Press Release No. 24/110

IMF Staff Concludes Visit to San Marino

April 9, 2024

• Growth in 2023 remained positive, thanks to the dynamic service sector, although manufacturing growth slowed down from historically high levels.
• Prudent fiscal policy continued in 2023, but further fiscal consolidation is needed to strengthen the fiscal position.
• Banks’ profitability has improved, supported by higher interest margins, but further efforts are needed to improve banks’ profitability and capitalization.

Washington, DC – April 9, 2024: An International Monetary Fund (IMF) mission visited San Marino during April 3-9, 2024, to discuss with the Sammarinese authorities’ recent economic developments and the challenges that weakening activity and higher interest rates will pose for San Marino. At the conclusion of the visit, Borja Gracia, IMF mission chief for San Marino, made the following statement:

Growth slowed down in 2023 from historical heights despite weaker activity in the manufacturing sector. Manufacturing growth, a key driver during 2021-22, slowed last year due to weak external demand and higher costs. Nevertheless, manufacturing exports have stabilized at high levels. Following the trend in Italy, the service sector showed resilience and the labor market remains tight with close to full employment. Growth in 2024 is projected to be around 1 percent, showing a moderate recovery, but uncertainty related to the volatile international environment weighs on the growth outlook.

Prudent fiscal policy continued in 2023, but further consolidation efforts are needed to sustain these gains and ensure a strong fiscal position. The government has appropriately saved inflation revenue windfalls and prudently indexed public sector wages and pensions below inflation containing spending pressures. However, San Marino is a euroized small open economy with remaining vulnerabilities in the financial sector and limited fiscal buffers. Thus, further consolidation is needed through tax policy reforms and improvements of spending efficiency. At the same time, a further recalibration of the pension system focused on addressing the challenges of an aging population, generous benefits and low penalties for early retirement will be needed to ensure the long-term sustainability of the pension system.

Efforts to reduce banks’ nonperforming loans (NPLs) reached a milestone with the establishment of the Asset Management Company and the introduction of calendar provisioning consistent with the European framework. The securitization and Cassa di Risparmio della Repubblica di San Marino’s decision to write off legacy assets have substantially reduced NPLs. At the same time, the establishment of the government guarantee below expected recovery values minimizes fiscal risks. Nevertheless, any undercapitalization that could arise from these developments should be promptly addressed with credible capitalization plans.

Higher interest rates have significantly improved the profitability of banks without deteriorating the quality of the loan portfolio so far. The liquidity of the banking system increased last year too. However, the structural profitability of most banks remains low. Looking ahead, with increasing deposit rates, interest margins will decrease impacting profitability. Profitability can also be affected by increasing NPLs given weak economic activity. In line with the recommendation of the Central Bank of San Marino, banks should use profits earned last year to increase capital buffers and should improve structural profitability by restarting efforts to reduce high operational costs that have stalled over the last few years.

The EU association agreement offers an opportunity to further integrate San Marino’s economy in Europe and attract foreign investment by reducing costs. This agreement could increase economic integration with the EU and expand market access by simplifying procedures and reducing legislative barriers. It is also an opportunity to strengthen Sammarinese public institutions as they adopt European standards and deepen their relations with EU counterparts. At the same time, adopting the European financial framework will impose significant costs on the Central Bank of San Marino that will have to be addressed.

Discussions will continue in the context of the Article IV consultation scheduled to take place in September.

We would like to thank our counterparts for excellent discussions.