{
  "title": "IMF Executive Board Concludes 2022 Article IV Consultation with the Republic of San Marino",
  "publication": "IMF News, November 23, 2022",
  "sourceUrl": "https://www.imf.org/en/news/articles/2022/11/21/pr22399-san-marino-imf-executive-board-concludes-2022-article-iv-consultation",
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  "summary": "IMF Executive Board Concludes 2022 Article IV Consultation with the Republic of San Marino",
  "publishDate": "2022-11-23",
  "sections": [
    {
      "heading": "Macroeconomic developments and outlook",
      "content": "- GDP growth:\n  - GDP is estimated to have grown by 8.3 percent in 2021 and 3.5 percent in 2022.\n  - Real GDP (percent change), 2017–2022: 0.3, 1.5, 2.1, -6.7, 8.3, 3.5.\n- Inflation and labor market:\n  - Inflation rate (average; percent), 2017–2021: 1.0, 1.8, 0.2, 6.9.\n  - Unemployment rate (average; percent), 2017–2022: 8.1, 8.0, 7.7, 7.3, 5.8, 5.4.\n- External sector and tourism:\n  - Strong external demand, supply chain constraints, and an elevated inflow of tourists have boosted activity.\n  - Gross international reserves (millions of euros), 2017–2022: 252.7, 248.1, 410.6, 636.8, 844.1, 652.1.\n  - Net foreign assets (percent of GDP), 2017–2021: 137.9, 124.8, 123.5, 130.7, 145.8.\n  - Current account balance (percent of GDP), 2017–2021: -0.4, -1.9, 2.0, 2.8, 4.5.\n- Energy shock and policy response:\n  - After Russia’s invasion of Ukraine, San Marino faced an unprecedented energy price shock and a food price shock, leading to high inflation and real income erosion.\n  - San Marino secured beneficial energy import prices this year and next, resulting in tariffs below regional peers at minimal fiscal costs.\n  - Authorities allowed price signals to guide demand while minimizing disruptive economic impact and supporting vulnerable groups.\n  - Plans to pass-through import energy prices to consumers next year will continue to avoid fiscal costs and preserve the financial soundness of the state-owned utility company."
    },
    {
      "heading": "Fiscal position, debt, and recommended consolidation",
      "content": "- Fiscal outcomes and public debt:\n  - Central government revenues (percent of GDP), 2017–2022: 22.1, 23.0, 22.3, 21.6, 21.9, 21.5.\n  - Central government expenditure (percent of GDP), 2017–2022: 25.6, 24.5, 22.4, 59.2, 39.4, 24.8.\n  - Central government overall balance (percent of GDP), 2017–2022: -3.5, -1.6, -0.1, -37.6, -17.4, -3.3.\n  - Government debt (Official), 2017–2022: 30.1, 25.9, 71.6, 66.9, 69.0.\n  - Public debt 2/, 2017–2021: 56.7, 57.2, 57.4, 86.3, 83.7.\n- Key fiscal vulnerabilities and recommendations:\n  - Elevated public debt and the large Eurobond rollover in 2024 make an ambitious fiscal consolidation necessary to ensure sustainability and reduce risks.\n  - The approval of pension reform expected this year and income tax reform next year are key and cannot be delayed.\n  - With likely higher-for-longer interest rates and energy prices, build fiscal buffers and save revenue over-performance this year to build up government deposits while resisting spending pressures.\n  - Fiscal adjustment target: a fiscal adjustment by the central government of 2 percent of GDP over the next three years to reach a central government primary balance of 2.5 percent of GDP complemented by pension reform.\n- Specific revenue and spending measures:\n  - Revenues: The proposed income tax law amendments should be promptly approved and be more ambitious in reducing exemptions and loopholes. Introduce the VAT.\n  - Spending: Public sector wage and pension increase in line with recently agreed private sector collective bargaining agreements could contain expenditure permanently and support the needed fiscal consolidation in the near term.\n  - Pensions: The proposed pension reform stabilizes the system’s deficit over the next decade, but further recalibration of pension spending will be needed to ensure long-term sustainability. The approval of this reform cannot be delayed given increasing deficits of the Social Security.\n- Debt management:\n  - Need to develop a comprehensive debt management strategy to support debt sustainability and help develop a domestic debt market over the medium-term.\n  - Conversion of ex-BNS uninsured depositors’ bonds will help develop the domestic debt market and reduce the burden on taxpayers.\n  - With limited fiscal space, San Marino needs a strong, medium-term debt management framework that increases predictability.\n  - Authorities should opportunistically rollover the Eurobond starting early next year whenever market conditions are favorable."
    },
    {
      "heading": "Financial sector: banks, NPLs, capitalization, and liquidity",
      "content": "- Banking sector performance and risks:\n  - Banks’ capitalization and profitability improved in 2021, while deposits grew, but very large nonperforming assets and weak capitalization remain significant challenges.\n  - Financial Soundness Indicators (percent) snapshot (2017–2021):\n    - Regulatory capital to risk-weighted assets: 13.7, 12.3, 9.5, 10.7, 14.4.\n    - NPL ratio: 51.6, 50.7, 58.9, 61.1, 59.0.\n    - NPL coverage ratio: 56.0, 58.2, 63.6, 64.4, 65.0.\n    - Return on equity (ROE): -10.3, -17.2, -74.6, -7.7, 3.8.\n    - Liquid assets to total assets: 15.7, 15.2, 18.0, 19.2, 27.3.\n    - Liquid assets to short-term liabilities: 28.3, 27.6, 32.7, 33.1, 44.0.\n  - Deposits (percent change), 2017–2021: 3.3, 1.3, -5.7, 8.6, … .\n  - Private sector credit (percent change), 2017–2020: 0.9, -4.1, -10.8.\n- Policy recommendations for banks and NPLs:\n  - Implement the strategy to reduce NPLs without further delay; delays have postponed banks' own NPL resolution.\n  - If NPLs are found to have a real economic value below net book value, their transfer should transparently result in a reduction of capital ratios.\n  - Any undercapitalization that could arise should be promptly addressed with credible capitalization plans.\n  - There should be a clear incentive structure for most NPLs to be transferred and NPLs remaining in banks’ books should be subject to calendar provisioning following European standards.\n  - The plan to transparently report the transfer of assets from the trading to the investment portfolio that is held until maturity is welcome.\n- Liquidity and reserves:\n  - In a euroized economy without independent monetary policy, preserving healthy levels of financial sector liquid buffers is key to preserve stability and confidence.\n  - International reserves have fallen as banks' deposits at CBSM moved abroad to take advantage of higher rates, a trend expected to continue in the near term."
    },
    {
      "heading": "Executive Board assessment and macro-financial risks",
      "content": "- Executive Board summary:\n  - With higher energy prices, tightening financial conditions, and growing global uncertainty, activity is expected to slow down.\n  - Priority: build fiscal and financial buffers, while accelerating the reform agenda.\n  - The rollover of the Eurobond maturing in 2024 remains a risk.\n- Key macroeconomic risks identified:\n  - High energy prices and further disruptions to energy supply.\n  - Tightening financial conditions and likely higher-for-longer interest rates.\n  - Growing global uncertainty and falling bond valuations increasing pressures on banks’ capital base.\n- Recommended near-term actions:\n  - Strengthen capital, improve banks’ efficiency and accelerate the reduction of nonperforming loans avoiding fiscal risks and forbearance.\n  - Save revenue over-performance to build government deposits.\n  - Approve pension reform and income tax reform on the proposed timelines.\n  - Develop comprehensive debt management strategy and prepare for Eurobond rollover opportunistically."
    },
    {
      "heading": "Structural reforms, AML/CFT, and institutional reforms",
      "content": "- Structural policy priorities:\n  - Reforms that preserve and support macroeconomic stability should be complemented with structural reforms needed to boost long-term growth.\n  - Progress towards the EU association agreement and the labor market reform are welcome but should be completed and implemented.\n  - Labor market reform should make permanent the recent liberalization of cross-border workers and increase flexibility of temporary employment.\n  - Plans to improve the business climate are critical; further efforts are needed to improve an outdated insolvency framework.\n- AML/CFT:\n  - San Marino should continue to make progress in strengthening the implementation of the AML/CFT framework.\n  - Efforts to transpose the EU AML directive into the domestic legal framework are welcome but should be expedited."
    },
    {
      "heading": "Selected economic indicators (highlights drawn from the IMF staff table)",
      "content": "- Activity and prices:\n  - Real GDP (percent change), 2017–2022: 0.3; 1.5; 2.1; -6.7; 8.3; 3.5.\n  - Unemployment rate (average; percent), 2017–2022: 8.1; 8.0; 7.7; 7.3; 5.8; 5.4.\n  - Inflation rate (average; percent), 2017–2021: 1.0; 1.8; 0.2; 6.9.\n- Public finances (percent of GDP), central government:\n  - Revenues, 2017–2022: 22.1; 23.0; 22.3; 21.6; 21.9; 21.5.\n  - Expenditure, 2017–2022: 25.6; 24.5; 22.4; 59.2; 39.4; 24.8.\n  - Overall balance, 2017–2022: -3.5; -1.6; -0.1; -37.6; -17.4; -3.3.\n- Debt and external:\n  - Government debt (Official), 2017–2021: 30.1; 25.9; 71.6; 66.9; 69.0.\n  - Public debt 2/, 2017–2021: 56.7; 57.2; 57.4; 86.3; 83.7.\n  - Gross international reserves (millions of euros), 2017–2022: 252.7; 248.1; 410.6; 636.8; 844.1; 652.1.\n- Financial soundness indicators (percent), 2017–2021:\n  - Regulatory capital to risk-weighted assets: 13.7; 12.3; 9.5; 10.7; 14.4.\n  - NPL ratio: 51.6; 50.7; 58.9; 61.1; 59.0.\n  - NPL coverage ratio: 56.0; 58.2; 63.6; 64.4; 65.0.\n  - Return on equity (ROE): -10.3; -17.2; -74.6; -7.7; 3.8.\n  - Liquid assets to total assets: 15.7; 15.2; 18.0; 19.2; 27.3.\n  - Liquid assets to short-term liabilities: 28.3; 27.6; 32.7; 33.1; 44.0.\n\nIMF Executive Board Concludes 2022 Article IV Consultation with the Republic of San Marino (Press Release No. 22/399, November 23, 2022).\n\n---\n\n\n References\n\n- https://www.imf.org/-/media/images/imf/bios/imfboard.jpg\n- The Executive Board\n- Republic of San Marino and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2022/11/21/pr22399-san-marino-imf-executive-board-concludes-2022-article-iv-consultation"
    }
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    "Published: November 23, 2022",
    "GDP growth:",
    "Inflation and labor market:",
    "External sector and tourism:",
    "Energy shock and policy response:",
    "Fiscal outcomes and public debt:",
    "Key fiscal vulnerabilities and recommendations:",
    "Specific revenue and spending measures:",
    "Debt management:",
    "Banking sector performance and risks:",
    "Policy recommendations for banks and NPLs:",
    "Liquidity and reserves:",
    "Executive Board summary:",
    "Key macroeconomic risks identified:",
    "Recommended near-term actions:",
    "Structural policy priorities:",
    "AML/CFT:",
    "Activity and prices:",
    "Public finances (percent of GDP), central government:",
    "Debt and external:",
    "Financial soundness indicators (percent), 2017–2021:",
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