## IMF Executive Board Concludes 2022 Article IV Consultation with the Republic of San Marino

_IMF News, November 23, 2022_

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## Bibliographic details
- Published: November 23, 2022

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### Macroeconomic developments and outlook
- GDP growth:
  - GDP is estimated to have grown by 8.3 percent in 2021 and 3.5 percent in 2022.
  - Real GDP (percent change), 2017–2022: 0.3, 1.5, 2.1, -6.7, 8.3, 3.5.
- Inflation and labor market:
  - Inflation rate (average; percent), 2017–2021: 1.0, 1.8, 0.2, 6.9.
  - Unemployment rate (average; percent), 2017–2022: 8.1, 8.0, 7.7, 7.3, 5.8, 5.4.
- External sector and tourism:
  - Strong external demand, supply chain constraints, and an elevated inflow of tourists have boosted activity.
  - Gross international reserves (millions of euros), 2017–2022: 252.7, 248.1, 410.6, 636.8, 844.1, 652.1.
  - Net foreign assets (percent of GDP), 2017–2021: 137.9, 124.8, 123.5, 130.7, 145.8.
  - Current account balance (percent of GDP), 2017–2021: -0.4, -1.9, 2.0, 2.8, 4.5.
- Energy shock and policy response:
  - 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.
  - San Marino secured beneficial energy import prices this year and next, resulting in tariffs below regional peers at minimal fiscal costs.
  - Authorities allowed price signals to guide demand while minimizing disruptive economic impact and supporting vulnerable groups.
  - 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.

### Fiscal position, debt, and recommended consolidation
- Fiscal outcomes and public debt:
  - Central government revenues (percent of GDP), 2017–2022: 22.1, 23.0, 22.3, 21.6, 21.9, 21.5.
  - Central government expenditure (percent of GDP), 2017–2022: 25.6, 24.5, 22.4, 59.2, 39.4, 24.8.
  - Central government overall balance (percent of GDP), 2017–2022: -3.5, -1.6, -0.1, -37.6, -17.4, -3.3.
  - Government debt (Official), 2017–2022: 30.1, 25.9, 71.6, 66.9, 69.0.
  - Public debt 2/, 2017–2021: 56.7, 57.2, 57.4, 86.3, 83.7.
- Key fiscal vulnerabilities and recommendations:
  - Elevated public debt and the large Eurobond rollover in 2024 make an ambitious fiscal consolidation necessary to ensure sustainability and reduce risks.
  - The approval of pension reform expected this year and income tax reform next year are key and cannot be delayed.
  - 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.
  - 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.
- Specific revenue and spending measures:
  - Revenues: The proposed income tax law amendments should be promptly approved and be more ambitious in reducing exemptions and loopholes. Introduce the VAT.
  - 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.
  - 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.
- Debt management:
  - Need to develop a comprehensive debt management strategy to support debt sustainability and help develop a domestic debt market over the medium-term.
  - Conversion of ex-BNS uninsured depositors’ bonds will help develop the domestic debt market and reduce the burden on taxpayers.
  - With limited fiscal space, San Marino needs a strong, medium-term debt management framework that increases predictability.
  - Authorities should opportunistically rollover the Eurobond starting early next year whenever market conditions are favorable.

### Financial sector: banks, NPLs, capitalization, and liquidity
- Banking sector performance and risks:
  - Banks’ capitalization and profitability improved in 2021, while deposits grew, but very large nonperforming assets and weak capitalization remain significant challenges.
  - Financial Soundness Indicators (percent) snapshot (2017–2021):
    - Regulatory capital to risk-weighted assets: 13.7, 12.3, 9.5, 10.7, 14.4.
    - NPL ratio: 51.6, 50.7, 58.9, 61.1, 59.0.
    - NPL coverage ratio: 56.0, 58.2, 63.6, 64.4, 65.0.
    - Return on equity (ROE): -10.3, -17.2, -74.6, -7.7, 3.8.
    - Liquid assets to total assets: 15.7, 15.2, 18.0, 19.2, 27.3.
    - Liquid assets to short-term liabilities: 28.3, 27.6, 32.7, 33.1, 44.0.
  - Deposits (percent change), 2017–2021: 3.3, 1.3, -5.7, 8.6, … .
  - Private sector credit (percent change), 2017–2020: 0.9, -4.1, -10.8.
- Policy recommendations for banks and NPLs:
  - Implement the strategy to reduce NPLs without further delay; delays have postponed banks' own NPL resolution.
  - 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.
  - Any undercapitalization that could arise should be promptly addressed with credible capitalization plans.
  - 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.
  - The plan to transparently report the transfer of assets from the trading to the investment portfolio that is held until maturity is welcome.
- Liquidity and reserves:
  - In a euroized economy without independent monetary policy, preserving healthy levels of financial sector liquid buffers is key to preserve stability and confidence.
  - 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.

### Executive Board assessment and macro-financial risks
- Executive Board summary:
  - With higher energy prices, tightening financial conditions, and growing global uncertainty, activity is expected to slow down.
  - Priority: build fiscal and financial buffers, while accelerating the reform agenda.
  - The rollover of the Eurobond maturing in 2024 remains a risk.
- Key macroeconomic risks identified:
  - High energy prices and further disruptions to energy supply.
  - Tightening financial conditions and likely higher-for-longer interest rates.
  - Growing global uncertainty and falling bond valuations increasing pressures on banks’ capital base.
- Recommended near-term actions:
  - Strengthen capital, improve banks’ efficiency and accelerate the reduction of nonperforming loans avoiding fiscal risks and forbearance.
  - Save revenue over-performance to build government deposits.
  - Approve pension reform and income tax reform on the proposed timelines.
  - Develop comprehensive debt management strategy and prepare for Eurobond rollover opportunistically.

### Structural reforms, AML/CFT, and institutional reforms
- Structural policy priorities:
  - Reforms that preserve and support macroeconomic stability should be complemented with structural reforms needed to boost long-term growth.
  - Progress towards the EU association agreement and the labor market reform are welcome but should be completed and implemented.
  - Labor market reform should make permanent the recent liberalization of cross-border workers and increase flexibility of temporary employment.
  - Plans to improve the business climate are critical; further efforts are needed to improve an outdated insolvency framework.
- AML/CFT:
  - San Marino should continue to make progress in strengthening the implementation of the AML/CFT framework.
  - Efforts to transpose the EU AML directive into the domestic legal framework are welcome but should be expedited.

### Selected economic indicators (highlights drawn from the IMF staff table)
- Activity and prices:
  - Real GDP (percent change), 2017–2022: 0.3; 1.5; 2.1; -6.7; 8.3; 3.5.
  - Unemployment rate (average; percent), 2017–2022: 8.1; 8.0; 7.7; 7.3; 5.8; 5.4.
  - Inflation rate (average; percent), 2017–2021: 1.0; 1.8; 0.2; 6.9.
- Public finances (percent of GDP), central government:
  - Revenues, 2017–2022: 22.1; 23.0; 22.3; 21.6; 21.9; 21.5.
  - Expenditure, 2017–2022: 25.6; 24.5; 22.4; 59.2; 39.4; 24.8.
  - Overall balance, 2017–2022: -3.5; -1.6; -0.1; -37.6; -17.4; -3.3.
- Debt and external:
  - Government debt (Official), 2017–2021: 30.1; 25.9; 71.6; 66.9; 69.0.
  - Public debt 2/, 2017–2021: 56.7; 57.2; 57.4; 86.3; 83.7.
  - Gross international reserves (millions of euros), 2017–2022: 252.7; 248.1; 410.6; 636.8; 844.1; 652.1.
- Financial soundness indicators (percent), 2017–2021:
  - Regulatory capital to risk-weighted assets: 13.7; 12.3; 9.5; 10.7; 14.4.
  - NPL ratio: 51.6; 50.7; 58.9; 61.1; 59.0.
  - NPL coverage ratio: 56.0; 58.2; 63.6; 64.4; 65.0.
  - Return on equity (ROE): -10.3; -17.2; -74.6; -7.7; 3.8.
  - Liquid assets to total assets: 15.7; 15.2; 18.0; 19.2; 27.3.
  - Liquid assets to short-term liabilities: 28.3; 27.6; 32.7; 33.1; 44.0.

*IMF Executive Board Concludes 2022 Article IV Consultation with the Republic of San Marino (Press Release No. 22/399, November 23, 2022).*

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_Source: https://www.imf.org/en/news/articles/2022/11/21/pr22399-san-marino-imf-executive-board-concludes-2022-article-iv-consultation_