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

IMF News, April 2, 2020

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

Press Release No. 20/126
Date of press release: April 2, 2020
Executive Board conclusion date: March 27, 2020
Staff report based on information available as of January 31, 2020 and on discussions with Sammarinese authorities in January 2020.
Note: the staff report was prepared before COVID-19 became a global pandemic and therefore does not reflect the implications of subsequent developments; the outbreak has greatly amplified uncertainty and downside risks.

San Marino is facing very significant challenges owing to the recent COVID-19 outbreak, which has taken a heavy toll on local population and businesses.
Authorities’ near-term efforts are focused on limiting and containing 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, current lack of external market access, and limited central bank liquidity buffers suggest that the balance of risks is heavily tilted to the downside.

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,
- considerable recapitalization needs.
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 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 external position is weaker than implied by fundamentals and desirable policy setting.
A comprehensive and credible stabilization plan is urgently needed.

Implement a coherent and credible strategy that:
- restores banking system viability,
- ensures fiscal sustainability,
- addresses structural impediments.
Enhance banking system liquidity and boost CBSM reserves:
- CBSM should further enhance liquidity management, including by aligning the ELA framework with international best practice.
- Restrict budget financing to only exceptional needs and on a temporary basis.
- Attract bank ownership participation by reputable banking groups.
- Sell non-performing loans (NPLs) and banks’ real estate portfolios to strategic investors to support liquidity.
Deep banking system restructuring is critical:
- Promptly address banks’ capital shortfalls following a fresh asset quality review and upfront loss-recognition.
- Repeal laws that allow banks to spread losses over time.
- CBSM should quickly intervene in undercapitalized banks that fail to raise capital.
- State support should be provided only to systemically-important and viable banks, following burden sharing.
- Reduce banks’ high operating costs by rationalizing the oversized branch network and staffing levels.
- Increase the share of income-generating assets, including by converting the tax credits into coupon-bearing assets, to improve profitability.

Accelerate NPL resolution by:
- Strengthening supervisory oversight.
- Streamlining judicial procedures.
Plans to establish an AMC should be carefully considered to avoid:
- Potential risks to public finances.
- Delayed recognition of bank losses.

Bank supervisors need adequate resources and sufficient powers to:
- Monitor systemic risks.
- Carry out frequent bank inspections.
- Promote compliance with regulations.
Review the CBSM law to enhance its institutional and financial independence to increase effectiveness as a supervisory authority.
Continue efforts to strengthen the anti-money laundering framework, including:
- Ongoing preparations of the second National Risk Assessment.
- Moneyval review.

Undertake a credible and ambitious fiscal consolidation and restrict state support to the banking system to safeguard public finances.
Put public debt on a downward and sustainable path through:
- Implementation of VAT and pension reforms.
- Measures to rationalize tax exemptions.
- Better targeting of social benefits.
- Increasing spending efficiency.
Limit state contributions to bank recapitalization.
Government plans to access external markets and increase liquidity should:
- Take into account debt sustainability considerations.
- Be accompanied by development of debt and cash management capacity.

Remove supply-side bottlenecks and increase economic integration to promote sustained growth.
Address labor market distortions and mitigate skill mismatch to promote job seeking and efficient allocation of labor.
Improve the business climate and close infrastructure gaps to:
- Attract foreign investment.
- Boost productivity.
- Increase external competitiveness.
Conclude the association agreement with the EU to simplify procedures for domestic firms and support expansion into new markets.

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 are recommended, including allocating additional resources to the Statistical Office to support the policy-making process.

IMF Executive Board press release and staff report conclusions as described above.