Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Belgium

March 1, 2006

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2005 Article IV consultation with Belgium is also available.

Public Information Notice (PIN) No. 06/22
March 1, 2006

On February 27, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.1


Following weakness in early 2005, mainly reflecting a negative contribution from the external sector and weak household consumption due to high energy prices, growth has picked up. Exports revived as external demand strengthened. Household confidence improved, rekindling consumption. Enterprises stepped up capital formation in response to rising profits and the low cost of funding. Boosted by oil price increases, inflation peaked in September 2005 while wages rose faster than in key trading partners, supported by widespread, if partial indexation. Low interest rates and the depreciation of the euro from earlier peaks supported demand. In spite of a balanced budget rule, the procyclicality of fiscal policy has been limited by the use of one-off measures.

The authorities and the staff project GDP growth to strengthen into 2006 to somewhat more than 2 percent, as demand from trading partners increases further. Private consumption is projected to pick up in response to tax cuts, and residential construction is likely to remain resilient, even though house price growth is likely to slow. Bank exposure to mortgages, use of variable interest rate mortgage loans, and household debt are low by international comparison, and there is no evidence of equity withdrawals. Business fixed investment is expected to moderate, after exceptional buoyancy in 2005. Domestic wage increases will continue to outpace those of key trading partners if the 2005-06 wage agreement is implemented as envisaged. While this would support consumption in the short run, it could adversely affect competitiveness and thus dampen exports and investment in the medium run.

As elsewhere, the economy is facing pressures from population aging on the budget and growth. Potential growth and future costs of aging are in line with the EU15 average, while labor productivity is slightly above it. However, the employment rate is very low in comparison and the tax wedge on labor very high. The government's strategy to deal with aging consists of fiscal consolidation and measures to raise labor utilization. With the budget in balance since 2000, public debt has fallen sharply as a share of GDP, creating room to fund the rising costs of aging through interest savings. However, these savings have recently been applied to cuts in social security contributions and spending increases. Most of the tax cuts have ended up in higher take-home-pay rather than in lower labor costs. A Generation Pact is set to be implemented to raise employment of the young, low-skilled, and older workers. Key measures include more targeted cuts in employers' social security contributions, a gradual reform of early retirement regimes, and a strengthening of training.

The financial sector, which has never experienced a systemic crisis, has seen its performance improve over the past two years. Profitability rose, mainly in the banking sector and, to a lesser extent, in the insurance sector. In the life sector, products with guaranteed returns above market rates continue to weigh on profits. Since early 2004, the banking and insurance supervisors have been operating as a single institution (CBFA) to better deal with the dominant bank-insurance conglomerates and increasing cross-border activity. The National Bank has developed macroprudential supervision and regularly publishes Financial Stability Reviews. A Financial Stability Committee has been established to ensure seamless coordination between the CBFA and the NBB and focus on issues of systemic importance. To further combat money laundering, a law was adopted to phase out all bearer instruments.

Executive Board Assessment

Executive Directors commended the authorities for the continued good performance of the economy and for adopting economic policies guided by a coherent set of medium-term objectives. Directors observed that measures taken to boost employment rates, deepen economic deregulation, and further administrative simplification are improving growth prospects. The maintenance of balanced budgets for six consecutive years has contributed to improved market confidence and to reduced risk premiums. They underscored that, while policy goals are appropriate, reforms should be strengthened and rebalanced to achieve both the budget surpluses envisaged and the higher labor utilization needed to address population aging. In particular, labor market rigidities should be dealt with more directly, with diminished recourse to budgetary resources to promote job creation.

Directors viewed that the near-term outlook, while dependent on external developments, is favorable and that the authorities' growth projections are realistic. They observed that domestic wage increases, which are set to exceed those of key trading partners, pose a downside risk to exports and investment in the medium term. Directors concurred that risks related to housing price developments are limited.

Directors urged the authorities to complement the present emphasis of fiscal policy on reducing public debt and supporting growth with medium-term spending restraint and a comprehensive approach to tax reform. They commended the authorities' track record of meeting announced budget targets, and welcomed their intention to save revenue windfalls from higher growth and to take further measures, as needed, to balance the 2006 budget. Directors underscored the need to adopt specific plans to curb spending. Emphasizing the benefits of a stable tax system, Directors discouraged the recourse to tax amnesties and ad hoc tax measures to meet revenue objectives. They supported the shift in the tax burden away from labor, in the context of comprehensive reforms.

Directors urged the authorities to adhere to the path toward fiscal surpluses, as recommended by the High Finance Council (HFC). To help achieve such surpluses, they saw merit in adopting a formal medium-term spending framework, or at a minimum shifting the focus of budget management to primary balance targets to ensure that the declining interest bill contributes to consolidation. Directors noted that it will be essential for the HFC to resume its traditional role in assessing developments in public finance, providing recommendations on the fiscal outlook, and underpinning the internal stability pact to ensure that policies at various levels of government are consistent with overall consolidation objectives.

Directors welcomed the Generation Pact as an important step toward higher employment rates, especially for the young and low-skilled. They noted, however, that, in order to boost employment of older workers meaningfully, the Pact's measures should be extended to phase out early retirement regimes and to improve the employability of such workers. Directors agreed that addressing labor market rigidities more directly would ensure that the wage-bargaining framework delivers more job creation, and noted that, to prevent an erosion of competitiveness, social partners will need to moderate wage increases. The use of reductions in taxes and social security contributions to boost take-home pay should be avoided, and indexation discontinued. In this connection, the use of "all-in" nominal wage agreements as an intermediate step was welcomed. Directors commended reductions in the administrative and regulatory burden on businesses, and encouraged the authorities to progress with economic deregulation and product market liberalization.

Directors welcomed the findings of the Financial System Stability Assessment that the financial sector was stable and resilient, and the authorities' intention to adopt its recommendations to further strengthen supervision. They underscored the need to maintain the high quality of banking supervision in a rapidly changing environment, and to raise insurance and pension supervision to the same quality. Adequate capacity should be devoted to the oversight and prudential supervision of the payments and securities settlement systems, while ensuring seamless coordination among the entities involved. Progress in shaping the Banking, Finance, and Insurance Commission supported by the National Bank of Belgium's macro prudential analysis should continue to preserve the record of financial stability.

Directors commended Belgium's continued commitment to a liberal international trading system and the recent increase in the level of its official development assistance.

Belgium: Selected Economic Indicators, 2002-06

  2002 2003 2004 2005 1/ 2006 1/

Real economy (change in percent)


Real GDP

1.5 0.9 2.4 1.5 2.1

Domestic demand

0.8 0.9 2.8 1.9 1.6


1.6 1.5 1.9 2.5 2.4

Unemployment rate (in percent)

7.3 8.0 7.9 8.3 8.2

Public finance (percent of GDP)


General government balance

0.0 0.1 0.0 0.0 -0.4

Structural balance

-0.5 -1.3 0.2 0.6 0.1

Primary balance

5.7 5.4 4.8 4.4 3.7

General government debt

103.2 98.5 94.9 94.0 90.4

Interest rates (percent)


Money market rate (3 months)

3.3 2.3 2.1 2.2 ...

Government bond yield

5.0 4.2 4.1 3.4 ...

Balance of payments (percent of GDP)


Trade balance

3.8 3.5 2.7 3.0 3.4

Current account

4.6 4.1 3.3 4.4 4.7

Official reserves (US$ billion)

11.0 11.0 10.4 9.3  

Exchange rate


Exchange rate regime

Member of EMU

Euro per U.S. dollar (January 18, 2006)


Nominal effective rate (2000=100, ULC based)

100.5 101.6 105.7 106.8  

Real effective rate (2000=100, ULC based)

101.5 104.5 108.6 110.6  

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

1/ IMF staff estimates and projections.

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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