## San Marino: Staff Concluding Statement of the 2024 Article IV Mission

_IMF News, October 4, 2024_

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## Bibliographic details
- Published: October 4, 2024

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### 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).*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2024/10/04/cs-san-marino-2024_