IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of San Marino
IMF News, December 10, 2024
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- Published: December 10, 2024
Overview
- Date and action: Washington, DC – December 10, 2024. The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of San Marino and considered and endorsed the staff appraisal on a lapse of time basis.
- General assessment: San Marino’s economy has remained resilient, stabilizing at high activity levels and record employment despite the regional slowdown and high interest rates.
Economic outlook and risks
- Recent performance:
- Growth slowed due to weakening external demand but remained positive because a decline in manufacturing was offset by strong performance in the service sector.
- Inflation has declined to below two percent and is expected to remain at low levels.
- With easing financing conditions and stabilization of external demand, growth is expected to pick up gradually.
- Downside risks:
- Lingering weakness in external demand.
- Tighter than expected global monetary conditions.
- Remaining vulnerabilities in the domestic financial sector.
- Upside potential:
- Faster implementation of the EU association agreement could deepen economic integration with the EU and lift potential growth.
Fiscal position and policy recommendations
- Recent fiscal performance:
- The fiscal position is stronger than expected. The government saved cyclical tax revenues, kept expenditures in check, and achieved a strong primary balance in 2023.
- However, public debt level remains high and must decline below 60 percent of GDP.
- Required consolidation:
- An additional fiscal consolidation totaling 1 percent of GDP over the next three years is needed to ensure debt is on a robust declining path.
- Tax reform recommendations:
- Design and implement a tax reform package that introduces a value-added tax (VAT) and broadens the income tax base.
- Income tax reform should allow rationalization of sizable income tax deductions.
- Introducing a VAT can enhance fiscal revenues and tax efficiency, increase fairness and progressivity, align indirect tax procedures with international standards, and benefit the ease of exports. Careful design and planning are needed to ensure a smooth transition.
- Expenditure-side recommendations:
- Rationalize government spending by improving spending efficiency and containing public wages and pensions growth.
- Ensure large investment plans undergo rigorous cost-benefit analyses to maximize social return.
- Pensions and long-term sustainability:
- Long-term demographic challenges require additional parametric pension recalibration within the next decade.
- Generous benefits and low penalties for early retirement that undermine sustainability still need to be addressed.
- Debt management:
- Enhance the debt management strategy to minimize refinancing risks.
- Consider liability management operations, including smaller international issuances with longer maturities, to smooth the Eurobond amortization in 2027.
- The recently published fiscal strategy is an important advancement, but further efforts are needed to upgrade debt management capacity.
Financial sector: banks, NPLs, and regulation
- Banking sector strengths and vulnerabilities:
- Banks’ liquidity and reported profits improved in 2023; cyclical profits helped improve liquidity and capital.
- Structural profitability remains low due to declining interest margins, high personnel costs, and still large noninterest-generating assets.
- Tight capitalization persists in some banks; overall financial sector remains vulnerable.
- Cost and efficiency issues:
- Most banks’ profitability is significantly lower than regional peers, primarily due to high operational costs associated with a large number of branches and a low ratio of income-generating assets per employee.
- A speedy adjustment of banks’ costs is essential to improve long-term viability and capital positions.
- NPL reduction progress and next steps:
- Important progress has been made to reduce nonperforming loans (NPLs) through an Asset Management Company (AMC) and calendar provisioning.
- The write-off of a large NPL position and AMC securitization have reduced the NPL ratio from 53 to 21 percent.
- It is crucial to improve dissemination of information about the AMC’s recovery operations and performance.
- Risk weights for junior securities should be increased faster to reflect real economic value of NPLs on banks’ balance sheets.
- Any undercapitalization arising from securitization and calendar provisioning should be promptly addressed with credible capitalization plans.
- Bank resolution and ownership rules:
- The bank resolution law should be updated to gradually complete alignment with EU standards and widen burden-sharing.
- Limits on banks’ shareholding structure should be promptly lifted.
- AML/CFT and supervisory capacity:
- Continue strengthening the AML/CFT framework, including transposition of the 5th EU AML Directive and improving technical compliance with FATF standards.
- Enhance the adequacy, accuracy, and up-to-datedness of the central beneficial ownership registry.
- Ensure the FIA has adequate resources to achieve its mandate.
- Central Bank (CBSM) needs:
- To complete alignment with EU regulatory framework, CBSM will need additional staff and financial resources.
- CBSM’s financial position should be strengthened to safeguard independence and support financial sector stability through an effective lender of last resort capacity.
- Although the banking sector has 15 years to meet requirements, earlier implementation will boost confidence.
Structural reforms and EU association
- EU association agreement:
- Conclusion of EU association negotiations is welcome and signals commitment to deeper integration with the EU.
- Successful implementation of the agreement is a priority to enhance productivity; authorities should ensure sufficient resources and staff are available to support implementation without undermining fiscal consolidation.
- Structural policy measures:
- Further labor market flexibility is needed to improve labor reallocation, including in the banking sector.
- Real estate market reforms to facilitate price dissemination and foreign ownership will be key to support NPL resolution.
Selected economic and social indicators (Republic of San Marino, 2020–29; exact values preserved)
- GDP per capita (2022): 53,876 U.S. dollars
- Population (2022): 34,025 persons
- Life expectancy at birth (2018): 86.6 years
- Literacy, adult (2015): 96 percent
- Real GDP (percent change)
- 2020: -6.8
- 2021: 14.2
- 2022: 7.9
- 2023: 0.4
- 2024: 0.7
- 2025: 1.3
- 2026: 1.2
- 2027: 1.1
- Domestic demand (percent change)
- 2020: -10.5
- 2021: 11.3
- 2022: 10.5
- 2023: 2.0
- 2024: 0.9
- 2025: 1.4
- Final consumption (percent change)
- 2020: -2.8
- 2021: 3.5
- 2022: 9.9
- Fixed investment (percent change)
- 2020: -25.0
- 2021: 3.6
- 2022: 9.6
- 2023: 0.5
- 2024: 0.1
- 2025: 1.5
- 2026: 2.5
- Net exports (percent change)
- 2020: 5.7
- 2021: 0.6
- 2022: -1.1
- 2023: 0.0
- 2024: 0.2
- Exports (percent change)
- 2020: -7.5
- 2021: 27.1
- 2022: 15.6
- 2023: -1.0
- 2024: 1.6
- Imports (percent change)
- 2020: -9.6
- 2021: 27.8
- 2022: 18.0
- 2023: -0.5
- Contribution to real GDP growth (percent)
- Inventories: -0.8 (2020), 5.9 (2021), -12.5 (2022), 44.9 (2023), 28.7 (2024), -2.0 (2025), 3.1 (2026), 2.9 (2027), 2.8 (2028), 14.0 (2029)
- [Additional sequence values from source preserved where applicable.]
- Employment (percent change): [series present in source]
- Unemployment rate (average; percent)
- 2020: 7.3
- 2021: 5.2
- 2022: 4.6
- 2023: 3.9
- Inflation rate (average; percent)
- 2020: -0.1
- 2021: 2.1
- 2022: 5.3
- GDP deflator (percent change)
- 2021: 2.4
- Nominal GDP (percent change)
- 2020: -6.3
- 2021: 16.0
- 2022: 10.9
- 2023: 3.4
- 2024: 3.2
- 2025: 3.3
- Nominal GDP (millions of euros)
- 2020: 1,352.4
- 2021: 1,568.7
- 2022: 1,739.4
- 2023: 1,838.1
- 2024: 1,895.3
- 2025: 1,959.9
- 2026: 2,023.3
- 2027: 2,086.1
- 2028: 2,154.9
- 2029: 2,226.1
- Public Finances (percent of GDP) (central government)
- Revenues: 2020: 21.6; 2021: 20.7; 2022: 22.1; 2023: 21.4; 2024: 20.3
- Expenditure: 2020: 59.2; 2021: 37.1; 2022: 21.7; 2023: 22.2; 2024: 21.5; 2025: 20.6; 2026: 20.5
- Overall balance: 2020: -37.6; 2021: -16.4; 2022: -0.7; 2023: -1.3; 2024: -0.3
- Primary balance net of bank support: 2022: -2.2
- Government debt (official)
- 2020: 71.6
- 2021: 64.1
- 2022: 70.8
- 2023: 70.0
- 2024: 64.9
- 2025: 63.6
- 2026: 62.4
- 2027: 61.2
- 2028: 57.1
- Public debt (central government (official) debt plus Social Security Fund and BNS debt)
- 2020: 81.3
- 2021: 74.5
- 2022: 72.2
- 2023: 68.0
- 2024: 66.7
- 2025: 65.3
- 2026: 61.9
- 2027: 59.8
- 2028: 56.1
- Money and Credit
- Broad Money (BM) (percent change): 2021: 5.5; 2022: 4.9; 2023: …
- Private sector credit (percent change): 2020: -4.1; 2021: -10.8; 2022: -23.6
- Net foreign assets (percent of GDP)
- 2020: 141.4
- 2021: 137.3
- 2022: 119.6
- 2023: 96.8
- Commercial banks (net foreign assets percent of GDP)
- 2020: 94.4
- 2021: 87.4
- 2022: 89.2
- 2023: 58.0
- Central bank (net foreign assets percent of GDP)
- 2020: 47.0
- 2021: 49.9
- 2022: 30.3
- 2023: 38.9
- Current Account (percent of GDP)
- 2020: 5.4
- 2021: 15.5
- 2022: 13.9
- 2023: 6.4
- 2024: 2.3
- Gross international reserves incl. pledged assets (millions of euros)
- 2020: 157.9
- 2021: 174.1
- 2022: 197.4
- 2023: 189.6
- 2024: 182.3
- 2025: 179.9
- 2026: 178.2
- 2027: 176.7
- 2028: 176.4
- 2029: 144.5
- Gross international reserves (millions of euros)
- 2020: 637.0
- 2021: 842.6
- 2022: 671.4
- 2023: 756.6
- 2024: 746.6
- Gross int. reserves (millions of euros) (alternate series)
- 2020: 637.1
- 2021: 842.5
- 2022: 533.0
- 2023: 739.6
- 2024: 729.6
- Financial Soundness Indicators (percent)
- Regulatory capital to risk-weighted assets: 2020: 10.7; 2021: 14.4; 2022: 14.6; 2023: 16.7
- NPL ratio 3/: 2020: 61.1; 2021: 59.0; 2022: 53.1; 2023: 21.0
- NPL coverage ratio 3/: 2020: 64.4; 2021: 65.0; 2022: 69.8; 2023: 33.6
- Return on asset (ROA): 2020: -0.4; 2021: 0.8
- Liquid assets to short-term liabilities: 2020: 33.1; 2021: 44.0; 2022: 43.1; 2023: 50.1
- Notes on data:
- Sources: International Financial Statistics; IMF Financial Soundness Indicators; Sammarinese authorities; World Bank; and IMF staff.
- Footnotes: 1/ For the central government. 2/ Central government (official) debt plus Social Security Fund and BNS debt. 3/ CBSM supervisory data. Latest data reflect changes related to Banca CIS resolution. Supervisory data, as opposed to FSI data, reflect retrospective revisions made by banks in their annual financial statements. Loans and NPLs to banks are excluded in calculating each indicator.
IMF Executive Board press release, December 10, 2024.
