## _cr0575

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---

### Executive Summary — Introduction and Outlook
- Robust economic recovery driven by household consumption and supportive policies.
- Real private consumption: 2.4 percent in 2003; 2.6 percent (annualized) during first three quarters of 2004.
- Inflation drivers: indirect taxes and energy prices; underlying inflation declined.
- Current account surplus close to 4 percent of GDP.
- Real GDP expected to grow at about 2.5 percent throughout 2005; about 2.2 percent adjusting for fewer working days in 2005.
- Main risks: oil-price shocks, weakness in trading partners, further euro appreciation, slower pickup in employment, adverse confidence effects.
- Interprofessional agreement of January 18, 2005: average nationwide cumulative wage increase of 4.5 percent for 2005–06.
- Population aging estimated to reduce potential GDP growth by about 1 percentage point from 2010 onward.
- Authorities’ productivity assumption: rise from 1 percent (mid-1990s) to 1.75 percent during 2009–30; staff views this as optimistic.

### Fiscal Policy — Recent Performance and Recommendations
- Large primary surpluses and budgets at least in balance over the past five years; public debt-to-GDP ratio declined from nearly 140 percent (peak) to less than 100 percent in 2004.
- Primary surplus fell by about 1 percentage point of GDP during 2002–04 as interest savings were applied to tax cuts and increased primary spending.
- Text Table 2 select series:
  - Headline balance: 1999 -0.4; 2000 0.2; 2001 0.6; 2002 0.1; 2003 0.4; 2004 0.0; 2005 -0.4
  - Interest payments (+): 1999 7.0; 2000 6.8; 2001 6.6; 2002 6.0; 2003 5.4; 2004 4.8; 2005 4.7
  - Adjusted Structural Primary Balance: 1999 6.1; 2000 5.4; 2001 5.7; 2002 5.7; 2003 4.9; 2004 4.4; 2005 4.2
  - Real primary expenditure growth (memorandum): 1999 3.1; 2000 2.5; 2001 1.3; 2002 4.4; 2003 4.3; 2004 1.0; 2005 3.0
  - Public debt: 1999 114.4; 2000 109.2; 2001 108.0; 2002 105.4; 2003 99.9; 2004 95.9; 2005 94.9
- Staff recommendations:
  - Shift decisively toward durable primary expenditure restraint; avoid reliance on one-off measures.
  - Reinforce the budgetary framework and the internal stability pact between federal and regional governments.
  - Implement a medium-term budget framework based on expenditure ceilings (consistent with past Fund advice).
  - For 2005 staff estimated an additional 0.4 percentage point of GDP in measures were needed to achieve balance (Table 4, Scenario A).
  - Authorities’ surplus objectives: 0.3 percent of GDP by 2007 (Scenario B); 1.5 percent of GDP by 2011 (endorsed by federal parliament).
  - Staff preference: combine fiscal adjustment and substantial labor market reform (Scenario C); example: curb discretionary spending growth to about 1.4 percent per year for the next decade and raise effective employment rate by 10 points by 2030 to secure fiscal sustainability without buildup of public assets.

### Coping with Population Aging — Scenarios and Numerical Implications (Box 3)
- Demographic projection: old-age dependency ratio projected to rise from about 40 percent to almost 70 percent between now and 2050.
- Associated annual fiscal costs projected to rise by about 7 percentage points of GDP by 2050 under current policies.
- Fiscal Adjustment Scenario:
  - Limit real discretionary primary spending growth to 0.3 percent in each of the next ten years and achieve a fiscal surplus of 4 percent of GDP by 2015; requires buildup of a net asset position by 2050.
- Adjustment + Reform Scenario:
  - Increase employment rate by 10 percentage points by 2030 and hold real discretionary primary spending growth to not more than 1.4 percent per year in the next ten years; fiscal surplus of about 2 percent in 2015 would suffice and avoid the need for a net asset position.

### Social Spending, Pensions, and Health Care
- Pension system: past reforms made the system sustainable, but retirement decisions are not yet actuarially fair.
- Staff recommendation: phase out early retirement schemes; make retirement decision actuarially fair and provide full information to individuals.
- Health care: mechanisms to detect overruns and activate clawbacks; staff recommended preparing to return to real spending growth rates lower than the 4.5 percent norm agreed for 2004–07.
- Other spending: urgent need for structural reforms in civil service and labor market programs; use information technology and impending retirements to secure savings.

### Labor Market — Findings, Measures, and Staff Advice
- Low labor utilization identified as key vulnerability; staff recommends raising employment by 10 percentage points (alternative HFC projection: 5 percentage points).
- Causes: wide tax wedge, generous early retirement schemes, poor career prospects for older workers, skill mismatches for youth, region-specific issues; hiring/firing rules play a lesser role.
- Measures enacted or planned:
  - Reductions in labor tax wedge; introduction of an earned income tax credit (“work bonus”).
  - Increased job search assistance and screening; age for exemption from job search requirements raised from 55 to 58.
  - Targeted cuts in social security contributions and child care cost reductions; subsidies for domestic and household services.
  - Agreement for cumulative nominal wage increases of 4.5 percent during 2005–06 and more flexibility in overtime and shiftwork.
- Text Table 3 select figures (Interprofessional Wage Agreements):
  - Labor cost norm: 1997-98 5.8; 1999-2000 5.9; 2001-02 6.1; 2003-04 5.4; 2005-06 5.3
  - Projected inflation (health index): 1997-98 3.6; 1999-2000 3.1; 2001-02 3.0; 2003-04 2.9; 2005-06 3.3
  - Belgium actual changes: 1997-98 3.4; 1999-2000 5.3; 2001-02 7.5; 2003-04 5.9; 2005-06 4.5
  - Real increase: 1997-98 0.5; 1999-2000 1.7; 2001-02 2.1; 2003-04 1.4; 2005-06 0.3
- Box 4 on labor tax cuts and institutions:
  - Rise in labor tax wedge from 38 percent in 1960 to 51 percent in 2000 may have lowered employment by up to 4 percentage points.
  - With employment elasticity w.r.t. labor costs of 0.5, increasing employment by 10 percent requires a 20 percent cut in labor costs.
  - Ongoing tax reform (budgetary cost of 2 percentage points of GDP) estimated to raise employment rate by 1.6 percentage points by 2005 under current wage-bargaining power; if bargaining power halved, effect 2.2 percentage points; fully competitive market 4.3 percentage points.
  - OECD estimate: actuarial fairness could boost employment rate by 2.3 percentage points.
- Staff view: more comprehensive reforms to the social bargaining model needed; narrow coverage of entitlements and streamline active labor market programs.

### Product Markets, Financial Sector, and Structural Issues
- Product markets: ongoing reforms should be accelerated to strengthen competition, liberalize network industries, and reduce administrative burdens.
- Competition authority expected to become operational in early 2005; electricity, fixed-line telecommunications, and postal services highlighted.
- Railway reforms proceeding; staff urged efficiency gains in exchange for takeover of old railway debt.
- Financial sector:
  - Improved performance in 2004; bank profitability increased; insurance sector returned to profit (nonlife premium growth and higher equity valuations).
  - Life insurance sector vulnerable due to guaranteed-return policies and solvency margin sensitivity to interest rates.
  - Banks’ risk-based capital asset ratio (2000–04): 11.9, 12.9, 13.1, 12.8, 12.3.
  - Nonperforming loans/total loans (2000–04): 2.7, 2.9, 2.9, 2.6, 2.2.
  - Consolidated supervisory agency covering banking, finance, and insurance started operating beginning of 2004; Financial Sector Assessment Program underway with a first mission in December 2004.

### External Position, Monetary Conditions, and Financial Markets
- Current account balance (percent of GDP): 1999–2005: 5.1, 3.9, 3.7, 5.3, 3.8, 3.9, 3.9.
- Real and nominal effective exchange rates (2000=100): Nominal effective rate series include 103.0, 100.0, 100.5, 101.2, 104.2, 104.8; Real effective rate 103.3, 100.0, 101.1, 100.2, 102.6, 102.7.
- Monetary conditions described as accommodating by monetary conditions index and a Taylor rule.
- Interest rates (Table 1): Money market rate series 3.0, 4.4, 4.3, 3.3, 2.2, 2.2; Government bond yield series 4.7, 5.6, 5.1, 5.0, 4.2, 4.3.
- External trade (Table 1): Exports and imports in U.S. dollars showed strong growth in 2003–04 (exports: 20.4 percent in 2003; 11.2 percent in 2004; imports: 21.3 percent in 2003; 11.7 percent in 2004).

### Debt Sustainability, Stress Tests, and Fiscal Projections
- Public sector debt (percent of GDP): 1999 114.4; 2000 109.2; 2001 108.0; 2002 105.4; 2003 99.9; 2004 95.9; 2005 94.9.
- Debt dynamics: change in public sector debt (yearly): -4.5, -5.2, -1.2, -2.6, -5.4, -4.0, -1.0 (1999–2005).
- Debt-stabilizing primary balance (baseline): 1.1 (percent of GDP).
- Debt path under alternative scenarios (selected):
  - Baseline I. 2005–2009: 95.9, 92.5, 90.6, 89.2, 88.3.
  - Bound test B2 (Real GDP growth = historical average − 2 s.d. in 2005–06): 95.9, 98.5, 101.0, 101.6, 102.7, 104.4.
  - Bound test B6 (10 percent of GDP increase in other debt-creating flows in 2005): 95.9, 104.9, 102.5, 100.7, 99.5, 98.7.
- Fiscal scenarios (Table 4, 2001–07):
  - Current policies (A): primary balance 7.2, 6.1, 5.8, 4.8, 3.3, 3.0; debt 108.0, 105.4, 99.9, 95.9, 94.9, 92.5.
  - Government Stability Program (B): balance around 0.0 through 2005–07; debt moves from 108.0 to 87.3 by 2007.
  - Reform and consolidation (C): debt 108.0 (2001) to 87.6 (2007).

### Staff Appraisal and Executive Board Recommendations
- Policies appropriately aimed at attenuating long-term impact of population aging and preserving fiscal health; however, fiscal and labor market reforms should be stepped up substantially and implemented concurrently.
- Fiscal recommendations:
  - Preserve and build on primary surplus; implement medium-term expenditure framework; strengthen internal stability pact; target small surplus by 2007 and structural surplus of 1.5 percent of GDP by 2011.
  - Implement health care reforms to curb spending growth; use IT and retirements for civil service savings; narrow entitlement coverage and streamline active labor market programs where feasible.
- Labor market recommendations:
  - Phase out early retirement, make retirement actuarially fair, tighten job search and availability requirements, limit unemployment benefit duration, maintain wage moderation and avoid wage drift.
  - Use targeted measures for youth and low-skilled: social security contribution cuts, childcare support, earned income tax credit.
- Product market and financial sector:
  - Accelerate liberalization and competition across regions; establish competition authority; continue merger of supervisors and complete FSAP; reduce administrative burden using IT.
- Other recommendations:
  - Continue anti–money-laundering enhancements; maintain multilateral trade liberalization stance; sustain and increase official development assistance toward UN target.

### Key Selected Indicators (staff tables and figures)
- Real economy (selected changes in percent): Private consumption 1999–2005: 2.3, 3.4, 0.7, 0.3, 2.2, 2.3, 2.3; GDP: 3.2, 3.7, 0.9, 0.9, 1.3, 2.7, 2.2.
- Inflation and wages: CPI (12-month growth) 1999–2005: 1.2, 2.3, 2.5, 1.7, 1.8, 1.9, 2.2; Compensation per employee 3.9, 2.6, 4.1, 4.3, 2.1, 3.3, 4.6.
- Labor market: Employment changes 1999–2005: 1.3, 1.9, 1.5, -0.3, 0.1, 0.7, 0.4; EU harmonized unemployment rate: 8.6, 6.9, 6.7, 7.3, 7.9, 7.8, 7.7.
- External and financial: Current account balance (percent of GDP) 1999–2005: 5.1, 3.9, 3.7, 5.3, 3.8, 3.9, 3.9; Risk-based capital asset ratio (2000–04): 11.9, 12.9, 13.1, 12.8, 12.3.
- Exchange rate: fixed conversion 40.3399 Belgian francs to the euro; euro per U.S. dollar (January 25, 2005): 0.769.

*Source: _cr0575 — IMF staff report and executive summary excerpts.*

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

### _cr0575 - Executive Summary ......................................................................................................

### Introduction
- Robust economic recovery driven by household consumption and supportive policies.
- Persistent fiscal consolidation has led to a rapid decline in the public debt-to-GDP ratio.
- Past Fund recommendations to curb real primary spending growth and to achieve fiscal surpluses alongside higher labor utilization and economic efficiency remain applicable.
- Authorities receptive to Fund advice but cautious about modifying the welfare system rapidly to preserve social peace; federal structure and interregional sensitivities constrain reform scope and speed.

### Economic developments and outlook
- Growth drivers and composition:
  - Private consumption and residential construction have been the principal engines of recent growth.
  - Real private consumption rose by 2.4 percent in 2003 and by 2.6 percent (annualized) during the first three quarters of 2004.
  - Business investment response has been uneven; export growth lower than expected relative to partner-country demand.
  - Employment has held up better than in prior cycles but has yet to rise strongly.
- Inflation and external position:
  - Inflation differences versus the euro area mainly reflect indirect taxes and energy prices; underlying inflation has declined.
  - Indirect tax changes: downward pressure in 2002–03 (TV license fee cut), upward pressure in 2004-05 (rising energy and tobacco taxes).
  - External position remains strong; current account surplus close to 4 percent of GDP.
  - Slight erosion of competitiveness due to modest real appreciation as relative wage increases were not entirely offset by productivity growth.
- Policy stance and near-term outlook:
  - Policy conditions considered accommodative by standard indicators (a Taylor rule and monetary conditions index), while capacity utilization rose but stayed near historic averages.
  - Real GDP expected to grow at about 2.5 percent throughout 2005; equivalent to about 2.2 percent if the lower number of working days in 2005 is taken into account.
  - Main risks: oil-price shocks (and associated global slowdown), weakness in trading partners, further euro appreciation, slower pickup in employment, and adverse confidence effects.
  - Interprofessional agreement of January 18, 2005: average nationwide cumulative wage increase of 4.5 percent for the period 2005–06.
- Demographics and long-term growth:
  - Population aging estimated to reduce potential GDP growth by about 1 percentage point from 2010 onward.
  - Authorities anticipate labor productivity growth rising from 1 percent in the mid-1990s to 1.75 percent during 2009–30; staff views this as optimistic and notes the assumption implies either a sharp increase in total factor productivity or substantial capital deepening.
  - The productivity assumption is critical because pensions adjust with prices while contributions are wage-based.

### Fiscal policy findings and recommendations
- Recent fiscal performance:
  - Large primary surpluses and budgets at least in balance over the past five years; declining public debt-to-GDP ratio.
  - One-off measures continue to play a role in achieving budget objectives; the primary surplus has declined recently amid spending pressures and tax cuts.
- Policy recommendations:
  - Shift decisively toward durable primary expenditure restraint to avoid return to deficits and to achieve needed surpluses.
  - Reinforce the budgetary framework and the internal stability pact between federal and regional governments.
  - Implement a medium-term budget framework based on expenditure ceilings (staff recommendation consistent with past Fund advice), as opposed to exclusive reliance on annual nominal balance targets.

### Social spending, pensions, and health care
- Pensions:
  - Past reforms have produced a sustainable pension system, but retirement decisions are not yet actuarially fair.
  - Early retirement schemes should be phased out.
- Health care:
  - Measures are in place to correct expenditure overruns, but policies to curb underlying spending growth in the medium run should be implemented.
- Other spending areas:
  - Urgent need for structural reforms in civil service and labor market programs.

### Labor market issues and recommendations
- Objectives and constraints:
  - Raising employment rates is a priority, but the authorities favor a gradual approach to preserve social peace.
- Recent and planned measures:
  - Ongoing reductions in the labor tax wedge.
  - Introduction of an earned income tax credit.
  - Actual and proposed measures to limit recourse to early retirement.
- Staff view and recommendations:
  - More comprehensive reforms to the social bargaining model are needed to raise the effectiveness of tax and incentive measures in boosting job creation and increasing wage and labor market flexibility.
  - Reform areas highlighted include unemployment benefits, early retirement arrangements, and wage bargaining features that affect interregional labor mobility and wage dispersion.

### Product markets, financial sector, and other structural issues
- Product market reforms:
  - Ongoing reforms should be accelerated to:
    - Strengthen effective competition.
    - De facto liberalize network industries.
    - Further reduce the administrative burden on businesses and taxpayers.
- Financial sector:
  - Sector has performed well overall; life insurance sector still faces challenges.
  - Merger of banking and insurance supervisors is progressing.
  - A Financial Sector Assessment Program has started and will be completed in the context of the next Article IV consultation.

### Staff appraisal (summary)
- Policies appropriately aimed at attenuating the long-term impact of population aging on growth and public finances.
- However, fiscal and labor market reforms should be stepped up substantially and implemented concurrently to secure durable fiscal surpluses and higher employment.
- Emphasis on durable expenditure restraint, reinforcement of fiscal governance, phasing out early retirement, curbing health spending growth, comprehensive labor-market and bargaining reforms, and accelerated product-market liberalization.

*Executive Summary, _cr0575 - Executive Summary ......................................................................................................*

### 8. Discussions focused on the authorities’ strategy to deal with population aging.

### 8. Discussions focused on the authorities’ strategy to deal with population aging

### Overview
- Agreement on objectives: fiscal consolidation and increased labor utilization.
- Difference in emphasis: staff urged broader and expeditious action; authorities prioritized consensus-building and gradualism to preserve social peace.
- Fiscal consolidation had progressed well until recently; staff saw urgent need to restrain real primary spending.
- Pension reform was well advanced; remaining excessive recourse to early retirement set to be tackled in early 2005.
- Consensus, including social partners, for raising employment rates; staff considered the current wage-bargaining model likely to impede progress.

### Fiscal Policy — Findings and projections
- Public debt fell from nearly 140 percent of GDP (peak) to less than 100 percent of GDP in 2004.
- Authorities committed to reducing the public debt ratio to less than the euro area average within the next ten years.
- During 2002–04, the primary surplus fell by about 1 percentage point of GDP as interest savings were applied to tax cuts and increases in primary spending (including on health care and law and order).
- Text Table 2 (Belgium: Budget Balance Adjusted for Cycle and Nonstructural Items, In percent of GDP) — select series:
  - Headline balance: 1999 -0.4; 2000 0.2; 2001 0.6; 2002 0.1; 2003 0.4; 2004 0.0; 2005 -0.4
  - Effect of the cycle (-): 1999 0.6; 2000 1.8; 2001 1.1; 2002 0.1; 2003 -0.6; 2004 -0.4; 2005 -0.3
  - Nonstructural measures (-)1/: 1999 -1.0; 2000 -0.1; 2001 -0.2; 2002 0.4; 2003 0.2; 2004 1.5; 2005 0.7; 2005 (last column) 0.4
    - Of which: Belgacom 1.9
    - Of which: Tax amnesty 0.1
  - Adjusted structural balance: 1999 -0.9; 2000 -1.4; 2001 -0.9; 2002 -0.3; 2003 -0.6; 2004 -0.3; 2005 -0.4
  - Interest payments (+): 1999 7.0; 2000 6.8; 2001 6.6; 2002 6.0; 2003 5.4; 2004 4.8; 2005 4.7
  - Adjusted Structural Primary Balance: 1999 6.1; 2000 5.4; 2001 5.7; 2002 5.7; 2003 4.9; 2004 4.4; 2005 4.2
  - Memorandum items:
    - Real primary expenditure growth: 1999 3.1; 2000 2.5; 2001 1.3; 2002 4.4; 2003 4.3; 2004 1.0; 2005 3.0
    - Public debt: 1999 114.4; 2000 109.2; 2001 108.0; 2002 105.4; 2003 99.9; 2004 95.9; 2005 94.9
- Staff view: balancing the budget after 2004 would become increasingly difficult unless durable spending restraint was implemented.
- For 2005, staff estimated an additional 0.4 percentage point of GDP in measures were needed to achieve balance (Table 4, Scenario A).
- In 2006, reaching balance complicated by an already-adopted tax reform reducing revenues by about 0.5 percentage point of GDP and potential spending pressure from municipal elections.
- Authorities implemented durable spending curbs in a number of areas; on health care, early detection of overruns activated clawback mechanisms and remedial measures.
- Staff recommended the health care sector prepare to return to real spending growth rates lower than the 4.5 percent norm agreed for 2004–07.
- Authorities noted one regional government had suspended net replacement of retirees; staff suggested extending this practice alongside adoption of information technology.
- Little support for staff recommendations to narrow coverage of entitlements or streamline active labor market policies.
- Authorities’ objectives for surpluses:
  - 0.3 percent of GDP by 2007 (Table 4, Scenario B)
  - 1.5 percent of GDP by 2011 (explicitly endorsed by the federal parliament)
- Staff assessment: achieving required consolidation solely through higher labor utilization unrealistic (would require employment rates of persons aged 20–59 of about 95 percent compared to 73 percent at present).
- Intermediate preferred option: combine fiscal adjustment and substantial labor market reform (Table 4, Scenario C and Box 3).
- Illustration by staff: curbing discretionary spending growth to about 1.4 percent per year for the next decade and raising the effective employment rate by 10 points by 2030 would secure fiscal sustainability without requiring buildup of public assets.
- Staff recommendation: adopt a multiyear expenditure-based fiscal framework to focus on durable spending reform and avoid reliance on one-off measures.
- Authorities to continue annual nominal budget targets through 2007 but noted increasing awareness of merits of expenditure-based framework.
- Agreement that an effective internal stability pact and strengthened monitoring, advance warning procedures, and compliance are key to securing fiscal consolidation at all government levels; HFC recommendation that all regional authorities converge to a balanced budget by 2010 seen as broadly appropriate.

### Box 3 — Coping with Population Aging (Key scenarios and numerical implications)
- Demographic projection: old-age dependency ratio (those aged over 60 as a share of those between 20–59) projected to rise from about 40 percent to almost 70 percent between now and 2050.
- Associated annual fiscal costs projected to rise by about 7 percentage points of GDP by 2050 under current policies.
- High Finance Council (2002) strategy: steady up-front fiscal adjustment could fully offset aging costs by savings on interest payments, provided effective employment rate increased by about 5 percentage points.
- Since 2002: costs of aging revised upward and pace of fiscal adjustment slowed; labor market policies have yet to deliver required higher employment.
- Fiscal Adjustment Scenario (cover aging costs solely by fiscal adjustment):
  - With aging costs exceeding the interest bill, generating sufficient savings would require buildup of a net asset position by 2050.
  - This would require limiting real discretionary primary spending growth to 0.3 percent in each of the next ten years and achieving a fiscal surplus of 4 percent of GDP by 2015.
- Adjustment + Reform Scenario (combine fiscal adjustment and higher employment):
  - An increase in the employment rate by 10 percentage points between now and 2030 would avoid the need for a net asset position in the long run.
  - Fiscal sustainability could be achieved by holding real discretionary primary spending growth to not more than 1.4 percent per year in the next ten years.
  - Under this scenario, a fiscal surplus of about 2 percent in 2015 would suffice.

### Labor Market — Findings, constraints, and policy measures
- Raising low labor utilization is necessary to cope with aging; increasing employment rate by five points (HFC projection) or ten points (staff recommendation) seen as feasible.
- Causes of low formal employment identified: wide tax wedge on labor; generous early retirement schemes; poor career opportunities for older workers; skill mismatches for the young; region-specific issues (concentration of migrants and hysteresis following industrial restructuring).
- Rules affecting hiring and firing seen to play a much lesser role.
- Staff highlighted large and open-ended benefits and the wage-bargaining framework as key underlying factors impeding employment.
- Labor relations governed by bargaining between social partners; unions often secure favorable outcomes and administer unemployment and health care benefits.
- Authorities adopted a proactive approach: inviting social partners to negotiate on government-proposed reforms with predetermined deadlines, with imposition if no agreement reached.
- Strong consensus that reforms should not increase poverty; equity-inspired push to curtail welfare abuse and remove policy-induced inactivity traps.
- Measures enacted or planned:
  - Active labor market policies and structural cuts in social security contributions and income taxes (effectiveness limited by current institutions and high budgetary cost).
  - Reduction in level and duration of benefits or increased taxation of benefits remain politically out of bounds; benefits indexed to prices causing replacement rates to drift downward.
  - Job search assistance increased for all new unemployed; screening for compliance to be expanded to existing stock; age for exemption from job search requirements raised from 55 to 58.
  - Inactivity traps reduced through targeted cuts in social security contributions and child care costs; the earned-income tax credit (“work bonus”); and subsidies for domestic and household services.
  - High Labor Council preparing a 2005 update assessing inactivity traps considering recent tax reform.
- Wage-bargaining round 2005–06 was gridlocked at mission time:
  - Employers sought a wage freeze and more flexible work arrangements; unions demanded somewhat more than full price indexation and offered few concessions.
  - Staff argued little or no room for increases in gross nominal wages given unit labor cost concerns; position considered reasonable by many since income tax cuts and increases in the work bonus would allow net take-home pay to rise.
  - Unions sought assurances wage moderation would lead to increased hiring rather than higher profits.
  - Agreement after the mission: cumulative nominal wage increases of 4.5 percent during 2005–06; introduction of more flexibility in overtime and shiftwork and making them fiscally more attractive.
- Text Table 3 (Belgium: Interprofessional Wage Agreements, 1997-2006, Hourly labor costs, percent change) — select figures:
  - Labor cost norm: 1997-98 5.8; 1999-2000 5.9; 2001-02 6.1; 2003-04 5.4; 2005-06 5.3
  - Projected inflation (health index): 1997-98 3.6; 1999-2000 3.1; 2001-02 3.0; 2003-04 2.9; 2005-06 3.3
  - Belgium actual changes: 1997-98 3.4; 1999-2000 5.3; 2001-02 7.5; 2003-04 5.9; 2005-06 4.5
  - Due to conventional wage increase: 1997-98 3.6; 1999-2000 4.4; 2001-02 7.1; 2003-04 4.2; 2005-06 3.6
  - Due to indexation: 1997-98 3.1; 1999-2000 2.6; 2001-02 4.8; 2003-04 2.8; 2005-06 3.3
  - Real increase: 1997-98 0.5; 1999-2000 1.7; 2001-02 2.1; 2003-04 1.4; 2005-06 0.3
  - Employers' social security contributions: 1997-98 0.6; 1999-2000 -1.5; 2001-02 1.0; 2003-04 -0.6; 2005-06 -0.4
  - Wage drift: 1997-98 -0.8; 1999-2000 2.4; 2001-02 -0.5; 2003-04 2.2; 2005-06 1.3
  - Memorandum: Relative unit labor cost (Belgium-reference countries) 1997-98 0.7; 1999-2000 0.3; 2001-02 1.8; 2003-04 0.3
  - Effect of income tax cuts on disposable income (mem.): 2003-04 0.1; 2005-06 0.5; (another entry) 1.0
- Box 4 findings on labor tax cuts and institutions:
  - Rise in labor tax wedge from 38 percent in 1960 to 51 percent in 2000 may have lowered employment rate by up to 4 percentage points.
  - Assuming employment elasticity w.r.t. labor costs of 0.5, increasing employment by 10 percent requires a 20 percent cut in labor costs.
  - Ongoing tax reform (budgetary cost of 2 percentage points of GDP) estimated to raise employment rate by 1.6 percentage points by 2005 under current wage-bargaining power.
  - If union bargaining power reduced by half, employment effect would be 2.2 percentage points; a fully competitive market would deliver 4.3 percentage points.
  - Table (Employment Effects of Labor Tax Cuts in a Wage-Bargaining Model, changes in percentage points or percent change):
    - Changes in marginal effective labor income tax: 1985-91 -3.6; 2000-05 -3.2
    - Changes in average effective labor income tax: 1985-91 -1.6; 2000-05 2.0
      - Income tax: 1985-91 -2.9; 2000-05 1.8
      - Employers' SSC: 1985-91 2.0; 2000-05 0.3
      - Employees' SSC: 1985-91 -0.7; 2000-05 -0.1
    - Employment effect under calibrated wage bargaining model: 1985-91 1.8; 2000-05 1.6
    - Employment effect with bargaining power reduced by half: 1985-91 2.4; 2000-05 2.2
    - Actual employment changes: 1985-91 1.8
- Staff conclusion: further labor and product market reforms would ease fiscal constraints and could create room for growth-enhancing tax cuts, provided expenditure restraint is in place.

*Source: _cr0575 - 8. Discussions focused on the authorities’ strategy to deal with population aging.*

### 20. Concerned that the staff-advocated overhaul of the current framework might

### 20. Concerned that the staff-advocated overhaul of the current framework might

### Labor market framework and wage bargaining: findings
- Since the inception of the competitiveness law in 1996 wage drift arguably slowed compared to trading partners, but it has remained high.
- Overruns of the labor cost norm, whether due to higher-than-anticipated inflation or wage drift, were not corrected in subsequent agreements despite a legal provision permitting such action.
- Cuts in income taxes and employer and employee social security contributions appear to have translated into higher take-home pay rather than lower labor costs.
- Sectoral, regional, and age-related hourly minimum wages well in excess of the national average minimum wage imply low effectiveness of budgetary and other measures to address inactivity traps.
- Wage dispersion is very limited, mainly due to price indexation and administrative extension of sectoral agreements.
- Staff assessment: the current wage bargaining framework would not be able to deliver significantly higher employment rates.

### Early retirement and older workers: measures and projections
- Authorities’ immediate priority: modify the early retirement regime to prevent premature exit from the labor force.
- Proposed measures to social partners include a broad menu aimed at improving career prospects, labor market availability, and flexibility of working arrangements for older workers.
- Menu includes financial disincentives for employers and employees seeking use of the early retirement regime.
- Early retirement remains an option in the case of enterprise restructuring, but as a last rather than first resort.
- Social partners expected to agree on a set of measures in the spring of 2005; the government announced reforms will be imposed in the absence of agreement.
- Staff and employers argued for a grandfathered, but complete phasing-out of early retirement schemes and the introduction of actuarial fairness into the retirement decision.
- OECD estimate: actuarial fairness could boost the employment rate by 2.3 percentage points.
- Staff recommendation: phase out early retirement schemes; make retirement decision actuarially fair and provide full information about financial consequences to individuals.

### Product markets and regulatory reform
- Product markets are becoming gradually more efficient, supported by a reduction in the administrative burden on enterprises.
- Strengthened competition authority expected to become operational in early 2005; relevant especially in electricity, fixed-line telecommunications, and domestic postal services where incumbents exercise monopoly power.
- Electricity sector: authorities instituting cross-border integration of infrastructure and markets; expected to take a few years to materialize.
- Railway reforms proceeding in line with EU directives; staff urged authorities to seek efficiency gains in exchange for the takeover of old railway debt.
- All price notification requirements and symbolic control over the basic bread price abolished in 2004.
- One-stop shop for starting a business established; corporate identification numbers being unified across administrations.
- Staff encouraged reducing fragmentation of responsibility for simplifying procedures.

### Financial sector performance and supervision
- Financial sector performance improved in 2004, supported by the economic recovery.
- Bank profitability increased substantially; insurance sector returned to profit, mainly due to increased premiums in the nonlife segment and higher equity valuations (Table 5).
- Banks’ operating costs remain high because restructuring is proceeding gradually.
- Life insurance vulnerable: many guaranteed-return policies locked in at above-market interest rates; recent shift toward fixed income securities on the asset side makes solvency margin vulnerable to increases in interest rates.
- Bank lending to households, including mortgages, exceeded lending to the corporate sector; large corporate borrowers turned to capital markets for funding.
- Smaller enterprises saw loan supply restricted, reportedly in the context of banks’ preparations for Basel II.
- Bank exposure to corporate borrowers from Central and Eastern European countries increased; foreign currency exposure remained fully hedged.
- A consolidated financial supervisory agency covering banking, finance, and insurance started operating at the beginning of 2004; central bank strengthening macroprudential supervision.
- FSAP forthcoming with the next Article IV consultation will provide a timely assessment of remaining issues. A first mission took place in December 2004.
- Central bank’s regular publication of financial stability reviews is helping market participants and fostering market discipline.

### External policy, anti-corruption, and development assistance
- Authorities continue to support multilateral trade liberalization.
- 2003 reform of the EU Common Agricultural Policy became effective in Belgium on January 1, 2005.
- Authorities availing themselves of the moratorium on immigration from newly acceded countries and are not considering an active migration policy to attenuate consequences of aging.
- Belgium updating framework to combat money laundering and financing of terrorism; FATF assessment conducted in January 2005; conclusions and recommendations will be included in the forthcoming FSAP.
- Legal system in compliance with the OECD antibribery convention; UN convention against corruption expected to be ratified by parliament in 2005.
- Official development assistance increased by 40 percent in 2003 to 0.6 percent of GNI, reflecting commitment to reach the UN target of 0.7 percent of GNI in the near term.
- Economic statistics are comprehensive and timely; staff suggests providing quarterly general government data and increasing public availability of key financial sector indicators.

### Staff appraisal: macro-fiscal and structural policy priorities
- Belgium faces impending population aging and increasing global competitive pressures; policies must be strengthened across a broad front.
- Fiscal adjustment and labor market reforms should be pursued concurrently over the medium term.
- Fiscal consolidation should prefund part of the cost of aging while avoiding future tax increases or cuts in already small pension benefits.
- Achieving higher employment rates is necessary to raise growth and enable sustained fiscal consolidation while preserving favorable social outcomes.
- Growth and risks: household spending and tax cuts have sustained disposable income growth; household savings resumed a declining trend. Downside risks include high oil prices, softer demand in major trading partners, further euro appreciation, weaker-than-expected employment, or sagging confidence.
- Fiscal targets and gaps:
  - Balancing the budget in 2005 appears feasible, though not without further efforts, especially on health care.
  - Authorities’ objective: achieve a small surplus by 2007 and a structural surplus of 1.5 percent of GDP by 2011.
- Structural reforms needed:
  - Health care: medium-term reforms necessary to lower spending growth; early response to spending overruns is commendable.
  - Civil service: adopt information technology and use impending wave of retirements for substantial savings.
  - Labor market: narrow coverage of entitlements, streamline active labor market programs, keep wage increases to a minimum and avoid wage drift in 2005–06.
  - Collective bargaining: modify to ensure effectiveness in delivering higher employment rates; abolish wage indexation and anomalies such as sectoral, regional, and age-related minimum wages; allow more flexible work and wage arrangements at the enterprise level.
- Specific labor-market measures:
  - Make retirement decision actuarially fair across all pension schemes and provide regular full information to individuals.
  - Tighten job search and availability requirements to speed reemployment; limit duration of unemployment benefits.
  - Earned income tax credit to mitigate inactivity traps; support with further changes in the tax and benefit system.
  - Continue evaluation, streamlining, and fine-tuning of labor market policies.
- Product-market and financial recommendations:
  - Extend liberalization and competition promotion across all regions and accelerate reform to benefit consumers.
  - Complement railway corporate restructuring and takeover of old debt with gradual reduction of subsidies.
  - Establish new competition authority to help introduce effective competition where lacking.
  - Continue merger of banking and insurance supervisory agencies and prepare for FSAP in next Article IV consultation.
- Development assistance and multilateral engagement:
  - Increase in official development assistance and commitment to UN target of 0.7 percent of GNI are commendable.
  - Authorities should use their position in international institutions to promote multilateral trade liberalization.

*Source: IMF staff report (sections 20–36).*

### 37. It is proposed that the next Article IV Consultation take place on the standard

### It is proposed that the next Article IV Consultation take place on the standard 12-month cycle.

### Economic developments
- GDP: "GDP has recovered strongly ..." (Figure 1: year-on-year growth rates series shown for Belgium, France, Germany; charts present quarterly points 2000Q1–2004Q1).
- Demand and output (Table 1, National Accounts, changes in percent):
  - Private consumption: 1999–2005: 2.3, 3.4, 0.7, 0.3, 2.2, 2.3, 2.3
  - Public consumption: 3.5, 2.3, 2.7, 2.3, 2.7, 3.5, 1.6
  - Gross fixed investment: 4.5, 3.4, 0.6, -3.4, -0.6, 2.8, 4.0
  - Exports of goods and nonfactor services: 5.3, 8.2, 1.8, 1.3, 1.7, 4.0, 5.5
  - Imports of goods and nonfactor services: 4.5, 8.3, 1.0, 1.0, 2.1, 4.5, 5.6
  - GDP: 3.2, 3.7, 0.9, 0.9, 1.3, 2.7, 2.2
- Output gap (percent of potential GDP): 0.0, 2.6, 1.2, -0.1, -1.0, -0.5, -0.4
- Manufacturing production: 1.1, 4.9, -0.4, 1.3, 0.4, 3.0, 2.7

### Inflation and wages
- Consumer price index (12-month growth) (Table 1): 1999–2005: 1.2, 2.3, 2.5, 1.7, 1.8, 1.9, 2.2
- GDP deflator (in percent): 1.4, 1.3, 1.8, 1.8, 2.0, 2.0, 2.2
- Compensation per employee (changes in percent): 3.9, 2.6, 4.1, 4.3, 2.1, 3.3, 4.6
- Unit labor costs (changes in percent): 2.0, 0.8, 4.8, 3.1, 0.9, 1.3, 2.8

### External developments
- Current account balance (percent of GDP, Table 1): 1999–2005: 5.1, 3.9, 3.7, 5.3, 3.8, 3.9, 3.9
- Trade balance (percent of GDP): 3.8, 2.1, 2.4, 3.6, 3.1, 3.5, 3.7
- Real and nominal effective exchange rates: Nominal effective rate (2000=100): 103.0, 100.0, 100.5, 101.2, 104.2, 104.8; Real effective rate (2000=100): 103.3, 100.0, 101.1, 100.2, 102.6, 102.7
- External indicators (Table 5, 2000–2004):
  - Exports (annual % change, U.S. dollars): 2.9, -0.3, 5.7, 20.4, 11.2
  - Imports (annual % change, U.S. dollars): 5.2, -0.5, 4.0, 21.3, 11.7
  - Current account balance (percent of GDP): 3.9, 3.7, 5.3, 3.9, 4.3

### Policy conditions and financial markets
- Monetary conditions: "Monetary conditions are accommodating" (Figure 4: MCI, REER, real short- and long-term interest rates shown; charts cover 2000M1–2005M1).
- Interest rates (Table 1):
  - Money market rate: 3.0, 4.4, 4.3, 3.3, 2.2, 2.2, ...
  - Government bond yield: 4.7, 5.6, 5.1, 5.0, 4.2, 4.3, ...
- Financial market indicators (Table 5):
  - 3-month T-bill yield: 4.0, 4.2, 3.2, 2.2, 2.0
  - 10-year government bond rate: 5.6, 5.1, 5.0, 4.2, 4.3
  - Spread of 10-year government bond rate with Germany (percentage points): 0.30, 0.31, 0.20, 0.09, 0.11

### Fiscal developments
- General government (Figure 5 and Table 2, in percent of GDP):
  - Revenue: 49.6, 49.5, 49.9, 50.3, 51.3, 49.6, 49.4
  - Expenditure: 50.0, 49.3, 49.3, 50.2, 51.0, 49.6, 49.8
  - Primary balance: 6.6, 6.9, 7.2, 6.1, 5.8, 4.8, 4.3
  - Fiscal balance: -0.4, 0.2, 0.6, 0.1, 0.4, 0.0, -0.4
  - Gross public debt: 114.4, 109.2, 108.0, 105.4, 99.9, 95.9, 94.9 (percent of GDP)
- Public sector debt (Table 3, projections and dynamics):
  - Public sector debt (percent of GDP): 1999–2005: 114.4, 109.2, 108.0, 105.4, 99.9, 95.9, 94.9
  - Change in public sector debt (yearly): -4.5, -5.2, -1.2, -2.6, -5.4, -4.0, -1.0
  - Primary deficit (percent of GDP): -6.6, -6.9, -7.2, -6.1, -5.8, -4.8, -4.3
  - Automatic debt dynamics contribution (percent): 2.1, 2.0, 3.9, 3.0, 1.8, 0.1, 0.5
  - Public sector debt-to-revenue ratio (percent): 230.5, 220.6, 216.3, 209.4, 194.7, 193.6, 192.2
  - Gross financing need (percent of GDP): 22.5, 19.4, 17.3, 17.2, 15.5, 14.2, 14.2
- Debt-stabilizing primary balance (Table 3, baseline): 1.1 (percent of GDP) in projections

### Debt sustainability stress tests (Table 3: alternative scenarios and bound tests)
- Baseline public sector gross debt path (percent of GDP) under baseline I.:
  - 2005–2009 (baseline): 95.9, 92.5, 90.6, 89.2, 88.3 (selected years shown in scenario tables)
- Alternative scenarios A:
  - A1 (Key variables at historical averages in 2005-09): debt path: 95.9, 95.0, 91.5, 88.0, 84.1, 80.2; debt-stabilizing primary balance: 2.0
  - A2 (No policy change in 2005-09): 95.9, 94.5, 90.6, 86.8, 83.2, 79.4; debt-stabilizing primary balance: 1.0
  - A3 (Country-specific shock: reduction in GDP growth of one standard deviation): 95.9, 94.9, 92.5, 90.6, 89.2, 88.3; 1.1
- Bound tests B:
  - B1 (Real interest rate = historical average + 2 s.d. in 2005–06): 95.9, 98.1, 98.7, 96.9, 95.6, 94.7; 1.2
  - B2 (Real GDP growth = historical average − 2 s.d. in 2005–06): 95.9, 98.5, 101.0, 101.6, 102.7, 104.4; 1.3
  - B3 (Primary balance = historical average − 2 s.d. in 2005–06): 95.9, 95.1, 91.8, 89.9, 88.5, 87.5; 1.1
  - B6 (10 percent of GDP increase in other debt-creating flows in 2005): 95.9, 104.9, 102.5, 100.7, 99.5, 98.7; 1.2

### Fiscal scenarios (Table 4, 2001–07; percent of GDP)
- Current policies (A) 2001–2007 (selected indicators):
  - Revenue: 49.9, 50.3, 51.3, 49.6, 48.8, 48.8
  - Expenditure: 49.3, 50.2, 51.0, 49.6, 50.1, 50.5
  - Primary expenditure: 42.8, 44.2, 45.5, 44.8, 45.1, 45.9
  - Primary balance: 7.2, 6.1, 5.8, 4.8, 3.3, 3.0
  - Debt: 108.0, 105.4, 99.9, 95.9, 94.9, 92.5
- Government scenario; Stability Program (B):
  - Balance around 0.0 through 2005–07; debt moves from 108.0 to 87.3 by 2007
- Reform and consolidation (C):
  - Slightly lower expenditure and debt: debt 108.0 (2001) to 87.6 (2007)

### Labor market and social indicators
- Employment and unemployment (Figure 6 and Figure 7):
  - Employment (national definition) changes, 1999–2005: 1.3, 1.9, 1.5, -0.3, 0.1, 0.7, 0.4
  - EU harmonized unemployment rate (percent of labor force): 8.6, 6.9, 6.7, 7.3, 7.9, 7.8, 7.7
  - NAIRU: 9.0, 8.5, 8.3, 7.9, 7.9, 7.9, 7.9
- Labor market structure:
  - "More persons are in jobs" but "hours worked are stable, reflecting rising part-time work."
  - Unemployment remains relatively high with stark regional differences and higher incidence for ages 15-24.
- Labor market indicators, 2003 (Figure 7):
  - Population (2003): 10.3 million
  - GDP per capita (2003): $29,408
  - Life expectancy at birth: Male 75.1, Female 81.1
  - Infant mortality rate: 5 per 1,000 live births
  - Population per physician (1995): 437
  - Population per sq. km. (1995): 335

### Financial sector and vulnerability indicators
- Banking sector (Table 5, 2000–04):
  - Risk-based capital asset ratio: 11.9, 12.9, 13.1, 12.8, 12.3
  - Nonperforming loans/total loans: 2.7, 2.9, 2.9, 2.6, 2.2
  - Foreign assets of banking sector (billions of U.S. dollars, end-of-period): 108.2, 127.0, 164.2, 194.3, 217.6
  - Foreign liabilities of banking sector (billions of U.S. dollars, end-of-period): 163.9, 176.3, 199.0, 236.4, 270.6
- Sectoral indicators:
  - Household savings ratio: 15.0, 16.9, 17.5, 16.3, ...
  - Share of mortgage credit in bank credit to private sector: 32.4, 34.0, 36.3, 40.0, 41.2

### IMF relations and Fund data (Appendix I, as of November 30, 2004)
- Membership status: Joined 12/27/45; Article VIII
- Quota: 4,605.20 SDR Million (100.00 percent)
  - Fund holdings of currency: 3,043.73 (66.09 percent of quota)
  - Reserve position in Fund: 1,561.48 (33.91 percent of quota)
- SDR Department:
  - Net cumulative allocation: 485.25 SDR Million (100.00 percent)
  - Holdings: 263.58 (54.32 percent)
- Outstanding purchases and loans: None
- Latest financial arrangements: None
- Projected payments to Fund (SDR Million; forthcoming):
  - Charges/interest: 2004: 4.90; 2005: 4.94; 2006: 4.94; 2007: 4.95
- Exchange rate arrangement: Belgium entered the final stage of European Economic and Monetary Union on January 1, 1999 at a rate of 40.3399 Belgian francs to the euro.

*Source: IMF staff country report text and tables provided in the content unit.*

### 40.3399 Belgian francs to the euro.

### _cr0575 - 40.3399 Belgian francs to the euro.

### Exchange rate and legal restrictions
- Fixed conversion: 40.3399 Belgian francs to the euro.
- Belgium retains restrictions vis-à-vis Iraq, the Socialist Peoples’ Libyan Arab Jamahiriya, and the Federal Republic of Yugoslavia (Serbia and Montenegro) pursuant to UN Security Council resolutions 661, 883, and 757, respectively.
- Residual restrictions vis-à-vis the Federal Republic of Yugoslavia (Serbia and Montenegro) relate solely to balances of the former National Bank of Yugoslavia that remain frozen, since they are subject to unresolved legal claims.

### Article IV consultations timing
- Belgium is on the 12-month cycle; the last consultation was completed on February 13, 2004.
- IMF Executive Board concluded the 2004 Article IV Consultation with Belgium on February 18, 2005.
- Public Information Notice issued March 3, 2005 (PIN No. 05/26).

### Background and staff view (key points)
- Recent upswing driven by: strong household spending, global recovery, and macroeconomic policies.
- Supporting factors: tax cuts, wage increases, low interest rates, rising housing prices, repatriation of assets (EU savings taxation directive and a tax amnesty).
- Monetary conditions remained accommodating despite the euro’s appreciation.
- Fiscal stance: countercyclical support masked by large, one-off deficit-reducing measures.
- Outlook and risks:
  - Growth expected to continue at a healthy pace in 2005, driven by private consumption and likely strengthening of corporate investment and employment growth.
  - Downside risks: high oil prices, weaker demand in key trading partners, further appreciation of the euro, weaker-than-expected employment growth, sagging confidence.
  - With actual GDP expected to remain below potential, no underlying inflationary pressures, though indirect tax increases and higher energy prices will add to headline inflation into 2005.
  - Possibility of some wage drift following the 2005–06 interprofessional wage agreement, which includes indexation.
  - Long-run concern: demographic pressures expected to reduce potential growth.

### Authorities’ strategy and reforms
- Strategy to cope with aging: fiscal adjustment, pension reform, measures to raise labor utilization.
- Public-debt-to-GDP ratio has been declining steadily due to large primary surpluses.
- Budget balance has been maintained over the past five years largely through favorable one-time measures; achieving balance in 2005 continues to rely on some one-off measures.
- Primary surplus decline in recent years as interest savings were used for tax cuts and increases in primary spending (including health care and law and order).
- Pension reform largely complete: pay-as-you-go pillar benefits relatively low; retirement decision not actuarially fair.
- Early retirement regime reform scheduled for early 2005, with some options remaining for enterprise restructurings.
- Labor market measures taken: cut tax wedge on labor, introduced an earned income tax credit, strengthened job search requirements and verification.

### Executive Board assessment and recommendations
- Commendation for sustained strong performance and prudent fiscal management; steady decline in debt ratio.
- Need for continued broad-based policy strengthening to address aging and competitiveness.
- Fiscal policy:
  - Support for balancing budgets in 2005–06 and gradually building surpluses thereafter, to about 1.5 percent of GDP by 2011.
  - Need to preserve current level of the primary surplus; fiscal efforts must be stepped up substantially.
  - Recommendation to implement reforms to lower health care spending growth, use information technology and impending retirements in civil service for budgetary savings.
  - Scope for durable adjustment through narrowing entitlements and streamlining active labor market programs.
  - Encourage adoption of a multi-year primary expenditure framework to reduce reliance on one-off measures and enhance transparency.
  - Renew and strengthen internal stability pact between federal and regional governments to ensure long-run balanced budgets across regions.
- Labor market and wages:
  - Boosting labor utilization is vital; need for wage moderation and modification of collective bargaining (remove indexation, introduce more flexibility).
  - Wage norm in 2005–06 collective agreement seen as on the high side.
  - Recommend making retirement decision actuarially fair and phasing out early retirement programs.
  - For young and less skilled: targeted cuts in social security contributions and childcare costs, earned income tax credit, tightened job search requirements, increased job search assistance.
  - Suggest limiting duration of unemployment benefits and streamlining active labor market programs.
  - Preserve social consensus in implementing reforms; emphasize education and vocational training.
- Product and service markets:
  - Encourage progress in improving functioning of product markets across all regions.
  - Support establishment of a new competition authority and gradual reduction of railway subsidies.
  - Recommend introducing more competition in energy and telecommunications sectors.
  - Continue lowering administrative burden on enterprises and taxpayers using information technology.
- Financial sector:
  - Performance improved overall; life insurance sector remains vulnerable to interest rate developments.
  - Commendation for merger of banking and insurance supervisory agencies; expect improved supervision of banking-insurance conglomerates.
  - Welcome timely initiation of the Financial Sector Stability Assessment to be completed with the next consultation.
  - Support regular publication of central bank financial stability reviews.
- Other policies:
  - Welcome efforts to combat money laundering and terrorism financing, adherence to antibribery initiatives, and support for multilateral trade liberalization.
  - Praise for sharp increase in official development assistance and commitment to raise it to the UN target.

### Core statistical and data notes (as of January 5, 2005)
- Data observation dates and sources:
  - Exchange Rates: Date of Latest Observation 1/5/05; Date Received 1/5/05; Frequency Daily; Source Reuters; Mode of Reporting Electronic; Confidentiality Public; Frequency of Publication Daily.
  - Interest Rates: Date of Latest Observation 1/5/05; Date Received 1/5/05; Frequency Daily; Source Reuters; Mode of Reporting Electronic; Confidentiality Public; Frequency of Publication Daily.
  - Consumer Price Index: Date of Latest Observation 11/04; Date Received 1/2/05; Frequency Monthly; Source Eurostat; Mode of Reporting Electronic; Confidentiality Public; Frequency of Publication Monthly.
  - Exports/Imports: Date of Latest Observation 10/04; Date Received 11/10/04; Frequency Monthly; Source NBB; Mode of Reporting NBB Website; Confidentiality Public; Frequency of Publication Monthly.
  - Current Account Balance: Date of Latest Observation 9/04; Date Received 11/10/04; Frequency Quarterly; Source NBB; Mode of Reporting NBB Website; Confidentiality Public; Frequency of Publication Monthly.
  - Overall Government Balance: Date of Latest Observation 2003; Date Received 5/30/04; Frequency Annually; Source NBB; Mode of Reporting NBB Website; Confidentiality Public; Frequency of Publication Annually.
  - GDP/GNP: Date of Latest Observation Q3/04; Date Received 12/8/04; Frequency Quarterly; Source NBB; Mode of Reporting NBB Website; Confidentiality Public; Frequency of Publication Quarterly.
- Key publicly accessible websites for macroeconomic data:
  - National Statistics Agency: www.statbel.fgov.be
  - National Bank of Belgium: www.nbb.be
  - Federal Planning Bureau: www.plan.be
  - Commission for Banking, Finance, and Insurance: www.cbfa.be
  - High Finance Council: www.docufin.be
  - Central Economic Council: www.ccecrb.fgov.be

### Selected economic indicators (staff estimates and projections where indicated)
- Real economy (change in percent)
  - Real GDP: 0.90.91.3 2.7 2.2
  - Domestic demand: 0.20.61.6 3.1 2.5
  - CPI: 2.41.61.5 1.9 2.2
  - Unemployment rate (in percent): 6.77.38.1 8.3 8.2
- Public finance (percent of GDP)
  - General government balance: 0.60.10.3 0.0 -0.4
  - Structural balance: -0.7-0.1-0.9 0.3 -0.1
  - Primary balance: 7.26.15.7 4.8 4.3
  - General government debt: 108.0   105.499.9 95.9 94.9
- Interest rates (percent)
  - Money market rate (3 months): 4.33.32.2 2.2 ...
  - Government bond yield: 5.15.04.2 4.3 ...
- Balance of payments (percent of GDP)
  - Trade balance: 2.43.63.1 3.5 3.7
  - Current account: 3.75.33.8 3.9 3.9
  - Official reserves (US$ billion): 11.911.011.0 10.4
- Exchange rate and competitiveness indicators
  - Exchange rate regime: Member of EMU
  - Euro per U.S. dollar (January 25, 2005): 0.769
  - Nominal effective rate (2000=100, ULC based): 100.0   100.5   101.2 104.2
  - Real effective rate (2000=100, ULC based): 100.0   101.1   100.2 102.6

*Source: _cr0575 - 40.3399 Belgian francs to the euro.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0575.pdf_