IMF Executive Board Concludes 2009 Article IV Consultation with San MarinoPublic Information Notice (PIN) No. 10/32
February 25, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On February 17, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with San Marino.1
The global financial crisis, which began to affect the economy of San Marino in the second half of 2008, is likely to continue to do so in 2009‒10. Growth turned negative by 1.1 percent in 2008; it is projected to be minus 5 percent in 2009 and to remain negative in 2010. As a consequence, unemployment is on the rise and inflation is declining. Due to the sharp deterioration in domestic demand, the trade balance is expected to improve.
Short-term vulnerabilities in the financial sector have risen due to exposure of the largest bank to a troubled Italian banking group and to liquidity pressures from a tax amnesty adopted by the Italian government. The authorities have responded with a range of policy measures, which have so far resulted in the orderly unwinding of the banks’ positions, but significant vulnerabilities remain.
For the medium-term, the economy of San Marino must adjust to the new international environment of greater transparency, but it is not yet clear how the economy will adapt to the end of activities based on limited bank secrecy.
Executive Board Assessment
Executive Directors noted the significant negative impact of the global economic crisis on San Marino’s economy and the macro financial vulnerabilities that the country faces. Directors endorsed the measures taken by the authorities to address the immediate pressures. They commended the authorities for strengthening international cooperation in economic and financial matters and for their effort to reach a double taxation agreement with Italy, which would help facilitate a repositioning of the economy.
Directors noted that the financial sector has withstood pressures relatively well. They commended the authorities for managing effectively the emerging liquidity pressures. However, in light of the continued uncertainties, Directors stressed that the central bank should maintain the safeguards it had adopted. Directors agreed that as soon as liquidity pressures abate, mandatory deposits should be replaced by a conventional reserve requirement system. They noted that recapitalization of the largest bank would enhance its financial strength.
Directors expressed concern about the dismissal of the head of banking supervision at the central bank and the ensuing resignation of its top management. They stressed that these developments impact the effectiveness of financial supervision and undermine the credibility of the reform process in the financial sector and the reputation of the country’s financial authorities. Directors called on the authorities to resolve this issue urgently and to take the necessary action to rebuild the reputation and credibility of the central bank and ensure its independence and accountability.
Directors considered the authorities’ fiscal policy stance to be broadly appropriate. At the same time, they emphasized the importance of ensuring fiscal sustainability. Consolidation measures should include reducing current expenditures as well as resuming pension reforms and consideration should be given to introducing co-payments on healthcare services and products.
Directors urged the authorities to implement the Financial Sector Assessment Program (FSAP) recommendations to further reinforce financial sector supervision and create a level playing field with the European Union. Noting structural weaknesses in the systemic liquidity management framework, Directors encouraged the authorities to address the lack of an effective lender-of-last resort framework, for example through better integration of Sammarinese banks with reputable international banks.
Directors underscored the need for greater product and labor market flexibility to improve the country’s business model. Noting the progress made in the statistical system, they encouraged the authorities to strengthen this effort.
Directors appreciated the transparency measures adopted by the authorities, including on anti-money laundering and combating the financing of terrorism, and urged them to fortify these efforts.