IMF Executive Board Concludes the 2020 Article IV Consultation with the Republic of San Marino

April 2, 2020

WASHINGTON, DC – On March 27, 2020 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of San Marino  [2] (see below an important note on the timing of the report which precedes the outbreak of COVID-19). [3]

San Marino is now facing very significant challenges owing to the recent COVID-19 outbreak, which has taken a heavy toll on local population and businesses. The authorities’ near-term efforts are rightly focused on limiting and containing the adverse social and economic effects, including by re-directing resources to the health system.

Medium-term growth prospects are projected to remain weak as tight credit conditions and a substantially weaker external environment will constrain the recovery. The high uncertainty around the extent and length of the COVID-19 spread, the current lack of external market access, and the limited central bank liquidity buffers suggest that the balance of risks is heavily tilted to the downside. San Marino’s key medium term challenge is to address the elevated macro-financial vulnerabilities emanating from the weak banking system liquidity and capital positions, poor asset quality, and high cost-to-income ratios as well as low government’s liquidity buffers and an excessive accumulation of fiscal liabilities.

Executive Board Assessment

In concluding the Article IV consultation with the Republic of San Marino, Executive Directors endorsed the staff’s appraisal as follows:

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, while multiple bank failures and continued state support to the banking system have eroded government liquidity buffers and led to an excessive and unsustainable accumulation of the implicit public debt. Absent a significant policy change, growth prospects are projected to remain subdued over the medium term with risks heavily tilted to the downside. The recent outbreak of COVID-19 in San Marino and Italy has significantly increased uncertainty. The external position is weaker than implied by fundamentals and desirable policy setting.

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 addresses structural impediments. The recent general elections and establishment of a four-party coalition government provides an opportunity to build a broad consensus for the necessary reforms.

Sustained efforts are needed to increase banking system liquidity and boost CBSM reserves. The CBSM should further enhance its liquidity management, including by aligning the ELA 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.

A deep banking system restructuring is critical to restore its profitability and sustainability. Banks’ capital shortfalls should be promptly addressed, following a fresh asset quality review and upfront loss-recognition while 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. Reducing banks’ high operating costs by rationalizing the oversized branch network and staffing levels, and increasing the share of income-generating assets, including by converting the tax credits into coupon-bearing assets, would improve their profitability.

Accelerating NPL resolution by strengthening supervisory oversight and streamlining judicial procedures should support these efforts. Plans to establish an AMC should be carefully considered to avoid potential risks to public finances and delayed recognition of bank losses.

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. Continued efforts to strengthen the anti-money laundering framework, including in the context of the ongoing preparations of the second National Risk Assessment and Moneyval review, are welcome.

Undertaking a credible and ambitious fiscal consolidation and restricting state support to the banking system would safeguard public finances. Putting public debt on a downward and sustainable path requires an implementation of VAT and pension reforms along with measures to rationalize the tax exemptions, better target social benefits, and increase spending efficiency. Limiting state contributions to bank recapitalization is also necessary. The government’s plan to access external markets and increase liquidity should take into account debt sustainability considerations and be accompanied by development of debt and cash management capacity.

Steps to remove supply-side bottlenecks and increase economic integration would promote sustained growth. Addressing the lingering distortions in the labor market and mitigating the skill mismatch are necessary to promote job seeking and efficient allocation of labor while improving the business climate and closing the infrastructure gaps would help attract foreign investment, boost productivity, and increase external competitiveness. Concluding the association agreement with the EU would simplify procedures for domestic firms and support their expansion into new markets.

Efforts to improve data reporting and provision should continue. San Marino’s adherence to the IMF’s e-GDDS is an important step in improving 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.

[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.

[2] The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

[3] The staff report reflects discussions with the Sammarinese authorities in January 2020 and is based on the information available as of January 31, 2020. It focuses on San Marino’s near- and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity, and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in San Marino and globally.

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