## _cr0789

## Source details

**Canonical URL:** [_cr0789](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0789.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0789.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0789.pdf.json)

---

### Executive summary and policy context
- Sound policies underpinned Belgium’s favorable recent performance, but further strengthening is necessary to meet challenges posed by globalization, aging, fiscal federalism, and increasing complexity of the financial sector.
- Authorities anticipate a lengthy process of consensus-building and gradual action on fiscal consolidation and labor market reforms; staff view: speed, depth, and coordination of policy implementation across all levels of government need to be stepped up.

### Recent macroeconomic developments
- Growth and demand
  - Economic growth slowed from nearly 3 percent in 2006 to a projected robust 2.2 percent in 2007.
  - Upturn that started in mid-2005 remained on track, supported by catch-up in private investment, revival of private consumption, and cyclical expansion in neighboring countries.
  - The economy is operating near capacity.
- Inflation and monetary conditions
  - Underlying inflation broadly in line with the euro area average; the relevant index for wage indexation rose by only 1.7 percent in 2006.
  - Headline inflation fell toward 2 percent at end-2006; inflation projected to reach nearly 2 percent in 2007, in part due to mid-year indirect tax increases.
  - Monetary conditions supportive; fiscal policy turned procyclical in 2006, imparting an impulse of almost 1 percentage point of GDP in 2006 as growth surprised on the upside.
- Housing and household sector
  - Residential real estate prices registered double-digit growth in 2005 for the second consecutive year; market cooled thereafter.
  - Some indicators suggest a slight overvaluation of the market since end-2005; price level remains below neighboring countries.
  - Household savings rate remained stable for the past three years.
- External sector and competitiveness
  - Current account and trade surpluses sustained; recent decline mainly due to adverse terms of trade effects.
  - Model-based estimates suggest the current exchange rate is not overvalued.
  - Export volume shares have fallen appreciably, while export value shares have held up well.
  - Export price deflators appear to outpace those of trading partners, raising suspicion of statistical bias in price-volume trade breakdown.
- Labor market
  - Unemployment rate remained stubbornly high and did not decline significantly during the upswing; all job creation since mid-2005 concentrated in nontradable sectors.
  - Recent tightening of job search requirements reduced the administrative unemployment rate slightly; authorities judged it too early to declare success.

### Financial system, supervision, and resilience
- System-wide features and trends
  - Financial system has gained further resilience; supervisors improved quality of supervision in line with 2005 FSAP recommendations.
  - Internationalization of financial institutions and expansion into nontraditional areas are modifying the systemic risk profile.
- Household and corporate finance
  - Households are adding about 2 percent of GDP per year to their large stock of net financial assets; shift toward mutual fund and insurance products.
  - Mortgage credit has been steadily growing; no evidence of loosening lending standards.
  - Corporate deleveraging continued; equity issuance skyrocketed in 2006 after tax changes (allowance for corporate equity, ACE).
- Performance and stress testing
  - Financial system stable, highly profitable, liquid, and solvent; risk asset ratios close to 12 percent in mid-2006.
  - Stress tests by the Financial Stability Committee indicate resilience to plausible shocks.
- Supervision and regulatory recommendations
  - CBFA and NBB have substantially improved supervision across banking, insurance, securities, payments, and settlement.
  - Staff urged acceleration of on-site pension fund exams and more outreach on new pension law.
  - Supervisors need to adapt to changing systemic risk profile of bank-insurance groups and consider risk-based allocation of CBFA resources.
  - Short-term FSAP-recommended actions include addressing weaknesses in insurance supervision; establishing consolidated supervision for bancassurance groups; devoting resources to oversight of the Euroclear Group/Euroclear Bank; emphasizing liquidity management; and enhancing crisis management arrangements.

### Aging, fiscal outlook, and sustainability scenarios
- Aging projections and implications
  - Aging-related expenditure projected to increase by 5.8 percent of GDP by 2050, even with employment rate rising by 7.5 percentage points.
  - Without growth-enhancing structural reforms, fiscal sustainability cannot be secured; fiscal adjustment in the 2006 Stability Program Update is insufficient for long-run sustainability.
- Staff baseline assumptions and outcomes
  - Annual labor productivity growth averages 1.5 percent during 2005–50; employment expected to remain constant with employment rate increase of about 5 percentage points.
  - Balanced budgets over the medium term allow reduction of public debt-to-GDP ratio to 65 percent, but rising aging costs are not offset in the long run and public debt-to-GDP would increase without bound.
- Scenario summaries
  - Adjustment without reform: upfront fiscal adjustment to reach staff-recommended surplus of 1.8 percent of GDP by 2012 reduces debt to low of 30 percent of GDP by 2028, but indebtedness rises thereafter as aging costs dominate.
  - Study Committee on Aging (SCA) scenario: assumes labor productivity growth of 1.7 percent annually, capital deepening of 0.6 percent of GDP, and employment rate boost of 2.5 percentage points above baseline; with fiscal adjustment to surplus of 1.5 percent by 2013, public debt falls to about 20 percent of GDP by 2030 but resumes upward trend by 2050.
  - Constant steady-state debt scenario: requires additional structural reforms yielding an extra ¼ percent of labor productivity growth per year to keep public debt ratio constant when dependency ratio stabilizes in 2050.
  - Alternative: achieving steady-state debt through productivity alone would require annual labor productivity growth to be 0.4 percent permanently higher than baseline; alternatively, pension and health care reforms yielding a decline in aging costs of 0.5 percent of GDP by 2030 would also achieve the objective.

### Fiscal policy assessment and recommendations
- Recent performance and gaps
  - Balancing the budget in 2006 represented a structural weakening by about 1 percent of GDP.
  - 2007 budget aims for a structural improvement of 0.6 percent of GDP; staff saw a remaining gap of about 0.3 percent of GDP and urged closing it with durable measures.
- Staff fiscal path proposals
  - Build budget surplus to 1.5 percent of GDP by 2011 and further beyond, in evenly-paced annual adjustments.
  - Durable measures recommended to achieve consolidation include streamlining operations across levels of government; increasing civil service efficiency via natural attrition; reducing subsidies; eliminating early retirement schemes; instituting time limits on unemployment benefits; and broader use of performance-based budgeting.
  - Staff recommended implementing additional pension reforms and more vigorously pursuing productivity-enhancing reforms.
- Institutional reforms
  - Revising fiscal federalism arrangements is a priority; regions have rapid revenue growth from transfers but little incentive to save.
  - Strengthen fiscal institutions: HCF mandate to assess compliance with stability programs should be complemented by ex ante evaluation of budgets across government layers; strengthen internal stability pact and HCF role.

### Labor market, wage bargaining, and product-market reforms
- Labor market challenges and measures
  - Low participation and high structural unemployment signal rigidities; Generation Pact measures expected to raise employment rate by 1 percentage point out of required 2½ percentage points.
  - Staff recommended phasing out early retirement arrangements, modifying wage-bargaining framework, shortening duration of unemployment benefits, enforcing job search requirements, lowering tax wedge on labor, and bolstering training and activation policies.
- Wage bargaining and competitiveness
  - Central bargaining framework (“competitiveness law”) constrains nominal hourly labor cost growth over two years to a “wage norm” (weighted average of estimated labor cost increases in France, Germany, and the Netherlands) and retains wage indexation.
  - Staff observed the framework did not account for productivity developments and had not prevented loss of competitiveness, especially in manufacturing; indexation remains anachronistic.
  - Staff recommendations: encourage “all-in” agreements for the 2007–08 wage round; ensure tax cuts lower labor costs rather than only take-home pay; enforce correction of past overruns of the wage norm; over the longer run, change framework to reflect productivity developments and differentials.
- Product-market reforms
  - Administrative burden reduced; energy sector liberalization lowered wholesale prices though retail competition remains to be unleashed.
  - Opening of services sector to international competition in line with EU directive; selective liberalization of 113 professions in short supply.
  - Further privatization and deeper reforms (telecommunications, railway, postal services) would increase efficiency but are not near-term priorities.

### Risks, outlook, and immediate policy priorities
- Key risks
  - Downside: abrupt euro appreciation associated with disorderly global imbalances resolution and a sharper-than-expected U.S. slowdown; German economy could diverge from baseline.
  - Domestic upside: residential construction could surprise on the upside.
- Outlook
  - Private investment expected to remain strong given good profitability and high capacity utilization but to grow more slowly after 2004–05 catch-up.
- Immediate policy priorities (staff view)
  - Speed up implementation and coordination of fiscal consolidation and labor market reforms across all government levels.
  - Strengthen fiscal institutions and revise fiscal federalism arrangements to lock in adjustment and support aging-related fiscal strategy.
  - Enforce wage moderation and strict execution of the Generation Pact to halt erosion in competitiveness and address high unemployment.
  - Sharpen supervisory focus on internationalization and nontraditional financial activities and deepen international cooperation; refine and recur liquidity stress tests.

### Key statistics and projections (selected, as reported)
- Macroeconomic projections and indicators
  - GDP growth projected: 2006 2.9; 2007 2.2.
  - CPI: 2006 2.4; 2007 1.9.
  - EU harmonized unemployment rate: 2006 8.3; 2007 8.1.
  - NAIRU: 2006 7.8; 2007 7.6.
- Fiscal targets and public debt
  - Staff-recommended fiscal surplus goal: raise fiscal surpluses to about 1.8 percent of GDP by 2012.
  - Public finance aggregates (percent of GDP): Revenue 2006 49.0; 2007 48.7. Expenditure 2006 49.0; 2007 48.8. Primary balance 2006 4.1; 2007 3.9. Structural balance 2006 -0.7; 2007 -0.4. Gross public debt 2006 89.0; 2007 85.6.
  - Government scenario (stability program) debt path: 2005 91.5; 2006 87.7; 2007 83.9; 2008 80.4; 2009 76.6; 2010 72.6.
- Demographic and other data
  - Population (2005) 10.5 million.
  - GDP per capita (2005) $35,712.
  - 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 indicators (selected)
  - Regulatory capital as percent of risk-weighted assets: 2006 12.6.
  - Regulatory Tier I capital to risk-weighted assets: 2006 9.0.
  - Nonperforming loans (NPL) as percent of gross loans: 2006 2.2.
  - Household debt as a percentage of GDP: 2006 47.0.
  - House price inflation (Houses): 2006 9.0.
  - Euro per U.S. dollar (January 4, 2007) 0.76.
  - Exchange conversion: 40.3399 Belgian francs to the euro.

*Source: _cr0789 - IMF staff report and Public Information Notice excerpts*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Policy context and overarching assessment
- Sound policies have underpinned Belgium’s recent favorable economic performance, but further strengthening is necessary to meet challenges posed by globalization, aging, fiscal federalism, and increasing complexity of the financial sector.
- There is broad recognition that fiscal consolidation and further labor market reforms are key, but the authorities anticipate a lengthy process of consensus-building and gradual action.
- Staff view: speed, depth, and coordination of policy implementation across all levels of government need to be stepped up.

### Recent macroeconomic developments
- Growth and demand
  - Economic growth slowed from nearly 3 percent in 2006 to a projected robust 2.2 percent in 2007.
  - The upturn that started in mid-2005 remained on track, supported by a catch-up in private investment, revival of private consumption, and cyclical expansion in neighboring countries.
  - The economy is operating near capacity.
- Inflation and monetary conditions
  - Underlying inflation broadly in line with the euro area average; administrative price changes and a methodological revision contributed to deviations.
  - The relevant index for wage indexation rose by only 1.7 percent in 2006.
  - Headline inflation fell toward 2 percent at end-2006; inflation is projected to reach nearly 2 percent in 2007, in part due to mid-year indirect tax increases.
  - Monetary conditions have been supportive; fiscal policy turned procyclical in 2006.
  - Fiscal policy imparted an impulse of almost 1 percentage point of GDP in 2006 as growth surprised on the upside.
- Housing and household sector
  - Residential real estate prices registered double-digit growth in 2005 for the second consecutive year, but the market cooled thereafter.
  - Some indicators suggest a slight overvaluation of the market since end-2005; price level remains below neighboring countries.
  - Household savings rate remained stable for the past three years.
- External sector and competitiveness
  - Current account and trade surpluses have been sustained; recent decline mainly due to adverse terms of trade effects.
  - Model-based estimates suggest the current exchange rate is not overvalued.
  - Exports: export volume shares have fallen appreciably, but export value shares have held up well.
  - Export price deflators appear to outpace those of trading partners, raising suspicions of a statistical bias in the price-volume breakdown of trade.
- Labor market
  - Unemployment rate remained stubbornly high and did not decline significantly during the upswing.
  - All job creation since mid-2005 has been in nontradable sectors; manufacturing losses not fully offset by gains in construction.
  - Recent tightening of job search requirements reduced the administrative unemployment rate slightly, but authorities judged it too early to declare success.

### Financial system
- The financial system has gained further resilience.
- Supervisors have made major strides in improving the already high quality of supervision in line with the recommendations of the 2005 FSAP.
- The trend toward internationalization of financial institutions and expansion in nontraditional areas is modifying the systemic risk profile.
- Supervisors acknowledged the need to sharpen focus on these developments and underscored the importance of international cooperation.

### Fiscal policy, aging, and institutions
- 2007 budget:
  - Consistent with the strategy to deal with aging, the 2007 budget sets in motion the buildup of fiscal surpluses, though some additional measures are likely required to achieve the target.
- Medium-term fiscal stance:
  - Medium-term consolidation objectives will have to be more ambitious than envisaged and backed by a specific strategy of expenditure restraint.
- Fiscal federalism and institutions:
  - Revising fiscal federalism arrangements has become a priority.
  - Fiscal institutions need strengthening.
- Use of past fiscal gains:
  - Interest savings have been used for tax cuts and spending hikes, leading to an erosion of the primary surplus despite balanced or surplus budgets since 2000 (disputed by Eurostat for 2005).
  - Primary spending growth remains too high for consolidation.
  - Authorities continue to focus on achieving nominal balance targets.
  - The High Council of Finance (HCF) has resumed its work.

### Labor market reform and the Generation Pact
- The Generation Pact sets out measures to raise employment of the young and old.
- There is no appetite, following the Generation Pact, for the more comprehensive package of labor market reforms recommended by staff.
- Fund recommendations that remain partially implemented include phasing out early retirement arrangements, modifying the wage-bargaining framework, shortening duration of unemployment benefits, and enforcing job search requirements.
- Social partners prefer maintaining the central wage-bargaining framework, though some flexibility has become acceptable.

### Risks and outlook scenarios
- Baseline risks:
  - Abrupt euro appreciation associated with a disorderly resolution of global imbalances and a sharper-than-expected U.S. slowdown are key downside risks.
  - The German economy could diverge—projected in the baseline to slow in association with an increase in the VAT rate, but it could go either way.
- Domestic upside risk: residential construction could surprise on the upside.
- Investment and profitability:
  - With good profitability and high capacity utilization rates, private investment should remain strong but grow more slowly after the catch-up in 2004–05.

### Staff view and recommended priorities
- Speed up implementation and coordination of fiscal consolidation and labor market reforms across all levels of government.
- Strengthen fiscal institutions and revise fiscal federalism arrangements to lock in adjustment and support aging-related fiscal strategy.
- Enforce wage moderation and strict execution of the Generation Pact to halt trend erosion in competitiveness and address high unemployment.
- Sharpen supervisory focus on internationalization and nontraditional activities in the financial sector and deepen international cooperation.

*Source: _cr0789 - EXECUTIVE SUMMARY*

### 10.      Households are benefiting from the ongoing

### _cr0789 - 10.      Households are benefiting from the ongoing

### Household financial deepening and asset allocation
- Households are adding about 2 percent of GDP per year to their large stock of net financial assets.
- These net financial assets are generally viewed as retirement savings, since specific third pillar pension savings vehicles are only beginning to emerge.
- In search of return, households have been increasing their claims on institutional investors, shifting into more flexible mutual fund and insurance products.
- This shift has been accompanied by a rise in the risks borne by households and fostered by a rise in the taxation of income from securities.

### Household liabilities and mortgage market
- Mortgage credit, the largest household source of credit, has been steadily growing since the late 1980s, recently boosted by low interest rates and the booming house market.
- Banks have allowed households to swiftly take advantage of changes in the level and term structure of interest rates by introducing new instruments with different risk and price profiles.
- There is no evidence of any loosening of lending standards.

### Corporate financing and deleveraging
- Corporate deleveraging is continuing, with the financial sector intermediating the shift toward equity finance.
- Profit margins of nonfinancial corporations have risen, generating internal funds for investment.
- Recourse to external financing has increasingly taken the form of equity issues after elimination of a duty on new equity issues and the institution of an allowance for corporate equity (ACE).
- Debt financing turned negative in 2005 for the first time in several years; equity issuance skyrocketed in 2006.
- Venture capital supply seems sufficient but remains undersized relative to the economy’s orientation toward innovation and small entrepreneurship.

### Internationalization and diversification of bank activities
- The trend toward internationalization of financial institutions has been accelerating; two of the four largest banks are cross-border institutions.
- The share of domestic customers has fallen to about one third of bank assets.
- Lending to non-euro area residents has been one of the fastest growing activities; at present, half of the corporate loans are to residents outside of the euro area.
- Banks have expanded into nontraditional areas such as energy trading and increasing engagement with hedge funds, mostly on behalf of clients with collateral transfers limiting banks’ capital at risk.

### Financial system performance and resilience
- The financial system has remained stable, highly profitable, liquid, and solvent.
- Bank-insurance groups are experiencing high returns on assets and equity, aided by historically low provisioning and nonperforming loans.
- Banks remain well capitalized with risk asset ratios reaching close to 12 percent in mid-2006.
- Solvency and coverage ratios of insurance companies and pension funds have been increasing due to exceptional growth in premiums in 2005 and rising equity valuations.
- Stress tests conducted by the Financial Stability Committee show the system to be resilient to plausible shocks, confirming the findings of the 2005 financial stability assessment by the IMF (FSAP).

### Supervision and regulatory improvements
- In line with FSAP recommendations, the unified supervisor (CBFA) and the central bank (NBB) have substantially improved the quality of supervision across banking, insurance, securities, payments, and settlement, fully aligning regulations and supervision with international standards.
- Pension fund and insurance supervision were upgraded; internal controls and operations of the CBFA and cooperation between the CBFA and the NBB improved.
- Staff urged acceleration of envisaged on-site exams of pension funds and more outreach on the new pension law.
- Supervisors need to adapt to the changing systemic risk profile of bank-insurance groups; staff recommended a risk-based allocation of CBFA resources given constraints.
- Authorities saw merit in risk-based approaches but emphasized reputational and legal reasons for continuous engagement with firms of lesser systemic importance.
- Authorities argued for establishment of an international tier to supervision for regionally and globally systemic institutions and remain committed to addressing the international dimension of crisis management, including engagement on the Euroclear payments and settlement system.

### Aging, fiscal outlook, and sustainability scenarios
- Aging-related expenditure is projected to increase by 5.8 percent of GDP by 2050, even with the employment rate rising by 7.5 percentage points.
- Without growth-enhancing structural reforms, fiscal sustainability cannot be secured; the fiscal adjustment in the 2006 Stability Program Update is insufficient for long-run sustainability.
- Staff baseline assumptions: annual labor productivity growth averages 1.5 percent during 2005–50; employment expected to remain constant with an employment rate increase of about 5 percentage points; balanced budgets over the medium term allow reduction of public debt-to-GDP ratio to 65 percent, but rising aging costs are not offset in the long run and public debt-to-GDP would increase without bound.
- Four scenario findings (summary):
  - Adjustment without reform: implementing upfront fiscal adjustment to reach a staff-recommended surplus of 1.8 percent of GDP by 2012 would reduce debt to a low of 30 percent of GDP by 2028, but indebtedness would rise again thereafter as aging costs dominate.
  - Study Committee on Aging (SCA) scenario: assumes annual labor productivity growth of 1.7 percent, capital deepening of 0.6 percent of GDP, and employment rate boost of 2.5 percentage points above baseline; with fiscal adjustment to a surplus of 1.5 percent by 2013, this scenario brings public debt down to about 20 percent of GDP by 2030 but aging costs continue to rise and debt resumes an upward trend by 2050.
  - Constant steady-state debt scenario: requires additional structural reforms yielding an extra ¼ percent of labor productivity growth per year to keep the public debt ratio constant when the dependency ratio stabilizes in 2050.
  - Achieving steady-state debt through productivity alone would require annual labor productivity growth to be 0.4 percent permanently higher than the baseline; alternatively, direct pension and health care reforms that yield a decline in aging costs of 0.5 percent of GDP by 2030 would also achieve the objective.

### Fiscal policy actions and recommendations
- Fiscal performance: balancing the budget in 2006 represented a structural weakening by about 1 percent of GDP; the 2007 budget aims for a structural improvement of 0.6 percent of GDP but staff saw a remaining gap of about 0.3 percent of GDP and urged closing it with durable measures.
- The staff argued for building up the budget surplus to 1.5 percent of GDP by 2011 and further beyond, in evenly-paced annual adjustments; also recommended implementing additional pension reforms and more vigorously pursuing productivity-enhancing reforms.
- Authorities expected the budget surplus to rise gradually to 1.1 percent of GDP in 2011 but HCF long-term projections suggest more effort is needed and complete prefinancing is not realistic.
- Without a specific medium-term strategy to reduce expenditure backed by solid consensus, planned fiscal adjustment may fail to materialize; year-to-year achievement has relied on one-off operations rather than durable reforms.
- Suggested durable fiscal savings include: streamlining operations across levels of government, increasing civil service efficiency via natural attrition, reducing subsidies, eliminating early retirement schemes, and instituting time limits on unemployment benefits.
- Authorities were receptive to broader use of performance-based budgeting to improve public sector efficiency, though complete spending autonomy of regions is an obstacle.

*Source: IMF staff report content provided in the supplied excerpt.*

### 21.      Faster progress in curbing spending and reforming labor markets would render

### 21.      Faster progress in curbing spending and reforming labor markets would render

### Fiscal policy and tax reforms
- Cuts in social security contributions have only recently begun to lower labor costs, mainly in sectors under strong competitive pressure.
- Shifts from income taxes to indirect taxes have been increasing incentives to work and will benefit the environment, but—through the universal practice of wage indexation—have been pushing up wage demands and the public wage bill, thus slowing job creation.
- The introduction of an allowance for corporate equity (ACE) will diminish distortions and is estimated to lower the effective corporate tax rate by 4 percentage points, but had to be accompanied by revenue-increasing measures to offset its budgetary impact.
- The ACE will promote investment more in capital- than in labor-intensive sectors; the authorities emphasized that the ACE would positively impact employment as well, though it might lead to short-term revenue loss.
- Staff view: effective corporate taxes were already among the lowest in the world and production was already very capital intensive; there is merit in a more determined reduction of the tax wedge on labor—one of the highest by international standards.

### Fiscal federalism and institutions
- Revision of fiscal federalism arrangements has become a priority as embedded imbalances are widening rapidly.
- Regional entities are experiencing rapid revenue growth due to increased transfers stemming from built-in parameters, but they have no real incentive to save these increases.
- Authorities welcomed staff calls for an urgent revision of arrangements, increased accountability, and better coordination of fiscal and other economic policies among all levels of government.
- Staff recommended improving the availability of budget information at the regional level to inform the political debate.
- Strengthening the fiscal framework and institutions is essential: staff emphasized the HCF’s mandate to assess compliance with stability programs and intergovernmental agreements on budget targets and suggested complementing this with ex ante evaluation of budgets across government layers.
- Authorities favored setting medium-term tax policy and nominal budget objectives rather than an expenditure-based framework, but agreed a stronger internal stability pact among levels of government was necessary and that the HCF should step up its role.

### Employment creation and labor market reforms
- Low participation and high structural unemployment signal labor market rigidities.
- The upward trend in employment rates is set to continue, but will contribute only two thirds of the increase needed to validate the authorities’ fiscal sustainability scenario.
- Measures of the Generation Pact are likely to raise the employment rate by a further 1 percentage point out of the required 2½ percentage points.
- Unemployment remains structurally very high for the low skilled and the young, with very sharp regional differences.
- With recent labor market reforms still being implemented, authorities judged it premature to consider new measures; emphasis placed on activation and training policies.
- Recent cut in marginal taxes on the high skilled and efforts to promote research and development are expected to have positive spillovers.
- Authorities agreed the tax wedge on labor should be further reduced and education and training improved, but saw no consensus for curbing the level and duration of out-of-work benefits and fully phasing out early retirement schemes.
- Staff recommended: keep wage increases below the projected increase for trading partners as long as employment rates had not caught up; Central Economic Council to report a broader battery of economic performance indicators to influence wage debates.
- Regional policy implications:
  - Regions with low employment rates of older workers and more rapidly aging populations should focus on keeping older workers in the labor force, but are unlikely to succeed if early retirement schemes are not phased out.
  - Coexistence of job shortages in some regions with high vacancy rates in others calls for strengthening mobility and cross-regional training programs.
  - Resolving high youth and female unemployment rates in some regions will require adjusting the level and tax treatment of benefits (set at the federal level) to lower reservation wages.

### Wage bargaining framework and external competitiveness
- Authorities doubted that an overhaul of the central wage-bargaining framework would have appreciable benefits; there was no support from labor unions and employers for fundamental change.
- The central bargaining framework (the “competitiveness law”) required growth of nominal hourly labor costs over two years not to exceed a “wage norm” (weighted average of estimated increases in labor costs in France, Germany, and the Netherlands) and retained wage indexation.
- Staff observed the framework did not take into account productivity developments and had not prevented loss of competitiveness, especially in manufacturing.
- Indexation remained an anachronistic feature, though several sectors had mechanisms to mitigate its effects.
- Staff recommended:
  - Encourage “all-in” agreements for the 2007–08 wage round to minimize high wage increases due to inflation surprises.
  - Ensure tax cuts lead unambiguously to lower labor costs rather than higher take-home pay.
  - Enforce correction of past overruns of the wage norm in subsequent wage agreements.
  - Over the longer run, change the framework to take into account productivity developments in Belgium and neighboring countries and productivity differentials at the sectoral and enterprise levels.
- Social partners recognized the framework must be made more conducive to job creation; staff suggested keeping wage increases below projected increases for trading partners until employment rates improved.

### Product market reforms and deregulation
- Ongoing product market reforms and deregulation are raising economic efficiency.
- Administrative burden on businesses and households has been reduced; liberalization of the energy sector has led to lower gas and electricity prices for wholesale customers though retail competition remains to be unleashed.
- Complete privatization of telecommunications and deeper reforms of railway and postal services would increase efficiency but are not on the near-term agenda.
- Opening-up of the services sector to international competition is set to take place in line with the EU directive; agreement reached to selectively allow entry of 113 professions in short supply domestically.
- Retail shop opening hours are set to be liberalized following stakeholder consultation.
- Policies to promote innovation and remove obstacles to competition in the services sector are needed to fully realize growth opportunities.

### Staff appraisal and policy recommendations
- Economy has performed well and financial sector resilience has increased, but stronger policies needed for long-run challenges of aging and globalization.
- Achieving nominal budget targets for seven years has established fiscal credibility but coincided with a trend decline in the primary budget surplus.
- Recommended multi-pronged approach to aging and globalization:
  - Intergenerational fairness requires significant prefunding of the rise in aging costs; fiscal consolidation must be more ambitious than envisaged.
  - Fiscal surpluses should be raised to about 1.8 percent of GDP by 2012, in evenly paced annual adjustments, based on a strategy of primary expenditure restraint across all levels of government.
  - Further pension reforms: early retirement schemes should be fully phased out and pension discounts made actuarially fair.
  - Durably reduce growth of health care spending.
  - Additional labor market reforms to lift employment rates to levels prevailing in neighboring countries and to achieve Lisbon objectives: streamline and coordinate labor market policies across regions, further reduce the tax wedge on labor, lower generosity and duration of out-of-work benefits, limit duration of unemployment benefits, and bolster training efforts.
  - Over the medium term, make the wage-bargaining framework more conducive to job creation by foregoing indexation and taking better account of productivity differentials between regions, sectors, and enterprises in setting wages.
- Structural adjustment in the 2007 budget is consistent with the aging strategy, but additional durable measures likely required as revenue projections seem optimistic and primary spending is set to grow only marginally slower than GDP.
- Successful consolidation requires revision of fiscal federalism arrangements with strengthened accountability and stronger coordination among federal and sub-federal entities; resumption and strengthening of HCF activities and internal stability pact warranted.
- Financial supervision: ongoing stress tests should be refined; liquidity stress tests should become recurrent; strengthen information exchange and international cooperation among supervisors.

### Key statistics and projections (as reported)
- ACE estimated to lower effective corporate tax rate by 4 percentage points.
- Employment and labor:
  - Generation Pact expected to raise employment rate by 1 percentage point out of required 2½ percentage points.
- Macroeconomic projections and indicators:
  - GDP growth projected to slow to 2.2 percent in 2007.
  - Fiscal surpluses should be raised to about 1.8 percent of GDP by 2012.
- Demographic and other data:
  - Population (2005) 10.5 million
  - GDP per capita (2005) $35,712
  - Life expectancy at birth (Male) 75.1
  - Life expectancy at birth (Female) 81.1
  - Infant mortality rate 5 per 1,000 live births
  - Population per physician (1995) 437
  - Population per sq. km. (1995) 335
- National accounts (selected changes, percent):
  - GDP: 2001 0.7; 2002 1.4; 2003 1.0; 2004 2.7; 2005 1.5; 2006 2.9; 2007 2.2
  - Private consumption: 2001 0.8; 2002 0.7; 2003 1.0; 2004 1.6; 2005 0.9; 2006 2.3; 2007 2.0
  - Gross fixed investment: 2001 -0.1; 2002 -1.4; 2003 -0.7; 2004 6.9; 2005 5.2; 2006 3.5; 2007 3.1
  - Exports of goods and nonfactor services: 2001 0.8; 2002 0.8; 2003 2.9; 2004 5.8; 2005 3.2; 2006 3.5; 2007 5.6
  - EU harmonized unemployment rate: 2001 6.6; 2002 7.5; 2003 8.2; 2004 8.4; 2005 8.4; 2006 8.3; 2007 8.1
  - NAIRU: 2001 8.3; 2002 7.9; 2003 7.9; 2004 7.9; 2005 7.8; 2006 7.8; 2007 7.6
  - Consumer price index: 2001 2.4; 2002 1.6; 2003 1.5; 2004 1.9; 2005 2.5; 2006 2.4; 2007 1.9
  - Compensation per employee: 2001 4.2; 2002 3.9; 2003 1.8; 2004 2.2; 2005 2.5; 2006 2.8; 2007 2.1
  - Unit labor costs: 2001 4.8; 2002 2.4; 2003 0.7; 2004 0.1; 2005 2.0; 2006 1.2; 2007 1.0
- Public finance aggregates (percent of GDP unless noted):
  - Revenue: 2001 49.6; 2002 49.8; 2003 51.1; 2004 49.3; 2005 49.9; 2006 49.0; 2007 48.7
  - Expenditure: 2001 49.0; 2002 49.8; 2003 51.1; 2004 49.3; 2005 52.2; 2006 49.0; 2007 48.8
  - Interest on public debt: 2001 6.5; 2002 5.7; 2003 5.3; 2004 4.7; 2005 4.4; 2006 4.1; 2007 3.9
  - Fiscal balance: 2001 0.6; 2002 0.0; 2003 0.0; 2004 0.0; 2005 -2.3; 2006 0.0; 2007 0.0
  - Primary balance: 2001 7.0; 2002 5.7; 2003 5.4; 2004 4.7; 2005 2.0; 2006 4.1; 2007 3.9
  - Structural balance: 2001 -0.4; 2002 -0.5; 2003 -0.8; 2004 -0.7; 2005 0.2; 2006 -0.7; 2007 -0.4
  - Structural primary balance: 2001 6.0; 2002 5.2; 2003 4.5; 2004 4.0; 2005 4.5; 2006 3.5; 2007 3.5
  - Gross public debt: 2001 106.4; 2002 103.2; 2003 98.6; 2004 94.4; 2005 93.2; 2006 89.0; 2007 85.6
- Balance of payments:
  - Current account balance (billions): 1995 8.8; 2005 12.4; 2001 11.4; 2002 10.2; 2003 7.4; 2004 7.5; 2006 8.7
  - Current account balance (percent of GDP): 1995 3.4; 2005 4.6; 2001 4.1; 2002 3.5; 2003 2.5; 2004 2.4; 2006 2.7
- Exchange rates:
  - Euro per U.S. dollar (January 4, 2007) 0.76
  - Nominal effective rate (2000=100): 2001 100.5; 2002 101.6; 2003 105.7; 2004 106.8; 2005 106.9; 2006 107.2
  - Real effective rate (2000=100): 2001 101.6; 2002 104.8; 2003 109.4; 2004 111.8; 2005 113.8; 2006 114.8

*Source: IMF staff report, as provided in the supplied content.*

### 91.5 percent of GDP. Other elements of the accounts, e.g., total expenditure, would also differ.

### _cr0789 - 91.5 percent of GDP. Other elements of the accounts, e.g., total expenditure, would also differ.

### External indicators (2000–2006)
- Exports (annual percentage change, in U.S. dollars) 1/: 2000 -0.8; 2001 -0.4; 2002 6.3; 2003 20.6; 2004 19.4; 2005 7.0; 2006 5.7.
- Imports (annual percentage change, in U.S. dollars) 1/: 2000 5.3; 2001 -0.6; 2002 4.2; 2003 21.2; 2004 20.2; 2005 8.4; 2006 6.1.
- Terms of trade (annual percentage change) 1/: 2000 -1.3; 2001 -1.0; 2002 1.6; 2003 1.2; 2004 0.5; 2005 -0.3; 2006 -0.3.
- Current account balance (percent of GDP) 1/: 2000 4.0; 2001 3.4; 2002 4.6; 2003 4.1; 2004 3.5; 2005 2.5; 2006 2.4.
- Inward portfolio investment (percent of GDP) 1/ 2/: 2000 56.4; 2001 63.5; 2002 8.1; 2003 2.5; 2004 1.5; 2005 -0.5; 2006 2.1.
- Inward foreign direct investment (percent of GDP) 1/ 2/: 2000 6.6; 2001 23.7; 2002 6.5; 2003 10.8; 2004 12.1; 2005 8.7; 2006 7.3.
- Official reserves (in billions of U.S. dollars, end-of-period) 3/: 2000 10.0; 2001 11.3; 2002 11.9; 2003 11.0; 2004 10.4; 2005 8.2; 2006 8.1.
- Official reserves (in months of imports): 0.6; 0.7; 0.7; 0.6; 0.4; 0.3.
- Exchange rate per U.S. dollar (period average) 4/ 5/: 2000 1.0821; 2001 1.1171; 2002 1.0590; 2003 0.8840; 2004 0.8040; 2005 0.8030; 2006 0.799.

### Market indicators and public debt
- Public sector debt (Maastricht definition): 2000 107.8; 2001 106.4; 2002 103.2; 2003 98.6; 2004 94.4; 2005 93.2; 2006 89.0 (in percent of GDP).
- 3-month T-bill yield (percent): 2000 4.0; 2001 4.2; 2002 3.2; 2003 2.2; 2004 2.0; 2005 2.1; 2006 3.1.
- 3-month T-bill yield (real, percent): 2000 1.5; 2001 1.7; 2002 1.5; 2003 0.6; 2004 -0.3; 2005 -0.4; 2006 0.7.
- Spread of 3-month T-bill over EURIBOR (percentage points): 2000 -0.3; 2001 0.0; 2002 -0.1; 2003 -0.1; 2004 -0.1; 2005 -0.2; 2006 -0.2.
- 10-year government bond yield (percent): 2000 5.6; 2001 5.1; 2002 5.0; 2003 4.2; 2004 4.3; 2005 3.4; 2006 3.8.
- 10-year government bond yield (real, percent): 2000 2.9; 2001 2.7; 2002 3.4; 2003 2.7; 2004 2.5; 2005 0.9; 2006 1.4.
- Spread of 10-year government bond rate with Germany (percentage points): 2000 0.3; 2001 0.3; 2002 0.2; 2003 0.1; 2004 0.1; 2005 0.2; 2006 0.0.
- Stock market index (period average): 2000 2,967; 2001 2,807; 2002 2,410; 2003 1,975; 2004 2,557; 2005 3,192; 2006 3,687.

### Credit markets indicators (end-of-period, percentage increase)
- Credit to the private sector 6/: 2000 3.5; 2001 1.4; 2002 1.5; 2003 3.0; 2004 1.7; 2005 8.7; 2006 5.8.
- Bank credit to households 6/: 2000 2.4; 2001 -1.1; 2002 4.1; 2003 6.8; 2004 9.6; 2005 13.5; 2006 6.0.
- Mortgages 6/: 2000 7.7; 2001 2.7; 2002 8.0; 2003 11.8; 2004 11.8; 2005 15.9; 2006 7.0.
- Bank credit to nonfinancial enterprises 6/: 2000 4.4; 2001 -1.2; 2002 -3.0; 2003 -4.1; 2004 -1.5; 2005 1.2; 2006 2.4.
- Number of credit institutions: 119; 113; 111; 109; 104; 104; 104 (1999–2005).

### Banking sector sensitivity and positions
- Off-balance sheet operations of banks as percent of assets: 1999 269; 2000 304; 2001 419; 2002 448; 2003 535; 2004 419.
- Of which: foreign exchange operations: 37; 35; 42; 45; 44; 39.
- Of which: interest rate operations: 21; 32; 48; 35; 43; 79.
- Other: 19; 22; 23; 24; 17; 24.
- Net long position in foreign exchange as a percentage of Tier I capital 6/: 8; 7; 9; 7; 5; 6; 8 (various years).

### Financial soundness indicators of the banking sector (1999–2006)
- Capital adequacy (Regulatory capital as percent of risk-weighted assets *): 1999 12.0; 2000 12.0; 2001 12.9; 2002 13.2; 2003 12.9; 2004 12.4; 2005 12.9; 2006 12.6.
- Regulatory Tier I capital to risk-weighted assets *: 1999 7.7; 2000 7.5; 2001 8.2; 2002 8.6; 2003 8.8; 2004 8.3; 2005 9.4; 2006 9.0.
- Capital as percent of assets 4/ 5/ *: 1999 2.5; 2000 2.8; 2001 2.7; 2002 3.0; 2003 3.1; 2004 2.8; 2005 3.1; 2006 2.8.
- Asset quality: Nonperforming loans (NPL) as percent of gross loans 8/ 9/ *: 1999 2.8; 2000 2.8; 2001 2.9; 2002 3.0; 2003 2.6; 2004 2.4; 2005 2.3; 2006 2.2.
- Provisions and write-offs as percent of NPL 9/: 1999 58.3; 2000 57.0; 2001 57.0; 2002 51.8; 2003 52.8; 2004 51.6; 2005 54.2; 2006 53.6.
- NPL net of provisions as percent of Tier I capital 9/ *: 1999 14.1; 2000 15.0; 2001 14.4; 2002 15.2; 2003 15.7; 2004 17.7; 2005 12.8; 2006 12.8.
- Foreign exchange loans as percent of total loans 5/: 1999 19.2; 2000 22.3; 2001 24.9; 2002 22.3; 2003 22.6; 2004 23.9; 2005 26.4; 2006 28.1.
- Large exposures as percent of Tier I capital 9/ *: 1999 57.0; 2000 51.0; 2001 67.0; 2002 61.0; 2003 46.0; 2004 48.0; 2005 40.0; 2006 38.0.

### Banking earnings, liquidity, and positions (1999–2006)
- Gross profits as percent of average assets (ROAA) 5/ *: 1999 0.6; 2000 0.8; 2001 0.5; 2002 0.5; 2003 0.5; 2004 0.6; 2005 0.6; 2006 0.7.
- Gross profits as percent of average equity capital (ROAE) 5/ *: 1999 23.5; 2000 29.6; 2001 19.2; 2002 17.1; 2003 17.1; 2004 17.8; 2005 21.1; 2006 22.2.
- Net interest margin (net interest income as percent of interest bearing assets) 5/: 1999 1.5; 2000 1.3; 2001 1.4; 2002 1.5; 2003 1.4; 2004 1.4; 2005 1.4; 2006 1.2.
- Liquid assets as percent of total assets 5/ 12/ *: 1999 36.1; 2000 35.3; 2001 35.3; 2002 33.3; 2003 33.2; 2004 32.0; 2005 32.7; 2006 31.5.
- Liquid assets as percent of short-term liabilities 5/ 13/ *: 1999 112.7; 2000 100.3; 2001 103.2; 2002 91.1; 2003 86.0; 2004 88.1; 2005 86.3; 2006 88.9.
- Deposits as percent of assets 5/: 1999 51.5; 2000 51.9; 2001 51.2; 2002 52.3; 2003 51.5; 2004 49.7; 2005 49.9; 2006 47.7.
- Loans as percent of deposits 5/ *: 1999 71.8; 2000 77.8; 2001 76.4; 2002 79.7; 2003 80.6; 2004 84.8; 2005 84.7; 2006 89.9.
- Net long position in foreign exchange as a percentage of Tier I capital *: 1999 6.5; 2000 7.5; 2001 6.8; 2002 8.5; 2003 7.0; 2004 6.3; 2005 5.3; 2006 4.5.

### Nonbanking sectors and household indicators (1999–2006)
- Insurance sector: Coverage ratio 2/: 1999 267.0; 2000 265.0; 2001 276.0; 2002 254.1; 2003 248.4; 2004 250.7; 2005 259.3.
- Insurance profitability (return on average equity): 1999 26.9; 2000 21.5; 2001 12.1; 2002 -10.4; 2003 7.3; 2004 18.0; 2005 23.3.
- Corporate sector: Total debt as a percentage of equity *: 1999 95.8; 2000 88.6; 2001 83.0; 2002 79.5; 2003 78.2; 2004 70.6; 2005 62.7.
- Household sector: Debt as a percentage of GDP *: 1999 44.5; 2000 42.9; 2001 41.3; 2002 41.4; 2003 42.3; 2004 42.9; 2005 45.7; 2006 47.0.
- Household debt service burden as a percentage of total disposable income *: 1999 2.0; 2000 2.5; 2001 2.5; 2002 1.8; 2003 1.5; 2004 1.2; 2005 1.5.
- Financial savings ratio as a percentage of GDP: 1999 8.0; 2000 7.3; 2001 7.6; 2002 6.0; 2003 5.5; 2004 5.0; 2005 2.8; 2006 4.7.
- Savings rate: 1999 17.4; 2000 15.5; 2001 16.6; 2002 15.9; 2003 14.6; 2004 13.3; 2005 13.3; 2006 13.6.
- Real estate: House price inflation (Houses) 5/ *: 1999 8.7; 2000 7.1; 2001 6.4; 2002 8.2; 2003 6.6; 2004 10.3; 2005 16.2; 2006 9.0.
- Mortgage loans as percent of total loans 6/: 1999 21.8; 2000 20.3; 2001 20.5; 2002 22.3; 2003 27.6; 2004 27.4; 2005 26.2; 2006 32.4.
- Variable rate mortgages as percent of total new mortgages: 1999 3.9; 2000 12.8; 2001 6.2; 2002 12.3; 2003 25.9; 2004 53.3; 2005 36.3; 2006 22.5.

### Operations of the general government (1999–2005)
- Revenue (percent of GDP): 1999 49.5; 2000 49.2; 2001 49.6; 2002 49.8; 2003 51.1; 2004 49.5; 2005 50.0.
- Tax revenue: 1999 44.7; 2000 44.4; 2001 44.4; 2002 44.7; 2003 44.2; 2004 44.7; 2005 44.9.
- Social contributions: 1999 14.3; 2000 14.0; 2001 14.2; 2002 14.4; 2003 14.3; 2004 14.1; 2005 13.9.
- Nontax revenue: 1999 4.8; 2000 4.7; 2001 5.2; 2002 5.1; 2003 6.9; 2004 4.8; 2005 5.1.
- Expenditure (percent of GDP): 1999 50.0; 2000 49.1; 2001 49.0; 2002 49.8; 2003 51.1; 2004 49.5; 2005 52.3.
- Primary expenditure: 1999 43.2; 2000 42.5; 2001 42.6; 2002 44.1; 2003 45.8; 2004 44.8; 2005 48.0.
- Interest: 1999 6.8; 2000 6.6; 2001 6.5; 2002 5.7; 2003 5.3; 2004 4.7; 2005 4.3.
- Overall balance: 1999 -0.5; 2000 0.1; 2001 0.6; 2002 0.0; 2003 0.0; 2004 0.0; 2005 -2.3.
- Primary balance: 1999 6.3; 2000 6.7; 2001 7.0; 2002 5.7; 2003 5.4; 2004 4.7; 2005 2.0.
- Structural balance (memorandum): 1999 0.0; 2000 -0.8; 2001 -0.4; 2002 -0.5; 2003 -0.8; 2004 -0.7; 2005 0.2.
- Central government balance: 1999 -0.9; 2000 0.1; 2001 -0.1; 2002 0.2; 2003 0.0; 2004 -0.2; 2005 -0.3.
- Gross public debt (Maastricht definition): 1999 113.7; 2000 107.8; 2001 106.4; 2002 103.2; 2003 98.6; 2004 94.4; 2005 93.2.
- Note: According to the authorities, the overall balance should be 0.1 percent of GDP in 2005 and the public debt 91.5 percent of GDP. Other elements of the accounts, e.g., total expenditure, would also differ.

### Fiscal scenarios, projections, and staff/authority variants (2002–2011)
Current policies (A) projections (selected):
- Revenue (percent of GDP): 2002 49.8; 2003 51.1; 2004 49.3; 2005 49.9; 2006 49.0; 2007 48.7; 2008 48.7; 2009 48.6; 2010 48.5; 2011 48.5.
- Expenditure (percent of GDP): 2002 49.8; 2003 51.1; 2004 49.3; 2005 52.2; 2006 49.0; 2007 48.8; 2008 48.7; 2009 48.6; 2010 48.5; 2011 48.4.
- Primary expenditure: 2002 44.1; 2003 45.8; 2004 44.6; 2005 47.9; 2006 44.9; 2007 44.9; 2008 44.9; 2009 44.9; 2010 44.9; 2011 44.9.
- Interest payments: 2002 5.7; 2003 5.3; 2004 4.7; 2005 4.3; 2006 4.1; 2007 3.9; 2008 3.8; 2009 3.7; 2010 3.6; 2011 3.4.
- Balance 1/: 2002 0.0; 2003 0.0; 2004 0.0; 2005 -2.3; 2006 0.0; 2007 0.0; 2008 0.0; 2009 0.0; 2010 0.0; 2011 0.1.
- Structural balance 2/: 2002 -0.5; 2003 -0.8; 2004 -0.7; 2005 0.2; 2006 -0.7; 2007 -0.4; 2008 0.0; 2009 0.0; 2010 0.1; 2011 0.1.
- Debt 1/: 2002 103.3; 2003 98.6; 2004 94.4; 2005 93.2; 2006 89.0; 2007 85.6; 2008 82.7; 2009 79.9; 2010 77.1; 2011 74.4.
Memorandum items (in percent):
- Real primary expenditure growth 2/: 2002 5.0; 2003 5.0; 2004 0.0; 2005 3.3; 2006 1.8; 2007 2.1; 2008 1.9; 2009 1.9; 2010 1.9; 2011 1.9.
- GDP growth: 2002 1.4; 2003 1.0; 2004 2.7; 2005 1.5; 2006 2.9; 2007 2.2; 2008 1.9; 2009 1.9; 2010 1.9; 2011 1.9.

Government scenario; stability program (B) (selected):
- Balance: 2002 0.0; 2003 0.0; 2004 0.0; 2005 0.1; 2006 0.0; 2007 0.3; 2008 0.5; 2009 0.7; 2010 0.9.
- Debt: 2002 103.3; 2003 98.6; 2004 94.4; 2005 91.5; 2006 87.7; 2007 83.9; 2008 80.4; 2009 76.6; 2010 72.6.

Staff-recommended scenario (C) (selected):
- Balance 1/: 2002 0.0; 2003 0.0; 2004 0.0; 2005 -2.3; 2006 0.0; 2007 0.3; 2008 0.6; 2009 0.9; 2010 1.2; 2011 1.5.
- Structural balance 2/: 2002 -0.5; 2003 -0.8; 2004 -0.7; 2005 0.2; 2006 -0.7; 2007 -0.1; 2008 0.6; 2009 0.9; 2010 1.2; 2011 1.6.
- Debt 1/: 2002 103.3; 2003 98.6; 2004 94.4; 2005 93.2; 2006 89.0; 2007 85.3; 2008 81.9; 2009 78.2; 2010 74.4; 2011 70.3.
- Note: According to the authorities, the balance should be 0.1 percent of GDP in 2005 and the public debt 91.5 percent of GDP. Other elements of the accounts, e.g., total expenditure, would also differ.
- Footnotes: 1/ Includes the effect of the restructuring of the national railway company in 2005 as presented by Eurostat. 2/ Excludes the effects of the restructuring of the national railway company from expenditures and the impact of the UMTS auctions and capital transfer related to the Belgacom pension fund takeover from revenues. 3/ Adjusted to exclude the impact of nonstructural measures.

### Regional indicators (Belgium, Brussels, Flanders, Wallonia)
- Population (1/1/06) share (percent): Belgium 100.0; Brussels 9.7; Flanders 57.8; Wallonia 32.5.
- Gross Value Added (GVA) (constant prices 2004) share (percent): Belgium 100.0; Brussels 19.4; Flanders 57.2; Wallonia 23.3.
- Labor income (2003) share (percent): Belgium 100.0; Brussels 20.5; Flanders 55.7; Wallonia 23.7.
- GVA growth 1999–2004 (percent): Belgium 2.0; Brussels 2.3; Flanders 2.1; Wallonia 1.6.
- Employment rate (2005) 2/ (percent of population aged 15–64): Belgium 61.1; Brussels 54.8; Flanders 64.9; Wallonia 56.1.
- Unemployment rate (2005) 3/: Belgium 8.5; Brussels 16.3; Flanders 5.4; Wallonia 11.8.
- Fiscal indicators (2006 unless otherwise indicated): Revenue/GDP: Belgium 49.0; Brussels 0.8; Flanders 6.4; Wallonia 1.9. Expenditure/GDP: Belgium 49.0; Brussels 0.8; Flanders 6.3; Wallonia 1.8. Balance/GDP: Belgium 0.0; Brussels 0.0; Flanders 0.1; Wallonia 0.0. Public debt/GDP: Belgium 87.4; Brussels 0.5; Flanders 0.1; Wallonia 1.9.
- Aging indicators (2050): Dependency ratio 5/: Belgium ...; Brussels 73.0; Flanders 91.0; Wallonia 88.0. Old age dependency ratio 6/: Belgium ...; Brussels 37.0; Flanders 54.0; Wallonia 48.0.

### IMF relations and country mission (as of November 30, 2006)
- Mission: Brussels, November 2–13, 2006. Staff team: Mr. Everaert (Head), Mr. Luzio, Ms. Zhou (all EUR), and Mr. Ouanes (MCM).
- Country interlocutors included: the prime minister; the governor of the central bank; the director of the treasury; chairman of the “Public Sector Borrowing Requirements” Section of the High Council of Finance; regional ministers; Financial Stability Committee; Finance, Banking, and Insurance Commission; ministry officials; Central Economic Council; Federal Planning Bureau; representatives of labor unions, employer organizations, and the financial sector.
- Fund relations: The previous Article IV Consultation took place on February 27, 2006. Belgium accepted the obligations under Article VIII and, apart from certain security restrictions, maintains an exchange system free of restrictions.
- Data: Belgium subscribes to the Fund’s Special Data Dissemination Standard, and comprehensive economic data are available on a timely basis (Appendix II).
- IMF membership and accounts (as of November 30, 2006): Quota SDR Million 4,605.20 (100.00 percent). Fund holdings of currency 4,180.05 (90.77 percent). Reserve position in Fund 425.17 (9.23 percent). SDR Department net cumulative allocation 485.25 (100.00 percent); holdings 261.98 (53.99 percent).
- Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): Charges/interest 2006 9.05; 2007 9.07; 2008 9.05; 2009 9.05.

*Source: IMF staff report content provided in the supplied PDF content unit.*

### 40.3399 Belgian francs to the euro.

### _cr0789 - 40.3399 Belgian francs to the euro.

### Article IV Consultations
- Belgium is on the 12-month cycle; the last consultation was completed on February 27, 2006 (EBM/06/19-1).
- On February 16, 2007, the IMF Executive Board concluded the Article IV consultation with Belgium.

### Exchange system and Article VIII status
- Belgium has accepted the obligations under Article VIII, Sections 2(a), 3, and 4 of the Fund’s Articles of Agreement.
- Maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for restrictions imposed for security reasons:
  - (1) 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. The 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.
  - (2) In accordance with the European Council Regulations set forth in the letter from the National Bank of Belgium dated October 30, 2006, and notified to the Executive Board in accordance with Decision No. 144-(52/51) (November 20, 2006).

### FSAP Participation — Key findings and recommendations
- FSAP Assessment: IMF Country Report No. 06/75.
- Summary findings:
  - Belgium’s financial system is resilient and benefits from Belgium-specific features that help stability, including:
    - Traditionally cautious attitude toward risk by banks.
    - Large holdings of government securities.
    - Extremely low holdings of equity by banks.
    - Stable source of funding benefiting from generous tax incentives.
    - High standard of banking supervision.
    - Stable macroeconomic policy framework.
  - Overall, supervision showed a high degree of compliance with international standards.
  - Near-term vulnerability appears low, reflecting:
    - Soundness of the dominant banking system.
    - Generally benign financial environment.
    - Strong financial condition of the corporate sector.
    - Relatively healthy financial position of the household sector.
  - Financial institutions were found to withstand an adverse macroeconomic stress well, helped in part by the beneficial diversification in the bancassurance model.
- Emerging issues and vulnerabilities:
  - Heavy exposure abroad and the open nature of the economy increase vulnerability to global economic developments and financial contagion.
  - Importance of the Euroclear Group globally creates potential domestic vulnerabilities.
  - Risks may increase with a downturn in the business cycle, increased cross-border operations, and deeper links with global money centers.
  - Insurance industry faces serious challenges despite improved financial position.
  - Need to strengthen supervision of insurance and pension funds.
  - The Banking, Finance, and Insurance Commission (CBFA) needs to take fuller advantage of synergies with the National Bank of Belgium (NBB) and further enhance effectiveness.
- Short-term actions recommended to maintain financial soundness and safeguard financial stability:
  - (1) Address identified weaknesses in the supervision of the insurance sector.
  - (2) Establish an effective mechanism for consolidated supervision of the bancassurance groups.
  - (3) Devote adequate resources and capacity to the oversight and supervision of the Euroclear Group/Euroclear Bank.
  - (4) Continue to place emphasis on liquidity management.
  - (5) Further enhance existing crisis management arrangements.

### Statistical issues and data quality
- Overall assessment:
  - Belgium’s economic and financial statistics are adequate for surveillance purposes.
  - The National Bank of Belgium (NBB) regularly publishes a full range of economic and financial data and provides calendar dates of main statistical releases.
  - On-line access to comprehensive databases is facilitated by the NBB’s data search engine.
  - Belgium is an SDDS subscriber.
- National accounts:
  - In compliance with EUROSTAT requirements, Belgium adopted chain-linked national accounts statistics in October 2006 and introduced new data sources.
  - Revisions of national accounts for the period 1995–2005 (annual and quarterly) have been completed; revisions for earlier years are still under way.
  - GDP growth based on the chain-linked national accounts data is more or less in line with that based on the old series, although the composition of growth changed somewhat, especially for 2004 and 2005:
    - 2004: External sector’s negative contribution to growth revised to a small positive contribution; private consumption and investment contributions revised stronger.
    - 2005: Growth contribution of private consumption and investment revised down; building up of inventories contributed more to growth.
  - Shortcomings mainly related to export and import deflators, which are based on unit values rather than prices collected directly from exporters and importers.
  - With chained-link national accounts data, discrepancies between export market shares in values and in volumes were reduced somewhat.
- Government and financial statistics recommendations:
  - General government revenue, expenditure, and balance on an accrual basis (ESA95) are published annually; NBB publishes monthly data on central government operations.
  - It would be helpful to present central government operations data quarterly on a national accounts basis to facilitate monitoring of public finances.
  - Overall quality and availability of financial indicators are good, but additional indicators for the insurance sector should be developed.
  - Authorities provide quarterly updates of financial soundness indicators in a timely manner.
- Institutional note:
  - Unlike in most other countries, the NBB is responsible for compiling national accounts statistics.

### Public Information Notice (PIN) — Executive Board assessment and staff projections
- Background economic assessment:
  - Economic upturn that started in mid-2005 remained on track, with catch-up in private investment, revival of private consumption, and cyclical expansion in neighboring countries broadening the recovery.
  - Underlying inflation stable and broadly in line with the euro area average.
  - Unemployment rate has not declined significantly; contributing factors include comparatively faster labor force growth, high relative labor costs, and less wage moderation.
  - Real exchange rate has been appreciating, eroding competitiveness; exports shares held up in value but declined in volume terms.
  - Current account remained in surplus.
- Monetary and fiscal stance:
  - Despite real exchange rate appreciation and interest rate hikes, monetary conditions remained accommodating, only recently reaching their long-run average.
  - Fiscal policy turned procyclical in 2006, imparting an impulse of almost 1 percentage point of GDP, as growth surprised on the upside.
  - 2007 budget aims for a surplus of 0.3 percent of GDP and a structural improvement of 0.6 percent of GDP.
  - Recourse to one-off measures to reach budget objectives is set to diminish; primary spending growth will be slightly below GDP growth.
  - Federal government spending is more restrictive, but regional authorities, which have little or no debt and an increasing share of revenue, are set to ramp up spending.
- Growth outlook and long-run challenges:
  - Staff projects GDP growth to decline from nearly 3 percent in 2006 to 2.2 percent in 2007, driven by rising interest rates, easing residential construction, restrictive fiscal stance, and softer global environment.
  - Over the long run, demographics likely to lessen growth, and aging-related costs will add several percentage points of GDP to fiscal spending.
- Financial sector conditions:
  - Benefiting from benign risk environment, low interest rates, and effervescent equity markets, financial enterprises experiencing high returns.
  - Banks remain well capitalized; solvency and coverage ratios of insurance companies and pension funds have been rising.
  - Internationalization of financial institutions accelerating; banks expanding in nontraditional areas and emerging markets.
  - Households increasing claims on institutional investors; mortgage financing largest source of credit.
  - Corporate deleveraging is continuing.
- Structural reforms and labor market:
  - In line with 2005 FSAP recommendations, regulations and supervision in banking, insurance, securities, payments, and settlement fully aligned with international standards; pension fund and insurance supervision upgraded; internal controls and operation of supervisory agency improved.
  - Upward trend in employment rates set to continue but will contribute only two thirds of the long-term increase targeted by authorities.
  - Generation Pact measures will help cover part of remaining gap; emphasis on activation and training policies.
  - Marginal taxes on the high skilled cut, efforts to promote research and development bolstered, and administrative burden on businesses and households reduced.
  - Services sector set to be subject to international competition in line with the EU directive.
- Executive Directors’ views and recommendations:
  - Commended authorities on sound fiscal and financial policies and significant fiscal consolidation.
  - Identified population aging and globalization as key long-run challenges; concerned about recent erosion of competitiveness.
  - Recommended building up budget surpluses, moderating wage growth, and improving education and functioning of labor and product markets.
  - Called for a coordinated early and decisive policy response across all levels of government.
  - Emphasized need for wage moderation and productivity-enhancing structural reforms to prevent further competitiveness erosion.
  - Urged further improvement of cooperation between CBFA and NBB; supervisors to focus on rapid expansion of bank-insurance groups in nontraditional areas and other countries.
  - Recommended a more ambitious path for fiscal consolidation and locking in the structural adjustment and nominal surplus targeted in the 2007 budget, with reduced recourse to one-off measures.
  - Stressed further pension reforms, including phasing out early retirement systems and establishing full actuarial fairness of the pension system.
  - Advised containing growth of health care spending.
  - Observed that revising fiscal federalism arrangements and strengthening fiscal institutions will be necessary to support fiscal consolidation and accountability across federal and sub-federal entities.
  - Welcomed resumption of activities of the High Council of Finance and supported enhancements to the internal stability pact.
  - Recommended further labor market reforms to lift employment rates and lower costs of aging, including lowering tax burden on labor, improving training, reducing generosity and duration of out-of-work benefits, and making wage bargaining more conducive to job creation.
  - Encouraged removal of obstacles to competition in the services sector and continuation of reforms to reduce administrative burdens and promote innovation.

### Belgium: Selected Economic Indicators (spots and projections as presented)
- Real economy (change in percent)
  - Real GDP: 2003 1.0; 2004 2.7; 2005 1.5; 2006 2.9; 2007 2.2 (IMF staff estimates and projections)
  - Domestic demand: 2003 0.9; 2004 2.9; 2005 2.1; 2006 2.7; 2007 1.7
  - CPI: 2003 1.5; 2004 1.9; 2005 2.5; 2006 2.4; 2007 1.9
  - Unemployment rate (in percent): 2003 8.2; 2004 8.4; 2005 8.4; 2006 8.3; 2007 8.1
- Public finance (percent of GDP)
  - General government balance: 2003 0.0; 2004 0.0; 2005 -2.3; 2006 0.0; 2007 0.0
  - General government balance excluding Eurostat adjustment: 2003 0.0; 2004 0.0; 2005 0.1; 2006 0.0; 2007 0.0
  - Structural balance: 2003 -0.8; 2004 -0.7; 2005 0.2; 2006 -0.7; 2007 -0.4
  - Primary balance: 2003 5.4; 2004 4.7; 2005 2.0; 2006 4.1; 2007 3.9
  - General government debt: 2003 98.6; 2004 94.4; 2005 91.5; 2006 87.4; 2007 84.1
- Interest rates (percent)
  - Money market rate (3 months): 2003 2.3; 2004 2.1; 2005 2.2; 2006 3.0; 2007 ...
  - Government bond yield: 2003 4.2; 2004 4.1; 2005 3.4; 2006 3.8; 2007 ...
- Balance of payments (percent of GDP)
  - Trade balance: 2003 3.5; 2004 2.7; 2005 1.6; 2006 1.2; 2007 1.4
  - Current account: 2003 4.1; 2004 3.5; 2005 2.5; 2006 2.4; 2007 2.7
  - Official reserves (US$ billion): 2003 11.0; 2004 10.4; 2005 8.2; 2006 8.1
- Exchange rate and competence indicators
  - Exchange rate regime: Member of EMU
  - Euro per U.S. dollar (January 4, 2006): 0.76
  - Nominal effective rate (2000=100, ULC based): 2003 101.6; 2004 105.7; 2005 106.8; 2006 106.9
  - Real effective rate (2000=100, ULC based): 2003 104.8; 2004 109.4; 2005 111.8; 2006 113.8

*IMF staff report and Public Information Notice excerpts for the 2006 Article IV Consultation with Belgium.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0789.pdf_