Public Information Notice: IMF Concludes Article IV Consultation with Belgium

March 7, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 21, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1


Real GDP growth is expected to slow to 2.6 percent in 2001, following four consecutive years of strong economic growth. During this upswing, employment rose substantially and the unemployment rate declined to 8.3 percent in December 2000 from an average of 9.1 percent in 1999. Strong domestic demand and a good competitive position—reflecting both sustained wage moderation and the depreciation of the euro—have underpinned growth.

The upswing is resulting in shortages in some labor markets, particularly in Flanders. Nevertheless, the Interprofessional Agreement governing wages for 2001-02 (concluded in November of last year) implied moderate labor-cost increases, both in relation to those in other countries and with respect to pressure on underlying inflation. Headline inflation rose sharply through 2000 due to oil price increases, but recently fell again; underlying inflation remained low.

The fiscal position continues to improve. The budget was in balance in 2000 and is expected to move to a small surplus position this year. The debt-GDP ratio, while still high at 110.6 percent of GDP, has been declining steadily for some time. This performance is directly attributable to the effects of the upswing: adjusted for the cycle, the deficit is projected to change little in 2001. There continue to be pressures on the spending side in 2001 especially in the health care sector.

The government's medium-term fiscal plan calls for a steady improvement in the deficit, to 0.7 percent of GDP in 2005, and significant back-loaded income tax cuts designed in part to enhance labor market performance. A number of structural labor market measures have also been introduced, including an employment program for youth, reforms to encourage employment among older people, and measures to reduce working time.

Executive Board Assessment

Executive Directors noted with satisfaction the continued robust growth of the Belgian economy, which had resulted in declining unemployment in the context of underlying price stability. They agreed that the outlook for 2001 is for more moderate economic growth. While external demand is slowing, domestic demand continues to benefit from strong employment growth, high consumer confidence, and appropriately supportive monetary conditions. Although headline inflation had risen as a result of oil price increases, Directors felt that more moderate growth, lower energy prices, and responsibly negotiated wage increases would help preserve price stability.

Directors commended the Belgian authorities for the sustained and successful effort to improve the fiscal position, noting in particular that the budget was balanced in 2000 for the first time in fifty years, and well ahead of the authorities' schedule. Directors supported the authorities' program of ambitious tax cuts in the medium term, especially as they saw reductions in the tax burden as an important policy for improving labor market performance. They also agreed that, over the medium term, some further increase in the structural surplus would be needed in light of Belgium's still high level of public debt and the expected spending pressures associated with the aging of the population. They supported the authorities' policy to allocate all growth-related windfalls in 2001 to debt reduction and encouraged them to continue this approach in subsequent years.

Directors emphasized that continued tight control over spending growth would be the key to combining tax cuts with a strong fiscal position. They recommended that the authorities reduce the growth of real primary spending to a rate significantly below the recent historical average. In this context, they welcomed the establishment of an explicit medium-term fiscal framework, and agreed that this approach would help support the authorities' fiscal objectives. A number of Directors saw merit in setting a more demanding medium-term consolidation target to clearly signal the authorities' commitment in this regard.

Directors agreed that the main economic policy challenge now is to improve labor market performance, in particular to raise employment and reduce regional disparities. They welcomed the authorities' policy of tax reductions and stressed that further cuts would be critical to retain competitiveness, given recent tax reductions in neighboring countries. Directors welcomed the planned tax reform to increase incentives to work, particularly for people at the low end of the wage scale.

Directors encouraged the authorities to reinforce the beneficial employment effects of tax reductions by accelerating and deepening structural reforms. Noting Belgium's still considerable level of unemployment, they suggested stronger enforcement of job-search requirements for benefit recipients, introducing competition in the area of employment agencies, and closer integration of training and job placement in order to reduce skill mismatches. Directors saw merit in limiting the duration of unemployment benefits, in order to sharpen work incentives.

Directors underscored the importance of raising the very low participation rate of people above the age of 50. They commended the authorities for their decision to require people in this age group on unemployment insurance to search for suitable employment and to have jobs offered to this category of the unemployed. As a next step, they urged the authorities to reform the early retirement system, with the aim of rewarding continued employment rather than premature retirement. Directors viewed such measures as being particularly important to ensure the continued participation in the workforce of the next generation of older workers, and to reduce the burden on the public pension system. In this regard, Directors noted with interest the authorities' plan regarding the financing of the Silver Fund.

Directors noted that, while the system of centralized wage bargaining had contributed to wage moderation, geographical economic disparities called for greater wage differentiation. In this context, they noted that some degree of flexibility had already been achieved under the previous wage agreement, and urged that its scope be expanded in the future. They also encouraged the authorities to promote labor mobility across regions—which, so far, had been limited—by ensuring cooperation of employment services and sharpening benefit recipients' incentives to accept jobs in other regions.

Directors urged the authorities to move forward with the remaining agenda for product market reforms, including the deregulation of utilities. They welcomed the authorities' ambitious plan for reducing the administrative burden on enterprises.

Given the high degree of integration of banking and insurance activities, Directors welcomed the improved cooperation between banking and insurance supervisors. Directors welcomed the authorities' intention to strengthen coordination between the prudential activities of banking supervision and the macro prudential activities of the central bank through prospective new institutional arrangements.

Directors commended the authorities for the increase in development assistance included in the authorities' medium-term budgetary program. They also welcomed the authorities' support for the EU Commission's proposal to grant free access to agricultural imports from developing countries.

It is expected that the next Article IV consultation with Belgium will be held on the standard 12-month cycle.

Belgium: Selected Economic Indicators

  1997 1998 1999 2000 20011/

Real economy (change in percent)
Real GDP 3.4 2.4 2.7 3.8 2.6
Domestic demand 2.5 3.6 2.2 3.1 2.1
CPI (year average) 1.5 0.9 1.1 2.9 2.2
Unemployment rate (in percent) 9.4 9.5 9.1 8.5 8.1
Public finance (percent of GDP)          
General government balance -1.9 -0.9 -0.7 0.0 0.2
Structural balance -0.5 0.3 0.3 0.1 0.1
Primary balance 6.1 6.7 6.5 6.9 6.7
General government debt 125.2 119.7 116.4 110.5 105.5
Interest rates (percent)          
Money market rate 2/ 3.5 3.6 3.0 4.4 ...
Government bond yield 5.7 4.7 4.5 5.6 ...
Balance of payments (percent of GDP) 3/          
Trade balance 3.2 2.8 2.6 2.5 2.7
Current account 5.7 4.8 4.5 4.4 4.8
Official reserves (US$ billion) 4/ 16.2 18.3 10.9 9.9  
Reserve cover (months of imports of GNFS) 1.0 1.2 0.7 0.7  
Exchange rate          
Exchange rate regime Member of euro area
Euro per U.S. dollar (December , 2000)          
Nominal effective rate (1995=100) 5/ 93.9 93.9 92.8 90.6  
Real effective rate (1995=100) 5/ 6/ 93.2 92.2 91.4 88.9  

Sources: Data provided by the Belgian authorities, and IMF staff projections.

1/ Staff projections.
2/ Since 1999, Euro rate
3/ BLEU on a transaction basis.
4/ Excluding gold; since January 1999, Eurosystem's definition.
5/ For 2000, average of the first seven months.
5/ Based on relative normalized unit labor costs in manufacturing.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the February 21, 2001 Executive Board discussion based on the staff report.


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