San Marino: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, October 4, 2024
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- Published: October 4, 2024
Macro outlook and growth prospects
- San Marino’s economy remains resilient, supported by a more diversified growth model with manufacturing and the nonfinancial service exporting sectors as key drivers.
- After an exceptionally strong post-pandemic recovery in 2021-22, growth slowed in 2023 to 0.4 percent following a decline in external demand.
- Growth is projected to edge up in 2024 and strengthen further in 2025 as external demand improves.
- Drivers and risks:
- Upside: underlying strength of the manufacturing sector, healthy private sector balance sheets, and prompt implementation of the EU association agreement.
- Downside: weakening of external demand and remaining vulnerabilities in the financial sector.
- Domestic demand outlook:
- Stronger consumption on the back of rising real wages and higher investment, facilitated by easing financial conditions, will support domestic and external demand in 2025.
Fiscal stance, debt, and recommended consolidation
- Fiscal performance and challenges:
- The fiscal position was stronger than expected in 2023: the government saved cyclical tax revenues, kept expenditures in check, and primary balance was stable in 2023.
- Moderate government spending pressures arose in 2024 as real spending compression reached its limits and the cost of interest subsidies for the private sector expanded.
- Public debt-to-GDP ratio continued declining but remains high.
- Policy anchor and recommended effort:
- The government’s goal: reduce public debt below 60 percent of GDP over the medium term.
- Recommended additional fiscal effort: totaling 1 percent of GDP over the next three years.
- Recommended fiscal measures (summary):
- Design and implement a tax reform package introducing a value-added tax (VAT) and broadening the income tax base.
- Introduce VAT to enhance fiscal revenues and tax efficiency while minimizing distortions, increasing fairness and progressivity, and aligning indirect tax procedures with international standards.
- Redesign tax rebates to avoid overlaps with other exemptions—such as San Marino Card (SMaC) discounts and income tax deductions.
- Leverage SMaC technology in combination with electronic invoicing to mitigate tax avoidance in the new VAT system.
- Rationalize income tax deductions to significantly enhance income tax revenues.
- Improve the efficiency of public spending.
- Shift from real expenditure compression across all spending areas to prioritizing consolidation of spending with low social return.
- Review transfers to the private sector—including interest subsidy programs—to ensure transfers are more targeted.
- Review extra-budgetary funds to rationalize spending.
- Prioritize large investment plans based on rigorous cost-benefit analyses.
- Keep public wages and pensions growth in check.
- Avoid public wage and pension growth above domestic inflation given limited fiscal space.
- Long-term pensions:
- 2022 pension reform increased contributions, delaying depletion of the pension fund for a decade.
- Further parametric calibrations are needed to address generous benefits.
- Gradual diversification of pension fund investments towards international markets is recommended to mitigate concentration of risks and increase returns.
- Debt management:
- Strengthen debt management capacity and provide more autonomy to implement the financing plan approved in the budget.
- To smooth the debt amortization of the Eurobond in 2027, consider liability management operations, including smaller international issuances with longer maturities.
Financial sector: progress, vulnerabilities, and reforms
- Recent improvements and remaining risks:
- Banks’ liquidity and reported profits improved in 2023; higher interest rates last year improved cyclical profits without deteriorating loan portfolio quality.
- Structural profitability remains low due to declining interest margins, high personnel costs, and limited income-generating assets.
- The banking sector has tight reported capitalization in some banks; safeguarding of profits to increase capital, as requested by the Central Bank, is welcome.
- Banks’ efficiency issues: continuing reduction of income-generating assets has not been followed by a scale-down of banking sector employment; largest number of branches per capita in Europe.
- NPL resolution and AMC actions:
- Write-off of a large NPL position and AMC securitization reduced the NPL ratio from 53 to 21 percent.
- Asset recovery of the AMC progressed better than expected: principal of state-guaranteed senior securities declined from 70 to 44½ million euros in the first half of 2024.
- Calendar provisioning has prompted banks to expedite recovery and write-offs of NPLs.
- Concerns and recommendations:
- Improve dissemination of information about the AMC asset recovery to anticipate and address bottlenecks.
- Increase risk weights for junior securities faster to reflect differences between net book value and real economic value of NPLs on banks’ balance sheets.
- Promptly address any undercapitalization arising from securitization and calendar provisioning with credible capitalization plans.
- Lift legal limits on banks’ shareholding structure to strengthen CBSM supervisory powers and help attract external capital.
- Bank resolution and regulatory alignment:
- Update the bank resolution law to gradually complete alignment with EU standards and widen burden-sharing; coordinate this process with addressing existing issues in the banking system.
- AML/CFT and institutional capacity:
- Domestic legal framework amended in 2023 to incorporate the 5th EU AML Directive and improve technical compliance with the FATF standards; resulted in an upgrade by MONEYVAL on technical compliance for AML/CFT sanctions regime.
- The National ML/TF Risk Assessment will be updated next year.
- Continue enhancing the adequacy, accuracy, and up-to-dateness of the central beneficial ownership registry.
- EU association agreement implications:
- The agreement requires CBSM to complete alignment of the regulatory framework with the EU.
- CBSM will need additional staff and financial resources; CBSM financial position should be strengthened to safeguard independence and support financial sector stability through an effective lender of last resort capacity.
- Legacy issues to address to comply with EU standards include gradual conversion of the perpetual bond owned by the state-owned bank into liquid instruments.
- While banks have 15 years to meet requirements, earlier implementation will boost confidence.
Structural reforms, competitiveness, and other policy priorities
- EU association agreement:
- The agreement provides a unique opportunity to accelerate public and financial sector reforms and further integration with the EU single market to boost confidence in the economy and lift potential growth.
- Successful implementation is a priority to support manufacturing competitiveness and consolidate gains in tourism.
- Authorities should ensure sufficient resources and staff for implementation without undermining the fiscal consolidation path.
- Labor market and real estate:
- Further labor market flexibility is needed to improve labor reallocation, including in the banking sector.
- Real estate market reforms should facilitate price and market information dissemination and foreign ownership to support NPL resolution.
- Energy and green transition:
- Authorities should foster energy safety and the green transition, including by allowing households to sell back excess solar generated electricity.
Key statistics and projections (selected indicators, 2021–26)
- Activity and Prices
- Real GDP (percent change): 14.2 (2021), 7.9 (2022), 0.4 (2023), 0.7 (2024), 1.3 (2025), 1.2 (2026)
- Unemployment rate (average; percent): 5.2 (2021), 4.6 (2022), 3.9 (2023)
- Inflation rate (average; percent): 2.1 (2021), 5.3 (2022), 5.9 (2023), 2.0 (2024)
- Nominal GDP (millions of euros): 1,569 (2021), 1,739 (2022), 1,838 (2023), 1,895 (2024), 1,960 (2025), 2,023 (2026)
- Public Finances (percent of GDP) 1/
- Revenues: 20.7 (2021), 22.1 (2022), 21.4 (2023), 20.3 (2024)
- Expenditure: 37.1 (2021), 21.7 (2022), 22.2 (2023), 21.6 (2024), 21.5 (2025)
- Overall balance: -16.4 (2021), -0.7 (2022), -1.5 (2023), -1.3 (2024), -1.1 (2025)
- Government debt (Official): 64.1 (2021), 70.8 (2022), 70.0 (2023), 64.9 (2024), 63.6 (2025), 62.4 (2026)
- Public debt 2/: 81.3 (2021), 74.5 (2022), 72.2 (2023), 68.0 (2024), 66.7 (2025), 65.3 (2026)
- Money and Credit
- Deposits (percent change): 4.9 (2021), 1.4 (2022)
- Private sector credit (percent change): -10.8 (2021), 0.0 (2022), -23.6 (2023)
- Net foreign assets (percent change): 12.6 (2021), -3.4 (2022), -14.4 (2023)
- External Accounts (percent of GDP)
- Current account balance 3/: 5.4 (2021), 15.5 (2022), 13.9 (2023), 6.4 (2024), 3.2 (2025)
- Gross international reserves (millions of euros): 842.5 (2021), 533.0 (2022), 739.6 (2023), 729.6 (2024)
- Financial Soundness Indicators (percent)
- Regulatory capital to risk-weighted assets: 14.4 (2021), 14.6 (2022), 16.7 (2023)
- NPL ratio: 59.0 (2021), 53.1 (2022), 21.0 (2023)
- NPL coverage ratio: 65.0 (2021), 69.8 (2022), 33.6 (2023)
- Return on equity (ROE): 3.8 (2021), 10.2 (2022)
- Liquid assets to total assets: 27.3 (2021), 26.5 (2022), 28.6 (2023)
- Liquid assets to short-term liabilities: 44.0 (2021), 43.1 (2022), 50.1 (2023)
Mission Concluding Statement — San Marino: Staff Concluding Statement of the 2024 Article IV Mission (October 4, 2024).