Italy: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, May 23, 2016
Source details
- Canonical URL
- Italy: Staff Concluding Statement of the 2016 Article IV Mission
Other formats
Bibliographic details
- Published: May 23, 2016
Overview and context
- Describes preliminary findings of IMF staff at the end of an official staff visit (mission) under Article IV.
- The authorities have consented to publication; views are those of IMF staff and do not necessarily represent the IMF Executive Board.
- The mission will prepare a report for the IMF Executive Board subject to management approval.
Recent macroeconomic developments and near-term outlook
- The economy grew by 0.8 percent in 2015 and continued to expand in the first quarter of 2016.
- Buoying factors: exceptionally accommodative monetary policy, favorable commodity prices, supportive fiscal policy, and improved confidence from wide-ranging reform efforts.
- Labor market: conditions are gradually improving; the unemployment rate remains above 11 percent, with considerably higher levels in some regions and among the youth.
- Financial sector: nonperforming loans (NPLs) appear to be stabilizing but bank balance sheets remain strained.
- Public debt: inched up to just under 133 percent of GDP, limiting fiscal space to respond to shocks.
- Growth projections on planned policies:
- 1.1 percent this year
- about 1¼ percent in 2017–18
- Risks: downside-tilted, including financial market volatility, Brexit, the refugee surge, and headwinds from the slowdown in global trade.
- Longer-term implications:
- Return to pre-crisis (2007) output levels only by the mid-2020s under projected growth.
- Widening of Italy’s income gap with the faster growing euro area average.
- Nominal growth may be too weak to firmly unwind financial fragilities; balance sheet repair would occur over a protracted period.
- Continued exposure to risks within an incomplete economic and monetary union.
Structural reform agenda and priorities
- Government has pursued a range of reforms: institutional, public administration, fiscal, labor market, and banking sector reforms.
- Notable measures and initiatives:
- Jobs Act being implemented.
- Legislation passed on reform of cooperative and mutual banks.
- Insolvency system under revision.
- Framework law on public administration approved with some implementing decrees issued.
- Reform of the state budget underway.
- Legislation passed and a constitutional referendum planned for October on institutional reforms to facilitate decision making and transfer competencies from regions to the center.
- Priority areas for further reform to lift growth:
- Product and service market reform:
- An annual competition law is required since 2009 but yet to be approved; a draft law under parliamentary debate seeks to address regulatory barriers.
- Strengthen provisions in line with competition authority recommendations and ensure an annual process of adopting pro-competition laws.
- Consider enhanced competition in local public service provision, transport, legal and professional services, and full implementation of existing legislation (e.g., retail sector).
- Public administration reform:
- Advance reforms to improve skill-mix, match positions with skills, align wages with productivity, simplify functions and procedures, rationalize procurement, and tackle privileges and employment in public enterprises, including through privatization.
- Wage bargaining:
- Modernize the wage bargaining system to broaden scope for firm-level negotiations, especially for smaller enterprises and many in the South, to strengthen the link between wages and productivity and alleviate regional disparities.
Strengthening banks’ ability to support the recovery
- Recent steps and reforms:
- Insolvency reforms to reduce time to collect claims and introduced out-of-court enforcement in commercial lending relationships.
- Reforms of the cooperative and mutual bank frameworks creating opportunity for consolidation.
- Additional recommended actions:
- Further improve insolvency and enforcement:
- More intensive use of out-of-court debt restructuring and a triage approach to identify viable firms.
- Systematize the insolvency system, integrate recent reforms, simplify procedures, rationalize appeals, and adopt best practices by courts.
- Prudential steps to resolve NPLs:
- Require banks to produce comprehensive NPL strategies with operational targets to reduce NPL levels markedly over the medium term via internal workout procedures, outsourcing to external servicers, and sales.
- Intensified supervisory oversight including regular NPL reporting and an intensive schedule of on-site monitoring led by collections and workout experts.
- Supervisory oversight of consolidation:
- Encourage and carefully assess consolidation proposals with focus on balance sheet health, long-term viability, strong governance, and provide clear guidance on supervisory expectations and timelines.
- Systematic asset quality assessment for banks not already subject to the European Central Bank comprehensive assessment, with prompt follow-up actions in line with regulatory requirements.
- Retail investor protection:
- Review potential anomalies surrounding bank retail debt issuances and address issues found.
- Prevent irregular selling practices to retail customers by strengthening legal and regulatory safeguards, improving quality of information, and effectiveness of controls.
- Role of Atlante:
- Recent private sector intervention (Atlante) has helped preserve financial stability and provides a window to press forward on measures to ensure banking system soundness and avoid weighing on participating banks’ profitability.
- Bank supervisors should ensure future bank investments are based solely on commercial considerations.
Bolstering fiscal sustainability and policy recommendations
- Fiscal context and recent history:
- Sizable fiscal adjustment in 2012–13 led to one of the highest structural primary surpluses in the euro zone.
- Fiscal stance turned more supportive of growth thereafter, using up windfall gains from the falling interest bill; debt-to-GDP has continued to edge up.
- Debt dynamics are expected to improve in coming years if nominal growth materializes as projected and medium-term fiscal targets are achieved, but improvement will be gradual and vulnerable to shocks (e.g., rise in interest rates).
- Ambitious privatization would help lower debt faster.
- Recommended fiscal strategy:
- Remain anchored to an ambitious medium-term consolidation path supported by pro-growth policies, taking advantage of the low interest rate environment.
- The mission recommends an evenly-phased adjustment over 2017–19, net of any remaining upfront costs from structural reforms, that would result in a small structural surplus of about ½ percent of GDP by 2019.
- Allow automatic stabilizers to operate if adverse shocks materialize.
- Support the adjustment with policies prioritizing more efficient spending and less distortive taxation.
- To achieve fiscal targets and create space to lower the high labor tax wedge may require difficult political choices, possibly on high levels of social spending and introducing a modern real estate tax.
- Do not undermine pension system sustainability.
- Broaden tax bases, including by rationalizing relatively large tax expenditures.
Concluding observations
- Timely implementation of complementary and mutually reinforcing financial, fiscal, and structural measures would help boost growth, rebuild buffers, and lower the upfront cost of reforms.
- Broad political support for comprehensive reforms should be maintained to take advantage of the current recovery and favorable low interest rate environment.
- The mission thanks the authorities and other interlocutors for helpful discussions.
Italy: Staff Concluding Statement of the 2016 Article IV Mission — May 23, 2016