San Marino: Staff Concluding Statement of the 2020 Article IV Mission

January 31, 2020

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Elevated macro-financial risks call for immediate action

1. Banking sector weaknesses continue to pose stability risks and hinder economic recovery. Significant deposit outflows and weak risk management have left the banking system with low liquidity, poor asset quality, and considerable recapitalization needs. All of these contributed to multiple bank failures in the past decade and excessive accumulation of fiscal liabilities, which have eroded the government’s liquidity buffers and undermined public debt sustainability. Banks’ weak capital and liquidity positions continue to constrain their ability to provide credit, thus weighing on economic activity.

2. Absent a significant policy change, growth prospects are projected to remain subdued with risks heavily tilted to the downside . The economy bottomed out from a prolonged recession in 2015, yet the sluggish recovery has kept GDP-per-capita well below its pre-crisis levels. In the absence of a clear strategy to repair the banking system and address fiscal risks, real GDP growth is projected to gradually moderate from 1.7 percent in 2018 to about 0.5 percent over the medium term owing to continued banking system deleveraging and a weak external environment. These growth prospects are surrounded by significant downside risks given the elevated financial and fiscal vulnerabilities.

3. A comprehensive and credible stabilization plan is urgently needed. Shifting the economy to a higher medium-term growth path requires implementation of a coherent and credible strategy that restores banking system viability, ensures fiscal sustainability, and removes the remaining supply-side bottlenecks to growth. The recent general elections and establishment of a four-party coalition government provides an opportunity to build a broad consensus for the necessary reforms and ensure a successful implementation.

Repairing the banking system

4. Strengthening the banking system’s capital and liquidity positions is critical to enhance its resilience to shocks and improve confidence. The Central Bank of San Marino (CBSM) has taken important steps to enhance regulatory oversight and increase its reserves, yet further efforts are needed. Specifically:

  • Addressing capital needs. Banks’ asset quality should be re-evaluated through a new prudent exercise, and identified capital shortfalls should be promptly addressed, following an upfront loss-recognition. Laws that allow banks to spread losses over time should be repealed. The CBSM should quickly intervene in undercapitalized banks that fail to raise capital while state support should be provided only to systemically-important and viable banks, following burden sharing.
  • Improving liquidity. Despite the recent stabilization of bank deposits and increase in CBSM reserves, banking system liquidity remains low and CBSM liquidity buffers are below adequate levels. The CBSM should further enhance its liquidity management, including by aligning the emergency liquidity assistance framework with international best practice, and restrict budget financing to only exceptional needs and on a temporary basis. Attracting bank ownership participation by reputable banking groups and selling non-performing loans (NPLs) and banks’ real estate portfolios to strategic investors would also support liquidity in the system.

5. A deep restructuring is needed to increase banks’ efficiency and restore their profitability. Owing to exceptionally high cost-to-income ratios, the banking system is expected to have registered a loss in 2019, the tenth year in a row. Reducing banks’ high operating costs, including by rationalizing the oversized branch network and staff levels, would improve their profitability. Increasing the share of income-generating assets, including through a conversion of banking system tax credits into government bonds, is also necessary. Continued CBSM ownership of the newly-created Banca Nazionale Sammarinese (BNS) presents a significant conflict of interest and poses risks to CBSM’s financial autonomy. Furthermore, the BNS is currently unviable as a bank given that most of its assets do not generate income, thus its banking license needs to be quickly revoked, as currently envisaged.

6. Accelerating NPL resolution would also support these efforts. A speedy resolution of NPLs would reduce the significant burden on banks and, over the medium term, free up resources for new lending. The CBSM should strengthen its ongoing efforts to set strict supervisory requirements on the adequacy of loan-loss provisioning, timeliness of write-offs, and development of decisive NPL reduction strategies. Expediting insolvency and enforcement procedures is also a priority. The authorities plan to develop a vehicle for NPL resolution should be carefully considered to avoid potential risks to public finances and delayed recognition of bank losses.

7. Strengthening the CBSM institutional framework and mitigating financial integrity risks would support financial stability. Bank supervisors need adequate resources and sufficient powers to monitor systemic risks, carry out frequent bank inspections, and promote compliance with regulations. Reviewing the CBSM law with a view to enhance its institutional and financial independence would increase its effectiveness as a supervisory authority. Further steps are needed to strengthen the anti-money laundering framework, and the authorities’ ongoing efforts to conduct a second National Risk Assessment are welcome.

Put public finances on a sustainable path

8. The fiscal deficit is set to significantly widen and further increase the already unsustainable level of fiscal liabilities. Government’s commitments to repay pension funds’ deposits in the failed Banca CIS, together with the expected transfers to the Cassa di Risparmio della Repubblica di San Marino (CRSM) and expiration of one-off measures, are projected to increase the fiscal deficit to about 5 percent of GDP in 2020 and the following years from an estimated 2.5 percent of GDP in 2019. While the official public debt is estimated at 32 percent of GDP in 2019, the overall fiscal liabilities, which include government commitments to the banking system and the pension funds, are estimated at an unsustainable level of 86 percent of GDP and projected to further increase, posing significant financing risks given the current lack of market access and limited domestic financing sources.

9. Restoring fiscal sustainability remains a key priority. San Marino needs to embark on a path of an ambitious fiscal consolidation, which—together with limited public sector contributions to bank recapitalization—will put public debt on a downward and sustainable trajectory. This requires the adoption of a comprehensive fiscal strategy that is based on both revenue and expenditure measures:

  • Revenue. Replacing the single-stage import tax (Monofase) with a VAT is critical to boost revenue collection, provided that the VAT is designed with limited exemptions and sufficiently-high rates and is implemented in a timeline that is consistent with the tax administration capacity. Rationalizing tax exemptions could further help the revenue-generating efforts.
  • Expenditure. The unstainable pension system is draining budget resources and requires urgent reform, especially considering the projected demographic pressures. Conducting spending reviews across public sector units and better targeting of social benefits could yield further saving.

10. Establishing access to external financing and diversify financing options can ease domestic liquidity constraints. To reduce fiscal risks, the government strategy to broaden financing sources should take into account debt sustainability considerations and be accompanied by development of debt and cash management capacity and a broad fiscal plan.

Promote sustainable growth

11. Structural reforms would strengthen external competitiveness and improve growth prospects. Areas of priority include:

  • Labor market . The labor market has been partially liberalized, yet there are still lingering distortions. Further relaxing the hiring process, including of nonresidents, revisiting the supplemental wage for temporary layoffs, rationalizing social benefits, and addressing skill mismatches through vocational training programs would promote job search and efficient allocation of labor.
  • Business climate. Recent simplification of procedures, including by advancing computerization and instituting self-certification are steps in the right direction, yet San Marino’s ease of doing business is lagging many of its peers. Further improvement, including in areas of starting a business, obtaining construction permits, and speeding up contract enforcement could help attract foreign investment and boost productivity.
  • Economic integration . Concluding the EU association agreement would increase economic integration and expand market access by simplifying procedures for domestic exporting firms. Closing infrastructure gaps, particularly in telecommunication and transportation, would allow expansion into high-value added sectors.

Improve data provision

12. Data reporting and provision has improved but more needs to be done. San Marino’s adherence to the IMF’s Enhanced General Data Dissemination System is welcome as it will improve and expedite data dissemination. Further steps to improve data quality, coverage, and reporting frequency, including by allocating additional resources to the Statistical Office, would support policy-making process.


The mission would like to thank the authorities and other counterparts for their warm hospitality as well as open and productive discussions.

IMF Communications Department

PRESS OFFICER: Andreas Adriano

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