IMF Executive Board Concludes 2021 Article IV Consultation

November 23, 2021

Washington, DC: On November 15, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of San Marino.

San Marino entered the COVID-19 crisis with large vulnerabilities. Notwithstanding limited buffers and a constrained policy response, economic performance was in line with other countries similarly affected by the pandemic. GDP is estimated to have fallen by 7.2 percent compared to an average of 6.3 percent in the euro area in 2020. GDP recovered strongly in the second half of the year as restrictions were relaxed. The strength of the manufacturing sector proved a key source of resilience with activity exceeding pre-pandemic levels by late last year.

The policy response was targeted and helped avoid major disruptions. The authorities adopted measures to support the health sector and the most vulnerable population, including with direct transfers and expanding the wage supplement scheme. With revenues collapsing and limited financing options, the government was forced to reallocate non-priority spending until large-scale external borrowing was secured for the first time in San Marino’s history. This allowed a significant step-up in the policy response and to rebuild liquidity buffers, providing macroeconomic stability.

Fast vaccination rollout, accommodative policies and a supportive external environment are underpinning a strong recovery and are likely to result in limited scarring. While stronger buffers and progress in banking sector reforms have reduced short-term vulnerabilities, new medium-term risks add to pre-existing challenges. Macroeconomic risks to the economy are significant, including scarring, external shocks, high energy prices and a worsening of the pandemic. With higher debt and limited fiscal space over the medium-term, uncertainty regarding the timing and approval of fiscal reforms, refinancing risks from external borrowing and weak banks’ balance sheets could undermine confidence and growth. However, actions taken since the outbreak of the crisis in the banking sector and accessing international capital markets have provided an opportunity to implement an ambitious reform agenda and move San Marino into a new sustainable growth model.

Executive Board Assessment [2]

Executive Directors noted that the pandemic has had a significant impact on the economy. They welcomed the successful vaccination campaign and the policy response, which have helped mitigate the impact of the pandemic and should help limit long-term scarring. The expected strong recovery of the San Marino economy will allow the authorities to refocus attention on long-standing issues.

Directors pointed to risks stemming from large public support to the banking system that increased public debt. They recommended targeting fiscal support going forward and emphasized that the recovery provides an opportunity to strengthen the fiscal position in order to put debt on a clear declining path. Directors stressed the need to build debt management capacity, improve public financial management, and mobilize revenues through better tax compliance and the introduction of VAT. Directors also saw room to improve the efficiency of public spending and the targeting of social programs, and implement pension reform. They also underscored the need to preserve high liquidity buffers to further mitigate risks.

Directors stressed the importance of a strong and viable banking system and welcomed the steps taken to address legacy issues and improve efficiency. They emphasized the need to continue strengthening banks’ capital, maintain liquidity buffers, and improve underwriting standards. Directors welcomed recent progress to tackle the large amount of NPLs but stressed the importance of containing risks to safeguard taxpayers from bearing further fiscal costs. Directors encouraged the authorities to address remaining AML/CFT issues.

Directors emphasized the importance of implementing structural reforms to address long-standing economic and social challenges and boost long-term growth. Further efforts are needed to reduce bureaucracy, revamp the insolvency framework, deepen international integration, continue the comprehensive reform of the labor market, and foster digitalization.

Directors encouraged the authorities to improve the frequency of data provision for surveillance.


San Marino: Selected Economic Indicators, 2016–21

Est.

Proj.

2016

2017

2018

2019

2020

2021

Activity and Prices

Real GDP (percent change)

2.3

0.3

1.5

2.4

-7.3

5.5

Unemployment rate (average; percent)

8.6

8.1

8.0

7.7

7.3

6.1

Inflation rate (average; percent)

0.6

1.0

1.8

1.0

0.2

1.6

Public Finances (percent of GDP) 1/

Revenues

23.3

22.3

23.0

22.9

21.6

20.5

Expenditure

23.4

25.7

24.5

22.4

59.1

39.4

Overall balance

-0.2

-3.4

-1.6

0.5

-37.5

-18.9

Government debt (Official)

24.0

25.9

30.1

32.0

77.9

75.0

Public debt 2/

24.0

61.0

63.5

63.5

77.9

94.3

Money and Credit

Deposits (percent change)

-4.7

3.3

1.3

-5.7

8.6

Private sector credit (percent change)

-5.1

1.1

-2.9

-7.1

-0.1

Net foreign assets (percent of GDP)

161.1

138.1

131.6

120.7

141.5

External Accounts (percent of GDP)

Current account balance

-0.1

-1.9

6.2

2.8

1.3

Gross international reserves (millions of euros)

427.8

252.7

248.1

410.6

637.0

650.0

Financial Soundness Indicators (percent) 3/

Regulatory capital to risk-weighted assets

11.5

13.7

12.3

9.5

10.7

NPL ratio

50.0

54.0

53.0

61.7

63.5

NPL coverage ratio

54.8

56.0

59.9

63.7

65.1

Return on equity (ROE)

-13.2

-10.1

-16.1

-70.3

-11.1

Liquid assets to total assets

23.7

18.6

22.8

19.8

22.4

Liquid assets to short-term liabilities

44.8

33.3

41.2

36.0

38.6

Sources: International Financial Statistics; IMF Financial Soundness Indicators; Sammarinese authorities; World Bank; and IMF staff.

1/ For the central government.

2/ Central government (official) debt plus Social Security Fund and BNS debt.

3/ 2017–18 data do not reflect 2017 AQR results, while 2019 data reflect changes related to Banca CIS resolution.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www.imf.org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .

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