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

_IMF News, April 2, 2020_

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## Bibliographic details
- Published: April 2, 2020

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### Timing and context
- 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.

### Key near-term findings related to COVID-19
- 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.

### Executive Board assessment — overarching view
- 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.

### Policy recommendations — banking sector stabilization and restructuring
- 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.

### NPL resolution, asset management company (AMC) considerations
- 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.

### Strengthening CBSM institutional framework and financial integrity
- 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.

### Fiscal policy and public finances
- 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.

### Structural reforms and growth-enhancing measures
- 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.

### Data and statistical capacity
- 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.*

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## References

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- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Republic of San Marino and the IMF](http://www.imf.org/external/country/SMR/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
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_Source: https://www.imf.org/en/news/articles/2020/04/01/pr20126-san-marino-imf-executive-board-concludes-the-2020-article-iv-consultation_