Public Information Notice No. 11/43

Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with Belgium

April 4, 2011

On March 23, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belgium.¹

Background

The Belgian economy is recovering from the financial crisis and global recession. Economic activity expanded more than foreseen in 2010, the unemployment rate is stabilizing, and progress was made in bank restructuring. But the absence of a new federal government delays addressing important long-term challenges facing the country.

The Belgian economy is expected to continue its gradual recovery but real GDP growth is projected to moderate somewhat in 2011, in view of the expected slowdown in the euro area. While the still sizable output gap is keeping core inflation subdued, headline inflation would remain above target in 2011, reflecting strong pass-through of rising world oil prices.

Fiscal consolidation started in 2010, and the overall fiscal deficit was reduced from 6 percent of GDP in 2009 to 4.6 percent in 2010. Building on this encouraging outcome, the caretaker government has prepared a draft federal budget for 2011 that aims at reducing the overall deficit to 3.6 percent of GDP in 2011, below the target under Belgium’s Stability Program (4.1 percent of GDP). With the sub-national budgets already adopted, the adjustment burden in 2011 will fall on the federal government and social security. The additional effort undertaken consists of spending restraint, including in healthcare, and a variety of revenue measures, including an increase of excise taxes on tobacco products. In order to restore fiscal sustainability, the authorities appropriately aim to reduce the overall deficit to 3 percent of GDP by 2012 and achieve a balanced budget by 2015. Given rising aging-related government spending, realizing their fiscal objectives will require a structural fiscal effort of about ¾ percent of GDP over the medium term at all levels of government.

Conditions in Belgium’s financial system have improved. The banking sector is still in the midst of significant restructuring. Deleveraging in the banking sector continued, and the banks saw a return to net profitability in the second half of 2009 and 2010. The integration of prudential supervision of licensed financial institutions into the National Bank of Belgium (NBB) is now foreseen to become effective as of April 1, 2011. The Financial Crisis Law passed in June 2010 gives the authorities strong powers to act decisively in times of crisis and provides supervisors with strong political backing for resolving systemic institutions.

Executive Board Assessment

Executive Directors commended the authorities for advancing fiscal consolidation and restoring confidence in the financial sector. To build on this progress, Directors underscored the need for a better articulated strategy to address macroeconomic policy priorities. Further efforts are necessary to bring down public debt relative to GDP, safeguard financial sector stability, and intensify structural reforms to boost potential growth, create jobs, and enhance competitiveness.

Directors welcomed the 2011 draft budget, which targets a more ambitious reduction of the overall deficit than that envisaged under the Stability Program, and supported the authorities’ objective of a balanced budget by 2015. Achieving these objectives will require, however, a strong fiscal adjustment, including limits on spending growth at all government levels, further reform of the pension system, and a slower expansion of health care expenditure. There is also some room to broaden the tax base, improve revenue collection, and reduce tax expenditures. Directors also recommended a review of the current arrangement for fiscal devolution so that spending is kept in line with trend growth, as well as the adoption of a multi-year fiscal framework based on clear rules and inter-governmental burden-sharing.

Directors noted that bank restructuring is progressing well, the banking system is well capitalized, and liquidity conditions are improving. Nevertheless, considerable risks remain, calling for continued vigilance and contingency planning. In particular, measures to ensure that banks are in compliance with the new regulatory framework should remain on top of the policy agenda, while maintaining flexibility in providing liquidity support in the event of renewed stress. Directors welcomed the integration of micro- and macro-prudential supervision at the central bank and the enactment of the new Financial Crisis Law. Further efforts should focus on identifying risks in the financial sector as a whole, strengthening coordination with supervisory agencies within the European Union, and facilitating the timely resolution of cross-border financial institutions.

Directors saw a need to reinvigorate labor market reforms, in particular strengthening job search incentives, reducing the tax wedge on wages, and raising labor market participation. They regarded the recent adoption of a labor market package as a welcome step toward wage moderation. Further flexibility in wage-setting would help enhance competitiveness, as would a review of the wage indexation mechanism to take account of productivity developments. Directors recommended enhancing the independence of the Competition Authority and improving transparency and regulation in energy markets.