{
  "title": "Italy: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, May 26, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/05/25/italy-staff-concluding-statement-of-the-2023-article-iv-mission",
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  "summary": "The Italian economy grew robustly over the past year despite sharply higher energy prices. Generous tax credits for building refurbishment and strong tourism spurred growth to an impressive 3.7 percent in 2022, with a further expansion of 1.8 percent (year-on-year) in the first quarter of 2023.",
  "publishDate": "2023-05-26",
  "sections": [
    {
      "heading": "Growth, inflation, and labor market — key findings",
      "content": "- Real GDP growth: 3.7 percent in 2022.\n- Early 2023 activity: expansion of 1.8 percent (year-on-year) in Q1 2023.\n- Public debt ratio: declined by 10 percentage points from its peak in 2020 on the large rebound in nominal GDP.\n- Employment: picked up strongly; unemployment rate fell sharply.\n- Inflation: energy price spike largely reversed, but broadening price pressures have driven core inflation to high levels.\n- Growth forecast: moderate to 1.1 percent in 2023 and 1.1 percent in 2024.\n- Near-term outlook: growth expected to temporarily tick up from 2025 as NRRP spending peaks and remain modestly above its long-term trend.\n- Inflation path: core inflation is forecast to decline gradually, with inflation returning to target only around 2026.\n- Demographics: falling working-age population will be a drag on long-term growth absent sustained productivity improvements."
    },
    {
      "heading": "Downside and upside scenarios — risks to the outlook",
      "content": "- Downside risks highlighted:\n  - Sharper tightening of monetary policy from more persistent euro-area inflation could raise borrowing costs for Italy.\n  - Renewed global financial stress (for example, an impasse on the U.S. debt ceiling) could reduce funding availability, retrench public and private spending, and revive sovereign-bank-corporate linkages concerns.\n  - Policies slowing public debt reduction or prolonged delays in NextGenerationEU disbursements could raise financing concerns.\n  - Escalating geopolitical tensions or extreme weather events could create supply disruptions.\n  - Stalled progress on NRRP implementation would lower output support and weaken future productivity.\n- Upside possibilities:\n  - More resilient growth supported by improved confidence among consumers and service sector firms, notably tourism benefiting from pent-up foreign demand, especially from Asia."
    },
    {
      "heading": "Fiscal policy recommendations",
      "content": "- Overall stance:\n  - Fiscal policy should help the economy navigate shocks while protecting public finance sustainability.\n  - Opportunistically save most windfall revenue from inflation surprises and tax credit accounting changes.\n  - A credible medium-term debt reduction plan, underpinned by specific measures, is advised.\n- Specific guidance:\n  - Saving revenue windfalls would smooth the significant fiscal effort needed to place the public debt ratio on a downward path and support disinflation.\n  - The primary balance for 2023 remains below pre-COVID levels; a faster than planned improvement in the primary balance is warranted and feasible.\n  - There is scope to increase spending efficiency and refine targeting of benefits; limit compensation to the temporary portion of higher energy prices.\n  - Over time, replace saved windfall revenues with efficient fiscal measures that promote sustainable and inclusive growth and boost productivity.\n  - Tax system reform should encourage employment, abolish ineffective tax expenditures, reinforce revenue collection, and protect progressivity.\n  - To contain aging-related spending: link the retirement age to life expectancy; better align benefits with lifetime contributions; discontinue early retirement arrangements.\n  - Suggested spending path: pursue a spending path—including tax expenditures—whereby primary current spending grows 1-2 percentage points below nominal GDP growth while maintaining a 3 percent of GDP primary surplus from 2025 onwards; this would create room for public investment and lower the debt ratio.\n  - Conduct a comprehensive spending review to identify needed savings.\n- Public sector guarantees:\n  - Strong centralized oversight and prudent management is encouraged.\n  - Stress test the guarantee portfolio under adverse scenarios.\n  - Strictly limit new guarantees, lower coverage rates, enhance credit risk assessments, and gradually reduce the stock of guarantees."
    },
    {
      "heading": "Financial sector resilience — findings and recommendations",
      "content": "- Current conditions:\n  - Banks’ capital and liquidity buffers broadly stable at comfortable levels over the past year.\n  - Nonperforming loans (NPLs) declined further.\n  - Higher net interest income and release of pandemic-era provisions boosted banks’ return on equity.\n  - Credit volumes expected to decline and NPLs likely to rise as borrowers’ repayment capacity is crimped by rising interest rates and slower growth.\n  - Funding costs expected to increase, particularly for banks with smaller excess reserves relative to maturing TLTRO borrowing.\n  - Fixed income securities portfolios values declined on rising yields; hedging strategies dampened unrealized losses for some banks.\n  - Pockets of weakness among less significant banks: weaker credit quality, lower provisioning coverage, larger sovereign bond holdings relative to capital.\n  - Insurance companies: increased surrenders of life insurance policies, declines in premium income, unrealized securities losses, though solvency remains solid.\n  - Commercial real estate is a focus area; Italian real estate investment funds are mostly closed-end with limited early redemption risk; residential real estate risks appear limited.\n- Policy recommendations:\n  - Closely monitor banks’ funding plans and adequacy of forward-looking liquidity buffers after TLTRO repayment.\n  - Assess feasibility of using interest rate swaps to bridge duration risk.\n  - Continue tailored stress tests capturing credit, duration, and liquidity risks, including concentrated funding and sovereign exposures.\n  - Calibrate capital and liquidity buffers and challenge dividend and share buyback plans based on stress test results.\n  - Continue comprehensive supervision of less significant banks, with higher capital requirements and guidance.\n  - Complete data collection on current price loan-to-value at individual loan level for commercial real estate exposures.\n- On policy measures and instruments:\n  - Introducing a new windfall tax on bank profits could reduce deposit rates, raise loan costs, and reduce financial intermediation; design should consider impacts on credit availability, credit cost, and resilience.\n  - Limit use of non-standard financial vehicles to mutualize banking sector costs; avoid public-private schemes that use deposit guarantee resources or voluntary contributions to prevent bank failures outside resolution except where rehabilitation prospects are strong.\n  - Reintroduction of a GACS-like scheme should face a high bar given current low NPL rate and ongoing sales/securitizations.\n  - Cap the proposed Guaranteed Loan Active Management (GLAM) scheme at the proposed level of ½ percent of GDP."
    },
    {
      "heading": "Structural reforms and long-term priorities",
      "content": "- NRRP implementation:\n  - Full and timely implementation of the National Recovery and Resilience Plan (NRRP) is needed to lift productivity and boost potential growth.\n  - Strengthen administrative and execution capacity of implementing municipalities to manage high project volumes.\n  - Accelerate procedures to promote competition and integrity of financial resources.\n- Labor market and productivity:\n  - Pursue ambitious, productivity-enhancing structural reforms to offset the drag from a shrinking workforce.\n  - Reduce unemployment and inactivity traps, decrease informality, and avoid propping up declining firms.\n- Energy and climate:\n  - Accelerate transition to renewables to reinforce energy security and meet climate targets.\n  - Prepare for adverse winter scenarios, including a complete shut-off of Russian gas or further hydroelectric disruptions.\n  - Return to market-based energy pricing to encourage efficiency, conservation, and faster renewable uptake.\n  - Identify and resolve bottlenecks delaying renewable projects; avoid new long-term fossil fuel dependence in energy contracts.\n  - Replace excise taxes on electricity with carbon taxes on input fuels to encourage renewable investment.\n  - Amend the superbonus scheme: sharply reduce the subsidy component, limit eligible investments to those achieving significant energy efficiency improvements, and embed mandatory green standards into building codes.\n- Economic fragmentation:\n  - Assess and prepare for risks from global economic fragmentation by enhancing efficiency and productivity, identifying exposed products, and developing coping strategies.\n  - Support EU-level solutions that preserve global integration benefits and multilateralism while accelerating the green transition to strengthen energy security.\n\nMission conducted May 8 – 23, 2023; statement issued May 26, 2023. The mission was led by Rachel van Elkan and comprised Apostolos Apostolou, Aleksandra Babii, Karina Garcia, Sylwia Nowak, Magali Pinat, and Sam Zhang.\n\n---\n\n\n References\n\n- Italy and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/05/25/italy-staff-concluding-statement-of-the-2023-article-iv-mission"
    }
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    "Published: May 26, 2023",
    "Real GDP growth: 3.7 percent in 2022.",
    "Early 2023 activity: expansion of 1.8 percent (year-on-year) in Q1 2023.",
    "Public debt ratio: declined by 10 percentage points from its peak in 2020 on the large rebound in nominal GDP.",
    "Employment: picked up strongly; unemployment rate fell sharply.",
    "Inflation: energy price spike largely reversed, but broadening price pressures have driven core inflation to high levels.",
    "Growth forecast: moderate to 1.1 percent in 2023 and 1.1 percent in 2024.",
    "Near-term outlook: growth expected to temporarily tick up from 2025 as NRRP spending peaks and remain modestly above its long-term trend.",
    "Inflation path: core inflation is forecast to decline gradually, with inflation returning to target only around 2026.",
    "Demographics: falling working-age population will be a drag on long-term growth absent sustained productivity improvements.",
    "Downside risks highlighted:",
    "Upside possibilities:",
    "Overall stance:",
    "Specific guidance:",
    "Public sector guarantees:",
    "Current conditions:",
    "Policy recommendations:",
    "On policy measures and instruments:",
    "NRRP implementation:",
    "Labor market and productivity:",
    "Energy and climate:",
    "Economic fragmentation:",
    "[Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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