IMF Wraps Up 2023 Article IV Talks with San Marino

Washington, DC: On November 17, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1]with the Republic of San Marino and considered and endorsed the staff appraisal without a meeting.

Despite external shocks and higher interest rates, growth has remained resilient in San Marino. Prudent policies and access to international capital markets increased policy buffers to healthy levels. Robust external demand until recently boosted manufacturing and the tourism sector. With the economy booming, employment reached record levels. The recovery has so far been resilient to headwinds from higher inflation, tightening financial condition and weak external demand. However, these factors and heightened global uncertainty will weigh on activity that is expected to slow down. Inflation is forecasted to remain elevated but declining in line with Italian trends.

The successful Eurobond rollover in May 2023 significantly reduced short-term risks improving domestic liquidity and supporting confidence. Downside risks relate to the weakening of external conditions, and further global monetary tightening while domestic risks concentrate on political uncertainty due to elections next year and remaining vulnerabilities in the financial sector. The underlying strength of the manufacturing sector and healthy private sector balance sheets provide some upside risks to the baseline.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed that San Marino has shown remarkable resilience to recent external headwinds. Directors, however, noted that growth is expected to slow toward its potential, in the context of tightening financial conditions, weak external demand, and heightened uncertainty. Noting that risks are tilted to the downside, Directors emphasized the importance of preserving macroeconomic stability, restructuring the financial sector, and enhancing potential growth.

Directors welcomed the improved fiscal position and underscored that further efforts are needed to reduce debt to below 60 percent of GDP by 2028. Important measures include broadening the income tax base, introducing a VAT, and improving the efficiency of public spending, by strengthening public financial management and better targeting social programs. Directors recommended continued prudent wage and pension indexation and highlighted that further reforms are needed to ensure the long-term sustainability of the pension system. They also stressed the need to develop and communicate a medium-term fiscal and debt strategy.

Directors recognized the considerable progress made in restructuring and consolidating the banking sector, but highlighted that vulnerabilities remain especially in a higher interest rate environment. Noting the elevated nonperforming loans (NPLs), high operational costs, and weak capitalization in some banks, Directors stressed the need to improve banks' profitability and capitalization, while avoiding forbearance and limiting fiscal risks. Directors welcomed the progress in implementing the authorities' strategy to reduce NPLs through an Asset Management Company (AMC) and calendar provisioning. They emphasized the need for credible capitalization plans to promptly address any undercapitalization that arises from the implementation of the strategy. Directors also underscored the importance of a strong governance structure for the AMC to reduce implementation risks. They encouraged efforts to improve and align the bank resolution framework with European standards.

Directors recommended strengthening the central bank's financial position to safeguard its independence and support financial sector stability. They also encouraged measures to strengthen the AML/CFT framework.

Directors underscored that structural reforms are critical to support long-term growth. They highlighted that the Association Agreement with the EU would enhance economic integration and attract foreign investments. Directors also stressed that further efforts are needed to increase the flexibility of the labor market, preserve the financial soundness of the state-owned utility company, and improve the insolvency framework. Noting that data provision remains broadly adequate for surveillance, Directors encouraged further efforts to improve the quality and the frequency of data.

San Marino: Selected Economic Indicators, 2018–23