On February 27, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV Consultation[1]with Belgium.
Belgium's post-pandemic recovery has slowed with spillovers from Russia's war in Ukraine, high inflation, tighter financial conditions, and elevated uncertainty. In response to the spike of energy prices, the federal and regional authorities provided timely and substantial support to households and firms. Along with automatic indexation of wages and benefits, energy support helped cushion impacts, although at significant cost, increasing the fiscal deficit in 2022 and 2023. The labor market has remained tight, with record-high job creation and low unemployment. The external current account swung to a large deficit in 2022, due largely to higher energy imports and lower vaccine exports. A resilient financial sector is facing challenges from the weaker macro-financial environment. Some important structural reforms took place in 2022.
Growth is expected to slow from 3.0 percent in 2022 to 0.2 percent in 2023, before returning to potential of 1.2 percent over the medium term. Inflation should decelerate from 10.3 percent in 2022 to 5.5 percent in 2023, as energy prices ease. Indexation has opened a wage gap with key trading partners, posing challenges for competitiveness. With aging and social-benefit pressures and in the absence of adjustment measures, the structural fiscal deficit is expected to remain elevated over the medium term at 5½ percent of GDP and high public debt will also rise to about 120 percent of GDP in 2028, increasing vulnerabilities. Risks are tilted to the downside, related to escalation of the war in Ukraine and a sharper-than-expected tightening of financial conditions. Lower energy prices would reduce fiscal pressures, and with progress on structural reforms before elections in 2024, boost confidence.
Executive Board Assessment[2]
Executive Directors broadly agreed with the thrust of the staff appraisal. They welcomed the authorities' timely policy response, which helped cushion the impact of the energy crisis on household and firms and strengthened energy security, but also led to fiscal deterioration and an erosion of competitiveness. Noting the economic slowdown this year and elevated uncertainty and downside risks, Directors called for prudent policies to preserve fiscal sustainability and financial stability and for structural reforms to boost competitiveness and reinvigorate growth.
Directors recommended a credible and ambitious multi-year, expenditure-led fiscal adjustment, drawing on spending reviews, to put debt on a declining path, replenish buffers, and complement monetary policy in curbing inflation. They encouraged the authorities to rationalize current spending while increasing productive public investment. Directors emphasized that energy support measures should remain limited and temporary, be better targeted, and maintain price signals. They also encouraged improved coordination of spending across government levels and welcomed efforts to initiate tax reforms and enhance public investment management.
Directors concurred that financial sector policies should continue to balance ensuring adequate credit provision, preserving resilience, and facilitating deployment of buffers to absorb losses when needed. Given rising interest rates and the slowing economy and housing market, they called for close monitoring of financial stability risks. While most Directors supported the authorities' near-term hold on additional macroprudential policy tightening, some Directors considered that further tightening could be desirable to continue strengthening resilience, as long as macro-financial conditions allow. Directors welcomed recent steps to further strengthen the AML/CFT framework and looked forward to the conclusions of the ongoing FSAP.
Directors emphasized that further labor and product market reforms are key to improve productivity and competitiveness and reinvigorate growth. They recommended additional measures to facilitate labor reallocation, including enhancing labor market flexibility and incentive setting in the social security and pension systems. Directors noted that pension reforms are critical for Belgium to receive the Next Generation EU funds. They also encouraged the authorities to consider revising the wage indexation framework once inflationary pressures subside. They welcomed efforts to improve the business environment, including reforms to the restructuring and insolvency frameworks and actions to strengthen cyber risk monitoring and preparedness.
Directors agreed that reaching ambitious climate goals require a wider set of initiatives and greater focus on coordination and execution, including aligning national climate policies with more ambitious EU targets and considering raising carbon pricing. They welcomed the significant new investments in renewables to enhance energy security.
It is expected that the next Article IV consultation with Belgium will be held on the standard
12-month cycle.
[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://www.imf.org/external/np/sec/misc/qualifiers.htm.
Table 1. Belgium: Selected Economic Indicators, 2021-23
Sources: Haver Analytics, Belgian authorities, and IMF staff projections. 1/ Contribution to GDP growth. |
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