## 1. Belgium’s Integration into Global Value Chains ## Source details **Canonical URL:** [1. Belgium’s Integration into Global Value Chains](https://www.imf.org/-/media/files/publications/cr/2026/english/1belea2026001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1belea2026001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1belea2026001-source-pdf.pdf.json) --- ### Context - Belgian economy resilient to successive shocks but sustaining a strong welfare state requires deep reforms. - Structural headwinds and recent legacies: - large structural fiscal deficits, - an elevated and rising public debt, - a deteriorated price-competitiveness, - a weak external position. - Rising spending pressures from: - an aging population, - green transition costs, - increasing defense spending. - Institutional constraint: fiscal federalism and decentralization complicate fiscal strengthening and debt sustainability. - Policy imperative: with population aging weighing on employment growth, raising productivity and labor-force participation is paramount. ### Recent developments (selected indicators and facts) - Growth and demand: - Growth decelerated to 1.1 percent in 2024 (from 1.7 percent in 2023) and was 1 percent y/y in 2025Q3. - Overall, growth is expected at 1.1 percent in 2025. - Private consumption remained the main driver; real wages saw recent sharp increases. - Investment, inventories, and net exports weighed down by trade and geopolitical uncertainty. - Inflation: - Headline inflation eased to 2.2 percent y/y in December 2025 (from 4.4 percent y/y in January), above the EA average of 1.9 percent. - Core inflation: 3 percent y/y in December 2025 (EA average 2.3 percent). - Services price inflation: 4.3 percent y/y, reflecting strong rent and administered-price growth. - Labor market: - Harmonized unemployment: 6.3 percent in 2025Q3 (EA average 6.4 percent). - Job-vacancy rate: 450 per 1,000 unemployed in 2025Q3. - Labor-productivity growth sluggish; unit labor cost increases since 2021 moved closer to EA average. - Finance and credit: - Private sector credit growth increased but remained below trend; credit gap narrowed but remained negative. - Credit-to-households accelerated (mortgage demand boosted by lower registration fees in Flanders and Wallonia). - External position: - External position in 2025 preliminarily assessed as substantially weaker than implied by fundamentals. - Current account deficit: 2 percent of GDP in 2025Q1–Q3; CA posted a deficit of 1.5 percent of GDP in 2025 (Table highlights). - Fiscal and debt: - General government deficit expected to increase to 5.2 percent of GDP (2025) from 4.4 percent (2024). - Structural primary deficit expected to rise to 2.9 percent of GDP from 2.3 percent. - Public debt-to-GDP expected to increase by close to 3 percentage points in 2025 to 107.2 percent. - Debt maturity and holdings: 64 percent of debt had residual maturity >5 years in 2024; average residual maturity 10.4 years in 2025H1 (EA average 8.3 years). Share held by non-residents: 61 percent in 2024 (55 percent in 2023). - Spreads averaged 56 bps in 2025 despite rating downgrades. ### Outlook and risks (baseline and scenarios) - Baseline projections (staff): - Growth returns gradually to 1.3 percent potential in the medium term. - Small positive net exports contribution; inflation falls below 2 percent in 2026 before policy and ETS-2 effects lift it back toward target. - Core inflation converges to about 2 percent. - Credit growth remains subdued; external CA deficit narrows gradually. - General government fiscal deficit broadly stabilizes above 5 percent of GDP through 2029, then rises to 5.6 percent by 2031 as a planned tax cut kicks in. - Public debt reaches 121.4 percent of GDP in 2031. - Downside risks: - Weaker external demand, higher US tariffs, geoeconomic fragmentation, higher sovereign yields, tighter global financial conditions, supply-chain disruptions, and domestic political fragmentation. - Impact of escalating trade tensions (Text Table 1 mid-points, cumulative deviation 2026–27): - Higher tariffs and supply-chain disruptions: Growth -1.7, Inflation -0.2 - Higher sovereign yields and tighter financial conditions: Growth -0.2, Inflation 0.5 - Overall: Growth -1.0, Inflation -0.4 - Policy guidance in a downside scenario: - No room for broad-based fiscal support: let automatic stabilizers work fully. - Provide targeted, time-bound support to the most vulnerable within a spending envelope consistent with fiscal consolidation. ### Box 1 — Belgium’s Integration into Global Value Chains (GVCs) - Depth of integration: - Belgium is among EU economies most deeply integrated in GVCs; forward and backward linkages stronger than the EU average. - Forward linkages: high share of Belgian value added in other countries’ exports; supplier of critical inputs (chemicals, pharmaceuticals, professional services). - Backward linkages: high share of foreign value added in Belgium’s exports; reliance on imported intermediates. - Dual role: upstream contributor of high-value components and downstream assembler using sophisticated inputs abroad. - Opportunities: - Export structure shifted toward high-value manufacturing: pharmaceuticals, chemicals, knowledge-intensive services. - Belgium’s value added in EU or OECD pharmaceutical exports rose faster than in their total exports, reflecting growing competitiveness and specialization supported by domestic production and foreign inputs (EU and US). - Strong forward linkages in business services (research, design, intangibles). - Vulnerabilities: - Deep GVC integration exposes Belgium to supply-chain disruptions, trade restrictions, geopolitical tensions. - Forward linkages weakened during the pandemic (drop in demand for finance, insurance, information exports); backward linkages surged (manufacturing reliance on foreign inputs, vaccines). - Sectoral concentration in pharmaceuticals amplifies macro risks. - Growing dependence on US market for pharmaceuticals increases exposure to foreign industrial policies and pricing regulation shifts. ### Fiscal policy, plans, and staff recommendations - Authorities’ medium-term fiscal structural plan (MTFSP) approved June 2025: - Foresees a 7-year adjustment with pension, tax, and labor market reforms. - MTFSP alone will not reduce the fiscal deficit in the short term; structural reforms improve fiscal balance gradually. - Implementation risks: consensus-building across five-party federal coalition; union opposition; BCR lacks a new government nearly two years after elections. - 2026 federal budget agreement: - Aims to reduce the 2029 deficit by €8.1 billion (1.1 percent of GDP) versus previous projections. - Measures: higher excise duties (fuel, flights), VAT rate adjustments, increased banking tax, deferred labor tax cuts; spending cuts via partial indexation in 2026 and 2028. - If implemented timely, will broadly stabilize the deficit through 2029—but at a high level—and debt will continue to rise. - Staff recommendation: - Further fiscal adjustment beyond current plans to stabilize debt. - Aim for general government deficit close to 3 percent of GDP by 2030. - Near-term specific target: lower the deficit to 4.8 percent of GDP in 2026 (a 0.8 percent of GDP reduction of the primary structural deficit). - Federal government should reach ~3 percent of GDP deficit by 2030; regions/communities should commit to credible multi‑year consolidation plans converging to combined balanced position. - Composition: primary focus on current-expenditure reductions (social spending reduction, efficiency gains, rationalize tax expenditures); protect growth-enhancing investment and complete RRP reforms before 2026 expiry. ### Debt dynamics and Debt Sustainability Analysis (key figures and projections) - Public debt (baseline projections, percent of GDP): - 2024: 103.9 - 2025: 107.2 - 2026: 109.7 - 2027: 112.1 - 2028: 114.4 - 2029: 116.6 - 2030: 119.1 - 2031: 121.4 - 2032: 124.3 - 2033: 127.3 - 2034: 130.5 - Change in public debt (percent of GDP): - 2025: 3.3; 2026: 2.5; 2027: 2.3; 2028: 2.4; 2029: 2.2; 2030: 2.5; 2031: 2.3 - Primary deficit (percent of GDP): - 2024: 2.7; 2025: 3.5; 2026: 3.1; 2027: 3.1; 2028: 2.9; 2029: 2.6; 2030: 2.8; 2031: 2.6 - Gross financing needs (GFN, percent of GDP): - 2024: 17.4; 2025: 16.4; 2026: 18.7; 2027: 18.5; 2028: 20.4; 2029: 19.0; 2030: 18.9; 2031: 19.8 - Effective interest rate (percent): - 2024: 2.2; 2025: 2.3; 2026: 2.3; 2027: 2.5; 2028: 2.6; 2029: 2.8; 2030: 2.9; 2031: 3.1 - DSA assessment: - Risk of sovereign stress: moderate. - Baseline: debt not stabilized; projected primary balance ~3.1 ppts of GDP below debt-stabilizing level of 0.3 percent. - Long-term fiscal pressures: aging, defense, and interest costs drive rising debt; mechanical and probabilistic indicators point to medium- to long-term risks without further consolidation. ### Pensions and long-run spending pressures - Before reforms: public pension expenditure projected to increase by 3.5 percent of GDP to 16.2 percent over the long term, exceeding most EU peers. - Government measures and impact: - Multi-pronged reforms (bonus-malus, tighten restrictions, raise Pillar II contribution rates, reduce nonwork years in pension calculations). - Study Committee on Aging (2025) estimates measures reduce aging costs by 1.9 percent of GDP by 2070. - Remaining challenge: - Pension spending still projected to reach 12.2 percent of GDP; further reforms needed to promote longer working lives and preserve adequacy. ### Tax reform and tax-expenditure issues - Tax-expenditure scale: - Above 6.1 percent of GDP in 2021 (latest assessment), equivalent to about €38 billion in 2025—among the highest in the EU. - Composition (2021): VAT 2.2; PIT 2.1; EIW T 0.8; ACC 0.6; CIT 0.4; WT 0.0. - Many measures not means-tested and are regressive. - Specific measure: - Introduction of a 10 percent capital-gains tax on financial assets welcomed; high exemptions (€10,000 to €15,000 of gains) could be decreased to raise revenue. - Recommendation: comprehensive review to eliminate ineffective or costly provisions to broaden the tax base, increase revenues, and reduce distortions. ### Subnational (Entity II) fiscal situation and governance - Regions and communities: - Aggregate deficit remained elevated at 1.6 percent of GDP (2024). - Regional deficits account for close to 20 percent of consolidated public debt. - Region-specific issues: - Flanders (60 percent of GDP): higher productivity, targeted 2026 budget to close €1.5 billion gap and balanced budget by 2027; measures include truck kilometer charges and care premiums. - Wallonia (23 percent of GDP): structural deficits from deindustrialization and flood reconstruction; 2026 structural savings €270 million. - Brussels-Capital Region (BCR): high unemployment, high administrative costs, severe fiscal stress; political deadlock since June 2024 delayed corrective measures. - Recommendations: - Strengthen cooperation agreement between federal and regional governments. - Define clear, binding medium-term fiscal paths for regions and communities; introduce accountability mechanisms and limit borrowing capacity. - Integrate spending reviews, recalibrate intergovernmental transfers, strengthen fiscal council independence. ### Financial stability, prudential policy, and FSAP follow-up - Banking and insurance: - Banking sector: well capitalized and liquid; profits robust; loan delinquencies low. - Insurance sector: overall profitable; aggregate solvency ratio above 200 percent. - Housing and real estate: - House prices up 3.7 percent y/y in 2025Q3 after earlier correction. - ECB estimated housing overvalued by 8 percent at end-2025Q2 (down from 12.3 percent end-2023). - CRE: market capital values rising; CRE NPLs 3 percent of total loans at end-2025Q3. - Macroprudential changes (NBB): - CCyB raised from 1 to 1.25 percent, effective July 2026. - SSyRB against residential mortgage risks eliminated. - Total required capital buffer projected to fall from €3.9 billion to about €3.3 billion. - Staff view: fully eliminating SSyRB not preferable given residual housing risks; NBB should be ready to further increase CCyB if risks do not abate and consider formalizing a positive neutral CCyB framework. - FSAP follow-up and supervisory actions: - Integration of models into NBB stress-testing formalized; insurers to periodically conduct own stress tests. - Mortgage valuation guidance updated April 2025. - Cooperation arrangements for emergency liquidity assistance for cross-border banking group drafted. - AML/CFT vulnerabilities identified by FATF: virtual asset activity supervision gaps, shell/dormant company misuse; FATF recommends designation of competent authority for VASPs, strengthened beneficial ownership verification, accelerated striking-off of inactive entities. - Legislative measures pending: institutional macroprudential framework changes, stronger bank governance, predictability of disaster-insurance coverage, creation of national AML/CFT committee including NBB. ### Policy priorities and recommendations (summary) - Immediate priorities: - Lower vulnerabilities from high and rising debt and external imbalances. - Restore fiscal and external buffers; create space for aging, green transition, and defense spending. - Bolster financial sector resilience. - Foster higher growth while preserving Belgium’s social model. - Policy instruments and sequencing: - Sustained fiscal consolidation paired with structural reforms (labor, pensions, tax, product markets). - Macroprudential policies and follow-up to 2023 FSAP. - Fiscal consolidation and structural reforms should proceed together; delay in one increases urgency of the other. - Annex V (Article IV recommendations) highlights: - Fiscal: sustained consolidation, rationalize current spending, make room for public investment, strengthen fiscal council and accountability across federated entities. - Financial sector: maintain capital buffers and prudential mortgage limits; continue FSAP implementation. - Labor market: policies to increase inclusion and participation; consider reforms to automatic indexation and 1996 wage law (social partners to provide options by end-2026). - Green transition: consolidate federal and regional climate efforts; NECP updated for 2021–30 submitted October 2025. *Italic: Extracted from IMF staff report chapter "1. Belgium’s Integration into Global Value Chains" (provided PDF content).* ### 1. Belgium’s Integration into Global Value Chains ________________________________________________ 9 ### 1. Belgium’s Integration into Global Value Chains ### Context - The Belgian economy has been resilient to successive shocks but sustaining a strong welfare state against significant headwinds requires deep reforms. - Belgium emerged from the pandemic and energy crisis with: - large structural fiscal deficits, - an elevated and rising public debt, - a deteriorated price-competitiveness, - a weak external position. - Headwinds include geopolitical tensions and trade uncertainty. - Rising spending pressures from: - an aging population, - green transition costs, - increasing defense spending. - Belgium’s system of fiscal federalism and decentralization adds complexity to strengthening the fiscal position and ensuring debt sustainability. - With population aging weighing on employment growth, raising productivity and labor-force participation is described as paramount to preventing potential-growth and tax-base erosion. - The federal government’s medium-term fiscal structural plan (MTFSP), approved by the EU Council in June 2025, foresees a 7-year adjustment supported by pension, tax, and labor market reforms but: - the MTFSP alone will not reduce the fiscal deficit in the short term, - structural reforms will only improve the fiscal balance gradually, - implementation may be slowed by the need to build consensus within the five-party federal coalition and opposition from unions, - the Brussels-Capital Region (BCR) remains without a new government nearly two years after the elections, preventing forceful action to reverse the rapid deterioration of its finances. ### Recent developments - Economic activity: - Growth decelerated to 1.1 percent in 2024 (from 1.7 percent in 2023) and was 1 percent y/y in 2025Q3. - Overall, growth is expected at 1.1 percent in 2025. - Private consumption remained the main driver, supported by recent sharp increases in real wages. - Trade and geopolitical uncertainty weighed on investment, inventories, and net exports. - Inflation: - Headline inflation eased to 2.2 percent y/y in December 2025 (from 4.4 percent y/y in January), but remained above the euro area (EA) average of 1.9 percent. - Core inflation stood at 3 percent y/y in December 2025, above the 2.3 percent y/y EA average. - Services price inflation rose to 4.3 percent y/y, largely reflecting strong rent and administered prices growth. - Expectations of future inflation were somewhat volatile during 2025H1 and are inching up. - Labor market and wages: - Harmonized unemployment increased from historical lows since 2024H2 and reached 6.3 percent in 2025Q3, slightly below the 6.4 percent EA average. - The rise in unemployment reflected an increase in labor force participation following government reforms, which outpaced employment growth. - The job-vacancy rate was 450 per 1,000 unemployed in 2025Q3. - Labor-productivity growth remained sluggish; declining wage growth in 2024-25H1 brought unit labor cost increases since 2021 closer to the EA average. - Financial conditions and credit: - Private sector credit growth increased despite higher interest rates but remained below trend. - Financial conditions loosened at a slower pace since start of 2025; more accommodative ECB policy was offset by an increase in the price of risk and a tightening of credit standards in 2025H2. - Credit-to-households accelerated despite higher interest rates, reflecting higher demand for mortgages boosted by lower registration fees in Flanders and Wallonia. - Credit to firms also accelerated despite subdued business investment. - The credit gap narrowed but remained negative; the credit-to-GDP ratio and credit gap metrics show continued below-trend credit expansion. - Banking and insurance: - Banking sector is well capitalized and liquid; bank profits remain robust and loan delinquencies low. - Insurance sector remains overall profitable with an aggregate solvency ratio above 200 percent. - External position: - Preliminary assessment: the external position in 2025 was substantially weaker than implied by medium-term fundamentals and desirable policies (Annex I). - The current account (CA) posted a deficit of 2 percent of GDP in 2025Q1-Q3, largely driven by continued weakness in travel services. - The goods trade balance recovered in Q3 after turning negative in Q2, as declines in imports—machinery and chemical—outweighed those in exports. - Fiscal developments: - The general government deficit continued to widen in 2025. - The overall deficit is expected to increase to 5.2 percent of GDP from 4.4 percent in 2024. - The structural primary deficit is expected to rise to 2.9 percent of GDP from 2.3 percent. - Deterioration mainly driven by: - an increase in defense spending (0.5 percent of GDP), - higher age-related social benefits (0.4 percent of GDP), - Federal deficit widened to 3.6 percent of GDP from 2.7 percent in 2024. - Regions and communities’ aggregate deficit remained elevated at 1.6 percent of GDP. - Public debt and borrowing costs: - Overall risk of sovereign stress remains moderate despite vulnerabilities (Annex III). - Public debt-to-GDP ratio is expected to increase by close to 3 percentage points in 2025 to 107.2 percent. - Debt is predominantly long-term: 64 percent had a residual maturity of more than 5 years in 2024; average residual maturity was 10.4 years in 2025H1 (EA average 8.3 years). - A growing share is held by non-residents: 61 percent of total in 2024 from 55 percent in 2023. - Spreads averaged 56 bps in 2025 despite rating downgrades of the Belgian sovereign and BCR. ### Outlook and risks - Baseline projections (staff): - Growth gradually returns to its 1.3 percent potential in the medium term, driven by private consumption and a gradual recovery of private investment. - A small positive contribution from net exports is expected, largely due to increased defense spending in Europe and spillovers from Germany’s infrastructure investments plan. - Inflation falls below 2 percent in 2026, before higher excise duties, adjustments to VAT rates, and the EU's new Emissions Trading System (ETS-2) raise it back to target. - Core inflation gradually converges from above to about 2 percent. - Credit growth remains subdued, with ECB policy rates largely unchanged, but interest rates rising with the price of risk. - The external CA deficit narrows as external demand gradually recovers. - Despite fiscal reforms and consolidation efforts, the general government fiscal deficit broadly stabilizes above 5 percent of GDP through 2029, before rising again to reach 5.6 percent by 2031 as a planned tax cut kicks in. - Public debt increases steadily, reaching 121.4 percent of GDP in 2031. - Downside risks: - Weaker external demand, geopolitical and trade tensions, and prolonged uncertainty could weaken growth in 2026–27. - Higher US tariffs are expected to continue dampening growth in 2026-27. - Geoeconomic fragmentation, higher sovereign yields, and tighter global financial conditions could amplify downside risks. - Supply-chain disruptions could push inflation up, possibly offset by downward pressure from tighter financial conditions. - Domestic political fragmentation and social pushback may hamper fiscal consolidation and structural reforms, increasing vulnerabilities and risk premia, worsening debt dynamics, and negatively impacting growth. - Policy guidance in a downside scenario: - With no room for broad-based fiscal support, the recommended response is to let automatic stabilizers work fully. - Targeted, time-bound support could be provided to the most vulnerable within a spending envelope consistent with continued fiscal consolidation to help contain inflationary pressures and preserve market confidence. ### Box 1 — Belgium’s Integration into Global Value Chains - Depth of integration: - Belgium is one of the EU economies most deeply integrated in global value chains (GVCs), with forward and backward linkages stronger than the EU average. - Forward linkages: high share of Belgian value added in other countries’ exports; reflects role as supplier of critical inputs such as chemicals, pharmaceuticals, and professional services. - Backward linkages: high share of foreign value added in Belgium’s own exports; indicates reliance on imported intermediates to produce goods and services for export. - Together, these linkages show Belgium’s dual role as a key upstream contributor of high-value components and services and a downstream assembler drawing on sophisticated inputs from abroad. - Opportunities: - Export structure has shifted toward high-value manufacturing, especially pharmaceuticals, chemicals, and knowledge-intensive services. - Belgium’s value added in EU or OECD pharmaceutical exports rose faster than and well above its value added in their total exports, reflecting growing competitiveness and specialization, supported by domestic production and foreign inputs, particularly from the EU and the US. - Strong forward linkages in business services highlight Belgium’s contribution of research, design, and other intangible assets to partner countries’ exports. - Vulnerabilities: - Deep GVC integration exposes Belgium to external risks. - Forward linkages weakened during the pandemic, mostly due to a decline in downstream countries’ and industries’ demand for finance, insurance and information exports. - Backward linkages surged due to increased reliance on foreign inputs in manufacturing, especially linked to manufacturing and export of vaccines. - Dual exposure makes Belgium vulnerable to supply-chain disruptions, trade restrictions, and geopolitical tensions. - Sectoral concentration, particularly in pharmaceuticals, amplifies macroeconomic risks from industry-specific shocks, regulatory changes, and intellectual property disputes. - Growing dependence on the US market, especially for pharmaceuticals, increases exposure to foreign industrial policies and shifts in pricing regulations. - Additional reference noted in the box: - For a detailed analysis, see Shim, Vassileva, and Wang, IMF Working Paper 26/02. - EU refers to the EU-27, treated as a single economy; exports therefore exclude intra-EU trade. The same convention applies to OECD aggregates. *International Monetary Fund — Belgium: 1. Belgium’s Integration into Global Value Chains* ### 13. The authorities agreed with staff on the outlook and key risks. They expect growth to ### 13. The authorities agreed with staff on the outlook and key risks. They expect growth to ### Outlook and key risks - Authorities expect growth to gradually increase to potential and inflation to return to target in the medium term. - Main external risks to the baseline outlook: - Downside risks to growth stemming from trade uncertainties, higher tariffs, or tighter financial conditions. - Upside risks to inflation from supply-chain disruptions. - Main domestic risk: - Implementation challenges that may hinder reforms and fiscal consolidation. - Text Table 1. Belgium: Impact of Escalating Trade Tensions, 2026–27 (Estimated range mid-points for cumulative deviation from the baseline over 2026-27) - Higher tariffs and supply-chain disruptions: Growth -1.7, Inflation -0.2 - Higher sovereign yields and tighter financial conditions: Growth -0.2, Inflation 0.5 - Overall: Growth -1.0, Inflation -0.4 *Source: IMF staff calculations. Note: See October 2025 WEO, Box 1.2, layered scenario A, for details on the shocks’ calibration.* ### Policy priorities in an uncertain global environment - Priorities identified: - Lowering vulnerabilities associated with the high and rising debt level and external imbalances. - Restoring fiscal and external buffers. - Creating space for rising spending pressures related to aging, the green transition and defense. - Bolstering financial sector resilience. - Fostering higher growth and preserving the core of Belgium’s social model. - Policy instruments emphasized given lack of autonomous monetary policy: - Sustained fiscal consolidation. - Macroprudential policies and follow up to the 2023 FSAP. - Reforms to lift employment, productivity, and competitiveness. - Policy sequencing: - Fiscal consolidation and structural reforms should go together; delay in one increases urgency of the other. ### A. Repairing public finances — assessment of plans - Authorities’ fiscal plan under the EU economic governance framework (EGF): - Represented a step forward but was insufficient to stop increases in the deficit and public debt. - MTFSP caps net primary expenditure growth (the sole indicator monitored by the European Commission for compliance with EGF rules). - Staff view: the agreed cap relied on overly optimistic macroeconomic assumptions, including an overestimated impact of reforms and negligible aging-cost drift. - Projected increase in defense spending amounts to €17 billion in 2025–29 and nearly offsets planned MTFSP adjustment. - Without further action, the fiscal deficit would have continued to increase in the medium term, driven by higher aging costs and interest payments. ### A. Repairing public finances — 2026 federal budget agreement - 2026 federal budget agreement measures: - Aims to achieve a reduction in the 2029 deficit of €8.1 billion (1.1 percent of GDP) compared to the government’s previous fiscal projections. - Key new revenue measures: higher excise duties on fuel and flights, adjustments to VAT rates, an increased banking tax, and deferred labor tax cuts. - New spending cuts: savings on the public wage bill through partial indexation in 2026 and 2028. - If implemented timely, agreement and previously decided measures will broadly stabilize the deficit through 2029—but at a high level—and debt will continue to rise. ### Staff recommendation: further fiscal adjustment to stabilize debt - Staff recommend fiscal adjustment beyond existing plans to stabilize debt: - Aim for a general government deficit close to 3 percent of GDP by 2030. - Federal government should reduce its deficit to this level while regions and communities commit to credible multi-year consolidation plans that converge to a combined balanced position. - This path would keep the general government deficit below 3 percent of GDP ten years after the adjustment period without further measures, stabilize debt slightly below 114 percent of GDP, and initiate a gradual decline toward the end of the projection period. - Specific near-term target: - Staff recommend lowering the deficit to 4.8 percent of GDP in 2026 (a 0.8 percent of GDP reduction of the primary structural deficit). - Trade-offs: - Achieving the medium-term adjustment will be challenging; greater and more abrupt efforts would likely be required to preserve market confidence if risks materialize. ### Projected fiscal paths and indicators (as presented) - Fiscal Balance: Staff Recommended Adjustment versus Current (Baseline) and Unchanged Policies (Percent of GDP) — charted values include: - Shown values across 2024–2031 with staff recommendation path reaching closer to -2.0 by 2031 versus worse baseline/un‑changed outcomes. - Net Primary Expenditure Growth (2024=100, average yearly growth over 2025-31 in percent): - MTFSP average yearly growth: 3.1, Baseline 2.5, Recommended adjustment 1.6 (values as presented in chart). - General Government Fiscal Balance (Percent of GDP) — historical and projections show various series (GG - MTFSP targets, GG - Unchanged policy, GG - Baseline). - Public Debt (Percent of GDP): - Staff recommend adjustment stabilizes debt slightly below 114 percent of GDP and initiates gradual decline toward end of projection period. ### 17. Composition of the recommended adjustment - Primary focus: current expenditure reductions. - Areas for additional efforts: - Further reducing current spending—especially social spending, which is 5 ppts of GDP above peers. - Increasing spending efficiency. - Rationalizing tax expenditure. - Protect growth-enhancing investment: - Preserve investment and complete reforms under the recovery and resilience plan (RRP) to maximize dedicated funding before it expires in 2026 and to sustain progress toward long-term goals. ### 18. Pension reforms - Before reforms: public pension expenditure projected to increase by 3.5 percent of GDP to 16.2 percent over the long term, more than most EU peers. - Reasons for pension pressure: - Lower effective retirement age, lower employment rate among older people, and relatively higher average gross pensions. - Net aggregate replacement ratio (ARR) is below the EU average. - Government measures: - Multi-pronged pension reform strategy to improve sustainability, fairness, and labor-market incentives. - Initial measures: limit early retirements by increasing penalties (reform of bonus-malus system), tighten restrictions, plan to raise contribution rates in private-sector occupational pension plans (Pillar II), and reduce the number of nonwork years that can factor in pension calculations. - Study Committee on Aging’s 2025 report estimates these measures will reduce aging costs by 1.9 percent of GDP by 2070. - Remaining challenge: - Pension spending still projected to reach 12.2 percent of GDP; further reforms needed to balance sustainability and adequacy by promoting longer working lives (e.g., further tighten eligibility to early retirement or raise statutory retirement age) while raising lower pensions. ### 19. Increasing spending efficiency — specific areas - Spending reviews: - Framework introduced under the RRP in 2021; eleven reviews conducted and two underway. - Topics: targeting and simplifying withholding tax exemptions, coherence of federal and regional R&D support, overview of subsidies. - Recommendation: integrate spending reviews into long-term budget planning, ensure continued monitoring, and conduct ex-post evaluations. - Public investment management (PIM): - Hindered by unclear infrastructure strategies, weak project preparation, fragmented governance, limited coordination among federal and federated entities, minimal Ministry of Finance oversight. - Recommendation: coordinated investment planning, standardize project selection and appraisal, improve federal-regional coordination, enhance role of finance and budget ministries. - Healthcare: - Access and outcomes good but costlier than peers; potential substantial efficiency gains. - Authorities initiated reforms to increase prevention, reduce fiscal cost of medicines, and restructure hospitals. - Education: - Outcomes comparable to peers but education spending exceeds EU average due to high wage bills and administrative complexity. - Issues: teacher shortages and skills mismatches. - Recommendations for communities (that govern education): reorganize resources, better align curricula with labor market needs, introduce outcome-based monitoring for schools, strengthen support to struggling students. ### 20. Tax reforms to support consolidation and broader agenda - Objectives: - Widen the gap between work income and nonwork benefits to incentivize labor participation and increase fairness. - Shift part of the tax burden from labor to capital—sequencing is important to avoid widening deficit. - Capital-gains tax: - Introduction of a 10 percent capital-gains tax on financial assets is welcomed, but high exemptions (€10,000 to €15,000 of gains) could be decreased to raise revenue and fairness. - Tax expenditures: - Above 6.1 percent of GDP in 2021 (latest assessment, Text Table 2), equivalent to about €38 billion in 2025—among the highest in the EU. - Composition (2021): - By revenue type (percent of GDP): Total 6.1; VAT 2.2; Personal income tax (PIT) 2.1; Withholding tax on earned income (EIW T) 0.8; Excise duties (ACC) 0.6; Corporate income tax (CIT) 0.4; Withholding tax on movable property (WT) 0.0. - By objective: Social measures 2.3 (59.0 percent of tax expenditure by objective for VAT), Housing significant shares, Employment 17.4 percent of PIT forgone revenue; many measures are not means-tested and are regressive. - Recommendation: comprehensive review to identify provisions that no longer serve policy priorities, are ineffective, or too costly—eliminate such provisions to broaden the tax base, increase revenues, complement expenditure measures, and reduce distortions. ### 21. Federal-regional cooperation and fiscal governance - Strengthen cooperation agreement between federal and regional governments to help achieve fiscal objectives. - Necessary steps: - Define clear and binding medium-term fiscal paths for regions and communities consistent with Belgium’s EGF targets. - Introduce strong accountability mechanisms (e.g., penalties) and limit federated entities’ borrowing capacity. - Complementary measures: systematic spending reviews at region and community levels; possibly recalibrate intergovernmental transfers (including because of unemployment benefits reform); strengthen the fiscal council, including appointing a council head unaffiliated with the NBB for clearer role distinction. ### Authorities’ views (paragraph 22) - Authorities concurred with staff that public finances need consolidating and stressed commitment to fiscal sustainability. - Mitigating factors noted by authorities: - High private savings and effective debt management. - Authorities’ stance: - Current reform package and consolidation efforts are unprecedented. - Committed to pursuing efforts within framework of the 2027 budget. - Estimate current measures will stabilize the deficit through 2029. - Welcomed discussions on improving spending efficiency and streamlining tax expenditures. - Outlined structural healthcare reforms in line with prior IMF recommendations. - Indicated progress in discussions on enhancing federal-regional coordination through a new national cooperation agreement. ### B. Preserving financial stability — assessment and risks - Overall assessment: systemic financial risks remain moderate but evolving. - Credit portfolio and corporate vulnerability: - Household debt stabilized at around 57 percent of GDP and continues to decline as a share of disposable income. - Corporate debt is relatively modest and decreasing (124 percent). - Nonperforming corporate loans are 3 percent of total loans—low but slightly above EA average. - Nonfinancial corporate profit margins declined in 2025H1 partly due to renewed labor-cost pressures from automatic wage increases; adverse shocks could materially affect loan quality. - Sovereign exposures: - Available-for-sale and held-to-maturity bonds are a small share of low total bank holdings of government debt and pose limited risks for bank solvency. - Insurers’ exposure is more significant but declining and subject to frequent stress-testing. - NBB 2024 sensitivity analysis: a 200 bp sovereign spread shock reduces insurers’ solvency capital requirement ratio by 42 percentage points, to 160 percent. - Residential real estate: - House prices up 3.7 percent y/y in 2025Q3 after correction in 2021Q3–2023Q3. - Price-to-income and price-to-rent ratios broadly stable owing to strong wage growth. - ECB estimated housing overvalued by 8 percent at end-2025Q2, down from 12.3 percent at end-2023. - Excess savings accumulated during the pandemic have strengthened many debtor households’ positions. - Prevalence of fixed-rate fully-amortizing mortgages and full-recourse loan provisions provide additional comfort. - Commercial real estate (CRE): - CRE warrants close monitoring: market capital values increasing, vacancies stable, investment volumes picked up. - CRE NPLs are 3 percent of total loans at end-2025Q3, lower than EA average. - Belgian banks’ loan portfolio is among the most exposed in the EA to CRE-collateralized corporate lending, at 15 percent of GDP or more than a fourth of total corporate credit. - Continued vigilance is needed. *Italic: Source: Extracted content from the provided IMF chapter/section PDF.* ### 24. The NBB recently modified its capital buffer requirements to cover a larger set of risks. ### 24. The NBB recently modified its capital buffer requirements to cover a larger set of risks. ### Capital buffer changes - Counter-cyclical capital buffer (CCyB) raised from 1 to 1.25 percent, effective July 2026. - Sectoral systemic risk buffer (SSyRB) against risks from residential mortgages eliminated. - Total required capital buffer projected to fall from €3.9 billion to about €3.3 billion amid evolving but not declining overall risks. - New Basel rules are expected to translate into higher Belgian internal ratings-based mortgage risk weights (Figure 5). ### Impact assessment and rationale - Moderation of housing market risks and the effectiveness of existing prudential expectations for mortgages cited as justification for lowering the SSyRB. - Given residual risks in the residential real estate market, staff view that fully eliminating the SSyRB was not preferable because it reduces overall required buffers. - The NBB’s recalibration reflects a shift toward more diversified risks, motivating the CCyB increase. ### Policy recommendations and considerations - The NBB should stand ready to further increase the CCyB if overall risks do not abate. - The NBB could consider formalizing a positive neutral CCyB framework to provide greater transparency and clarity for the market. ### Implementation of FSAP recommendations and related supervisory actions - Integration of individual models within NBB’s stress-testing framework has been formalized and is now systematic. - Insurers expected to periodically conduct their own stress tests to monitor liquidity risks. - Guidance for the consistent valuation of mortgage loans updated in April 2025. - Cooperation arrangements for emergency liquidity assistance involving a cross-border banking group are being drafted. - Resources for anti-money laundering and combating terrorism financing (AML/CFT) were further increased in 2025. - Measures requiring legislative action remain pending (Annex VI), including changes to the institutional macroprudential policy framework, strengthening banks’ corporate governance, and enhancing predictability of natural disaster-related insurance coverage. - Creation of a national committee on AML/CFT and proliferation financing including the NBB remains pending. ### AML/CFT vulnerabilities identified by FATF (summary) - Rapid growth of virtual asset activity combined with the absence of an effective supervisory and regulatory framework for virtual asset service providers (VASPs) presents significant cross-border financial integrity risks. - FATF recommends timely designation of an adequately resourced competent authority for licensing and supervision of VASP activities and strengthening risk-based oversight. - Increased creation and misuse of shell and dormant companies—facilitated by the 2019 Companies and Associations Code—underscore persistent transparency gaps. - FATF calls for accelerated striking-off of inactive entities, strengthened beneficial ownership verification, and tighter controls over nominee arrangements. ### Authorities’ views (regarding buffers and reforms) - Authorities agreed with staff on systemic financial risks but argued the recent recalibration of macroprudential buffers fully reflects the nature and level of risks. - They consider the elimination of the SSyRB justified by moderation in mortgage risks and view the increase in the CCyB as appropriate for more diversified risks. - Authorities consider the overall level of required capital buffer adequate to guard against residual residential real estate risks. - Authorities reiterated commitment to further implementing FSAP recommendations and noted improvements in stress testing frameworks, crisis management arrangements, operational readiness of resolution plans, the deposit insurance fund, and the ELA framework. - Legislation to improve bank governance is expected to be adopted in the first half of 2026; measures on disaster-insurance coverage predictability, regular complaints reporting by insurers, and NBB proposed changes to the institutional macroprudential policy framework will be reviewed by the Ministries of Finance and Economy in the coming months. *INTERNATIONAL MONETARY FUND (Belgium report excerpt).* ### 43. It is proposed that the next Article IV consultation take place on the standard 12– ### 1belea2026001-source-pdf - 43. It is proposed that the next Article IV consultation take place on the standard 12–month cycle. ### Macroeconomic developments (Figures and key narrative) - Private consumption drove growth in 2024 and 2025Q1–Q3. - Consumer and business confidence recovered (NBB). - Real wages stabilized following a sharp increase in 2022Q3–2023Q4. - Household saving ratio remained around pre-pandemic level. - Energy and processed food inflation fell in 2025. - Headline inflation remained above the EA average at end–2025. - Contributions to Real GDP Growth (quarterly): Private consumption, Public consumption, Gross fixed capital formation, Net exports, Change in inventories, GDP (series shown in charts; sources: NBB, Haver Analytics, and IMF staff calculations). ### External sector developments (Figure 2 and narrative) - The current account posted a deficit in 2024. - A moderate goods trade surplus was more than offset by a larger deficit in services. - Investment income remained robust but was more than offset by a larger private current transfer outflow. - The financial account balance remained broadly stable, supported by strong direct investment inflow. - The NIIP strengthened on higher net equity and FDI. - Real effective exchange rates appreciated strongly across all measures, partly reflecting wage developments. - Time series highlights (charts; percent of GDP): Current Account, Financial Account, Trade Balance (goods and services), Primary and Secondary Income Balance, Net International Investment Position, NEER, ULC-based REER, CPI-based REER (sources: NBB, Haver Analytics, IMF staff calculations). ### Integration in global value chains (Figure 3) - Belgium’s exports dominated by manufacturing and a rising share of business services. - Within business services exports, finance, professional, and scientific services are gaining prominence. - Within manufacturing exports, pharmaceuticals have overtaken traditional sectors such as motor vehicles. - A growing share of value added in Belgium’s pharmaceutical exports originates from the US and other EU countries. - Belgium is increasingly reliant on business services inputs from the US to boost pharmaceutical exports' value-added. - Backward linkages surged during the pandemic as the pharmaceutical and chemical industries expanded. - Data sources: OECD TiVA 2025 and IMF staff calculations. ### Fiscal developments (Figure 4 and Tables 1–3) - The fiscal deficit increased further in 2024, reflecting higher primary structural deficits and contributing to rising debt. - Direct tax revenues have increased as a share of GDP, while indirect tax revenues are growing more slowly, keeping the revenue-to-GDP ratio broadly unchanged. - Persistent and rising social spending needs since 2019 continue to exert pressure on expenditures. - Key projections (Table 1: Selected Economic Indicators, 2023–31; percent change or percent of GDP unless otherwise indicated; based on information available as of January 15, 2026): - Real GDP: 2023 = 1.7; 2024 = 1.1; 2025 = 1.1; 2026–27 = 1.0 1.2; 2028–29 = 1.3 1.3; 2030 = 1.3; 2031 = 1.3. - Private consumption: 2023 = 1.1; 2024 = 2.0; 2025 = 2.0; 2026–27 = 1.3 1.3; 2028–29 = 1.2 1.3; 2030 = 1.3; 2031 = 1.6. - Household saving ratio: 2023 = 14.1; 2024 = 12.9; 2025 = 11.5; 2026 = 11.4; 2027 = 11.4; 2028 = 11.5; 2029 = 11.6; 2030 = 11.8; 2031 = 12.0. - Consumer prices (HICP): 2023 = 2.3; 2024 = 4.3; 2025 = 3.0; 2026 = 1.8; 2027 = 2.1; 2028 = 2.0; 2029 = 1.9; 2030 = 1.8; 2031 = 1.9. - General government balance (percent of GDP): 2023 = -4.0; 2024 = -4.4; 2025 = -5.2; 2026 = -5.0; 2027 = -5.1; 2028 = -5.1; 2029 = -5.1; 2030 = -5.5; 2031 = -5.6. - General government debt (percent of GDP): 2023 = 102.4; 2024 = 103.9; 2025 = 107.2; 2026 = 109.7; 2027 = 112.1; 2028 = 114.4; 2029 = 116.6; 2030 = 119.1; 2031 = 121.4. - Current account (percent of GDP): 2023 = 0.2; 2024 = -0.4; 2025 = -1.5; 2026 = -0.9; 2027 = -1.0; 2028 = -0.7; 2029 = -0.5; 2030 = -0.4; 2031 = -0.2. - General Government Statement of Operations (Table 3 highlights, percent of GDP): - Revenue: 2023 = 48.8; 2024 = 49.7; 2025 = 49.7; 2026 = 49.8; 2027 = 49.8; 2028 = 50.0; 2029 = 50.0; 2030 = 50.3; 2031 = 50.3. - Expenditure: 2023 = 52.8; 2024 = 54.1; 2025 = 55.0; 2026 = 54.8; 2027 = 54.9; 2028 = 55.1; 2029 = 55.4; 2030 = 55.8; 2031 = 55.9. - Taxes and social contributions breakdown provided in Table 3 (personal income tax, corporate income tax, VAT, excise, social contributions, actual and imputed social contributions). - Gross operating balance and Net lending/borrowing series provided; Unchanged policy scenario shown. ### Financial sector and housing prudential measures (Figure 5) - Borrower-based recommendations in place since January 2020: - Loan-to-value (LTV) limits for new loans have remained in place since January 2020, leading to a less-risky distribution of new borrowers. - Recommended maximum debt-service-to-income (DSTI) ratio of 50 percent, in combination with an LTV above 90 percent, has not materially reduced the share of new borrowers at high risk of default should interest rates rise. - Debt-to-income (DTI) limit of 9 percent, in combination with an LTV above 90 percent for owner-occupiers, helped shift the distribution of new borrowers towards greater repayment capacity. - Charted distributions (NBB): Loan-to-Value Ratio Limit (percent), Debt-Service-to-Income Ratio Limit (percent), DSTI distribution (% of total new bank loans), Debt-to-Income Ratio Limit (percent), DTI distribution (% of total new bank loans), LTV distribution (% of total new bank loans). ### Government consolidated balance sheet and financial soundness (Tables 4–5) - General Government Consolidated Balance Sheet (2015–24): Net financial worth and detailed financial assets and liabilities series provided in percent of GDP (currency and deposits, securities other than shares, loans, shares and other equity, financial derivatives, other accounts receivable/payable). - Financial Soundness Indicators for the Banking Sector: compiled for 2014–25Q3 (table provided; details not repeated here but included in the source). ### Annex I — External Sector Assessment (summary) - Overall assessment: On a preliminary basis, the external position in 2025 was substantially weaker than the level implied by medium-term fundamentals and desirable policies. - The current account (CA) deficit is expected to have worsened in 2025 to 1.5 percent of GDP, driven by higher trade deficits. - In the medium term, the CA deficit is expected to narrow as global trade recovers, while fiscal consolidation and structural reforms are expected to further improve the external position in the longer term. - Potential policy responses recommended: - Sustained, expenditure-led fiscal consolidation beyond the baseline to bring the external position closer to fundamentals. - Rebuild fiscal buffers and create space to increase public investment to boost potential growth and support the green transition. - Implement significant pension, social benefit, tax, labor, product-market and wage-setting reforms to enhance productivity, potential growth, and competitiveness. - Work with EU partners to deepen the single market and further the saving and investment union to increase growth and resilience. - Foreign asset and liability position and trajectory (background): - NIIP declined to 54.4 percent of GDP in 2025Q3 from 58.6 percent at end-2024. - Deterioration reflected a modest reduction in gross foreign assets (by 0.5 ppts of GDP) and a more pronounced increase in gross foreign liabilities (by 3.7 ppts of GDP), mostly driven by higher portfolio liabilities and other investment liabilities. - Net portfolio investment remained the largest contributor to the positive NIIP, though it fell by 2.9 ppts of GDP to 34.1 percent of GDP in 2025Q3. - Net foreign direct investment declined by 4.3 ppts of GDP to 18.1 percent of GDP. - Net other investment liabilities continued to decline to 4.7 percent of GDP at 2025Q3, down from a peak (series discussed in the source). *Source: Haver Analytics, Belgian authorities, NBB, OECD TiVA 2025, Statbel, Eurostat, and IMF staff calculations; based on information available as of January 15, 2026.* ### 15.3 percent at end-2022. Interbank debt on the liabilities side has remained elevated since 2022 due to ### 15.3 percent at end-2022. Interbank debt on the liabilities side has remained elevated since 2022 due to ### NIIP and External Positions - NIIP-to-GDP ratio has declined modestly since 2024 and is expected to continue to edge lower over the medium term, reflecting projected current account deficits and underlying growth dynamics. - The NIIP remains substantially positive and does not raise sustainability concerns. - Belgium’s large gross international asset and liability positions are primarily driven by the activities of corporate treasury centers and do not appear to give rise to macro-relevant balance sheet mismatches. - 2025Q3 (percent of GDP): - NIIP: 54.4 - Gross Assets: 415.4 - Debt Assets: 128.2 - Gross Liab.: 360.9 - Debt Liab: 148.0 ### Current Account: Background and Assessment - Background: - Belgium’s CA balance averaged 0.3 percent of GDP over 2014–24, fluctuating between modest surpluses and deficits. - In 2025Q1 – Q3, the CA deficit widened to 2.1 percent of GDP, from -0.4percent for the full year in 2024. - The deterioration was primarily driven by a widening goods and services deficit, which reached 1.4 percent of GDP in 2025Q1-Q3, mainly due to weakening exports of goods. - The primary income balance and current transfers remained broadly unchanged relative to 2024Q1-Q3. - Assessment: - The EBA model estimates a CA norm of 3.5 percent of GDP, against a cyclically-adjusted CA balance of -1.2 percent of GDP, implying a gap of -4.7 percent of GDP expected in 2025. - This is within a range estimated by IMF staff for the CA gap of between –5.1 and –4.3 percent of GDP, applying the standard error of the CA norm estimated at ±0.4 percent of GDP. - 2025 (percent of GDP): - CA: -1.5 - Cycl. Adj. CA: -1.2 - EBA Norm: 3.5 - EBA Gap: -4.7 - Staff Adj.: 0 - Staff Gap: –4.7 ### Real Exchange Rate (REER) - Background: - Both the CPI- and ULC-based REERs appreciated significantly in 2025, by 3.2 percent and 3.6 percent, respectively, between end-2024 and end-2025, driven by higher inflation and wage increases than trading partners, and currency appreciation. - Between January 2020 and December 2024, the ULC-based and CPI-based REERs rose by 6.5 percent and 4.3 percent, respectively. - Assessment: - The IMF staff-assessed CA gap implies a REER overvaluation in the range of 6.3 to 7.5 percent, with a midpoint of 6.9 percent (applying an estimated elasticity of the CA balance to the REER of 0.68). - The EBA REER index model points to an overvaluation of 9.5 percent while the REER level model points to an overvaluation of 18.1 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background (first half of 2025): - The financial account recorded a net outflow of 0.1 percent of GDP. - The direct investment balance was positive at 1.1 percent of GDP, reflecting larger negative transactions on the liabilities than on the asset side. - Portfolio investment posted a net outflow of 4 percent of GDP, driven by a larger increase from the liability side, reflecting strong investment in Belgian bonds by non-residents. - The balance of other investments registered a net inflow of 2.8 percent of GDP, partially offsetting the portfolio outflows, due to financial transactions in the banking sector. - Assessment: - Belgium remains exposed to financial market risks and vulnerabilities associated with high external public debt, but these vulnerabilities are limited by the large, positive NIIP. ### FX Intervention and Reserves - Background: - The euro has the status of a global reserve currency. - Assessment: - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Regional Public Finances: Overview - Fiscal deficits of federated entities and rising public debt are complicating Belgium’s compliance with EU fiscal rules and challenging general government debt sustainability. - Marked economic disparities across regions, combined with limited revenue-raising powers and expanding expenditure responsibilities, have created structural imbalances. - Urgent actions to implement fiscal consolidation, together with improved coordination and enhanced accountability, are essential to ensure sustainability at both the federal and regional levels. ### Institutional and Fiscal Structure - Belgium is a federated state with multiple nonfederal governments (Entity II comprises three Regions: Flanders, Wallonia, Brussels-Capital; three Communities: Flemish, French, German-speaking; and local authorities). - Local authorities’ budgets must be balanced individually; borrowing allowed only for investment subject to regional authorization. - Sixth state reform (2011–14) transferred significant spending responsibilities to regions and communities and introduced equalization and adjustment rules under a Special Financing Law. - Financing of regions: regional surcharges on the federal PIT, federal transfers including a regional PIT share, and corrective transfers. - Federated entities operate autonomously with no hierarchical relationship with the federal government; there are no formal debt issuance limits for federated entities. ### Regional Economic Performance and Projections - Flanders: 60 percent of overall GDP; higher productivity, lower unemployment, strong export-oriented industrial base. - Wallonia: 23 percent of total GDP; lags due to deindustrialization, lower labor force participation, higher public spending needs. - Brussels-Capital Region (BCR): administrative and services hub; faces high unemployment and high commuter flows that distort local indicators. - Federal Planning Bureau projects economic growth in 2026–27 to moderate in Flanders (to 1.2 percent) and Wallonia (1.0 percent), and to remain subdued in BCR (around 0.7 percent). - Belgium totals: 11.8 million (2025); 596 billion EUR (2023); 30,689 square km; 5.0 million (2024) employed persons noted. ### Deterioration of Regional Public Finances - Drivers: - National shocks—pandemic, energy crisis—increased public spending and limited consolidation. - After 2022, rising interest rates and debt servicing costs worsened debt dynamics. - Key facts: - Fiscal deficit of regions and communities widened for two consecutive years, increasing to 1.6 percent of GDP in 2024, or 35 percent of the general government deficit (of 4.4 percent of GDP). - Regional governments now account for close to 20 percent of total consolidated public debt, a record high. - Their deficit is increasingly financed by debt securities (67 percent of gross debt in 2025Q3 from 39 percent in 2019). - Effective interest rates of the regions and communities rose to 2.4 percent, above the federal government rate at 2.1 percent in 2024. - The rise was partly due to rating downgrades. - Table II.1 highlights (percent of GDP, selected entries): - General government net lending/borrowing (selected years/proj.): 2019 -2.0; 2020 -9.0; 2021 -5.4; 2022 -3.6; 2023 -4.0; 2024 -4.4; 2025 -5.3 - General government debt: 2019 97.6; 2020 111.2; 2021 108.5; 2022 103.1; 2023 102.4; 2024 103.9; 2025 107.2 - Entity II (Regions and Communities) debt: 2019 12.7; 2020 16.4; 2021 16.7; 2022 16.7; 2023 16.8; 2024 18.2 ### Divergent Fiscal Challenges Across Regions - Flanders: - Fiscal deficit nearly doubled to 0.7 percent of GDP in 2024. - Public debt rose by 1.4 percentage points to 7.7 percent of GDP. - Flanders accounted for 47 percent of the deficits of regions and communities in 2024. - Wallonia: - Faced large reconstruction costs from floods in 2021, long-term structural deficits from higher social spending pressures and weaker growth and revenue performance. - Brussels-Capital Region (BCR): - Incurs high administrative costs, cost overruns on a large public transport project, and a limited tax base. - BCR’s fiscal deficit is equivalent to a quarter of its total revenue. - Interest payments are 6.4 percent of total revenue, the highest among the regions and communities. - BCR’s fiscal situation deteriorated further due to a political deadlock since June 2024 elections that prevented formation of a government and delayed corrective fiscal measures. - Rating downgrades and accounting disputes may further undermine investor confidence and raise borrowing costs, potentially putting liquidity at risk. ### Regional Fiscal Indicators and Trends (selected figures) - Employment Rate by Region and Gender in 2025Q3 (Percent, 20-64 years): Flanders 74.6 (total), Walloon region 64.7 (total), Brussels-Capital region 64.4 (total), Belgium 67.5 (total). - Unemployment Rates (Percent, 15-64 years): Persistently higher in Brussels and Wallonia relative to Flanders and national average (series shown across 2018Q1–2025Q1). - Job Vacancy Rate (Percent): Elevated (series shown across 2018Q1–2025Q1). - Gross Debt of Governments by Key Financial Instruments (Billions EUR) highlights increased use of debt securities by regions & communities between 2019 and 2025Q3. - Public Debt Outstanding (Percent of GDP) shows rising shares for Communities & Regions relative to general government across 2011–2024. *IMF staff compilation from the provided Belgium chapter content.* ### 8. Entity II’s fiscal balance is expected to remain in deficit with rising debt under staff’s ### 8. Entity II’s fiscal balance is expected to remain in deficit with rising debt under staff’s baseline scenario ### Fiscal outlook for Entity II and regions - Aggregated deficit of regions and communities projected to narrow to 0.75–1 percent of GDP in 2029 from 1.5 percent of GDP in 2026. - Entity II’s fiscal balance expected to remain in deficit with rising debt under staff’s baseline scenario. - More ambitious structural fiscal consolidation and reforms are needed at Entity II to improve transparency, credibility, and debt sustainability. ### Flanders: 2026 budget and outlook - 2026 budget targets closing its €1.5 billion (0.2 percent of GDP) fiscal gap and aims for a balanced budget by 2027. - Measures rely largely on: - raising truck kilometer charges; - increasing care premiums (a Flemish social contribution); - reducing spending on welfare, education, and subsidies. - Short-term savings also from postponing policy plans (e.g., inheritance tax reduction), expected underutilization of budgeted expenditure, and efforts to improve tax collection. - Government’s outlook indicates a fiscal deterioration of -0.1 percent of GDP in 2027 to -0.2 percent in 2029 (Flanders, October 2025 Investor Presentation). - Recommendation: consider structural fiscal measures and growth-enhancing reforms to secure a trajectory toward budget balance by 2027. ### Wallonia: 2026 budget and outlook - Targets multi-year deficit reduction to achieve budget balance by 2029. - Plans structural savings of about €150 million per year over 2025–29, supported by improved spending efficiency and targeted reforms. - 2026 budget commits to a structural saving of €270 million (0.04 percent of GDP or about one-tenth of Wallonia’s fiscal deficit) to reduce the fiscal deficit to 0.3 percent of GDP. - Measures include reducing employment subsidies, rationalizing training schemes, optimizing health sector spending, and modernizing the civil service to cap administrative expenditure. ### Brussels-Capital Region (BCR) - A decisive effort to expedite an agreement on a 2026 budget and medium-term fiscal consolidation plan is critical. ### Coordination, governance, and accountability - Coordination gaps between the federal and regional governments hinder coherent fiscal planning. - Lack of binding subnational fiscal rules undermines credibility of consolidation efforts. - First step recommended: update the 2013 Cooperation Agreement between the federal and regional governments to formalize fiscal coordination and allow effective implementation to reduce the general government deficit. - Given devolved competency in public investment, raising the efficiency of infrastructure investment requires improving coordination within and among the federal government and federated entities. - Over the medium term, consider reforming the decentralized fiscal framework by: - improving vertical balance by expanding own-revenue capacity; - strengthening incentives for improving fiscal disciplines. - Entity II should be accountable to overall fiscal adjustment paths under EU economic governance rules: - Translate EU primary net expenditure growth norms into growth paths for federal and regional governments’ primary net expenditures. - High Council of Finance (HCF) should monitor compliance. - Aligning regional spending with these expenditure trajectories should be a minimum requirement. - Consider strengthening PFM systems, developing in-year compliance monitoring and an early warning system for significant deviations. - Consider penalties to encourage compliance. ### Conclusion on Entity II fiscal position - Deterioration of public finances within Entity II poses significant challenges to Belgium’s adherence to EU fiscal rules and the overall sustainability of its public finances. - Marked economic disparities among the regions complicate the fiscal landscape. - Recent shocks and rising interest rates have exacerbated deficits and debt levels, with notable fiscal deterioration, especially in BCR and Wallonia. - Current measures in all regions are insufficient to reverse structural fiscal imbalances. - Policy priorities: more ambitious and credible long-term strategies to reduce spending, increase revenue, boost growth, strengthen coordination between federal and regional governments, reinforce fiscal rules at the subnational level, and ensure accountability under EU fiscal frameworks. ### Sovereign risk and Debt Sustainability Analysis (DSA) — key findings - Belgium’s risk of sovereign stress is assessed as moderate. - Public debt expected to rise from 103.9 percent of GDP in 2024 to 121.4 percent in 2031 percent of GDP, driven primarily by aging-related expenditure, rising defense spending, and increasing interest payments. - General government debt estimated at 107.2 percent of GDP in 2025. - In staff’s baseline scenario: - Debt projected to rise to 121.4 percent in 2031, only marginally lower than under unchanged policy. - Macroeconomic assumptions: - Growth projected to be stable at 1.1 percent in 2025 and return to its potential of 1.3 percent in 2029. - Headline inflation projected to decline to 1.8 percent in 2026 from 3 percent in 2025, subsequently stabilizing at around target from 2027 and beyond in the medium term. - Fiscal assumptions: - Overall fiscal deficit expected to remain elevated at 5.2 percent of GDP in 2025 and to widen to 5.6 percent of GDP in 2031. - Projected primary balance is about 3.1 ppts of GDP below its debt-stabilizing level of 0.3 percent of GDP. - Interest rates and gross financing needs (GFN): - Long-term interest rates (benchmark 10-year bond yield) projected to increase to about 4 percent (average) by 2030, a rise of 220 bps from 2022 (average). - Effective rate expected to gradually rise to 3.1 percent in 2031, compared to a historical low of 1.6 percent in 2022. - Interest costs rising to 3.2 percent of GDP in 2031, up from 1.6 percent of GDP in 2022. - Gross financing needs expected to increase to an average of 18.8 percent of GDP from 2025 to 2031. - Risk assessment and mitigating factors: - Belgium assessed at moderate risk of sovereign stress. - Mitigating factors include an extended debt maturity profile and a large and stable domestic (and euro-resident) investor base. - Public debt predominantly long-term with an average residual maturity of 10.4 years in 2024. - About 40 percent of public debt is held by residents. - Share held by the central bank peaked at 21.4 percent of outstanding debt and fell to 17.4 percent of GDP in 2024 as QE unwound. - Strong demand for the September 2023 one-year state bond (€21.9 billion, 3.7 percent of GDP) demonstrated market absorption capacity. - Sovereign credit rating at AA, but with a negative outlook from S&P and Moody, presenting downgrade risk if fiscal reforms stalled or interest rates rose faster than nominal growth. - Long-term projections and concerns: - Fiscal cost of aging projected to increase by 1.7 ppts of GDP during 2024–70, reaching 27.5 percent of GDP in 2070 (2025 Annual Report by the Aging Committee). - Long-term risk assessed as moderate; additional long-term spending pressures (demographic changes and green transitions) could arise beyond baseline projections. - DSA summary assessment: - Debt stabilization in the baseline: No. - Commentary: High and rising level of public debt under unchanged policies driven by aging-related spending pressures, rising defense spending, and increasing interest costs. Higher financing costs and maturation of lower-cost debt will dissipate favorable debt dynamics and require increasingly larger fiscal effort to stabilize debt. *Source: IMF staff analysis in the provided chapter.* ### 5. Debt consolidation across sectors: ### 5. Debt consolidation across sectors ### Public debt structure indicators - Public debt is predominantly denominated in domestic currency, marketable, and governed by domestic law. - The share held by the central bank: - Increased steadily since 2015, peaking at 20.9 percent of outstanding debt in 2022. - Decreased to 17.4 percent of GDP in 2024. - Trend: - Declining share held by domestic commercial banks and other financial institutions. - Maturity: - Commentary reports an average residual maturity of 10.4 years in 2024. - Figure label shows "Residual maturity: 11. years". - Perimeter notes: - Debt by currency and holder figures use the consolidated public sector and general government perimeters as indicated. ### Baseline scenario projections (Percent of GDP unless indicated otherwise) - Public debt (actual and projections): - 2024: 103.9 - 2025: 107.2 - 2026: 109.7 - 2027: 112.1 - 2028: 114.4 - 2029: 116.6 - 2030: 119.1 - 2031: 121.4 - 2032: 124.3 - 2033: 127.3 - 2034: 130.5 - Change in public debt: - 2024: 1.7 - 2025: 3.3 - 2026: 2.5 - 2027: 2.3 - 2028: 2.4 - 2029: 2.2 - 2030: 2.5 - 2031: 2.3 - 2032: 2.9 - 2033: 3.0 - 2034: 3.2 - Contribution of identified flows (matches Change in public debt series for projection years): - 2024: 1.3 - 2025: 3.3 - 2026: 2.5 - 2027: 2.3 - 2028: 2.4 - 2029: 2.2 - 2030: 2.5 - 2031: 2.3 - 2032: 2.9 - 2033: 3.0 - 2034: 3.2 - Primary deficit (percent of GDP): - 2024: 2.7 - 2025: 3.5 - 2026: 3.1 - 2027: 3.1 - 2028: 2.9 - 2029: 2.6 - 2030: 2.8 - 2031: 2.6 - 2032: 3.0 - 2033: 3.1 - 2034: 3.1 - Noninterest revenues (percent of GDP): - 2024: 49.1 - 2025: 49.1 - 2026: 49.2 - 2027: 49.2 - 2028: 49.3 - 2029: 49.7 - 2030: 49.6 - 2031: 50.0 - 2032: 49.7 - 2033: 49.7 - 2034: 49.7 - Noninterest expenditures (percent of GDP): - 2024: 51.8 - 2025: 52.6 - 2026: 52.3 - 2027: 52.3 - 2028: 52.3 - 2029: 52.3 - 2030: 52.4 - 2031: 52.6 - 2032: 52.7 - 2033: 52.8 - 2034: 52.8 - Automatic debt dynamics: - 2024: -0.7 - 2025: -0.3 - 2026: -0.4 - 2027: -0.3 - 2028: -0.4 - 2029: -0.1 - 2030: 0.0 - 2031: 0.1 - 2032: 0.2 - 2033: 0.3 - 2034: 0.4 - Other identified flows: - 2024: -0.7 - 2025: 0.1 - 2026: -0.1 - 2027: -0.5 - 2028: -0.2 - 2029: -0.3 - 2030: -0.3 - 2031: -0.3 - 2032: -0.3 - 2033: -0.3 - 2034: -0.4 - (minus) Interest Revenues: -0.6 (for each year listed) - Other transactions: - 2024: -0.1 - 2025: 0.7 - 2026: 0.5 - 2027: 0.2 - 2028: 0.4 - 2029: 0.3 - 2030: 0.3 - 2031: 0.3 - 2032: 0.3 - 2033: 0.3 - 2034: 0.3 - Contribution of residual: 0.4 in 2024 then 0.0 thereafter. - Gross financing needs: - 2024: 17.4 - 2025: 16.4 - 2026: 18.7 - 2027: 18.5 - 2028: 20.4 - 2029: 19.0 - 2030: 18.9 - 2031: 19.8 - 2032: 19.6 - 2033: 21.0 - 2034: 21.2 - Debt service (component of GFN): - 2024: 15.2 - 2025: 13.5 - 2026: 16.2 - 2027: 16.1 - 2028: 18.1 - 2029: 17.0 - 2030: 16.7 - 2031: 17.8 - 2032: 17.2 - 2033: 18.6 - 2034: 18.7 - Currency composition of GFN: - Local currency debt service series matches debt service values above. - Foreign currency entries shown as 0.00 for listed years. Memo: - Real GDP growth (percent): - 2024: 1.1 - 2025: 1.1 - 2026: 1.0 - 2027: 1.2 - 2028: 1.2 - 2029: 1.3 - 2030: 1.3 - 2031: 1.3 - 2032: 1.3 - 2033: 1.3 - 2034: 1.3 - Inflation (GDP deflator; percent): - 2024: 1.9 - 2025: 1.5 - 2026: 1.7 - 2027: 1.6 - 2028: 1.7 - 2029: 1.7 - 2030: 1.7 - 2031: 1.7 - 2032: 1.7 - 2033: 1.7 - 2034: 1.7 - Nominal GDP growth (percent): - 2024: 3.0 - 2025: 2.6 - 2026: 2.8 - 2027: 2.8 - 2028: 2.9 - 2029: 2.9 - 2030: 3.0 - 2031: 3.1 - 2032: 3.0 - 2033: 3.0 - 2034: 3.0 - Effective interest rate (percent): - 2024: 2.2 - 2025: 2.3 - 2026: 2.3 - 2027: 2.5 - 2028: 2.6 - 2029: 2.8 - 2030: 2.9 - 2031: 3.1 - 2032: 3.2 - 2033: 3.2 - 2034: 3.3 Commentary on baseline: - The public debt to GDP ratio will continue to rise over the forecast horizon, reflecting a projected primary balance that remains negative, and at 3.1 ppts of GDP below its debt-stabilizing primary balance of 0.3 percent of GDP, based on the baseline scenario. ### Realism of baseline assumptions - Past forecast errors do not reveal any systematic biases and the projected fiscal adjustment and debt reduction are reported as well within norms. - Notes on methodology: - Projections made in the October and April WEO vintage. - Data cover annual observations from 1990 to 2019 for MAC advanced and emerging economies. - The Laubach (2009) rule is referenced with a stated rule that bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. ### Medium-term risk assessment - Mechanical signals point to high medium-term risk. - Probabilistic fan chart indicates borderline high risks of debt non-stabilization under the baseline scenario, with the risk just above the moderate risk (2.01). - Key metrics and indices (reported values): - Debt fanchart module: - Fanchart width: 34.10.5 (percent of GDP) - Probability of debt non-stabilizaiton (percent): 97.8 0.8 - Terminal debt-to-GDP x: 36.10.8 - Debt fanchart index (DFI): 2.1 - Risk signal: 3/High - Gross Financing Needs (Percent of GDP): - Average baseline GFN: 18.6 - Contrib 1/: 6.4 (percent of GDP) - GFN financeability: - Initial Banks' claims on the gen. govt (pct bank assets): 4.8 - Chg. In banks' claims in stress (pct banks' assets): 9.6 - GFN financeability index (GFI): 11.1 - Risk signal: 4/Moderate - Medium-term index and final assessment: - Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 21.6 pct. ### Long-term risk analysis - Mechanical signals of three standard scenarios breach GFN thresholds, indicating long-term risks in the absence of fiscal consolidation. - Projections shown for: - Baseline with t+5 - Baseline with t+5 and DSPB (debt-stabilizing primary balance) - Historical 10-year average - The charts compare GFN-to-GDP ratio and Total Public Debt-to-GDP Ratio under scenarios including medium-term extrapolation, amortization-to-GDP ratios, and long-run projections. ### Demographics and health-related long-run risks - Baseline scenario incorporates the cost of aging projected by the authorities: - Increase in healthcare cost of 0.7 percent of GDP in 2024–30. - Increase in healthcare cost of 1.6 percent of GDP in 2030–70. - Excess cost growth (ECG) risk: - Standard ECG assumed at 0.8 percent. - Should ECG materialize at 0.8 percent, the GFN and Debt to GDP ratio would be: - 9.6 ppts higher (GFN) - 49.5 ppts higher (Debt-to-GDP) - Charts show long-run trajectories for GFN-to-GDP and Total Public Debt-to-GDP under: - Baseline: Extension of fifth projection year - Health (Demographics) - Health (Demographics + ECG) ### Risk Assessment Matrix — key external and Belgium-specific risks and policy responses - For each risk the matrix reports: Relative Likelihood, Time Horizon, Expected Impact, and Policy Response(s). External Risks - Geopolitical Tensions - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: High — risks to growth, inflation, and financial stability given Belgium’s cross-border linkages. - Policy Response: - Accelerate structural reforms (including that of automatic indexation mechanisms). - Work with EU partners to deepen the single market and financial integration. - Allow automatic stabilizers to work fully but pursue steady fiscal consolidation. - Strengthen financial sector resilience, keep buffers and contingency plans. - Work with partners on legal and systemic considerations regarding Russian assets frozen in Belgium. - Escalating Trade Measures and Prolonged Uncertainty - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: High — lower trade, investment, growth; possible re-emergence of inflation. - Policy Response: Same as above regarding fiscal policy, structural reforms, and financial sector resilience. - Commodity Price Volatility - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: Medium — energy price volatility could affect inflation and energy-intensive sectors. - Policy Response: - Provide well-targeted temporary support to the most vulnerable. - Tighten fiscal policy to counteract upward inflationary pressures. - Pause automatic wage indexation if needed to prevent a wage-price spiral. - Increase renewable energy capacity and accelerate the green transition. - Financial Market Volatility and Correction - Relative Likelihood: High - Time Horizon: ST - Expected Impact: Medium — tighter financial conditions could weigh on confidence and strain leveraged sectors and the sovereign. - Policy Response: - Strengthen supervision of nonbank financial institutions. - Recalibrate and develop macroprudential measures and contingency plans. - Fiscal Vulnerabilities and Higher Long-Term Interest Rates - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: High — upward pressure on financing costs, threaten debt sustainability. - Policy Response: - Substantial, structural fiscal tightening to maintain credibility, reduce government bond yields, and stabilize public debt. - Rising Social Discontent - Relative Likelihood: Medium - Time Horizon: NT, ST - Expected Impact: Medium — strikes and mass rallies may delay reforms and fiscal consolidation. - Policy Response: - Strengthen social dialogue and political consensus. - Proactively communicate on the case for and modalities of reforms. Other External Risks - Cyberthreats - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: Low — could inflict significant damage but mitigated by existing frameworks. - Policy Response: - Intensify monitoring of cyber risks and information exchange. - Strengthen cyber security framework, resilience testing, and business continuity plans. - Accelerate implementation of the Digital Operational Resilience Act (DORA). - Climate Change - Relative Likelihood: Medium - Time Horizon: MT - Expected Impact: Medium — vulnerability to floods, sea level rise, storm surges. - Policy Response: - Set predictable long-term transition path and energy supply strategy. - Strengthen climate adaptation policies and infrastructure. - Provide limited, well-targeted, time-bound fiscal support if risks materialize. - Labor Supply Gaps - Relative Likelihood: Medium - Time Horizon: MT - Expected Impact: Medium — tighter migration could worsen labor shortages and reduce potential output. - Policy Response: - Reform wage-setting mechanism to foster mobility. - Implement active labor market policies to raise participation, especially among older workers, lower-skilled individuals, and migrants. - Reform and promote secondary-level vocational training. Belgium-Specific Risks - Political fragmentation - Relative Likelihood: Medium - Time Horizon: NT, MT - Expected Impact: Medium — could delay implementation of fiscal consolidation and structural reforms, worsening debt dynamics. - Policy Response: - Intensify dialogue with coalition partners, clearly outlining consequences of inaction or delayed/partial reform. *Source: IMF Staff (figures, tables, and commentary extracted from "5. Debt consolidation across sectors").* ### Annex V. 2025 Article IV Recommendations ### Annex V. 2025 Article IV Recommendations ### Fiscal Policy - Sustained fiscal consolidation is needed to support disinflation, rebuild buffers, lower vulnerabilities to change in market sentiment, and address pressures from aging and the green transition. - The authorities’ fiscal plan and the 2026 budget will broadly stabilize the fiscal deficit through 2029 but will not stabilize debt over the medium term. - Fiscal adjustment priorities: - Rationalize current spending. - Make room for more public investment. - Increase efficiency of spending. - Benefits and pension reforms have been initiated and will gradually reduce current spending; protracted coalition negotiations delayed other related fiscal reforms. - Strengthen the overall fiscal framework through: - A revitalized fiscal council. - Greater accountability of the federal and all federated entities in sharing the burden of fiscal adjustment. - No progress amid protracted BCR government formation and deterioration in regional and communities’ public finances; strengthening the cooperation agreement is part of the coalition government’s agenda. ### Financial Sector Policy - To preserve macro-financial stability, capital buffers and prudential limits on residential mortgages should be maintained. - Recent regulatory actions: - The NBB raised the CCyB from 1 to 1.25 percent. - Prudential limits on residential mortgage loans were kept in effect but the SSyRB for residential mortgages was eliminated. - In total, the amount of required capital buffers was lowered by 15 percent. - Continued progress on the 2023 FSAP recommendations will strengthen systemic risk assessment, supervision, the macroprudential framework, and crisis management and resolution preparedness; measures requiring legislative action remain pending. ### Labor Market - Policy aim: Foster a labor market more inclusive of low-skilled workers, older workers, women, and individuals with an immigration background, or disabilities, notably through lifelong learning, reskilling, and active labor-market policies to enhance overall economic performance. - Implementation status: - Active labor market policies beyond benefits, night and flex-job reforms, and measures to foster lifelong learning and reskilling have not been formulated. - Consideration should be given to abolishing automatic indexation and the 1996 wage law which, together, prevent an optimal allocation of labor and higher employment. - Social partners were asked by the federal government to provide options to reform automatic wage indexation and the wage law by end-2026. Abolishing the system is not on the agenda. ### Education - Education reforms should upskill the labor force by aligning curricula with the skills companies need, better leveraging teachers’ time, and strengthening support to students in difficulty. - Implementation status: No progress to date. ### Productivity and Product Markets - Further product market reforms and efforts with EU partners to deepen the single market and advance the capital market union will support firms’ productivity. - Implementation status: - Product market reforms are not a key focus of the coalition agreement. - Building consensus on EU plans to deepen the single market and advance the capital market union remains challenging. ### The Green Transition - Consolidation of federal and regional climate efforts into a coherent and cohesive national strategy is essential. - Belgium submitted the final update of its national energy and climate plan (NECP) for 2021–30 to the EC in October 2025, following an agreement between federal and regional governments. - Policy recommendations to achieve climate objectives: - Expansion of the EU ETS should be complemented by carbon taxation and the phasing out of fossil fuel subsidies, while ensuring support for vulnerable population. - Assessment of the updated NECP: - Reinforces regional climate policies. - Lacks a comprehensive national plan for carbon taxation. - Sets provisions for support for vulnerable population but not for fully phasing out subsidies. *Source: IMF staff; see IMF Country Report 25/69.* --- ### Annex VI. Follow-up on Implementation of Key 2023 FSAP Recommendations ### Overview - Table VI.1 summarizes implementation status of key 2023 FSAP recommendations across Systemic Risk Assessment, Macroprudential Policy, Banking Regulation and Supervision, Insurance Regulation and Supervision, Euroclear Bank Assessment, Crisis Management and Financial Safety Net, and Financial Integrity. - Timing legend used in the table: C = Continuous; I = Immediate (within one year); NT = Near Term (within 1–3 years); MT = Medium Term (within 3–5 years). ### Systemic Risk Assessment — Key Findings and Actions - Recommendation 1: Strengthen NBB’s Stress Testing Framework - Status: - Integration of credit risk and net interest rate income (NII) models into the NBB’s semiannual risk review has been formalized and is now systematic. - Major banks can now accurately report IFRS9 data on loan staging; methodology for transition rates finalized, but full incorporation of IFRS 9 into credit risk modeling is postponed until more data points are available. - NII model revised to include “catch-up” effect and “migration effect” (assuming 10 percent sight deposit migrate to term deposits). Reverse stress tests will be conducted for most benign and most adverse EBA stress test scenarios. Extension of the NII model to less significant institutions is planned for 2026. - Recommendation 2: NBB–FSMA data sharing and investment funds stress tests - Status: - A formal agreement was signed in 2023. - FSMA stress tests have been conducted periodically; FSMA staff coordinate inputs for the NBFI report, latest published January 2025. - Recommendation 3: Increase insurers’ resilience - Status: - Measures to reduce dependence on lower tier capital are pending for one insurer after NBB/EIOPA stress test in November 2024; the insurer did not submit reactive management actions. - NBB/EIOPA stress test includes a liquidity component; an NBB circular requires insurers to implement liquidity stress tests and scenario analysis; insurers expected to periodically conduct their own liquidity stress tests. ### Macroprudential Policy — Key Findings and Actions - Recommendation 4: Align NBB powers for macroprudential policy - Status: - NBB Board supports adapting the institutional framework for capital-based measures but opposes extending powers for legally-binding borrower-based measures. Informal discussions with the Ministry of Finance are ongoing. - Recommendation 5: Strengthen accountability for measures requiring government intervention - Status: - Article 36/40 of NBB’s Organic Law requires federal agencies that deviate from NBB recommendations to explain why; macroprudential decisions requiring government intervention could be made public accordingly. - Recommendation 6: Strengthen systemic risk assessment framework - Status: - NBB reviewed its semi-annual risk assessment framework in 2024H1 and adopted a new framework covering all identified systemic risks, better linking (tail-) risk quantification and macroprudential policy decisions; includes a risk assessment for NBFIs. ### Banking Regulation and Supervision — Key Findings and Actions - Recommendation 7: Strengthen banks’ corporate governance - Status: - NBB identified measures; some require modification of banking and insurance law and transposition of CRD6 and Solvency II. A new draft banking law was submitted to the Minister of Finance; expected adoption and effect in April 2026. The new law will not require that the Chair of the Board Committees be an independent non-executive director. Draft amendments to insurance law will follow. - Recommendation 8: Harmonize internal supervisory decision-making - Status: - Alignment of follow-up on on-site inspection findings across supervisory departments expected to be completed in 2026Q1. Changes to Pillar 2 requirements are now reflected in internal decision-making documentation. - Recommendation 9: Maintain adequate prudential supervisory staffing for LSI supervision - Status: - NBB committed to maintaining staffing in LSI teams. NBB and FSMA made an inventory of consumer protection and conduct information to be shared periodically to feed into the SREP; inventory covers all banks, stockbroking firms and insurance undertakings under NBB supervision. ### Insurance Regulation and Supervision — Key Findings and Actions - Recommendation 10: Finalize legal framework for natural catastrophe public-private partnership - Status: - NBB provided technical advice. A national working group on natural catastrophes created in September 2025 will finalize the proposal before submission to Parliament. - Recommendation 11: Provide guidance for consistent valuation of mortgage loans - Status: - General and specific residential real estate data collection guidelines including valuation guidance were updated in February 2024 and April 2025. - Recommendation 12: Contact third country supervisors for information sharing - Status: - No contact initiated yet; legal basis for information sharing with third country supervisors is currently insufficient. - Recommendation 13: Obtain legal powers for regular complaints reporting by insurers - Status: - Introduction requires change by Royal Decree. FSMA prepared draft decree and accompanying regulation; proposed Decree and regulation to be discussed with the Minister of Economy once regulation is finalized. ### Euroclear Bank (EB) Assessment — Key Findings and Actions - Recommendation 14: Improve IT and information security risk management - Status: - Substantive improvements made in 2024–25; security controls and asset management notably improved. Further identity and access management improvements will be completed in 2026Q2. - Recommendation 15: Increase transparency on direct participants’ clients - Status: - EB implemented a new know-your-customer query for operational risk monitoring in 2025 to identify omnibus accounts; query flags accounts for further checks and may lead to requests for segregation. - Recommendation 16: Strengthen testing of business continuity and participant default procedures - Status: - October 2024 and 2025 exercises incorporated more robust simulation techniques. ### Crisis Management and Financial Safety Net — Key Findings and Actions - Recommendation 17: Finalize Rules of Procedure of the NBB Resolution Board and the national resolution handbook - Status: - NBB prioritized drafting sections on tools for resolution and operational steps for bail-in and sale-of-business. Work on additional powers and tools (including bridge tool) continued in 2025. A shell entity is expected by end-2026. A new draft Royal Decree updating resolution rules and the Resolution Board structure is expected to be adopted and enter into force during 2026Q1; the Decree will allow more legal basis for hybrid Board meetings. - Recommendation 18: Strengthen NBB internal coordination for crisis management - Status: - Internal coordination substructure established (risk team on recovery and crisis management). Cooperation agreements between the Resolution Unit and Financial Stability and Supervisory Departments will be prepared after expected interactions are identified. - Recommendation 19: Enhance ELA framework - Status: - i) NBB started technical discussions and adverse financial market event simulation exercises; a cooperation arrangement for ELA involving a cross-border banking group is being implemented as a blueprint. - ii) Policies to assess prospective solvency and document lines of action and responsibility for ELA in resolution were drafted in 2025 in line with Eurosystem procedures. - iii) Belgian legal framework provides for ELA to NBFIs but no precedent; collateral requirements, valuation methods, and risk mitigation strategies were discussed at ECB level. - Recommendation 20: Enhance the Deposit Insurance System (DIS) - Status: - i) Operational readiness to meet the target of 7 working days for pay-outs was tested in 2024. Institutions covering 99.95 percent of deposits were deemed to have provided timely and sufficient information. Improvements to IT processes for cross-border payouts and operational efficiency recommended and expected in 2026. - ii) The DIS fund is now segregated from the national budget, and its target level was increased to 1.8 percent of covered deposits with adoption of new law in November 2023. Full operationalization of the public backstop and development of a separate investment policy are still pending. - iii) Work on the operationalization of the paybox plus mandate will resume in 2026. ### Financial Integrity — Key Findings and Actions - Recommendation 21: Make the NBB a member of the national committee on terrorist financing - Status: - A legislative proposal for a new broader national committee on money laundering, terrorism financing and proliferation financing, including the NBB, was prepared by Treasury with NBB support. Submission to the Council of Ministers is expected by end-2026H2. - Recommendation 22: Increase NBB resources for AML/CFT supervision and enhance sanctions framework - Status: - AML off-site team resources increased by 2 FTEs in 2024 and one additional FTE in 2025. On-site AML team resources increased by 1 FTE in 2024. - Several administrative sanctioning proceedings are in the pipeline within the existing sanctions framework. - Cooperation on sectoral risk assessments between the NBB and federal judicial entities involved in TF prosecution was strengthened. A new sectoral assessment will be published in 2026. - A new AML framework harmonized at EU level requiring stricter due diligence, with enhanced suspicious transactions’ reporting obligations, will enter into force by July 2027. *Source: IMF staff; see IMF Country Report 25/69.* ### Annex VII. Data Issues ### Annex VII. Data Issues ### Rationale for staff assessment - The data provided to the Fund is adequate for surveillance. - The National Bank of Belgium (NBB) consistently publishes a comprehensive set of economic and financial statistics and provides calendar dates for key statistical releases. - The current account data undergoes substantial revisions, mainly due to volatility in trade and primary income balances, which are affected by the significant activities of multinational corporations. This poses challenges for real-time data accuracy and calls for careful analysis to ensure sound policy advice. - Quarterly balance of payments (BOP) data is released with a 3-month delay, while revisions to the annual data occur with a 9-month lag. - There is room to improve the alignment between net exports reported in the national accounts and those in the BOP statistics. ### Changes since the last Article IV consultation - General and specific residential real estate data collection guidelines including valuation guidance were updated in April 2025. ### Corrective actions and capacity development priorities - Recent data refinements brought annual figures for imports and exports of goods and services in national accounts broadly in line with BOP statistics for 2019-24. - Limited discrepancies in imports of services for 2022 and 2023 remain. - Quarterly primary income, secondary income and capital account data are now aligned with rest of the world statistics. - Discrepancies in trade balance quarterly data remain (limited as a percentage of gross flows, but relatively substantial as a percentage of GDP). - Continued efforts are encouraged to integrate new data sources and enhance methodologies to improve BOP statistics. ### Use of data and staff estimates - Staff does not use any data and/or estimates in the staff report in lieu of official statistics. ### Other data gaps and publication recommendations - It would be beneficial to publish market conduct data for the insurance sector, including indicators of insurance underwriting risks. - Further broaden the range of statistics and data sources used to monitor risks to the financial sector stemming from commercial real estate. ### Data adequacy assessment (summary from Table VII.1) - Data Adequacy Assessment Rating 1/ - Sector/Dimension ratings (as presented): - National Accounts: AAABA - Prices: B - Government Finance Statistics: A - External Sector Statistics: Coverage AAAAA; Consistency ABB; Frequency and Timeliness AAA - Monetary and Financial Statistics: Coverage AAAA; Consistency BA; Frequency and Timeliness B; Granularity A (Monetary and Financial Statistics top cell) - Inter-sectoral Consistency: A - Median Rating: (presented in heatmap) - Granularity 3/: Government Finance Statistics top cell shows granularity of reported government operations data; bottom cell shows granularity of public debt statistics. - Questionnaire Results 2/: Overall questionnaire assessment based on standardized questionnaire and scoring system. - Note excerpts: - "The data provided to the Fund are adequate for surveillance." - "The data provided to the Fund have some shortcomings but are broadly adequate for surveillance." - "The data provided to the Fund have some shortcomings that somewhat hamper surveillance." - "The data provided to the Fund have serious shortcomings that significantly hamper surveillance." ### Data standards and dissemination (Table VII.2) - Belgium adheres to the Special Data Dissemination Standard (SDDS) Plus since January 2023 and publishes the data on its National Summary Data Page. - The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board. *Source: Annex VII. Data Issues, Belgium — Staff Report for the 2026 Article IV Consultation* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1belea2026001-source-pdf.pdf_