Public Information Notice: IMF Concludes 2001 Article IV Consultation with Belgium

March 13, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2001 Article IV Consultation with Belgium is also available (use the free Adobe Acrobat Reader to view this PDF file).

On March 1, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1


Following four years of robust expansion, real GDP growth slowed markedly in 2001, as higher oil prices, declining equity values, and the deteriorating external environment adversely affected business investment, household consumption, and exports. The outlook for 2002 depends critically on a recovery in the world economy and, especially, in Belgium's key European trading partners. Growth for the year is projected by staff at 0.7 percent, although activity is expected to pick up significantly in the second half of the year as the effects of earlier monetary easing are anticipated to lead to a generalized global recovery.

Headline inflation stabilized and began to fall in 2001, along with world oil prices. Underlying inflation, however, continued to rise, due in part to food prices and the lagged indirect effects of oil prices on non-energy components of the CPI. Wage growth outpaced that in Belgium's three major trading partners (Germany, France, and the Netherlands) for the third year running, reflecting mainly the effects of wage indexation. Wages may still prove consistent with the 2001-02 Interprofessional Agreement (which is meant to ensure external competitiveness), but in retrospect that Agreement was based on an overestimate of wage growth in Belgium's trading partners. As a result, external competitiveness against the euro area has gradually eroded, although the weakness of the euro has sustained global competitiveness.

Despite the slowdown in growth, according to preliminary estimates a fiscal surplus was achieved in 2001. This represented a substantial tightening of the underlying, or cyclically adjusted, position, although since Belgium is a very open economy this fiscal withdrawal is unlikely to have seriously aggravated the downturn. The 2002 budget calls for balance; if achieved, it would result in a further fiscal tightening. Over the medium term, the government in its 2002-05 Stability Program reaffirmed its commitment to a modest fiscal surplus and further reductions in the tax burden.

Some further structural measures have been introduced in the past year, including to tackle the low participation rate of older workers. At the same time, however, the momentum for more fundamental reform, notably in the extensive system of benefits, appears to be weak.

Executive Board Assessment

Executive Directors noted that continued fiscal consolidation, building on the substantial progress to date, will be key to prepare for population aging, to ensure a further sustained reduction of the public debt, and to provide room for sustainable reductions of the tax burden. In the structural area, the authorities face the critical challenge to accelerate and deepen labor market reforms aimed at reducing mismatches of supply and demand and at achieving a steady increase in the participation rate. Directors also encouraged the authorities to keep up the momentum of product market reforms.

Directors noted that, as a highly open economy, Belgium was strongly affected by the external shocks of last year, with exports suffering markedly from the economic slowdown in its trading partners, and business and household confidence weakening. While a recovery is likely in the course of the year, this will largely depend on the speed and strength of a broader recovery in Europe. With the drop in oil prices, Directors anticipated a continued decline in headline inflation, but they also noted that wage growth has remained above that in key trading partners, which is undermining Belgium's competitiveness and must be kept in check.

Directors commended the authorities on their efforts to consolidate the fiscal position, noting that balance has been achieved two years ahead of schedule and that the debt to GDP ratio, though still high, has declined rapidly. They supported the authorities' policy to achieve a sustainable surplus position over the next few years in order to meet the fiscal costs of population aging. Directors recommended that this surplus should be 1 percent of GDP. A few Directors felt that, subject to steady progress toward this objective, the automatic stabilizers should be allowed to operate in the short run. Most Directors, however, supported the authorities' view that the balanced budget objective for 2002 should help support medium-term stabilization goals, without exerting excessive fiscal withdrawal, given the openness of the economy and the low fiscal multiplier. Directors also encouraged the authorities to pursue their policy of reducing the tax burden, to the extent fiscal room becomes available, in order to improve the structural performance of the Belgian economy.

The twin goals of achieving a budget surplus and cutting taxes will require strict expenditure control, and Directors agreed that this will be the key fiscal challenge in the years ahead. They supported the commitment, reiterated in both the 2002-05 Stability Program and the 2002 budget, to reduce real primary spending growth, and urged the authorities to take concrete and sustainable actions in this regard. Directors observed that areas of high spending pressure—notably health care—will have to be either reined in or offset by savings elsewhere. They also noted that achieving sustained expenditure control will require an effort at all levels of government and, in this regard, felt that a more explicit medium-term fiscal framework that emphasizes commitment to expenditure ceilings could be useful.

Directors welcomed recent tax reforms, noting that the cuts in income tax rates to be implemented this year should enhance work incentives, while the planned corporate tax reform should improve the investment climate. They considered the planned extension of "second-pillar" pension schemes to the sectoral level a useful alternative to the state pension, although it is not a substitute for more comprehensive reforms.

Directors underscored that improved labor-market performance will be crucial to medium-term economic prospects. While responsible wage behavior will be essential for job creation and competitiveness, they urged the authorities to be more ambitious in addressing persistent weaknesses in the labor market and moving toward the employment goals laid out at the Lisbon Summit. Directors highlighted, in particular, the need for a more comprehensive reform of benefit programs aimed at sharpening work incentives, while continuing to protect the most vulnerable members of society. Some recent initiatives, including the "activation" of unemployment benefits and the elimination of the pension penalty for those returning to work, were welcomed, but further measures will be needed to curtail early retirement and raise the employment rate substantially. While noting the high enrollment in youth employment programs, Directors cautioned that special employment programs may crowd out private sector employment. They felt, however, that these initiatives provide helpful momentum for more forceful reforms. Directors also cautioned that measures to reduce working hours should not raise labor costs.

Directors noted the significant and longstanding geographical differences in labor market performance. While recognizing the impediments involved, they encouraged the authorities to continue efforts aimed at increasing geographical labor mobility. Directors considered that greater wage differentiation would contribute to the reduction of regional disparities, and also highlighted the need for training and education programs to address regional job mismatches.

While welcoming the recent progress with product market reforms and the authorities' commitment to meeting European Union timetables for liberalizing the network sectors, Directors felt that Belgium's growth potential would benefit from a more rapid pace of reform. They also encouraged the authorities to persevere with the program to reduce administrative burdens and to complete the public sector management reform.

Directors noted that the banking sector has weathered the economic downturn and continues to perform favorably. They encouraged the authorities to press forward with banking supervision reforms, and looked forward to plans for better exploiting complementarities between the supervisor and the central bank at the staff level as well as between micro and macro prudential supervision. Directors welcomed the authorities' interest in participating in the Financial Sector Assessment Program by 2003. They also commended their firm stance on combating money laundering and the financing of terrorism.

Directors encouraged the authorities to make further efforts to increase official development assistance toward the United Nations target of 0.7 percent of GNP.


Belgium: Selected Economic Indicators







Real economy (change in percent


Real GDP






Domestic demand






CPI (year average)






Unemployment rate (in percent)






Public finance (percent of GDP)


General government balance






Structural balance






Primary balance






General government debt






Interest rates (percent


Money market rate1






Government bond yield






Balance of payments (percent of GDP)2


Trade balance






Current account






Official reserves (US$ billion)3






Reserve cover (months of imports of GNFS)






Exchange rate


Exchange rate regime

Member of euro area

Euro per U.S. dollar (January 8, 2002)4




Nominal effective rate (1995=100)5






Real effective rate (1995=100)5 , 6






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

1Staff projections.

2BLEU on a transaction basis.

3Excluding gold; since January 1999, Eurosystem's definition for 2001, November.

4Belgium entered the final stage of EMU on January 1, 1999 at a rate of 40.3399 Belgian francs to the euro.


5For 2001, average of through end-November.


6Based 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.


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