## _cr04257

## Source details

**Canonical URL:** [_cr04257](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04257.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04257.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04257.pdf.json)

---

### Economic performance and outlook
- Growth history and near-term outlook:
  - Real GDP growth averaged "7½ percent per year" in the 1990s.
  - Growth "slowed to a third of that rate in 2000–02" (average "2¾ percent" in 2000-2002).
  - GDP "is expected to rise by 2 percent in 2004, after stalling in 2003."
  - Employment upturn in Q1 2004: "1.3 percent year-on-year."
  - Selected real economy indicators (change in percent): Real GDP 1999 9.0; 2000 2.2; 2001 5.5; 2002 0.3; 2003 0.0; 2004 2.0. Employment 1999 4.5; 2000 2.8; 2001 5.8; 2002 3.1; 2003 0.8; 2004 1.8.
- Downside risks to near- and medium-term outlook:
  - Italy’s new tax on commuters’ income (Box 2).
  - Prospective EU-related changes in savings taxation (Box 3).
  - These risks may "depress employment and deposit growth" and erode competitiveness.

### Structural characteristics and vulnerabilities
- Size, demographics, and currency regime:
  - Population "about 30,000."
  - Area "23.5 square miles." (Total area (sq. km.): 61.2; Population (December 2003): 29,241.)
  - Uses the euro as official currency and "operates in a customs union with the European Union"; inflation and interest developments "are coupled with those of Italy."
- Labour and sectoral composition:
  - Italian commuters account for "about 35 percent of private sector employment."
  - Manufacturing employment "still accounts for more than 40 percent of total employment."
  - Financial sector accounts for "only 4 percent of private employment" while its salaries and profits are "10 and 16 percent of the total," respectively.
  - Figure 3 (2003) private sector employment breakdown: Commerce and Tourism 22%; Services, Transport, and Communication 19%; Financial sector 4%; Manufacturing 41%; Agriculture 1%; Construction 11%.
- Financial system scale and nonresident exposure:
  - Deposits and managed funds in Sammarinese banks are "about ten times GDP" (versus "two-three times GDP in Italy and neighboring zones").
  - In 2003, nonresidents’ funds were "US$6.6 billion," corresponding to "about half of deposits and 60 percent of managed funds."
  - Size of the financial system is large by international standards though smaller than Luxembourg, Andorra, Monaco, Liechtenstein, and the Cayman Islands.

### Fiscal position, 2003 adjustment, and medium-term objectives
- 2003 fiscal turnaround:
  - Central administration balance moved from a deficit of 2.2 percent in 2002 to a surplus of 1.6 percent of GDP in 2003 (staff outturn); authorities’ revised data raise the 2003 surplus to 2.4 percent of GDP.
  - Authorities’ original 2003 target was a deficit of 1.6 percent of GDP; the outturn was better-than-targeted.
  - Parliament approved a budget close to balance for 2004 and balanced-budget targets for 2005-2006.
  - Maintaining the 2003 budget surplus would allow San Marino to repay its debt by 2006 (see Appendix III debt sustainability analysis).
- Revenue and tax-base issues:
  - Total revenues net of reimbursements fell by about 7½ percent of GDP from 1992 to 2003.
  - Pension system reserves rose to 13.8 percent of GDP at end-2003 despite pension expenditure systematically exceeding social security contributions.
  - The fall in net revenues reflected: a collapse of non-tax revenues; a large contraction of the import tax (monofase), which accounts for over 90 percent of indirect taxes; lower direct taxes.
  - Taxes on the financial sector "more than halved" amid reduced profitability and lower interest rates (staff estimates).
  - Withholding tax context and rates:
    - First new EU-related withholding tax level: 15 percent.
    - Current San Marino withholding taxes mentioned: 11 percent for bank deposits, 8 percent for long-term certificates, 4 percent for foreign bonds, and 2 percent for repos.
    - Italian withholding tax rate: 12.5 percent.
    - Agreement stipulates 75 percent of proceeds from the withholding tax be remitted to the country of residence of the investor; other taxes on same income are to be credited against it.
- Expenditure developments:
  - Between 1992 and 2003, total expenditures fell by about 9½ percent of GDP; lower capital expenditures explain about half of the adjustment.
  - Public sector wage bill trimmed by almost 1½ percent of GDP.
  - Average public sector wages remained about 25 percent above those in the private sector.

### Fiscal policy recommendations and public debt management
- Medium-term fiscal objective:
  - Authorities aim "at maintaining the budget in balance or in surplus over the medium term" while "preserving tax rate advantages."
- Core recommendations:
  - Sustain fiscal consolidation while preserving or lowering tax rates—by addressing tax administration weaknesses and reforming generous entitlements.
  - Strengthen tax administration; staff supported giving the tax collection agency access to financial information on non-complying taxpayers (noted as controversial relative to banking secrecy).
  - Contain public health and pension expenditure; introduce far-reaching pension reform.
- Public debt and issuance:
  - 2004 budget law foresees placing a bond of up to €120 million (about 10 percent of GDP) and up to 10-year maturity.
  - Staff view: agreed on refinancing high-interest bank loans with a debut Eurobond issue but had reservations about issuing debt to finance infrastructure projects before resolving tax compliance problems; recommended verifying whether renegotiating high-interest bank loans might be lower-cost.

### Pension system risks, reform proposals, and fiscal scenarios
- Current pension facts:
  - Pension expenditure exceeds 6 percent of GDP and continues accumulating reserves.
  - Worker-to-retiree ratio is 4:1.
- Staff simulations:
  - Project public debt buildup to between 20 and 65 percent of GDP by 2020 depending on employment growth if no reform is undertaken.
- Authorities’ reform proposal:
  - Two-pillar system:
    - First pillar: compulsory pay-as-you-go but compute pension benefits linked to lifetime contributions (replicates Italy’s 1995 change).
    - Second pillar: fully-funded.
- Staff recommendations:
  - Support contribution-based first pillar to reduce underreporting incentives; suggest considering making the first pillar fully-funded.
  - To finance closing the existing pay-as-you-go system, consider raising effective average retirement age (currently at 60) or equivalent actuarially-fair benefit reductions and using accumulated reserves; reduce benefits for workers further from retirement as part of transition.

### Labor and product market issues
- Recent labor market developments:
  - "Cutbacks in public sector employment and moderate growth in public sector wages have recently improved the functioning of the labor market."
  - "Labor market flexibility remains insufficient" and gains "risk being reversed."
- Recommended measures to boost medium-term growth:
  - Eliminate remaining hiring restrictions on nonresidents.
  - Allow fixed-term contracts for Sammarinese workers (after consideration/experimental phase).
  - Resist pressures to reintroduce tax exemptions.
  - "Substituting rules for political discretion in key areas of economic activity."

### Financial sector soundness, governance, and AML/CFT
- Recent dynamics and risks:
  - New entrants and repatriation of Italian deposits after the 2002–2003 tax amnesty ("scudo fiscale") eroded profitability.
  - Declining profitability "raises risk-taking incentives."
  - Number of banks increased from 4 in 2000 to 10 in 2003, with two more about to open; about forty non-bank financial intermediaries started operations over the last three years.
- Comparative strengths:
  - Sammarinese banks are "relatively more efficient, better capitalized, and with fewer nonperforming loans than comparators."
  - Risk-based capital asset ratio (1998–2003): 35.0, 47.8, 46.4, 42.4, 44.7, 35.8.
  - Non-performing loans/total loans (1998–2003): 1.6, 1.4, 1.1, 1.3, 1.1, 1.1.
- Governance and supervisory recommendations:
  - Grant adequate supervisory and regulatory powers to the Central Bank of San Marino (CBSM); ensure operational independence, stable financing, and clear accountability to Parliament.
  - Transfer the right to grant and revoke licenses to an independent supervisory and regulatory authority (current law accords this authority to the government).
  - Increase frequency of on-site inspections and expand supervisory staff (CBSM to be doubled by end-2004).
  - Complete adoption of Basel I-related regulations and issue market risk and derivatives regulations.
- AML/CFT and international cooperation:
  - "AML/CFT provisions have been strengthened."
  - Technical assistance from LEG on financial legislation scheduled for 2005.
  - Authorities have expressed interest in an FSAP; Parliament approved new AML/CFT provisions; San Marino is a member of MONEYVAL and was evaluated in February 2000 and March 2003.
  - Staff emphasized strict implementation of "know-your-customer" measures in line with FATF recommendations.

### Statistical issues, data transparency, and IMF relations
- Statistical shortcomings and progress:
  - Delay of 1½ years in the release of national accounts; experimental national accounts produced since 1992; data for 1995–99 calculated in accordance with ESA95.
  - No balance of payments compilation; currency union with Italy and use of euro reduced BOP policy relevance.
  - Since May 1997, balance sheet data on commercial banks and monetary authorities provided to STA’s EIS database quarterly with ~six-week lag.
  - No broad money survey exists; data on nonbank financial intermediaries are lacking; CBSM and Treasury public deposit/credit data do not match.
- Staff encouragements:
  - CBSM to compile and disseminate monthly monetary and financial data and carry out an FSI self-assessment.
  - Authorities expressed interest in participating in the GDDS and requested TA to prepare metadata.
  - Authorities have received STA multisector and Monetary and Financial Statistics missions and advanced a formal request for TA in GFS compilation.
- IMF membership and Fund position:
  - Membership Status: Joined 9/23/92. Article VIII.
  - Quota 17.00 (percent quota 100.00); Fund holdings of currency 12.90 (75.88); Reserve position in Fund 4.10 (24.13).
  - Holding of currency (in percent of quota) 75.88 (as of May 31, 2004).

### Key macro, fiscal, and financial indicators (selected exact figures from source)
- Population (December 2003): 29,241.
- GNP per capita (current US$, 2002): 34,902.
- Real GDP (annual percent change) 1996–2004: 4.9, 6.9, 7.5, 9.0, 2.2, 5.5, 0.3, 0.0, 2.0.
- Employment (annual percent change) 1996–2004: 2.6, 3.3, 4.3, 4.5, 2.8, 5.8, 3.1, 0.8, 1.8.
- Central administration balance moved from deficit of 2.2 percent in 2002 to surplus of 1.6 percent of GDP in 2003 (staff); authorities’ revised 2003 surplus = 2.4 percent of GDP.
- Central government balance (percent of GDP) 1996–2004: -2.7, -2.0, 1.7, -3.0, -3.2, -3.6, -2.2, 1.6, -0.6.
- Revenues (million euros) 1992–2004 (selected): 143.9, 157.2, 172.4, 174.8, 191.2, 206.4, 247.7, 224.7, 236.6, 252.6, 256.4, 288.0, 271.9.
- Expenditure (million euros) 1992–2004 (selected): 145.8, 164.3, 193.3, 200.2, 207.4, 219.6, 235.5, 248.7, 265.7, 285.3, 276.8, 272.4, 277.6.
- Public sector debt (percent of GDP) 1998–2008 (baseline projections): 4.1, 3.9, 4.3, 5.5, 5.3, 4.9, 4.7, 4.5, 4.3, 4.0, 3.8.
- Gross financing need (percent of GDP) 1998–2008 (selected): 0.0, 4.4, 4.9, 5.0, 5.3, 1.2, 3.3, 2.6, 2.4, 2.3, 2.2.
- Trade balance (in millions of US$) 1996–2004 (selected): 22.6, -27.0, -12.2, -21.1, -44.6, -38.0, -100.9, ...
- Number of tourists (in millions), 1996–2004: 3.3, 3.3, 3.3, 3.1, 3.1, 3.0, 3.1, 2.8, 2.6.

### Executive Board and staff policy messages (summarized)
- Growth imperative: Return to a high growth path requires decisive fiscal, structural, and financial sector reforms; otherwise competitiveness will continue to erode.
- Fiscal policy: Maintain budget surplus until net financial position is positive and long-standing fiscal problems are resolved; reduce public sector wage bill further; improve tax administration; scale back generous entitlement programs.
- Pension reform: Implement far-reaching reform linking pensions to lifetime contributions; consider using reserves and raising effective retirement age to finance transition.
- Labor and product markets: Eliminate residual hiring restrictions on nonresidents; introduce fixed-term contracts for Sammarinese workers; reduce state intervention and political discretion in licensing and subsidies.
- Financial sector: Strengthen legislation and supervisory capacity; transfer licensing authority to independent supervisory body; increase on-site inspections; complete Basel I implementation and issue market risk and derivatives regulations; undertake an FSAP.
- Statistics: Compile general government accounts in line with ESA95 and improve timeliness of national accounts and monetary/financial statistics.

*Source: _cr04257 - IMF Staff Report and related Executive Board and Public Information Notice materials (July–August 2004)._

### Executive Summary ......................................................................................................

### _cr04257 - Executive Summary

### Economic performance and outlook
- The economy "slowed considerably since 2000" after losing key competitive advantages; returning to a high growth path "is feasible but requires decisive fiscal, structural, and financial sector reforms."
- Growth trends and near-term outlook:
  - Real GDP growth averaged "7½ percent per year" in the 1990s.
  - Growth "slowed to a third of that rate in 2000–02" (average "2¾ percent" in 2000-2002).
  - GDP "is expected to rise by 2 percent in 2004, after stalling in 2003."
  - Employment upturn in Q1 2004: "1.3 percent year-on-year."
- Key short- and medium-term downside risks:
  - Italy’s new tax on commuters’ income (Box 2).
  - Prospective EU-related changes in savings taxation (Box 3).
  - These risks may "depress employment and deposit growth" and erode competitiveness.

### Structural characteristics and vulnerabilities
- Country size and basic demographics:
  - Population "about 30,000."
  - Area "23.5 square miles."
- Currency and external coupling:
  - Uses the euro as official currency and "operates in a customs union with the European Union"; inflation and interest developments "are coupled with those of Italy."
- Labour and sectoral composition:
  - Italian commuters account for "about 35 percent of private sector employment."
  - Manufacturing employment "still accounts for more than 40 percent of total employment."
  - The financial sector accounts for "only 4 percent of private employment" but its salaries and profits are "10 and 16 percent of the total," respectively.
- Financial system scale and nonresident exposure:
  - Deposits and managed funds in Sammarinese banks are "about ten times GDP" (versus "two-three times GDP in Italy and neighboring zones").
  - In 2003, nonresidents’ funds were "US$6.6 billion," corresponding to "about half of deposits and 60 percent of managed funds."
  - The size of the financial system is large by international standards though smaller than Luxembourg, Andorra, Monaco, Liechtenstein, and the Cayman Islands.
- Recent shocks and contributors to slowdown:
  - Narrowing tax differentials with Italy, greater labor market flexibility in Italy, and new price competition from nearby shopping centers.
  - Italian 2002–2003 tax amnesty ("scudo fiscale") led to outflows of about "€760 million (11 percent of 2001 nonresidents’ funds)."
  - Euro appreciation and weak Italian consumption reduced competitiveness and tourism.

### Fiscal position and policy
- Recent fiscal turnaround:
  - After a decade of recurrent deficits, the government achieved "a surplus of 1½ percent of GDP in 2003."
  - This was achieved by "containing the public sector wage bill and improving the administration of indirect taxes."
  - The central government’s net asset position had "deteriorated by more than 15 percent of GDP in a decade" prior to the turnaround.
- Medium-term fiscal objective:
  - Authorities aim "at maintaining the budget in balance or in surplus over the medium term" while "preserving tax rate advantages."
- Remaining fiscal challenges:
  - "Poor revenue performance and generous entitlement programs remain largely unaddressed," risking sustainability of the fiscal turnaround.
  - Population aging and downside risks to employment growth increase urgency for "a far-reaching pension reform."
- Implementation of Fund advice and TA:
  - Implementation has been "gradual but ongoing": reduction of public sector size, return of central government budget to balance in 2003, consideration of pension and health-care reform, strengthening legal framework against money laundering and terrorism financing, and enhancement of bank supervision and regulation.
  - The authorities have received STA multi-sector and Monetary and Financial Statistics missions, have "advanced a formal request for TA in GFS compilation," are "scheduled to receive TA from LEG on banking and other financial and regulatory legislation," and "are expected to request an FSAP."

### Labor and product market issues
- Labour market developments:
  - "Cutbacks in public sector employment and moderate growth in public sector wages have recently improved the functioning of the labor market."
  - However, "labor market flexibility remains insufficient" and gains "risk being reversed."
- Policy actions to boost medium-term growth:
  - Further labor and product market reforms are needed to attract foreign investment and foster services and financial sector development.
  - Specific measures recommended include:
    - Eliminate remaining hiring restrictions on nonresidents.
    - Allow fixed-term contracts for Sammarinese workers.
    - Resist pressures to reintroduce tax exemptions.
    - Adhere to the government's goal of "substituting rules for political discretion in key areas of economic activity."

### Financial sector soundness and development
- Recent financial sector dynamics:
  - New entrants and the repatriation of Italian deposits after the tax amnesty "eroded profitability."
  - Declining profitability "raises risk-taking incentives."
- Comparative strengths:
  - Sammarinese banks are "relatively more efficient, better capitalized, and with fewer nonperforming loans than comparators."
- Required measures to balance development and soundness:
  - Upgrade financial legislation and improve supervisory practices.
  - Increase the frequency of on-site inspections.
  - Transfer the right to grant and revoke licenses to an independent supervisory and regulatory authority.
- AML/CFT and international cooperation:
  - "AML/CFT provisions have been strengthened."
  - Technical assistance from LEG on financial legislation is "scheduled for 2005."
  - The authorities "have expressed interest in an FSAP."
- Expectations around EU Savings Tax (Box 3):
  - Market participants generally assessed that increased withholding taxes on interest income "would not trigger an immediate outflow of funds" and that "alternative tax-exempt savings instruments were likely to be developed in the medium term."

### Policy recommendations and implementation status
- Core policy priorities identified:
  - Sustain fiscal consolidation while preserving or lowering tax rates—by addressing tax administration weaknesses and reforming generous entitlements.
  - Implement far-reaching pension reform to address population aging and employment risks.
  - Advance labor and product market reforms to regain competitiveness and attract foreign investment.
  - Strengthen financial legislation, supervisory capacity, and AML/CFT frameworks to support sector development while safeguarding soundness.
- Progress on past Fund recommendations:
  - "Implementation of past policy advice has generally been positive" though political instability delayed some adjustments.
  - Political context: four changes in governing coalition composition in less than two years prior to December 2003; a new more stable government took charge in December 2003 and "is expected to last until the next 2006 elections."

_Executive Summary: IMF Staff Report (pages cited within provided content)._

### 12. Remarkable fiscal adjustment took place in 2003 with the central administration

### 12. Remarkable fiscal adjustment took place in 2003 with the central administration

### Fiscal outcome and adjustment in 2003
- Central administration balance moved from a deficit of 2.2 percent in 2002 to a surplus of 1.6 percent of GDP in 2003.
- A large reassessment of past tax arrears in 2001 transformed a slight net asset position into a net liability position of 11 percent of GDP in 2003.
- To finance the cash deficit prior to 2003, the government ran down deposits with the banking system and, since the mid 1990s, borrowed short-term.
- The authorities’ original 2003 target was a deficit of 1.6 percent of GDP; the outturn was better-than-targeted.
- Parliament approved a budget close to balance for 2004 and balanced-budget targets for 2005-2006.
- Maintaining the 2003 budget surplus would allow San Marino to repay its debt by 2006 (see Appendix III debt sustainability analysis).

### Revenues, tax-base issues, and financial-sector taxation
- Pension system reserves rose to 13.8 percent of GDP at end-2003 despite pension expenditure systematically exceeding social security contributions.
- Staff highlighted poor revenue performance as a glaring budget weakness; total revenues net of reimbursements fell by about 7½ percent of GDP from 1992 to 2003.
- The fall in net revenues reflected:
  - a collapse of non-tax revenues,
  - a large contraction of the import tax (monofase), which accounts for over 90 percent of indirect taxes,
  - lower direct taxes.
- Taxes on the financial sector "more than halved" amid reduced profitability and lower interest rates (staff estimates).
- Withholding tax context and rates:
  - First new EU-related withholding tax level: 15 percent.
  - Current San Marino withholding taxes mentioned: 11 percent for bank deposits, 8 percent for long-term certificates, 4 percent for foreign bonds, and 2 percent for repos.
  - Italian withholding tax rate: 12.5 percent.
  - Agreement stipulates 75 percent of proceeds from the withholding tax be remitted to the country of residence of the investor; other taxes on same income are to be credited against it.

### Policy measures to improve revenues and compliance
- Authorities’ strategy: expand the tax base while preserving tax rate advantages.
- Measures taken since 2002:
  - stopped granting new tax exemptions,
  - changed notification requirements to enhance compliance with property-income tax,
  - improved estimates of import tax reimbursements,
  - limited scope for accumulating tax arrears,
  - placed the Central Bank in charge of collecting overdue taxes.
- Staff recommendations/supported measures:
  - give the tax collection agency access to financial information on non-complying taxpayers (noted as controversial relative to banking secrecy),
  - reduce incentives to underreport incomes by linking pension benefits to paid contributions.
- Concern noted: higher Italian taxes on commuters’ incomes could reduce San Marino’s tax revenues and social security contributions by reducing employment/income growth and increasing incentives to underreport commuters’ salaries.

### Expenditure developments and public sector measures
- Between 1992 and 2003, total expenditures fell by about 9½ percent of GDP; lower capital expenditures explain about half of the adjustment.
- Public sector wage bill trimmed by almost 1½ percent of GDP due to a tight hiring freeze, responsible wage negotiations, and limited overtime.
- Current transfers to the public sector fell by a similar amount, reflecting lower personnel costs in public enterprises and the Social Security Institute (SSI).
- Average public sector wages remained about 25 percent above those in the private sector.
- Transfers to the SSI have exceeded budget estimates in recent years; sustaining savings will require containing public health and pension expenditure.

### Health sector measures and staff views
- Initiatives to pare public health costs:
  - wage-bill savings in the SSI have stabilized health expenditure in percent of GDP,
  - renegotiated price conditions with suppliers,
  - limited the list of pharmaceutical products offered free of charge to best-price medicines within each category,
  - since 2003, the budget provides a fixed allocation to the SSI,
  - draft legislation institutes a Health Authority and specifies professional requirements for health administrators.
- Staff view:
  - supported initiatives but warned cost reductions alone might be insufficient to contain rapidly growing demand for health services,
  - suggested introducing co-payments on selected services and pharmaceuticals might become necessary (authorities resisted).

### Pension system risks, reform proposals, and scenarios
- Current pension facts:
  - pension expenditure exceeds 6 percent of GDP and continues accumulating reserves,
  - worker-to-retiree ratio is 4:1.
- Staff simulations (pension deficits without reform) project public debt buildup to between 20 and 65 percent of GDP by 2020 depending on employment growth.
- Authorities plan a major reform: a two-pillar system
  - First pillar: remain compulsory and pay-as-you-go, but compute pension benefits linked to lifetime contributions (replicates Italy’s 1995 change) instead of averaging last 5 or 10 years.
  - Second pillar: fully-funded.
- Staff recommendations:
  - support contribution-based first pillar to reduce underreporting incentives;
  - suggest authorities consider making the first pillar fully-funded;
  - to finance closing the existing pay-as-you-go system, consider raising effective average retirement age (currently at 60) or equivalent actuarially-fair benefit reductions and using accumulated reserves;
  - reduce benefits for workers further from retirement as part of transition.

### Public debt management and bond issuance concerns
- 2004 budget law foresees placing a bond of up to €120 million (about 10 percent of GDP) and up to 10-year maturity.
- Staff view:
  - agreed on refinancing high-interest bank loans with a debut Eurobond issue,
  - had reservations about issuing debt to finance infrastructure projects before resolving tax compliance problems,
  - recommended verifying whether renegotiating high-interest bank loans might be a lower-cost alternative to bond issuance.

### Labor and product market reforms
- Developments increasing labor market flexibility:
  - containment of public sector employment and wage growth,
  - public administration reform granting hiring autonomy to managers,
  - new regulation of nonresidents’ hiring speeding authorization and reducing scope for political interference.
- Staff recommendations:
  - eliminate remaining hiring restrictions on nonresidents that could discourage business expansion or openings,
  - introduce fixed-term contracts matching Italian flexibility (authorities to consider after an experimental phase).

### State intervention, subsidies, and productivity
- Staff welcomed stopping new tax exemptions since 2002 and urged reducing state intervention.
- Subsidized credit cost about 0.5 percent of GDP in 2001; staff stressed need to limit subsidized credit and replace political discretion with clear, transparent rules across licensing and public health management.

### Financial sector developments and risks
- Banks’ profitability suffered in 2001-03 due to increased competition from new entrants and a decrease in managed funds from the Italian “scudo fiscale.”
- Number of banks increased from 4 in 2000 to 10 in 2003, with two more about to open.
- About forty non-bank financial intermediaries started operations over the last three years.
- Sammarinese banks remain relatively more efficient, better capitalized, and with fewer non-performing loans than comparators.
- Market views:
  - increased competition improved number and quality of services,
  - declining profitability raises risk-taking incentives, though small loan portfolios and limited trading activity constrain current risky positions,
  - greater potential risks seen in underperforming institutions accepting deposits or funds from “dubious” clients.
- Staff emphasized strict implementation of “know-your-customer” measures in line with FATF recommendations.

*Source: _cr04257 - 12. Remarkable fiscal adjustment took place in 2003 with the central administration*

### 31. The authorities and most financial sector representatives were confident that a

### _cr04257 - 31. The authorities and most financial sector representatives were confident that a

### Taxation of savings and investor confidence
- Withholding tax on interest income of 15 percent—entailed by the agreement with the EU—was not expected to cause a significant outflow of funds.
- A further increase of the tax up to 35 percent by 2010 was expected to have a greater impact, but by then the Sammarinese financial system was expected to devise savings instruments with tax-exempt returns.
- The directive’s scope is limited to private individuals and certain categories of savings products:
  - Only interest payments shall be subject to the exchange of information or the withholding tax.
  - Income from share dividends, unit trusts, pension funds, or insurance policies shall be excluded.
- The agreement with the EU on the taxation of savings is expected to remove a significant element of uncertainty and reassure investors that banking secrecy laws will be retained.

### Financial sector governance, central bank law, and supervisory powers
- Government commitment:
  - Formation of the Central Bank of San Marino (CBSM) viewed as essential; quick approval of the Central Bank law was committed to following the July 2003 operational merger law of the Istituto di Credito Sammarinese (ICS) and the Office of Bank Supervision (OBS).
- Staff recommendations for the Central Bank law:
  - Grant adequate supervisory and regulatory powers to the CBSM.
  - Establish a governance structure that ensures operational independence from the government and the banking sector, a stable source of financing, and clear lines of accountability to Parliament.
  - Address conflict of interest from commercial banks holding ICS/CBSM capital by depriving banks of associated voting rights and ensuring no representatives on the CBSM’s Board.
  - Accord the right to grant and revoke licenses to the supervisory authority (current law accords this authority to the government, with the CBSM providing only a non-binding opinion).
- Concerns about lender-of-last-resort and deposit insurance functions:
  - Staff questioned the capacity of the CBSM to act as lender-of-last-resort and manage and administer deposit insurance because of the small size of the CBSM’s balance sheet, and of the government budget, in relation to bank deposits.
  - This limitation was considered less critical given higher capitalization and liquidity of assets of Sammarinese banks.
  - Unclear whether the upcoming law will limit the CBSM’s functions accordingly.

### Regulatory upgrades, supervisory staffing, and FSAP
- Ongoing and planned measures:
  - CBSM increasing its supervisory staff—to be doubled by end-2004—and setting up a credit registry.
  - In March 2003, San Marino adopted the “1988 Capital Accord” of the Basel Committee on Banking Supervision (Basel I) and has issued regulations implementing related capital adequacy requirements.
  - Regulations on market risk and derivatives remain to be issued.
  - A new law will introduce mutual funds to be registered in San Marino.
- Technical assistance and assessments:
  - Authorities will receive technical assistance on banking and other financial and regulatory legislation from LEG.
  - Authorities agreed with staff to undertake a Financial Sector Assessment Program (FSAP) at the earliest opportunity to assess supervisory structures.
- Anti-money laundering / counter-financing of terrorism (AML/CFT):
  - Parliament recently approved new AML/CFT provisions to bring San Marino further into line with international standards.
  - Authorities completed the Fund questionnaire on the current status of efforts to combat money laundering and terrorism financing.
  - San Marino is a member of the MONEYVAL Committee and was evaluated in February 2000 and March 2003.

### Supervisory practices and on-site inspection emphasis
- Current practice:
  - Frequent exchanges of information and advice have established mutual trust between the supervisory authority and financial institutions.
- Staff recommendations:
  - Supplement information-exchange approach with more frequent on-site inspections, especially given recent proliferation of banks and non-bank financial institutions.
  - Supervision and regulation could benefit from best practices prevailing in other small financial centers.
- Prudential vigilance:
  - CBSM should remain vigilant and apply the highest supervisory standards to prevent losses of reputation and outflows of funds from scandals or problems in even small institutions.
  - Guard against excessive risk-taking as profits wane under competitive pressure from the sharp increase in licenses to banks and nonbank financial institutions.
  - Increase frequency of on-site inspections while keeping supervisory and regulatory burden to a minimum given San Marino’s small size.

### Statistical issues and data transparency
- Ongoing initiatives:
  - Statistical Office collecting indicators on current economic conditions (e.g., electricity consumption).
  - Ongoing compilation of experimental consolidated accounts for the public sector according to GFS methodology for 2002, aiming for full public sector accounts consistent with Eurostat’s ESA95 standards.
- Persistent shortcomings:
  - Delay of 1½ years in the release of national accounts.
  - Until consolidated data are produced regularly and timely, fiscal accounts remain nontransparent and require substantial reclassifications.
- Staff encouragements:
  - CBSM to (i) compile and disseminate monthly monetary and financial data, and, in particular, a broad money survey; and (ii) carry out a Financial Soundness Indicators (FSI) self-assessment, moving toward frequent and timely reporting of FSIs.
  - Authorities expressed interest in participating in the GDDS and requested technical assistance to prepare metadata.
- Coordination recommendation:
  - Authorities should assign clear responsibilities to ensure consistency of data published by the Ministry of Finance and the CBSM.
- Reference to prior work:
  - Recommendations of the February 2004 STA TA mission on monetary and financial statistics led to publication of a country page for San Marino in the June 2004 issue of IFS.

### Other factual points
- Currency exposure:
  - Sammarinese financial institutions have no exposure in foreign currency.
  - Banks’ clients have negligible amounts of foreign-currency credit lines (4 percent of loans) and deposits (less than 2 percent of total deposits) for operational purposes.
- Official development assistance:
  - In 2003, San Marino’s official development assistance (ODA) was less than 0.01 percent of GDP.

### Staff appraisal and policy recommendations
- Growth and reform imperative:
  - After exceptional performance in the 1990s, growth slowed since 2000; San Marino can either reform to return to a high growth path or face continued erosion of competitiveness and convergence to neighboring growth rates.
- Fiscal policy:
  - Maintain a budget surplus until the net financial position of the central administration turns positive and long-standing fiscal problems are resolved.
  - Reduce public sector wage bill further; supplement with significant improvements in tax administration and scale back generous entitlement programs.
  - Tax collection agency should have more information on non-complying taxpayers.
  - Government should be ready to introduce monetary disincentives if administrative measures fail to curb growing demand for health services.
- Pension reform:
  - Far-reaching reform needed; link pensions to social security contributions over the entire working life to reduce incentives to underreport incomes and improve balance of pension funds.
  - Consider using substantial pension reserves to smooth the transition from pay-as-you-go to a fully-funded system, while avoiding depleting reserves to prolong generous benefits.
  - Reduce pension benefits and raise effective average retirement age as needed to finance closing down of pay-as-you-go system.
- Labor and product market reforms:
  - Eliminate bureaucratic hindrances and reduce state interventions that stunt business activity.
  - Introduce fixed-term labor contracts for Sammarinese workers, liberalize further nonresidents’ hiring, streamline bureaucracy, and speed up administrative procedures.
- Rule-based governance:
  - Substitute rules for political discretion in key economic areas, including ensuring that licenses for banks and nonbank financial institutions are granted and revoked by an independent supervisory authority.
- Financial sector development strategy:
  - Create conditions for safe expansion or a scaling down of the financial sector depending on international pressures and competitiveness:
    - If expanded, aim for size and services of a full-fledged financial center with modern legislation and a nimble supervisory agency.
    - Ongoing adoption of Basel I should be completed as early as possible with issuance of market risk and derivatives regulations; undertaking an FSAP is welcome.
  - CBSM should be ready to provide technical support and professional supervisors as new legislation on insurance, mutual and pension funds, and other financial products is introduced.
- Statistical improvements:
  - Devote additional efforts to compilation of general government accounts in line with Eurostat’s ESA95 methodology and timely national account statistics.
  - Collect indicators enabling estimates of GDP growth.

*Source: _cr04257 - 31. The authorities and most financial sector representatives were confident that a (IMF PDF chapter/section)*

### 51. It is proposed that the next Article IV consultation be held on a 24-month cycle.

### _cr04257 - 51. It is proposed that the next Article IV consultation be held on a 24-month cycle.

### Article IV consultation cycle
- It is proposed that the next Article IV consultation be held on a 24-month cycle.
- Appendix I, section VIII: "San Marino is on a 24-month consultation cycle; the last consultation discussions with San Marino were held in September 2001 and concluded on  12/5/2001 (EBM/01/124)."

### Key macroeconomic and external statistics (selected)
- Total area (sq. km.): 61.2
- Population (December 2003): 29,241
- GNP per capita (current US$, 2002): 34,902
- Life expectancy (2000): 77 (male); 84 (female)
- Infant mortality (2002): 4 per thousand
- Number of tourists (in millions), 1996–2004: 3.3, 3.3, 3.3, 3.1, 3.1, 3.0, 3.1, 2.8, 2.6
  - Percent change (same period): -0.7, -1.1, -1.3, -3.6, -2.5, -1.2, 2.2, -8.3, -7.1
- US$ exchange rate (end of period) 4/ (1996–2004): 1,530.57, 1,759.19, 1,653.10, 0.9951, 1.0751, 1.1350, 0.9540, 0.8840, 0.812
- Nominal effective exchange rate index (Italy) 5/ (1996–2004): 75.59, 75.87, 76.07, 74.17, 70.77, 71.27, 72.17, 75.37, 76.6
- Real effective exchange rate index (Italy) 5/ (1996–2004): 84.77, 85.28, 85.98, 84.18, 80.78, 81.78, 83.58, 81.18, 89.8

### Output, labor and price indicators (1996–2004, selected series)
- Real GDP (annual percent change) 1996–2004: 4.9, 6.9, 7.5, 9.0, 2.2, 5.5, 0.3, 0.0, 2.0
- Employment (annual percent change) 1996–2004: 2.6, 3.3, 4.3, 4.5, 2.8, 5.8, 3.1, 0.8, 1.8
- Unemployment rate (end of year) 1996–2004: 4.9, 4.2, 4.0, 3.2, 3.0, 2.4, 3.9, 4.5, 2.9
- Inflation rate (annual average) 1996–2004: 4.9, 2.0, 1.8, 1.6, 2.6, 2.8, 2.3, 2.5, 2.1
- Wages (selected): 9.3, 5.0, 4.2, 3.9, 1.9, -0.5, 3.7, 5.7, ...

### External accounts (selected, in percent of GDP where noted)
- Trade balance (in millions of US$) 1996–2004 (selected): 22.6, -27.0, -12.2, -21.1, -44.6, -38.0, -100.9, ...
- Exports 3/ (in percent of GDP): 218.7, 234.6, 202.4, 197.4, 193.8, 186.8, 177.6, ...
- Imports 3/ (in percent of GDP): 215.8, 238.3, 203.8, 200.0, 199.5, 191.5, 187.9, ...

### Fiscal operations (central administration, accrual basis, 1992–2004; million euros and percent of GDP)
- Revenues (million euros) 1992–2004 (selected): 143.9, 157.2, 172.4, 174.8, 191.2, 206.4, 247.7, 224.7, 236.6, 252.6, 256.4, 288.0, 271.9
- Expenditure (million euros) 1992–2004 (selected): 145.8, 164.3, 193.3, 200.2, 207.4, 219.6, 235.5, 248.7, 265.7, 285.3, 276.8, 272.4, 277.6
- Central government balance (percent of GDP) 1992–2004 (selected): -2.0, -7.2, -20.8, -25.4, -16.2, -13.2, 12.2, -23.9, -29.0, -32.7, -20.4, 15.7, -5.6
- Revenues (percent of GDP) 1992–2004 (selected): 37.5, 36.2, 35.7, 31.4, 31.5, 31.2, 34.2, 28.1, 28.2, 27.7, 27.4, 30.1, 27.3
- Expenditure (percent of GDP) 1992–2004 (selected): 38.0, 37.8, 40.0, 36.0, 34.2, 33.2, 32.6, 31.0, 31.6, 31.3, 29.6, 28.4, 27.8
- Central government net revenue (percent of GDP) 1996–2004: 31.5, 31.2, 34.2, 28.1, 28.2, 27.7, 27.4, 30.1, 27.3
- Central government net expenditure (percent of GDP) 1996–2004: 34.2, 33.2, 32.6, 31.0, 31.3, 31.3, 29.6, 28.4, 27.8
- Central government balance (percent of GDP) 1996–2004: -2.7, -2.0, 1.7, -3.0, -3.2, -3.6, -2.2, 1.6, -0.6
- Gross public debt (percent of GDP) 1996–2004: 3.7, 4.0, 4.1, 3.9, 4.3, 5.5, 5.3, 4.9, 5.3

### Public sector debt sustainability (Table 4, key lines; percent of GDP unless noted)
Baseline projections (public sector debt)
- Public sector debt 1998–2008: 4.1, 3.9, 4.3, 5.5, 5.3, 4.9, 4.7, 4.5, 4.3, 4.0, 3.8
- Change in public sector debt 1998–2008: 0.1, -0.2, 0.4, 1.2, -0.3, -0.4, -0.2, -0.2, -0.2, -0.2, -0.2
- Identified debt-creating flows (4+7+12) 1998–2008: -2.0, 2.6, 3.3, 3.3, 2.0, -1.8, 0.4, -0.2, -0.2, -0.2, -0.2
- Primary deficit 1998–2008: -2.2, 2.6, 3.2, 3.3, 1.9, -1.9, 0.3, -0.3, -0.3, -0.3, -0.2
- Revenue and grants (percent of GDP) 1998–2008 (selected): 34.2, 28.1, 28.2, 27.7, 27.4, 30.1, 27.3, 27.8, 27.8, 27.8, 27.8
- Primary (noninterest) expenditure (percent of GDP) 1998–2008 (selected): 32.1, 30.7, 31.3, 31.1, 29.4, 28.2, 27.5, 27.5, 27.6, 27.6, 27.6
- Automatic debt dynamics contribution 1998–2008: 0.1, -0.1, 0.1, -0.1, 0.1, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0
- Public sector debt-to-revenue ratio 1998–2008: 12.1, 14.0, 15.4, 19.9, 19.2, 16.3, 17.3, 16.1, 15.3, 14.5, 13.8
- Gross financing need 1998–2008 (percent of GDP): 0.0, 4.4, 4.9, 5.0, 5.3, 1.2, 3.3, 2.6, 2.4, 2.3, 2.2
- Gross financing need (in millions of U.S. dollars) 1998–2008 (selected): 0.2, 37.6, 38.1, 40.9, 46.7, 10-Year, 12.5, 40.1, 33.1, 33.1, 33.2, 33.3, 33.3

Key macro and fiscal assumptions (selected averages and projections)
- Real GDP growth (in percent) historical and projected series: 7.5, 9.0, 2.2, 5.5, 0.3, 5.2, 3.3, 0.0, 2.0, 3.1, 3.1, 3.1, 3.1, 2.4
- Average nominal interest rate on public debt (in percent) (selected): 12.8, 9.3, 7.9, 6.7, 4.7, 10.6, 4.2, 4.6, 6.2, 6.2, 6.2, 6.2, 6.2, 5.9
- Average real interest rate (percent) (selected): 11.0, 7.7, 5.3, 3.9, 2.3, 6.6, 5.9, 2.1, 4.1, 4.2, 4.2, 4.2, 4.2, 3.8
- Inflation rate (GDP deflator, in percent) (selected): 1.8, 1.6, 2.6, 2.8, 2.4, 4.0, 4.0, 2.5, 2.1, 2.0, 2.0, 2.0, 2.0, 2.1
- Growth of real primary spending (deflated by GDP deflator, in percent) (selected): 0.0, 4.3, 4.4, 4.6, -5.2, 0.8, 3.0, -4.0, -0.4, 3.2, 3.2, 3.1, 3.1, 1.4
- Primary deficit (selected): -2.2, 2.6, 3.2, 3.3, 1.9, 2.2, 1.8, -1.9, 0.3, -0.3, -0.3, -0.3, -0.2, -0.4

Alternative scenarios and stress tests (debt-stabilizing primary balance outcomes, percent of GDP)
- A1. Key variables at historical averages in 2004–08: debt-stabilizing primary balance: 4.9, 6.6, 8.9, 11.2, 13.6, 15.9, 0.2
- A2. Primary balance under no policy change in 2004–08: 4.9, 2.6, 0.8, -0.8, -2.4, -3.9, ... 9/
- A3. Reduction in GDP growth (relative to baseline) of one standard deviation: 4.9, 4.9, 4.8, 4.7, 4.6, 4.5, 0.2
- B1. Real interest rate at historical average plus two standard deviations in 2004 and 2005: 4.9, 5.4, 5.9, 5.7, 5.5, 5.3, 0.1
- B2. Real GDP growth at historical average minus two standard deviations in 2004 and 2005: 4.9, 5.8, 8.1, 10.2, 12.3, 14.5, 0.1
- B3. Primary balance at historical average minus two standard deviations in 2004 and 2005: 4.9, 10.3, 16.3, 16.2, 16.1, 16.0, 0.2
- B4. Combination of 2-4 using one standard deviation shocks: 4.9, 8.9, 13.8, 13.7, 13.6, 13.5, 0.1
- B5. One time 30 percent real depreciation in 2004 10/: 4.9, 4.7, 4.5, 4.3, 4.0, 3.8, 0.0
- B6. 10 percent of GDP increase in other debt-creating flows in 2004: 4.9, 14.7, 14.6, 14.5, 14.3, 14.2, 0.1

### Financial sector indicators and banking sector (1998–2003, selected)
- Risk-based capital asset ratio 2/ (1998–2003): 35.0, 47.8, 46.4, 42.4, 44.7, 35.8
- Profits of the banking sector (in millions of U.S. dollars) 1998–2003: 105.0, 81.6, 88.7, 45.3, 53.9, 62.8
- Rate of return on average equity, banking sector 3/ (1998–2003): 5.1, 4.9, 5.0, 4.4, 4.1, 4.1
- Loan/deposit ratio (1998–2003): 25.4, 23.3, 27.0, 27.3, 34.3, 39.7
- Non-performing loans/total loans (1998–2003): 1.6, 1.4, 1.1, 1.3, 1.1, 1.1
- Loan Loss Provision / Net Interest Revenue (1998–2003): 6.7, 8.6, 8.8, 7.5, 7.8, ...
- Foreign assets of banking sector (in billions of euros, eop) 3/ (1998–2003): 3.7, 4.4, 4.6, 5.1, 4.6, 4.4
- Foreign liabilities of banking sector (in billions of euros, eop) 3/ (1998–2003): 3.3, 3.9, 4.1, 4.5, 3.3, 3.4
- Cost-income ratio of the banking system (1998–2003): 19.4, 23.2, 22.7, 29.3, 31.2, 29.7

Selected figures and observations from charts and text
- Figure 1: Inflation, exchange rates and interest rates, 1990–2003 — charts depict nominal and real effective exchange rates (lira up to 1998, euro thereafter), US$/lira to 1998 and thereafter euro, and interest rates with a noted stable positive spread between San Marino and Italy average lending rates.
- Figure 3 (2003): Breakdown of private sector employment by activity — Commerce and Tourism 22%; Services, Transport, and Communication 19%; Financial sector 4%; Manufacturing 41%; Agriculture 1%; Construction 11%.
  - Breakdown of private sector dependent labor income: Manufacturing 52%; Construction 11%; Commerce and Tourism 9%; Services, Transport, and Communication 18%; Financial sector 10%.
  - Breakdown of private sector gross profits, 2002: Manufacturing 48%; Construction 4%; Commerce and Tourism 8%; Services, Transport, and Communication 24%; Financial sector 16%.
- Figures 11–13: Banking sector profitability, efficiency, capital ratios and non-performing loans show: profitability declined markedly despite relatively good net interest margin; lower cost-income ratios in San Marino than comparators; value added per employee higher than Italian banks; Tier 1 capital ratios well above Italian comparators; non-performing loans remained low and well below Italian comparators.

### Statistical issues and data quality (Appendix II)
- Progress has been made, but important shortcomings remain due to difficulties compiling basic data (mainly from an absence of border controls) and limited number of adequately trained personnel.
- Authorities received STA multisector TA mission in 1997 and STA Monetary and Financial Statistics TA mission in 2004; authorities have requested TA in GFS compilation.
- National accounts:
  - Experimental national accounts produced since 1992.
  - Data for 1995–99 calculated in accordance with ESA95.
  - Output data are published with two-year delay and sectoral value added is not available.
- Prices and surveys:
  - As of 2004, consumer prices are collected directly and published monthly with short delay.
  - A first survey on consumer and business confidence is about to be completed.
- Government finance statistics and budgeting:
  - Relevant cash and accrual data are collected but complete GFS are unavailable.
  - Central government accounts are not presented according to standard IMF classifications.
  - The central government budget is written to close at par, with amortization included as expenditure and "borrowing requirement" included among revenues.
  - Actual financing of revenue shortfalls has come from (i) drawing down deposits at the central bank; (ii) changes in volumes of payables/receivables; and (iii) new loans.
  - The authorities’ monitored concept (avanzo/disavanzo d’esercizio) differs from a standard accrual central government balance.
  - GFS database includes annual data for 1995 for consolidated central government compiled by the 1997 mission.
- Monetary and banking statistics:
  - Since May 1997, balance sheet data on commercial banks and monetary authorities provided to STA’s EIS database quarterly with ~six-week lag.
  - CBSM improved sectorization and expanded data collection to cover offshore asset management activities.
  - A previous weakness in breakdown between residents and nonresidents has been remedied.
  - No broad money survey exists; data on nonbank financial intermediaries are lacking.
  - CBSM’s data on public sector deposits and banks’ credits to public sector do not match Treasury figures.
- Balance of payments:
  - San Marino does not compile balance of payments accounts; currency union with Italy and use of euro reduced BOP policy relevance.

### IMF relations, membership and technical assistance (Appendix I & II)
- Membership Status: Joined 9/23/92. Article VIII.
- General Resources Account: Quota 17.00 (percent quota 100.00); Fund holdings of currency 12.90 (75.88); Reserve position in Fund 4.10 (24.13).
- SDR Department: Holdings 0.51 (N/A).
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Obligations to Fund: None.
- Exchange Rate and Trade Arrangements:
  - Prior to 1999 currency was Italian lira; since January 1, 1999 San Marino uses the euro as official currency under a Monetary Agreement with Italy.
  - Central monetary institution: Banca Centrale della Republica di San Marino.
  - Foreign exchange transactions conducted through commercial banks without restriction at rates quoted in Italian markets.
  - No taxes or subsidies on purchases or sales of foreign exchange.
  - Basis of EU trade relationship: Agreement on Cooperation and Customs Union between the European Economic Community and the Republic of San Marino (signed 1991; entered into force on April 1, 2002).
- Technical Assistance (selected):
  - 1997 STA Multisector assistance (3/97).
  - 2004 STA Monetary and Financial Statistics (1/29–2/4, 2004).
- Resident Representative: None.

### Key findings and policy-relevant points (from staff text and tables)
- San Marino operates a euro currency arrangement since January 1, 1999 under a Monetary Agreement with Italy.
- Public sector debt levels are very low (public sector debt around 3.8–5.5 percent of GDP in 1998–2004) and projected to remain low through 2008 under baseline assumptions.
- Gross financing needs are modest (examples: 4.4–5.3 percent of GDP in 1999–2002; 1.2 percent in 2003; projected 3.3 percent in 2005).
- Fiscal balances display variability and some conceptual differences between authorities’ accounting and standard IMF accrual-based measures; central government accounts and GFS require improvement and standardization.
- Banking sector appears well capitalized (high Tier 1 ratios) with low non-performing loans, but profitability declined in 1998–2003 and data coverage for nonbank financial intermediaries is limited.
- Statistical capacity has improved but notable gaps remain: no BOP compilation; delays in national accounts publication; incomplete GFS; lack of broad money survey; mismatches between CBSM and Treasury on public deposit/credit data.

_Statement by the IMF Staff Representative, July 28, 2004. Source: _cr04257 - 51. It is proposed that the next Article IV consultation be held on a 24-month cycle._

### 1.      This statement reflects information that became available after the staff report was

### IMF Concludes 2004 Article IV Consultation with San Marino

### Executive summary and recent data
- This statement reflects information that became available after the staff report was issued and does not change the thrust of the staff appraisal.
- Executive Board discussion concluded on July 28, 2004; Public Information Notice dated August 4, 2004.
- The authorities revised 2003 fiscal data, raising the surplus of the central administration to 2.4 percent of GDP (up from a preliminary 1.6 percent of GDP). Lower transfers to the Social Security Institute (SSI) fully account for the revision.
- The revision increases the likelihood that carry-over effects of the 2003 adjustment will allow an overperformance relative to the deficit target of about one half percent of GDP for 2004, as suggested in paragraph 14 of the staff report.
- GDP developments and projections:
  - GDP growth decelerated to an average of about 2.8 percent in 2000–2002.
  - GDP is expected to rise by 2 percent in 2004, after stagnating in 2003.

### Key findings on macroeconomic performance and risks
- Growth and labor market
  - Growth of San Marino’s economy has slowed considerably since 2000.
  - Manufacturing and commerce faltered amid inflexible labor markets, narrowing tax advantages, and greater price competition.
  - Recent initiatives improved labor and product market functioning; some rigidities remain.
  - Selected real economy indicators (change in percent):
    - Real GDP: 1999 9.0; 2000 2.2; 2001 5.5; 2002 0.3; 2003 0.0; 2004 2.0.
    - Employment: 1999 4.5; 2000 2.8; 2001 5.8; 2002 3.1; 2003 0.8; 2004 1.8.
    - Unemployment rate (in percent): 1999 3.2; 2000 3.0; 2001 2.4; 2002 3.9; 2003 4.5; 2004 2.9.
    - Consumer prices (percent change, period average): 1999 1.6; 2000 2.6; 2001 2.8; 2002 2.3; 2003 2.5; 2004 2.1.
- Fiscal position
  - After years of recurrent fiscal deficits, the government achieved a surplus of about 1.5 percent of GDP in 2003 (staff report narrative); authorities’ data show central administration surplus 2003 = 2.4 percent of GDP.
  - Carry-over effects of the 2003 adjustment and budget measures should allow an overperformance relative to the deficit target of a half percent of GDP in 2004.
  - Long-term concerns: slow revenue growth and rising social security spending.
    - Total revenues of the central government fell by about 7.5 percent of GDP from 1992 to 2003.
    - Pension expenditure grew by about 3.8 percent of GDP over the same period.
  - Central government fiscal indicators (in percent of GDP): central government balance: 1999 -3.0; 2000 -3.2; 2001 -3.6; 2002 -2.2; 2003 2.4; 2004 -0.6.
  - Central government deposits: 1999 10.8; 2000 2.2; 2001 0.0; 2002 5.2; 2003 7.0; 2004 6.7.
  - Gross public debt: 1999 3.9; 2000 4.3; 2001 5.5; 2002 5.3; 2003 4.9; 2004 5.3.
- Financial sector
  - Sammarinese banks are somewhat more efficient and better capitalized, and have fewer nonperforming loans, than comparators, but increased competition has compressed profitability.
  - Authorities have begun revamping the financial sector’s legislative and regulatory framework by adopting Basel I and merging ICS and the Office of Bank Supervision.
  - Parliament approved new provisions for anti-money laundering and combating the financing of terrorism (AML/CFT).
  - Authorities intend to request a Financial Sector Assessment Program (FSAP).
  - Fund position as of May 31, 2004:
    - Holding of currency (in percent of quota) 75.88.
    - Quota (in millions of SDR) 17.00.
- External sector and exchange rate
  - Exchange rate regime: Uses euro.
  - Present exchange rate (July 22, 2004): US$ 1.2268 per euro.
  - Selected balance of payments items:
    - Trade balance (in millions of US$): 1999 -21.1; 2000 -44.6; 2001 -38.0; 2002 -100.9.
    - Exports (in percent of GDP): 1999 197.4; 2000 193.8; 2001 186.8; 2002 177.6.
    - Imports (in percent of GDP): 1999 200.0; 2000 199.5; 2001 191.5; 2002 187.9.
- Statistical and institutional
  - Progress in improving statistical database welcomed; important shortcomings remain.
  - Directors encouraged additional efforts to compile timely national account statistics and general government accounts in line with Eurostat’s ESA95 methodology.

### Executive Board views and policy recommendations
- Overall assessment
  - Directors welcomed indications that an economic recovery appears to be underway and commended the government for pursuing an ambitious reform agenda to return San Marino to a high growth path.
  - Important synergies could arise from maintaining a budget surplus, reforming the pension system, eliminating residual labor and product market rigidities, and upgrading financial sector regulation.
- Fiscal policy and public spending
  - Commended decisive fiscal correction of 2003; encouraged continuation of measures to improve the net financial position toward balanced budgets or surplus over the medium term.
  - Recommended further reductions in the public sector wage bill, significant improvements in tax administration, and scaling back generous entitlement programs.
  - Welcomed elimination of substantial tax exemptions and stressed importance of giving the tax collection agency access to financial information on non-complying taxpayers.
  - Praised initiatives to improve public expenditure management and administrative measures to reduce costs in the public health system; suggested the government be prepared to introduce monetary disincentives if demand for health services is not curbed.
- Pensions
  - Welcomed authorities’ intention to reform the pension system; endorsed a comprehensive reform linking pensions to social security contributions over the entire working life.
  - Some Directors saw scope for more ambitious reform, including using substantial reserves to introduce a fully-funded system.
- Labor and product markets
  - Called for deepening labor and product market reforms to match enhanced labor market flexibility of neighboring Italian regions.
  - Encouraged introducing fixed-term contracts for Sammarinese workers and further liberalizing rules governing hiring of nonresidents.
  - Urged substitution of rules for political discretion in key economic areas.
- Financial sector supervision and institutions
  - Supported upgrading the legislative and regulatory framework to enhance competitiveness while safeguarding soundness.
  - Called for quick approval of law creating the new Central Bank of San Marino (CBSM) with governance ensuring stable financing, clear accountability to Parliament, and operational independence.
  - Encouraged transferring authority to license financial institutions to the CBSM.
  - Emphasized enhancing supervisory practices, more frequent on-site inspections, and vigorous enforcement of international standards; welcomed expansion of supervisory staff.
  - Noted EU-related increase in withholding taxes may reduce appeal of traditional banking; CBSM should prepare for broader services and products.
  - Welcomed San Marino’s intention to request an FSAP and commended AML/CFT commitments.
- Official development assistance
  - Directors urged San Marino to move toward providing official development assistance in line with the UN-recommended target.

### Authorities’ statements and actions
- Statement by Pier Carlo Padoan, Executive Director for San Marino (July 28, 2004):
  - Authorities appreciate Fund staff work and continue fruitful relationship with the Fund.
  - Recent data point to recovery: May unemployment decreased to 3.17 percent from 4.09 in May 2003; imports rose 6 percent in Q1 year-on-year.
  - Administration active in international cooperation and negotiating double taxation agreements with multiple countries.
  - With respect to taxation of savings of nonresidents, an agreement in principle has been reached with ECOFIN.
- Fiscal policy actions
  - Authorities enacted a fiscal adjustment plan bringing the central government balance into surplus 2003 = 2.4 percent of GDP (authorities’ figure) against a deficit of 2.2 percent in 2002.
  - Authorities plan continued fiscal adjustment with essentially balanced-budget targets and measures to strengthen tax administration and public expenditure management, including establishing an accounting inspectorate.
- Financial sector and AML surveillance
  - Authorities envisage financial sector development on three pillars:
    - Strengthened institutional framework via merging supervisory agency with the Central Bank and hiring new staff.
    - Adequacy of supervisory framework: early-year adoption of Basel I capital adequacy rules; regulation on market and derivatives risks under development and expected by end of summer.
    - Greater international scrutiny and adoption of international best practices; FSAP mission under consideration and to be discussed at government meeting on August 2.
  - AML actions: subscription to 1990 Strasbourg Convention; membership in Council of Europe Select Committee of Experts on Evaluation of AML measures; Moneyval mission report (2003) finalized and to be discussed in January 2005.
  - Extending notification requirements for AML to parties beyond banks and financial firms in accordance with Directive 97/2001; application for Egmont Group membership expected to become operational by mid-2005.

*Source: IMF Public Information Notice No. 04/82; Executive Board discussion concluded July 28, 2004; selected tables and statements from the staff report and authorities as provided.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04257.pdf_