{
  "title": "San Marino: Staff Concluding Statement of the 2024 Article IV Mission",
  "publication": "IMF News, October 4, 2024",
  "sourceUrl": "https://www.imf.org/en/news/articles/2024/10/04/cs-san-marino-2024",
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  "summary": "San Marino: Staff Concluding Statement of the 2024 Article IV Mission",
  "publishDate": "2024-10-04",
  "sections": [
    {
      "heading": "Macro outlook and growth prospects",
      "content": "- San Marino’s economy remains resilient, supported by a more diversified growth model with manufacturing and the nonfinancial service exporting sectors as key drivers.\n- After an exceptionally strong post-pandemic recovery in 2021-22, growth slowed in 2023 to 0.4 percent following a decline in external demand.\n- Growth is projected to edge up in 2024 and strengthen further in 2025 as external demand improves.\n- Drivers and risks:\n  - Upside: underlying strength of the manufacturing sector, healthy private sector balance sheets, and prompt implementation of the EU association agreement.\n  - Downside: weakening of external demand and remaining vulnerabilities in the financial sector.\n- Domestic demand outlook:\n  - 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."
    },
    {
      "heading": "Fiscal stance, debt, and recommended consolidation",
      "content": "- Fiscal performance and challenges:\n  - 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.\n  - 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.\n  - Public debt-to-GDP ratio continued declining but remains high.\n- Policy anchor and recommended effort:\n  - The government’s goal: reduce public debt below 60 percent of GDP over the medium term.\n  - Recommended additional fiscal effort: totaling 1 percent of GDP over the next three years.\n- Recommended fiscal measures (summary):\n  - Design and implement a tax reform package introducing a value-added tax (VAT) and broadening the income tax base.\n    - Introduce VAT to enhance fiscal revenues and tax efficiency while minimizing distortions, increasing fairness and progressivity, and aligning indirect tax procedures with international standards.\n    - Redesign tax rebates to avoid overlaps with other exemptions—such as San Marino Card (SMaC) discounts and income tax deductions.\n    - Leverage SMaC technology in combination with electronic invoicing to mitigate tax avoidance in the new VAT system.\n    - Rationalize income tax deductions to significantly enhance income tax revenues.\n  - Improve the efficiency of public spending.\n    - Shift from real expenditure compression across all spending areas to prioritizing consolidation of spending with low social return.\n    - Review transfers to the private sector—including interest subsidy programs—to ensure transfers are more targeted.\n    - Review extra-budgetary funds to rationalize spending.\n    - Prioritize large investment plans based on rigorous cost-benefit analyses.\n  - Keep public wages and pensions growth in check.\n    - Avoid public wage and pension growth above domestic inflation given limited fiscal space.\n  - Long-term pensions:\n    - 2022 pension reform increased contributions, delaying depletion of the pension fund for a decade.\n    - Further parametric calibrations are needed to address generous benefits.\n    - Gradual diversification of pension fund investments towards international markets is recommended to mitigate concentration of risks and increase returns.\n  - Debt management:\n    - Strengthen debt management capacity and provide more autonomy to implement the financing plan approved in the budget.\n    - To smooth the debt amortization of the Eurobond in 2027, consider liability management operations, including smaller international issuances with longer maturities."
    },
    {
      "heading": "Financial sector: progress, vulnerabilities, and reforms",
      "content": "- Recent improvements and remaining risks:\n  - Banks’ liquidity and reported profits improved in 2023; higher interest rates last year improved cyclical profits without deteriorating loan portfolio quality.\n  - Structural profitability remains low due to declining interest margins, high personnel costs, and limited income-generating assets.\n  - The banking sector has tight reported capitalization in some banks; safeguarding of profits to increase capital, as requested by the Central Bank, is welcome.\n  - 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.\n- NPL resolution and AMC actions:\n  - Write-off of a large NPL position and AMC securitization reduced the NPL ratio from 53 to 21 percent.\n  - 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.\n  - Calendar provisioning has prompted banks to expedite recovery and write-offs of NPLs.\n  - Concerns and recommendations:\n    - Improve dissemination of information about the AMC asset recovery to anticipate and address bottlenecks.\n    - Increase risk weights for junior securities faster to reflect differences between net book value and real economic value of NPLs on banks’ balance sheets.\n    - Promptly address any undercapitalization arising from securitization and calendar provisioning with credible capitalization plans.\n    - Lift legal limits on banks’ shareholding structure to strengthen CBSM supervisory powers and help attract external capital.\n- Bank resolution and regulatory alignment:\n  - 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.\n- AML/CFT and institutional capacity:\n  - 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.\n  - The National ML/TF Risk Assessment will be updated next year.\n  - Continue enhancing the adequacy, accuracy, and up-to-dateness of the central beneficial ownership registry.\n- EU association agreement implications:\n  - The agreement requires CBSM to complete alignment of the regulatory framework with the EU.\n  - 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.\n  - 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.\n  - While banks have 15 years to meet requirements, earlier implementation will boost confidence."
    },
    {
      "heading": "Structural reforms, competitiveness, and other policy priorities",
      "content": "- EU association agreement:\n  - 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.\n  - Successful implementation is a priority to support manufacturing competitiveness and consolidate gains in tourism.\n  - Authorities should ensure sufficient resources and staff for implementation without undermining the fiscal consolidation path.\n- Labor market and real estate:\n  - Further labor market flexibility is needed to improve labor reallocation, including in the banking sector.\n  - Real estate market reforms should facilitate price and market information dissemination and foreign ownership to support NPL resolution.\n- Energy and green transition:\n  - Authorities should foster energy safety and the green transition, including by allowing households to sell back excess solar generated electricity."
    },
    {
      "heading": "Key statistics and projections (selected indicators, 2021–26)",
      "content": "- Activity and Prices\n  - Real GDP (percent change): 14.2 (2021), 7.9 (2022), 0.4 (2023), 0.7 (2024), 1.3 (2025), 1.2 (2026)\n  - Unemployment rate (average; percent): 5.2 (2021), 4.6 (2022), 3.9 (2023)\n  - Inflation rate (average; percent): 2.1 (2021), 5.3 (2022), 5.9 (2023), 2.0 (2024)\n  - Nominal GDP (millions of euros): 1,569 (2021), 1,739 (2022), 1,838 (2023), 1,895 (2024), 1,960 (2025), 2,023 (2026)\n- Public Finances (percent of GDP) 1/\n  - Revenues: 20.7 (2021), 22.1 (2022), 21.4 (2023), 20.3 (2024)\n  - Expenditure: 37.1 (2021), 21.7 (2022), 22.2 (2023), 21.6 (2024), 21.5 (2025)\n  - Overall balance: -16.4 (2021), -0.7 (2022), -1.5 (2023), -1.3 (2024), -1.1 (2025)\n  - Government debt (Official): 64.1 (2021), 70.8 (2022), 70.0 (2023), 64.9 (2024), 63.6 (2025), 62.4 (2026)\n  - Public debt 2/: 81.3 (2021), 74.5 (2022), 72.2 (2023), 68.0 (2024), 66.7 (2025), 65.3 (2026)\n- Money and Credit\n  - Deposits (percent change): 4.9 (2021), 1.4 (2022)\n  - Private sector credit (percent change): -10.8 (2021), 0.0 (2022), -23.6 (2023)\n  - Net foreign assets (percent change): 12.6 (2021), -3.4 (2022), -14.4 (2023)\n- External Accounts (percent of GDP)\n  - Current account balance 3/: 5.4 (2021), 15.5 (2022), 13.9 (2023), 6.4 (2024), 3.2 (2025)\n  - Gross international reserves (millions of euros): 842.5 (2021), 533.0 (2022), 739.6 (2023), 729.6 (2024)\n- Financial Soundness Indicators (percent)\n  - Regulatory capital to risk-weighted assets: 14.4 (2021), 14.6 (2022), 16.7 (2023)\n  - NPL ratio: 59.0 (2021), 53.1 (2022), 21.0 (2023)\n  - NPL coverage ratio: 65.0 (2021), 69.8 (2022), 33.6 (2023)\n  - Return on equity (ROE): 3.8 (2021), 10.2 (2022)\n  - Liquid assets to total assets: 27.3 (2021), 26.5 (2022), 28.6 (2023)\n  - Liquid assets to short-term liabilities: 44.0 (2021), 43.1 (2022), 50.1 (2023)\n\nMission Concluding Statement — San Marino: Staff Concluding Statement of the 2024 Article IV Mission (October 4, 2024).\n\n---\n\n\n References\n\n- Republic of San Marino 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/2024/10/04/cs-san-marino-2024"
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    "Published: October 4, 2024",
    "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:",
    "Domestic demand outlook:",
    "Fiscal performance and challenges:",
    "Policy anchor and recommended effort:",
    "Recommended fiscal measures (summary):",
    "Recent improvements and remaining risks:",
    "NPL resolution and AMC actions:",
    "Bank resolution and regulatory alignment:",
    "AML/CFT and institutional capacity:",
    "EU association agreement implications:",
    "EU association agreement:",
    "Labor market and real estate:",
    "Energy and green transition:",
    "Activity and Prices",
    "Public Finances (percent of GDP) 1/",
    "Money and Credit",
    "External Accounts (percent of GDP)",
    "Financial Soundness Indicators (percent)",
    "[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)",
    "[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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