality, strong capitalization, and stable liquidity. - Noted that accumulation of SyRB to one percent strengthens the sector and that maintaining CCyB at zero aligns with the credit cycle stage. - Observed that policy rate reduction stimulated household credit demand while firm credit demand declined. - Emphasized subdued risks from the real estate sector and improved overall capital positions of LSIs aided by supervision. - Committed to tackling challenges from the digital economy and climate change within the financial system and to aligning the AML/CFT framework with international standards. *Italic: IMF staff report excerpt.* ### 33. Tackling Italy’s productivity malaise through innovation and skills development is ### Tackling Italy’s productivity malaise through innovation and skills development is urgently needed to reinforce resilience and offset the impact of unfavorable demographics. ### Productivity, innovation, and skills - Italy’s R&D investment in 2023 amounted to 1.3 percent of GDP, below the EU average of 2.2 percent of GDP and the 3–5 percent of GDP seen in other major economies, including Germany, the United States, and Korea. - Investment in Information and Communication Technology (ICT) stood at 2.3 percent of GDP, lagging France and the United States. - Nearly 16 percent of the youth population was neither in employment, education, nor training in 2024. - The wage premium on tertiary education is low, discouraging higher education and incentivizing emigration of highly qualified graduates. - Italy ranks below several other major advanced economies in terms of preparedness to adopt artificial intelligence (IMF AIPreparedness Index shown comparatively with Singapore, United States, Germany, France, Spain, Italy). ### National Recovery and Resilience Plan (NRRP) implementation - The window to implement the NRRP has shrunk to just over a year; the deadline for meeting NRRP milestones and targets is mid-2026; some spending is expected to take place in 2027. - Two thirds of milestones and targets associated with the reforms have been achieved by end-2024, compared with only 10 percent of milestones and targets associated with investments. - Around €5 billion remains available for green technologies expenditures incurred by end-2025. - If fully implemented, the NRRP should help narrow structural gaps in public sector efficiency, infrastructure, labor market participation, and human capital, with productivity gains extending beyond 2026. - To maximize the impact of new infrastructure, adequate and sustained funding for staffing and maintenance will be needed beyond the NRRP’s horizon. ### Policy reforms to raise potential growth beyond the NRRP - Reforms should build on NRRP design and implementation lessons: well-defined milestones and targets, ongoing monitoring, and performance-based disbursements. - The MTFSP through 2029 is a welcome longer-term framework, but further details are needed to ensure continued reform momentum. - Priority reform areas: - Boost human capital and upgrade skills to offset a declining working-age population. - Increase labor supply and workforce participation, especially among women, including by expanding access to childcare and removing policy-induced disincentives (e.g., tax credits for dependent spouses). - Revive private sector capacity to produce and adopt innovations. ### Reviving private sector dynamism and access to finance - Italian firms struggle to scale up and innovate; mature Italian firms are significantly smaller than in other countries, and few new entrants become market leaders. - Key actions to enhance business dynamism: - Continue implementation of the insolvency reform. - Eliminate size-based tax incentives. - Deepen capital markets, particularly broaden access to risk capital. - Ensure a more predictable regulatory environment to support technological upgrades and the digital transition. - EU-level actions—advancing the single market and making progress towards the savings and investment union—would help firms achieve economies of scale and improve access to capital. - Efforts to address risks of transnational aspects of corruption should continue. ### Industrial policy guidance - Italy announced new industrial policy measures in 2024 and early 2025 targeting dual use products, raw materials, technology, and low-carbon products. - Industrial policy should be: - Deployed cautiously and targeted where externalities or market failures prevent market solutions. - Time-bound, underpinned by rigorous cost-benefit analysis, consider spillovers and complementary policies, and avoid distortionary discriminatory measures. - Coordinated at the EU level to limit cross-industry and cross-country spillovers. ### Climate, energy security, and the transition to renewables - Climate and energy security are macro-critical for Italy given its economic structure and vulnerability to higher, more volatile energy prices. - Italy’s climate targets: - Fit-for-55 package and Italy’s Nationally Determined Contribution aim to reduce greenhouse gas emissions by 55 percent by 2030 relative to 1990 levels. - Challenges to accelerate renewables include grid infrastructure limitations, construction bottlenecks, community engagement issues, and insufficient energy storage. - Recommended policy measures: - Accelerated permitting for renewables. - Expanded energy storage. - Deeper electricity market integration. - The National Energy and Climate Plan and the National Climate Change Adaptation Plan will guide implementation; the latter focuses on strengthening resilience to climate impacts. ### Authorities’ views - The authorities view the NRRP and the MTFSP as a coherent reform agenda; all milestones and targets due through 2024 have been met, with 2025 objectives on track and implementation at an advanced stage—over half of milestones and targets have been achieved. - Flexibility agreed with the European Commission allows substitution of delayed measures with equivalent budget-funded actions to ensure timely milestone completion and disbursements. - Authorities emphasize ongoing efforts to raise productivity and labor force participation and view industrial policy as a strategic tool to enhance innovation and competitiveness. - Authorities remain steadfast in mitigating risks of transnational aspects of corruption. ### Staff appraisal, outlook, and fiscal and financial recommendations - Recent macro developments and outlook: - Growth performed around potential for the second consecutive year. - Employment rate reached a record high. - Credit to households has turned positive; contraction in credit to corporates has eased. - Headline inflation gradually increased to just below 2 percent. - The 2024 public-sector deficit and debt ratio turned out better than projected. - Growth projections and risks: - Growth is expected to slow to 0.5 percent this year, before temporarily picking up to 0.8 percent next year on the back of peak NRRP spending and positive trade spillovers from Germany. - Headline inflation is projected to average 1.7 percent this year, before converging to the ECB’s 2 percent target in 2026. - Downside risks dominate, including escalating trade tensions, regional conflicts, tightening global financial conditions, macro-critical climate-related shocks, cyberthreats, and delayed or inefficient NRRP implementation. - Fiscal recommendations: - Maintain strong fiscal discipline and reach a primary surplus of 3 percent of GDP by 2027. - Rationalize tax expenditures, including by reducing preferential treatment of self-employment income, to broaden the tax base and improve progressivity. - Replace hiring subsidies with productivity-enhancing measures. - Any new spending should be fully compensated by savings elsewhere given Italy’s at-risk fiscal space. - Over the longer term, contain pension-related pressures, avoid new costly early retirement schemes, boost labor supply and skill levels, and ensure a steady decline in public guarantees through prudent management, centralized monitoring, and adequate provisioning. - Financial sector recommendations: - Maintain the current countercyclical capital buffer; the increase in the systemic risk buffer to 1 percent is welcome. - Closely monitor loan quality amid risks to firms from trade tensions. - Address vulnerabilities among some LSIs and integrate cyber risk into governance and risk frameworks. - Timely escalate corrective measures for weak banks to support improvements in capital adequacy and operational efficiency. _Italic: IMF staff summary based on the chapter "Tackling Italy’s productivity malaise through innovation and skills development is urgently needed..."_ ### 45. It is recommended that the next Article IV consultation take place on the standard 12- ### It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Real Sector Developments - Recommendation: The next Article IV consultation should take place on the standard 12-month cycle. - Real GDP (Index: 2019Q4=100): plotted series for Germany, France, Spain, Italy (latest indicator labeled 2025Q1). - Contributions to Real GDP Growth (Percent, year-on-year growth; 2025Q1): decomposition shown for Private consumption, Public consumption, Gross fixed capital formation, Net exports, Changes in inventories, GDP. - Real GDP by Expenditure Category (Index: 2019Q4=100; 2025Q1): series for Private consumption, Public consumption, Gross fixed capital formation, Exports, Imports. - Manufacturing GVA and Industrial Production (Index: 2019Q4=100; 2025Q1): series for GVA, Energy-intensive manufacturing, Non-energy-intensive manufacturing. - Industrial Production (Index: 2021=100; Apr 2025): series comparing Italy and Germany. - Business Confidence Indicators (Index: 2021=100; May 2025): Composite, Manufacturing, Construction, Services, Retail. ### Inflation and Labor Market Dynamics - GDP Deflator and Income Component Contributions (Percent): series for Unit labor costs, Unit profits, Unit taxes, GDP deflator (2005–2025Q1). - PPI and CPI Inflation (Year-on-year percent change; May 2025): CPI (RHS), Domestic PPI, Domestic PPI excl. energy. - Labor Shortages and Capacity Utilization (2025): Capacity utilization and Labor shortages (labor shortages in percent balance, capacity utilization in percent of capacity; 2025Q1). - Job Vacancies (Percent of total jobs; 2025Q1): Total (excl. public admin.), Industry, Construction, Services (excl. public admin.). - Short-Time Work (Millions of authorized hours; 2025 1/ reflects data through March only): historical series 2010–2025. - Employment and Participation Rate (Employment in millions; Participation rate percent, RHS; 2025Q1): series showing Employment around 22.0–24.5 millions (2019–2025). - Note on CIG: Italy’s Cassa Integrazione Guadagni (CIG) provides partial wage replacement to employees whose working hours are reduced or suspended due to temporary economic disruptions. ### Labor Market Developments - Young People Neither in Employment, Education, nor Training, 2024 (Percent): Italy compared with France, Spain, EU, Germany. - Unemployment Rate (Percent; 2025Q1): series with youth counts (Thousands, RHS). - Employment by Sector (Index: 2019Q1=100; 2025Q1): Industry, Construction, Private services, Public services. - Changes in Employment by Industry (Thousands of persons; 2025Q1 relative to 2019Q4): Agriculture, Industry excl. construction, Construction, ICT/science & prof. services, Other services. - Employment and Labor Force Participation Rates, 2024Q4 (Percent): comparisons with Germany, France, Spain. - Share of Fixed-Term Employees by Age Group (Percent; 2024): series for 15-34 years, 35-49 years, 50-64 years. ### Fiscal Developments and Issues - Fiscal balances (Percent): Primary balance (percent of GDP) and Structural primary balance (percent of potential GDP) series (2005–2024). - Government Bond Yields and Spreads (Jun 2025): 10-year spread over Bunds (basis points, RHS), 1-year yield, 10-year yield. - Interest Expense and Bond Yields (Percent; 2024): Interest expense (percent of GDP), Average cost of new issuances. - Central Government Bond Operations, Upcoming Redemptions (Billions of euros; As of Feb 28, 2025): schedule by maturity (Short-term, Medium- and long-term) including Feb-26 marker. - Change in General Government Expenditures (Billions of euros, cumulative since 2008): components include Capital Transfers, Public Investment, Social benefits, Current Expenditure Excl. Wage Bill and Social Benefits, Interest, Wage Bill. - NGEU Grants and Loans, 2020–26 (Percent of 2024 GDP): cross-country comparison including Italy. Key fiscal figures from Table 1 (2024–30 projections; Annual percentage change unless noted): - Real GDP: 2024: 0.7, 2025: 0.5, 2026: 0.8, 2027: 0.6, 2028: 0.7, 2029: 0.7, 2030: 0.7 - Real domestic demand: 2024: 0.4, 2025: 0.8, 2026: 1.0, 2027: 0.5, 2028: 0.6, 2029: 0.6, 2030: 0.6 - Gross fixed capital formation: 2024: 0.5, 2025: 2.1, 2026: 2.5, 2027: 0.9, 2028: 1.0, 2029: 1.0, 2030: 1.0 - Savings (Percent of GDP): 2024: 23.5, 2025: 23.8, 2026: 24.7, 2027: 25.2, 2028: 25.7, 2029: 26.0, 2030: 26.5 - Investment (Percent of GDP): 2024: 22.4, 2025: 22.9, 2026: 23.9, 2027: 24.0, 2028: 24.3, 2029: 24.4, 2030: 24.7 - Nominal GDP (billions of euros): 2024: 2,192; 2025: 2,250; 2026: 2,313; 2027: 2,373; 2028: 2,437; 2029: 2,503; 2030: 2,571 - Potential GDP growth: 0.7 (each year 2024–2030) - Output gap (percent of potential): 2024: 0.0; 2025: -0.2; 2026: -0.1; 2027: -0.2; 2028: -0.2; 2029: -0.2; 2030: -0.2 - Employment growth: 2024: 1.5; 2025: 0.9; 2026: -0.4; 2027: -0.5; 2028: -0.5; 2029: -0.5; 2030: -0.7 - Unemployment rate (percent): 2024: 6.6; 2025: 6.6; 2026: 6.7; 2027: 6.8; 2028: 6.9; 2029: 6.8; 2030: 6.8 - Consumer prices: 2024: 1.1; 2025: 1.7; 2026: 2.0; 2027: 2.0; 2028: 2.0; 2029: 2.0; 2030: 2.0 - Hourly compensation (industry including construction): 2024: 2.9; 2025: 2.3; 2026: 1.3; 2027: 1.4; 2028: 1.3; 2029: 1.2; 2030: 1.1 - Unit labor costs (industry including construction): 2024: 4.8; 2025: 2.2; 2026: 0.8; 2027: 0.9; 2028: 0.8; 2029: 0.7; 2030: 0.6 - General government net lending/borrowing (Percent of GDP): 2024: -3.4; 2025: -3.3; 2026: -2.8; 2027: -2.7; 2028: -2.4; 2029: -2.4; 2030: -2.5 - General government gross debt (Percent of GDP): 2024: 135.3; 2025: 136.9; 2026: 138.4; 2027: 138.5; 2028: 138.0; 2029: 137.5; 2030: 137.2 - Current account balance (Percent of GDP): 2024: 1.1; 2025: 0.9; 2026: 0.8; 2027: 1.2; 2028: 1.4; 2029: 1.6; 2030: 1.8 From Table 2 (Statement of Operations–General Government, Billions of euros and Percent of GDP): - Revenue (Billions of euros): 2022: 935.5; 2023: 995.7; 2024: 1,032.9; 2025: 1,066.7; 2026: 1,089.4; 2027: 1,113.5; 2028: 1,146.0; 2029: 1,175.0; 2030: 1,207.0 - Expenditure (Billions of euros): 2022: 1,097.6; 2023: 1,150.0; 2024: 1,108.4; 2025: 1,140.8; 2026: 1,154.9; 2027: 1,176.4; 2028: 1,204.0; 2029: 1,236.2; 2030: 1,271.4 - Net lending/borrowing (Billions of euros): 2022: -162.0; 2023: -154.3; 2024: -75.5; 2025: -74.1; 2026: -65.5; 2027: -62.9; 2028: -58.0; 2029: -61.3; 2030: -64.4 - General government gross debt (Percent of GDP): 2022: 138.3; 2023: 134.6; 2024: 135.3; 2025: 136.9; 2026: 138.4; 2027: 138.5; 2028: 138.0; 2029: 137.5; 2030: 137.2 - Primary balance (Percent of potential GDP): 2022: -4.0; 2023: -3.6; 2024: 0.4; 2025: 0.7; 2026: 1.2; 2027: 1.5; 2028: 1.9; 2029: 1.9; 2030: 2.0 - Structural overall balance and Structural primary balance shown for 2022–2030 with values preserved in source table. ### External Developments - Current Account Balance (Percent of GDP, rolling annual; 2025Q1): components Goods, Services and primary income, Secondary income. - Net Saving (Percent of GDP, deviation from 2019): series for Total, GG, HH, NFC, FC; charted through 2025. - Export and Import Volume Growth (Percent, year-on-year rolling; Mar 2025): Export and Import growth series. - Cumulative External Financial Flows by Sector (Billions of euros; 2024): Bank of Italy, MFIs excluding BdI, General government, Other sectors. - Target2 Balance (Billions of euros; Apr 2025): series 2019–2025. - Financial Account Balance (Percent of GDP; 2025Q1): components Other investment, Financial derivatives, Portfolio Investment Liabilities, Portfolio Investment Assets (opposite sign), FDI. From Table 3 (Summary of Balance of Payments, Billions of euros and Percent of GDP, 2022–30): - Current account balance (Billions of euros): 2022: -34.5; 2023: 2.9; 2024: 24.8; 2025: 19.4; 2026: 18.0; 2027: 28.8; 2028: 35.2; 2029: 40.0; 2030: 46.2 - Current account balance (Percent of GDP): 2022: -1.7; 2023: 0.1; 2024: 1.1; 2025: 0.9; 2026: 0.8; 2027: 1.2; 2028: 1.4; 2029: 1.6; 2030: 1.8 - Gross external debt (Percent of GDP): 2022: 124.7; 2023: 119.0; 2024: 120.5; 2025: 121.2; 2026: 121.2; 2027: 120.9; 2028: 120.4; 2029: 119.6; 2030: 119.1 ### Financial Sector Developments - Non-Performing Loans and Coverage Ratio (Billions of euros; series 2010–2025): Other NPEs, Bad loans, Coverage ratio (percent, RHS). - Net Liquidity Position (Average share of total assets; Mar 2025): Liquidity indicator - significant groups; Liquidity indicator - less significant groups; Net liquidity position definition provided. - ECB Liquidity Support and Bank Financing (Billions of euros; Feb 2024): Deposits, Debt securities, ECB support (RHS). - Real Estate Prices (Index: 2010Q1=100; 2024Q4): series 2019–2024. - Return on Equity (Percent, seasonally adjusted; 2024Q3): Italy versus Euro Area. - Outstanding Borrowing Under LTROs (Billions of euros; Apr 2025): series 2019–2025. - Banks' risk tolerance and Lending Standards (Net percentages; 2025Q1): indicators for Banks' risk tolerance, Risk perceptions, Competition, Cost of funds and balance sheet constraints, Credit standards (actual). - Foreign Banks’ Exposure to Italy by Sector (Percent of own GDP; 2024Q4): exposures by country. - Interest Rates on Loans (Percent; Feb/Mar 2025): Overnight deposits, Deposits with an agreed maturity, Bank bonds; New loans to NFCs and New mortgage loans series. - Index of Bank Credit Demand by Firms (Diffusion Index; 2025Q1): series and definition preserved. - European Banks' CDS Spreads (Basis points; Jun 2025): series for French, German, Italian, Spanish banks. From Table 5 (Financial Soundness Indicators for Banks, Percent, 2017–2024): - Regulatory capital to risk-weighted assets: 2017: 16.7; 2018: 16.1; 2019: 17.2; 2020: 19.3; 2021: 18.8; 2022: 19.2; 2023: 19.4; 2024Q2: 19.9 - Nonperforming loans to total gross loans: 2017: 14.4; 2018: 8.4; 2019: 6.7; 2020: 4.4; 2021: 3.3; 2022: 2.8; 2023: 2.7; 2024Q2: 2.8 - Return on assets: 2017: 0.6; 2018: 0.5; 2019: 0.4; 2020: 0.1; 2021: 0.4; 2022: 0.7; 2023: 1.2; 2024Q2: 0.8 - Return on equity: 2017: 7.5; 2018: 6.1; 2019: 5.1; 2020: 0.9; 2021: 6.0; 2022: 7.5; 2023: 12.1; 2024Q2: 6.6 - Liquid assets to total assets: 2017: 17.3; 2018: 16.1; 2019: 14.6; 2020: 21.3; 2021: 23.1; 2022: 18.3; 2023: 17.6; 2024Q2: 16.3 - Liquidity coverage ratio: 2022: 188.1; 2023: 186.5; 2024Q2: 173.9 - Net stable funding ratio: 2022: 132.4; 2023: 132.2; 2024Q2: 133.3 - Customer deposits to total (noninterbank) loans: 2017: 69.1; 2018: 67.9; 2019: 75.1; 2020: 68.5; 2021: 90.6; 2022: 78.0; 2023: 80.1; 2024Q2: 82.0 ### Climate - GHG EmissionsIntensity vs. Total Emissions, 2023 (Emissions/GDP KgCO2e/USD; Emissions per capita tCO2e/person): Italy (ITA) plotted alongside Other EMDEs, Other AE, EUR. - Climate Risks and Readiness, 2022: GAIN Vulnerability Score and IMF-Adapted Readiness Score comparing Italy, Rest of the World, EUR, Most Vulnerable Countries. - Disaster Frequency and Intensity (2000–2023): series for Drought, Extreme temperature, Flood, Landslide, Storm, Wildfire; Intensity defined as (Total death + 30 percent Total Affected)/Total population. - People Affected and Disaster Intensity (Thousands; 2000–2023): series for Drought, Extreme temperature, Flood, Landslide, Storm, Wildfire with Intensity (RHS). - Energy flows (Petajoules): Total Energy Import and Total Final Consumption series (2002, 2012, 2022) by fuel type; Total Energy Export and Domestic Production series (2002, 2012, 2022). - CPAT-based projections and notes: CPAT estimations are indicative and based on uniform assumptions across all countries (no new mitigation policies, 50 percent reduction in explicit subsidies if applicable, energy prices based on average IMF-WB forecasts, and macroeconomic projections from the latest WEO). - GHG Emissions vs. NDC Targets (Mt): Historic emissions and CPAT projections plotted vs. NDC target. - Emissions by Sector (2003–2023): sectoral shares (Top 20 Emitters avg) and Italy vs. World, Spain, France, Germany. - Electricity Generation by Energy Source, 2023 (Percent of total): Italy compared with Germany, Spain, France, United States; shares for Gas, Other fossil, Nuclear, Renewables. ### Monetary and Financial Aggregates From Table 4 (Monetary, 2020–24; values in millions or units as presented): - Net foreign assets: 2020: -156; 2021: -161; 2022: -265; 2023: -133; 2024: -350 - Broad money: 2020: 1,946; 2021: 2,095; 2022: 2,104; 2023: 2,047; 2024: 2,119 - Currency Issued: 2020: 218; 2021: 236; 2022: 241; 2023: 238; 2024: 247 - Demand deposits: 2020: 1367; 2021: 1507; 2022: 1491; 2023: 1369; 2024: 1417 - Claims on Nonresidents: 2020: 687; 2021: 754; 2022: 764; 2023: 808; 2024: 591 ### Key Projections and Tables - Table summaries and projections preserved for Real GDP, domestic demand, sectoral contributions, prices, fiscal and external accounts (2024–30) as detailed in Tables 1–3. - Fiscal consolidation indicators: Structural primary balance and Structural overall balance trajectories shown for 2022–2030 (percent of potential GDP). *Source: IMF staff calculations and national authorities as presented in the provided PDF content.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks – Conjunctural - Trade policy and investment shocks - Relative Likelihood: High - Impact If Realized: Medium — adverse effects on export growth due to Italy’s openness, integration in global value chains, and importance of manufacturing; potential mitigation if trade within the EU and with the rest of the world remains open; potential euro depreciation may act as a shock absorber. - Policy Responses: - Continue support for reducing barriers to trade and enhancing investment within the EU and with the rest of the world; ensure opportunities to diversify export products and destinations. - Accelerate the structural reform agenda to boost productivity and competitiveness. - Facilitate worker reallocation, reskilling/upskilling, while providing an adequate social safety net. - Sovereign debt distress - Relative Likelihood: High - Impact If Realized: High — higher sovereign borrowing costs and a shift in risk sentiment would cause repricing of government, bank and NFC bonds, curtail credit activity, strain leveraged corporates and households, deteriorate loan quality, increase insolvencies, and worsen public debt dynamics. - Policy Responses: - Formulate and implement a credible medium-term fiscal consolidation path that embeds structural reforms and productivity-boosting investments. - Keeping the Systemic Risk buffer at its current level to enable banks to retain high profits and better absorb weakening loan quality without reducing lending. Rely on bank resolution systems to address unsound banks. - Closely monitor banks’ loan classification practices, including for publicly guaranteed loans. - Tighter financial conditions and systemic instability - Relative Likelihood: Medium - Impact If Realized: High — could trigger asset repricing, market dislocations, weak bank and NBFI distress, further U.S. dollar appreciation, wider global imbalances, worsened debt affordability, capital outflows from EMDEs, and lower economic growth. - Policy Responses: Same as for sovereign debt distress. - Regional conflicts - Relative Likelihood: Medium - Impact If Realized: Medium — limited remaining direct trade and transit links to conflict regions, but escalation could raise costs of international trade, slow just-in-time manufacturing, increase defense needs, and strain domestic absorption capacity for refugees. - Policy Responses: - Consider strategies to increase resilience to supply shocks (increase inventories, diversify suppliers of critical commodities). - Improve integration of refugees into the domestic economy to help alleviate worker shortages due to population aging. - Commodity price volatility - Relative Likelihood: Medium - Impact If Realized: High — as a large commodity importer, supply disruptions and/or price spikes could significantly affect business profitability, output, real incomes, and the current account. - Policy Responses: - Allow domestic commodity prices to increase to encourage conservation, while providing well-targeted support to vulnerable households and firms. - Encourage inventory accumulation and more efficient consumption. - Promote investment in innovative energy systems, including renewables, battery storage, and associated grid infrastructure. - Global growth acceleration (positive upside) - Relative Likelihood: Low - Impact If Realized: Medium/High — growth acceleration in major trading partners could boost exports of goods and tourism services, increase investment, and strengthen growth. - Policy Responses: - Allow automatic fiscal stabilizers to operate and build fiscal buffers. - Continue to implement long-term growth-enhancing investments and reforms. ### Global Risks – Structural - Deepening geoeconomic fragmentation - Relative Likelihood: High - Impact If Realized: Medium — about half of Italy's trade is with non-EU countries; vulnerability to trade tensions with major partners; reshoring and supplier diversification are ongoing but uncertainty remains for firms reliant on foreign inputs and markets. - Policy Responses: - Protect and deepen the EU’s Single Market by strengthening EU integration in taxation, state aid, and the banking and capital markets unions. - Continue support for openness of trade and investment, and for the efficient functioning of a multi-lateral rules-based trading system. - Favor targeted de-risking over decoupling; take pre-emptive action to mitigate high-risk areas as self-insurance despite upfront costs. - Safeguard energy security by accelerating the green transition. - Cyberthreats - Relative Likelihood: High - Impact If Realized: High/Medium — digitalization is progressing but cyberattacks could impair financial system functioning, public services, and the economy; the number of cyberattack incidents increased by 15 percent to 357 in 2024, approximately once per day. - Policy Responses: - Raise awareness and enhance monitoring of cyberattacks. - Urge businesses and institutions to have robust cyber defenses and business continuity plans. - As per the FSAP recommendation, continue to strengthen the Bank of Italy’s monitoring and oversight of the financial sector’s IT resilience and cyber risk defenses. - Climate change - 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 - Inefficient or partial implementation of the NRRP (National Recovery and Resilience Plan) - Relative Likelihood: Medium - Impact If Realized: High — execution bottlenecks impede efficient execution; high-quality public investment and comprehensive structural reforms in the NRRP are needed to raise output, support green and digital transitions, and boost potential growth. - Policy Responses: - Ensure full implementation of the Plan through high-quality public investment, including in digitization, green infrastructure, education, and innovation, as well as structural reforms. - Ensure transparency and financial integrity of the use of public funds. - Ineffective tax reform - Relative Likelihood: High - Impact If Realized: High — a more regressive tax system or reliance on ad hoc rate cuts could disappoint on revenues, reduce progressivity, raise inequality, increase need for costly social transfers, and risk under-delivery on fiscal consolidation. - Policy Responses: - Ensure reforms reduce complexity and broaden the tax base to promote vertical and horizontal equity. - 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 — already elevated public debt and gross financing needs mean further shocks would increase borrowing costs and could trigger sharp fiscal adjustment; high borrowing costs could lead to financing constraints for banks and a credit crunch; proliferation of public loan guarantees may increase. - Policy Responses: - Lean into continued fiscal overperformance. - Promote high-quality public investment and comprehensive fiscal and structural reforms to secure a stable source of revenues and lift potential growth. ### DSA Summary Assessment and Debt Structure Highlights - Overall risk of sovereign stress: Moderate. - Medium-term mechanical signal: High — reflects high and rising public debt, sizable gross financing needs, and a high probability that debt may not stabilize. - Long-term risks: High — public debt ratio projected to increase sharply on aging-related costs amid a shrinking working-age population, raising amortization costs. - Mitigating factors cited: potential ECB support, relatively long maturity of government debt, healthy retail appetite for government bonds, and reduced bank-sovereign linkages. - Debt coverage and disclosure: Consistent with standard recommendations; most debt is issued by the central government; government guarantees not included in public debt unless called. - Public debt composition and structure (as reported): - Inflation-linked bonds constitute about 10 percent of the total stock of the Italian government bonds. - The average residual maturity of the general government debt is 7.9 years. - The majority of public debt is owned by residents with one fourth of the debt held by the Bank of Italy. - Commentary: Debt is predominantly in domestic currency and marketable. ### Baseline Scenario — Key Figures (percent of GDP unless indicated) - Public debt (actual/projection): - Actual 2024: 135.3 - 2025: 136.9 - 2026: 138.4 - 2027: 138.5 - 2028: 138.0 - 2029: 137.5 - 2030: 137.2 - 2031: 137.1 - 2032: 137.3 - 2033: 137.7 - 2034: 138.3 - Change in public debt (percent of GDP): 0.7 (2024), 1.6 (2025), 1.5 (2026), 0.1 (2027), -0.4 (2028), -0.5 (2029), -0.4 (2030), -0.1 (2031), 0.2 (2032), 0.4 (2033), 0.5 (2034) - Primary deficit (percent of GDP): -0.4 (2024), -0.7 (2025), -1.2 (2026), -1.5 (2027), -1.9 (2028), -1.9 (2029), -1.9 (2030), -1.9 (2031), -1.7 (2032), -1.7 (2033), -1.6 (2034) - Noninterest revenues (percent of GDP): 47.1 (2024), 47.4 (2025), 47.1 (2026), 46.9 (2027), 47.0 (2028), 46.9 (2029), 46.9 (2030), 46.9 (2031), 46.8 (2032), 46.8 (2033), 46.9 (2034) - Noninterest expenditures (percent of GDP): 46.7 (2024), 46.7 (2025), 45.9 (2026), 45.4 (2027), 45.1 (2028), 45.0 (2029), 45.0 (2030), 45.0 (2031), 45.1 (2032), 45.2 (2033), 45.2 (2034) - Automatic debt dynamics (percent of GDP): 0.2 (2024), 0.5 (2025), 0.5 (2026), 1.0 (2027), 1.1 (2028), 1.2 (2029), 1.5 (2030), 1.8 (2031), 2.0 (2032), 2.1 (2033), 2.2 (2034) - Real interest rate and relative inflation (percent): 1.1 (2024), 1.2 (2025), 1.6 (2026), 1.8 (2027), 2.0 (2028), 2.2 (2029), 2.5 (2030), 2.8 (2031), 2.9 (2032), 3.0 (2033), 3.1 (2034) - Real growth rate (percent): 0.7 (2024), 0.5 (2025), 0.8 (2026), 0.6 (2027), 0.7 (2028), 0.7 (2029), 0.7 (2030), 0.7 (2031), 0.7 (2032), 0.7 (2033), 0.7 (2034) - Gross financing needs (percent of GDP): 24.1 (2024), 19.9 (2025), 22.3 (2026), 22.7 (2027), 25.5 (2028), 23.5 (2029), 20.5 (2030), 23.1 (2031), 24.1 (2032), 23.4 (2033), 20.4 (2034) - Of which: debt service (percent of GDP): 24.6 (2024), 20.6 (2025), 29.3 (2026), 28.3 (2027), 27.4 (2028), 25.4 (2029), 25.9 (2030), 25.0 (2031), 21.7 (2032), 20.9 (2033), 22.0 (2034) - Local currency debt service (percent of GDP): 23.4 (2024), 22.2 (2025), 22.7 (2026), 28.3 (2027), 27.4 (2028), 25.4 (2029), 25.9 (2030), 25.0 (2031), 21.7 (2032), 20.9 (2033), 22.0 (2034) - Memo indicators: - Real GDP growth (percent): 0.7 (2024), 0.5 (2025), 0.8 (2026), 0.6 (2027), 0.7 (2028), 0.7 (2029), 0.7 (2030), 0.7 (2031), 0.7 (2032), 0.7 (2033), 0.7 (2034) - Inflation (GDP deflator; percent): 2.1 (2024), 2.1 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029), 2.0 (2030), 2.0 (2031), 2.0 (2032), 2.0 (2033), 2.0 (2034) - Nominal GDP growth (percent): 2.9 (2024), 2.6 (2025), 2.8 (2026), 2.6 (2027), 2.7 (2028), 2.7 (2029), 2.7 (2030), 2.7 (2031), 2.7 (2032), 2.7 (2033), 2.7 (2034) - Effective interest rate (percent): 3.0 (2024), 3.0 (2025), 3.2 (2026), 3.3 (2027), 3.5 (2028), 3.6 (2029), 3.9 (2030), 4.1 (2031), 4.2 (2032), 4.3 (2033), 4.3 (2034) - Commentary: 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 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 an increase in other age-related expenditures. *Source: IMF staff (Annex I. Risk Assessment Matrix; Annex II. Sovereign Risk and Debt Sustainability Analysis, selected figures).* ### Annex II. Figure 4. Italy: Realism of Baseline Assumptions ### Annex II. Figure 4. Italy: Realism of Baseline Assumptions ### Realism analysis — summary findings - The realism analysis shows a large median forecast error for medium-term primary deficit and debt, suggesting optimism bias. - Forecast errors are more moderate for r - g projections and stock-flow adjustments. - Key public-debt-creating flows identified for the next five years are higher interest payments and residual items representing the stock-flow adjustments from the past issuance of tax credits. - The projected debt and primary balance improvements are within norms as the Superbonus and other housing-related tax credits phase out. ### Distributional and percentile signals - 3-year debt reduction above 75th percentile: 5.9 ppts of GDP. - 3-year adjustment above 75th percentile: 2 ppts of GDP. - Percentile rank references in the figure: 36.3 (distribution 3/ — 3-year reduction) and 71 (percentile rank — 3-year adjustment). ### Drivers and component changes (past 5 years vs next 5 years) - Components shown include: Primary deficit, Real interest rate and relative inflation, Real GDP growth, Exchange rate depreciation, Residual (stock-flow adjustments), Change in public sector debt. - The figure highlights residuals tied to issuance of tax credits as a material contribution to public debt-creating flows. ### Fiscal adjustment and growth scenarios (illustrative) - Baseline and alternative scenarios are presented with fiscal multipliers labeled: Multiplier = 0.5; Multiplier = 1; Multiplier = 1.5. - Fiscal adjustment and possible growth paths are shown as: 3-year debt reduction and 3-year adjustment in cyclically-adjusted primary balance (percent of GDP), and real GDP growth using multiplier assumptions. ### Conceptual notes and methodological flags - Forecast track record uses projections made in the October and April WEO vintage. - Historical output gap revisions are presented as percentile ranks of the country’s output gap revisions. - The Laubach (2009) rule is referenced as a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. *Source: IMF Staff.* ### Annex V. Voluntary Assessment of Transnational Aspects of ### Annex V. Voluntary Assessment of Transnational Aspects of Corruption ### D. Supply Side - Recent progress and assessments - Italy volunteered to have its legal and institutional frameworks on foreign bribery assessed in the context of bilateral surveillance, reflecting the moderate risk. - The OECD 2024 Phase 4 Follow-Up Report commended progress in implementing earlier recommendations. - Efforts undertaken include raising awareness among public officials—including judges and prosecutors—through targeted training and enhanced media monitoring via a dedicated section in the Ministry of Justice. - Additional measures implemented: (i) enhancing mutual legal assistance; (ii) publishing judgements in foreign bribery cases, including non-trial resolutions; and (iii) addressing delays in criminal proceedings by hiring more magistrates and adopting technological tools. - Remaining legal and enforcement gaps - Continued strengthening of both preventive and enforcement measures is recommended. - Adoption of a comprehensive national strategy to fight foreign bribery is recommended to help identify high-risk sectors and outline mitigating actions. - Preventive measures should include deeper engagement with the private sector and more proactive promotion of anti-corruption compliance programs. - The continued practice of requiring proof of foreign law in foreign bribery cases contravenes the OECD Anti-Bribery Convention and should be modified. - On sanctions: - Fines for foreign bribery remain unavailable against natural persons. - The maximum fines for legal persons remain too low to be effective. - Legislative amendments are underway to address these gaps. - The statute of limitations for legal persons for foreign bribery cases is considered too short. - The OECD Working Group on Bribery expressed concern over declining enforcement levels, noting that convictions are largely achieved through non-trial resolutions, and the number of acquittals at trial remains disproportionately high. - Note: The authorities consider patteggiamento as a plea bargaining (a sentencing decision issued by a judge, based on an agreement between the defendant and the public prosecutor). - Recent guidance - In February 2025, the Ministry of Justice published the Guidelines for the Drafting of Codes of Conduct for Representative Associations of Entities, which provides guidance and criteria for adopting codes of conduct, with a focus on combatting the bribery of foreign public officials. ### E. Facilitation Side - Strengthened detection and deterrence capacity - Italy has strengthened its capacity to detect and deter the transnational aspects of corruption, with a focus on foreign bribery and illicit financial flows. - Authorities adopted a comprehensive approach to tackling the concealment of corruption proceeds, including enhanced detection, inter-agency collaboration, and enforcement. - Extensive training programs have been carried out: - Guardia di Finanza expanded specialized training for law enforcement. - The Financial Intelligence Unit (FIU) enhanced coordination with law enforcement and judicial authorities, including through a dedicated working group focused on identifying financial patterns associated with corruption. - New anomaly indicators have been issued to better detect transactions involving foreign politically exposed persons, and strategic analysis on corruption has been developed. - The Bank of Italy has reinforced its supervisory approach to ensure compliance with preventive measures, including for tackling foreign bribery. - Outstanding actions needed - Continued efforts are needed to ensure compliance with the requirements for foreign politically-exposed persons and to strengthen entity transparency. - Full operationalization of the Register of Beneficial Ownership is critical for advancing entity transparency and ensuring consistent application of existing obligations. - Implementation of the Register remains suspended, pending a ruling by the Court of Justice of the European Union. Resolution of this dispute is essential for progress. *Source: Annex V. Voluntary Assessment of Transnational Aspects of Corruption (Italy), as contained in the provided IMF document excerpt.* ### Annex VII. Implementation of Key 2020 FSAP Recommendations ### Annex VII. Implementation of Key 2020 FSAP Recommendations ### Bank Supervision and Regulation and NPL Resolution - Enhance banks’ capital levels, as appropriate, to ensure all banks maintain adequate capital ratios under stress scenarios. - The Bank of Italy (BdI) introduced a new approach for determination of the Pillar 2 Guidance (P2G) for less significant institutions (LSIs), consistent with CRR-CRD and EBA. - Supervisory stress tests on LSIs are carried out every two years by the BdI and complemented by ICAAP quantifications. - Over the period 2020–2022, the P2G more than doubled. - The increased level of the P2G was confirmed by SREP 2023 and continued to increase following SREP 2024, aligning LSIs with significant banks. - Agency: Bank of Italy (BdI), SSM. Time: ST. - Consider more timely escalation of corrective measures for weak banks to effect improvement or achieve consolidation/orderly wind-downs. - BdI actions promoted turnaround processes via capital strengthening and combinations with banking/financial partners and increased adoption of early intervention measures. - Since the pandemic, BdI launched horizontal analyses to identify LSI weaknesses focusing on (i) business model sustainability; (ii) credit risk; and (iii) turnaround costs; updated to prioritize banks by riskiness. - Since 2018 BdI implemented an early intervention framework supported by an IT tool to automatically detect financial deterioration of LSIs. - February 2022: BdI achieved compliance with EBA GL 2021/11 via new provisions on recovery plans. - December 2023: ECB adopted new Joint Supervisory Standards on crisis management for LSIs. - BdI used intrusive measures including appointment of temporary administrators supporting the BoD, enhancement of independent directors’ roles, removal of corporate body members, and special administration in severe cases. - Revamping of the Schema Volontario d’Intervento (SVI) could enable earlier intervention for troubled banks. - Agency: BdI. Time: I. - Perform more periodic deep dives and thematic/targeted inspections on key LSI weaknesses (governance, credit risk, business models). - BdI performed deep dives and thematic analyses off-site and on-site; 2020 request for LSIs to perform business model self-assessments over two years. - 2024: enhanced focus on outsourcers providing critical services to LSIs; follow-up inspections of two IT outsourcers and coverage of other providers (IT services, credit collection, compliance, risk management). - Action plans from banks were benchmarked and results shared with off-site supervisors for follow-up. - Fit and Proper (FAP) initiatives: benchmarking exercises in 2021 and 2022; end-2022 request for all LSIs to define action plans to fully integrate climate & environmental (C&E) factors by end-2025. - November 2023 document promoted adoption of best practices and FAP assessment policies by 2024 for corporate body renewals. - Main horizontal activities in 2024–2025: 1. Governance/FAP: methodological progress including supervisors’ assessments of corporate bodies and examination of BoD minutes; workshop on November 2023 document. 2. State-Guaranteed loans: dedicated monitoring to assess credit risk, soundness of processes, exposure to residual and operational/AML risks; June 2024 letter to LSIs with recommendations and request for Internal Audit review; April 2025 follow-up letter requiring resolution of identified shortcomings and inclusion of related risks in ICAAP. 3. LSIs ICT risk assessment: completion of a three-year supervisory plan and compliance assessment with EBA GL on ICT risk; 2024 inspections led to a horizontal action and a letter to banks summarizing findings and requesting proactive responses; BdI incorporated results into SREP; plan for 2025 includes on-site inspections focused on third-party IT and credit information system providers. 4. Integration of C&E risks: supervisory activities to monitor alignment with non-binding guidance on integration into strategies, governance, control systems, risk management, and disclosures. 5. Market and monetary policy changes: deep-dive on liquidity profiles with funding plans, pricing, and bond issuance; liquidity risk included in annual assessments; LSIs submit weekly forecasts on maturity ladder, increasing to daily in case of tension. 6. Deposits collected by LSIs in other EU countries: 2025Q1 survey launched on Online Deposit Platforms (ODPs); increased monitoring of "challenger banks" combining on-site and deep dives to ensure compliance with prudential and AML frameworks. - BdI continued on-site inspections and in 2025 planned two targeted inspections assessing (i) governance and credit, and (ii) credit risk and adequacy of remedies for high NPL banks. - Agency: BdI. Time: ST. - Continue scrutinizing banks’ credit risk and loan classification and provisioning practices, particularly UTP portfolios, and challenge NPL reduction plans. - BdI intensified supervision of loan classification, provisioning practices, and NPL management strategies via horizontal and bank-specific analyses. - Increased supervisory actions toward servicing entities; November 2021 communication on sector risks and recommended controls for servicing business. - OSI methodology enhanced in 2022 to align with IFRS9 and securitization best practices. - September 2023: BdI letter to LSIs highlighting potential impacts from economic/geopolitical situation and higher interest rates; banks required to adopt prudent and conservative credit classification and provisioning policies. - 2024: continued off-site and on-site supervision, with particular attention to classification, provisioning, and evaluation of NPL strategies; second half of 2024: BdI letter requiring assessment of processes for State-guaranteed loans. - Agencies: BdI, SSM. Time: C. - Consider extending SSM approach on bank-specific expectations for gradual path to full provisioning on existing NPL stocks to LSIs with high NPLs and update LSI NPL management guidance. - EBA Guidelines on NPE management adopted, replacing the 2018 national GL; only a small number of banks subject to stricter NPE monitoring. - Current SREP methodology defines a supervisory proxy to calculate a P2R and a P2G add-on to cover under-provisioning risk in baseline and stressed scenarios. - For SREP 2024, BdI adopted the SSM LSI SREP methodology for Italian LSIs and provided additional Central Credit Register information to analysts on provisioning, concentration, and collateralization. - ECB coordinating an impact assessment at SSM level; BdI continued provision monitoring in 2024 and co-chaired coverage impact analyses. - Agency: BdI. Time: I. - Amend relevant laws to confer BdI and IVASS authority on removal of authorization and winding-up of banks and insurers, respectively. - Ministry involvement in resolution/liquidation initiation occurs only on BdI proposal; Minister may accept or refuse, but in practice acceptance is the only viable outcome; Minister involvement provides protection from social/political pressures and responsibility-sharing. - Insurance sector withdrawals: under Art. 240 of the Italian Insurance Code, authorization withdrawal is by decree of the Minister of Economic Development upon IVASS proposal; if authorization withdrawn for all classes, compulsory winding up is immediate. - Agencies: MEF, MISE. Time: ST. - Address governance regulation gaps for banks and insurers by issuing draft MEF and MISE decrees. - Banks: decree on suitability requirements for board members and key function holders entered into force in January 2020; complemented by BdI Regulation adopted on May 4, 2021. - Insurance: IVASS provided technical input to MISE on FAP requirements for corporate officers and key function holders; IVASS proposed coordinated table with MEF to draft regulation for qualifying shareholders implementing art. 77 of the Italian Insurance Code; informal discussions occurred with MISE but no concrete developments to date. - Following public consultation, draft regulation revising the Ministerial Decree on suitability of major shareholders is under review; adoption of necessary provisions would complete the FAP regulatory framework for insurance. - Agencies: MEF, MISE, IVASS. Time: I. ### Macroprudential Policies and Framework - Establish a national macroprudential policy authority with a leading role for BdI. - Legislative Decree 207/2023, drafted according to Law 127/2022 (Art. 6), was issued in December 2023 and in force since January 2024 to establish the national macroprudential authority. - The Committee for Macroprudential Policies met twice in 2024 and once in [text truncated in source]. - Agency: (legislative framework involves BdI and Competent Authorities). Time: (not specified in excerpt). *Source: Annex VII. Implementation of Key 2020 FSAP Recommendations* ### 2025. In its two meetings held in 2024, ### 1itaea2025001-source-pdf - 2025. In its two meetings held in 2024, ### Macroprudential Policies and Framework - Assessment focus in 2024: capital buffers in the banking sector, household investments in certificates, risks linked to the growth of the non-banking finance sector, and developments in liquidity risk. - Actions: No macroprudential measures adopted in 2024; actions by individual authorities deemed sufficient. - Bank of Italy (BdI) SyRB decision: - On 26 April 2024, BdI announced activation of a systemic risk buffer (SyRB) 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, with a phase-in period. - The final target rate for the systemic risk buffer is expected to be met by June 2025. - Supporting analysis published in the Bank of Italy's ‘Occasional Papers’ series titled ‘Increasing macroprudential space in Italy by activating a systemic risk buffer’. - Recommendation noted: incorporate the Systemic Risk Buffer (SyRB) and borrower-based tools into the macroprudential toolkit — status: incorporated into BdI’s macroprudential toolkit via a revision of Circular n. 285 in February 2022; activation described above. (Agency: MEF, BdI. Timing: ST) - Recommendation noted: consider implementing prudential policies to moderate the sovereign-bank nexus with an appropriate phase-in period — status: No actions planned beyond regular/continued monitoring; BdI view is that at euro area/EU level such national action is not advisable. (Agency: BdI. Timing: MT) ### Insolvency Framework - Reforms completed and monitored: - August 2021: decree law 118/2021 introduced a new framework to enhance out-of-court workouts. - July 2022: new bankruptcy code entered into force, amended to implement the EU preventative restructuring directive; strengthens bankruptcy professionals’ appointment and training requirements; relaxed early warning mechanism to voluntary use; provides a wide range of restructuring tools including out-of-court negotiated restructuring. - Monitoring and adjustments: - Since July 2022, instruments monitored and feedback collected from judges, lawyers, and professionals. - Government can recast the Insolvency Code within two years from entry into force; work underway on procedural provisions to increase efficiency and clarity. - Legislative Decree No. 136, in force since September 27, 2024, introduced targeted amendments to the Italian Insolvency Code to clarify procedural aspects and enhance coherence without significant change to structure; additional provisions aim to improve procedural efficiency and recovery processes. - Business Crisis Observatory (established 2023) continues to monitor Code’s effectiveness through data collection and institutional feedback, supporting Minister of Justice’s reporting obligations under Article 353 of the Code. - (Agency: MoJ, NJC. Timing: ST) ### Reinforcing Crisis Management and Safety Nets - Loss-absorbing capacity and resolution: - Resolution plans drafted for all Italian LSIs; plans updated every one or two years. - Binding MREL target set according to BRRD2, equal to the loss absorption amount if liquidation is preferred and including recapitalization amount and market confidence charge if resolution is preferred. - Comprehensive Manual for crisis management and resolution finalized in November 2020 and periodically updated. - Policy line: use of public funds limited to exceptional events undermining financial stability; European Commission (DG COMP) monitors application of national public funds for bank crises per EU regulations. - Recent progress: - One additional LSI earmarked for resolution; MREL add-ons reaffirmed for those previously assigned. - For LSIs under resolution, MREL target includes loss absorption, recapitalization, and market confidence charge. - For LSIs with liquidation as preferred strategy, BdI has set MREL targets equal to the loss absorption amount plus: a) the full CBR TREA-based targets; b) half of the CBR for LRE-based targets. - For other LSIs earmarked for liquidation without an MREL add-on, no MREL target is set, per EU Directive 2024/1174 amending Regulation (EU) 806/2014 and Directive (EU) 2014/59/EU (the “Daisy Chain Act”). - (Agency: BdI, MEF. Timing: ST) - Deposit Guarantee Schemes (DGS) governance and funding: - FITD promoted and BdI approved by-law amendment to strengthen Chair independence and introduce independence of one Board member; further governance increases planned. - Decree of the Italian Minister of Finance no 169/2020 envisages fit and proper requirements (including independence) for DGS in line with proportionality. - Current funding target level: 0.8 percent of covered deposits (minimum EU legislative requirement under DGSD). - FITD funding agreement of € 3.5 billion with a pool of major banks can be activated if available financial means (AFM) are insufficient. - For FGDCC, a credit line finalized with two parent companies of cooperative banking groups and the managing institution of the Institutional Protection Scheme to strengthen financing capacity. - Recommendation: reinforce DGS by removing active bankers from boards; assess funding adequacy; strengthen backstops; avoid DGS resources for failure prevention outside resolution/liquidation except exceptional cases — status: steps taken as above. (Agency: DGS, BdI, MEF. Timing: ST) ### Fund Relations, Financial Data, and Membership - IMF membership: Joined March 27, 1947; Article VIII. - Quota and holdings (General Resources Account): - Quota: 15,070.00 (SDR Million) 100.00 percent of Quota - Fund holdings of currency: 11,009.00 73.05 - Reserve Tranche Position: 4,061.03 26.95 - Lending to the Fund: None - New arrangements to borrow: 13,797.04 - SDR Department: - Net cumulative allocation: 21,020.03 100.00 (SDR Million) - Holdings: 21,989.56 104.61 - Outstanding Purchases and Loans: None - Financial Arrangements: None - Projected obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs): Charges/Interest: 0.10 in each of 2025, 2026, 2027, 2028, 2029; Total: 0.10 in each of those years. - Exchange rate arrangements: currency is the euro; euro area arrangement is free floating; Italy participates in EMU with 19 other EU members and has no separate legal tender. - Article IV cycle: standard 12-month consultation cycle; previous consultation discussions took place during May 6–20, 2024; staff report (IMF Country Report No. 24/240) discussed by Executive Board on July 19, 2024. - ROSCs/FSAP and Technical Assistance: lists of past assessments and missions included (dates and report numbers preserved in source). ### Statement by Italian Authorities — Key Views and Recent Developments (July 18, 2025) - Overall appraisal: - Authorities thank IMF staff and value policy advice; see progress since last year: headline deficit halved, primary balance turned to a surplus, MTFSP approved outlining a gradual 7-year fiscal adjustment, market confidence increased with improved rating assessments, financial system soundness improved, NRRP implementation accelerated, current account turned to a surplus, labor market and economic activity resilient in early 2025. - Next meeting of the Committee scheduled on 4 December 2025. - Economic outlook and recent developments: - Public finances improved markedly in 2024, halving the deficit to GDP ratio and enabling a return to a primary surplus. - Improved tax compliance and broadening of tax base credited as drivers of 2024 outturn; NRRP reforms and targets contributed. - Labor market: employment rate rose to 62.9 percent in May 2025 (National Statistical Office). - Current account: surplus of 1.1 percent of GDP in 2024. - Net international investment position: 15.3 percent of GDP at end-2024. - Fiscal policy: - Continued fiscal discipline emphasized; MTFSP commits to gradual sustained deficit reduction over seven years. - Authorities prudently committed to bring deficit below 3 percent in 2026; preliminary data suggest possible exit from excessive deficit procedure as early as next year. - Financial sector: - Authorities note historically high banking profitability, substantial liquidity reserves, capital positions above pre-pandemic levels, and low/stable NPLs. - BdI decision to activate SyRB of 1 percent on credit and counterparty credit risk exposures highlighted as strengthening resilience. - Structural challenges and reform agenda: - Authorities stress need to raise potential growth alongside fiscal consolidation. - NRRP performance: Italy ranks as one of the EU’s top performers; reforms yielding results (e.g., reducing court backlogs, improved tax compliance). - Three-pillar strategy underway: interministerial group on fertility and female labor participation; discussions with European Commission to establish domestic compartment of Invest EU to crowd in private capital; implementation of the ‘Mattei Plan’ to seek clean energy sources. - Areas of disagreement or nuance with Fund staff: - Fiscal policy: government considers MTFSP sufficient; staff call for additional fiscal effort (primary surplus of 3 percent of GDP by 2027) viewed as substantially different from Commission assessment. - Sovereign risk and DSA: authorities view IMF debt simulations as conservative due to assumptions on primary surplus and potential growth; willing to share more information to improve projection accuracy. - External sector: authorities view external position as broadly in line with fundamentals; note divergences between IMF and European Commission models and call for EBA methodological review. - Potential growth and demographics: authorities consider IMF demographic assumptions particularly pessimistic (IMF projection of working-age population decline of 19 percent by 2040 and 31 percent by 2050 cited as closer to a “low population” scenario) versus Eurostat/ISTAT baseline figures; question conservative TFP assumptions (constant annual TFP growth rate of 0.2 percent from 2031 onwards) and note MTFSP expectation of TFP level rise of 2.6 percent by 2031 implying average additional annual TFP growth of 0.3 percentage points over 2022-2031. - Climate transition: authorities share staff recommendations to reduce greenhouse gas emissions and accelerate renewables; report that roughly a half of Italy’s energy production comes from renewables; about 39 percent of total NRRP funds allocated to climate objectives. - Disaster insurance: authorities note mandatory disaster insurance can incentivize risk mitigation via premium differentiation and discounts for mitigation efforts. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1itaea2025001-source-pdf.pdf_