Workers Concluding Assertion of the 2022 Article IV Mission

October 7, 2022

San Marino: Workers Concluding Assertion of the 2022 Article IV Mission

October 7, 2022

A Concluding Assertion describes the preliminary findings of IMF workers on the finish of an official workers go to (or ‘mission’), usually to a member nation. Missions are undertaken as a part of common (normally annual) consultations below Article IV of the IMF’s Articles of Settlement, within the context of a request to make use of IMF sources (borrow from the IMF), as a part of discussions of workers monitored packages, or as a part of different workers monitoring of financial developments.

The authorities have consented to the publication of this assertion. The views expressed on this assertion are these of the IMF workers and don’t essentially symbolize the views of the IMF’s Govt Board. Based mostly on the preliminary findings of this mission, workers will put together a report that, topic to administration approval, will probably be introduced to the IMF Govt Board for dialogue and resolution.

San Marino’s financial efficiency has been outstanding over the past two
years. Nevertheless, larger vitality costs

beneath neighboring international locations

weakening exterior demand and tighter worldwide monetary
circumstances will have an effect on development going ahead. This difficult context
mixed with the rollover of the Eurobond, requires additional constructing
up of buffers. Preserving wholesome ranges of fiscal and monetary sector
buffers is essential to protect stability and confidence in a euroized
financial system like San Marino. Specifically, an bold fiscal
consolidation, and additional efforts to deal with excessive nonperforming loans
and enhancements in banks’ capitalization must be authorized and
carried out directly.

The Sammarinese financial system has skilled sturdy development with a decent
labor market, elevated confidence, and noteworthy stability over the
final two years.

With development projected at 8.3 p.c for 2021, the robust momentum has been
saved thus far this yr leading to a degree of financial exercise
considerably above pre-pandemic heights. Sturdy exterior demand boosted
manufacturing and a rebound in tourism led to robust financial exercise that
mixed with elevated confidence, led to larger authorities and banking
sector deposits and worldwide reserves. On this context, employment
reached the very best degree in over a decade and the tight home labor
market led the authorities to liberalize cross-border employment. On the
similar time, the banking sector skilled a continued deposit enhance and
improved liquidity, profitability, and capitalization.

With larger vitality costs, tightening monetary circumstances, and rising
international uncertainty, exercise is anticipated to decelerate.

The vitality worth will increase are eroding households’ actual revenue and corporations’
revenue margins. Mixed with weakening exterior demand, these developments
are anticipated to contribute to a marked deceleration of financial exercise
and deterioration of the present account surplus and worldwide reserves
because the financial system adjusts to the unfavourable phrases of commerce shock. As exercise
slows down, fiscal revenues will probably be impacted whereas inflation can enhance
spending pressures including to pre-existing fiscal challenges. Draw back dangers
associated to Russia’s invasion of Ukraine, significantly an extra disruption
of vitality provides in Europe, proceed to dominate the outlook though the
outstanding resilience of the financial system in the previous few years might present
some upside threat. On this connection, the cautious wage will increase agreed in
the latest collective bargaining settlement within the industrial sector will
assist protect employment because the financial system weakens, offering welcome
flexibility to the labor market. The rollover of the Eurobond in early 2024
stays a threat.

The authorities’ response to excessive vitality costs permits worth alerts to
function, helps susceptible teams and mitigates the macroeconomic

By a mixture of a long-term gasoline contract signed final yr and well timed
electrical energy contracts, complemented with hedging operations simply earlier than
costs surged, San Marino was in a position to safe considerably decrease gasoline and
electrical energy import worth will increase than these in Europe for this yr and
subsequent. This has allowed the authorities to regulate tariffs to price restoration
ranges however nicely beneath neighboring international locations, at minimal fiscal prices,
avoiding the possibly disruptive macroeconomic affect related to
unprecedentedly giant tariff will increase. The authorities’ plans to
pass-through import vitality costs to shoppers subsequent yr will proceed to
keep away from fiscal prices and protect the monetary soundness of the state-owned
utility firm (AASS).

Rising international rates of interest, elevated public debt, and the
Eurobond rollover in 2024, name for an bold path for fiscal coverage
however weakening financial exercise.

With elevated international monetary uncertainty, the authorities must be
able to make the most of favorable market circumstances and rollover the
Eurobond at any time when the chance arises beginning early subsequent yr. Sturdy
financial exercise thus far this yr has quickly boosted revenues, whereas
the affect of the vitality disaster on the funds has been restricted. Given the
weakening outlook, the authorities ought to save income over-performance
this yr to construct up authorities deposits whereas resisting spending
pressures. Going ahead, strengthening the fiscal place would require a
fiscal adjustment by the central authorities of two p.c of GDP over the
subsequent three years to succeed in a central authorities main stability of two.5
p.c of GDP complemented by pension reform. Specifically,

  • Revenues.
    The proposed revenue tax legislation amendments must be promptly authorized and
    be extra bold in simplifying the system and decreasing exemptions and
    loopholes. The delay in implementing it this yr
    might depart San Marino in a susceptible fiscal place with a debt path
    that’s declining however not sturdy to most shocks. Moreover,
    introducing a Worth Added Tax must also be thought-about significantly in
    the context of nearer EU integration. Lastly, there’s additionally room to
    enhance revenues by repealing reductions on petroleum merchandise and
    increasing the usage of excise duties that might, on the similar time, assist
    tackle environmental externalities.
  • Spending.
    Public sector wage and pension enhance in keeping with lately agreed
    personal sector collective bargaining agreements might comprise
    expenditure completely and help the wanted fiscal consolidation in
    the close to time period. Extra broadly, additional enchancment in spending effectivity
    will probably be wanted and spending evaluate throughout all public sector items is
    important to comprise authorities spending. Finalizing the Public
    Monetary Administration reform will improve management over public funds
    via higher accounting, reporting and transparency.
  • Pensions.
    The pension reform below parliamentary dialogue, stabilizes the
    system’s deficit over the following decade however additional recalibration of
    pension spending will probably be wanted to make sure long-term sustainability. The
    approval of this reform, anticipated this yr, is a key precedence that
    can’t be delayed given growing deficits of the Social Safety. By
    growing contribution charges, the reform reduces projected deficits
    and stabilizes pension fund property within the near-term. Nevertheless, within the
    absence of extra bold measures to comprise pension spending—linking
    the retirement age to life expectancy, growing penalties for early
    retirement, and calculating advantages primarily based on the whole
    profession—deficits will reemerge requiring a depletion of pension fund
    property. Lastly, the present restrict on authorities transfers to the
    Social Safety must be preserved.

There’s a have to develop a complete debt administration technique
that may help debt sustainability and assist develop a home debt
market over the medium-term.

With restricted fiscal house, San Marino wants a robust, medium-term debt
administration framework to cut back rollover threat and monetary price, that
incorporates plans for worldwide and home issuances, and will increase
predictability. Publishing a medium-term debt technique, an issuance
calendar and an annual public debt report will assist on this regard. On this
context, the conversion of ex-BNS uninsured depositors’ bonds will assist
develop the home debt market and cut back the burden on taxpayers.
Importantly, it can additionally clean financing wants in a difficult interval.

Banks’ profitability and capitalization have improved, however important
challenges stay.

In 2021, banks have achieved profitability for the primary time for the reason that
International Monetary Disaster and their capital base was strengthened. Nevertheless,
with terribly excessive nonperforming loans (NPLs) and the latest halt of
effectivity enhancements, profitability stays restricted and fragile. Within the
context of falling bond valuations and weakening exercise, new pressures on
the capital base have arisen. The Central Financial institution of San Marino (CBSM) allowed
banks to switch property from the buying and selling to the funding portfolio that
is held till maturity. The plan to report these operations transparently
is welcome.

There was a delay within the implementation of the technique to cut back

NPLs tie up administrative sources and banks’ capital, limiting the
capability of recent lending to help financial exercise. An asset administration
firm might create the economies of scale to deal with system extensive NPLs
extra effectively, whereas offering recent liquidity to banks and the
alternative of getting an exterior valuation of NPLs. Nevertheless, the dearth of
implementation greater than two years after having been designed, has delayed
banks personal NPL decision. Progress has been made establishing the by-laws
for the servicer, the supervisory framework for the therapy of auto
property acquired by banks, and pre-selecting respected exterior arrangers,
with the ultimate choice presently underway. If NPLs are discovered to have a
actual financial worth beneath the online e-book worth, their switch ought to
transparently lead to a discount of capital ratios. Any
undercapitalization that might come up must be promptly addressed with
credible capitalization plans. There must be a transparent expectation and
incentive construction for many NPLs to be transferred. NPLs remaining in
banks’ e-book must be topic to progressive recognition of previous losses
(calendar provisioning), following European requirements.

In a euroized financial system with out unbiased financial coverage, preserving
wholesome ranges of monetary sector liquid buffers is essential to protect
stability and confidence.

That is extra so given the restricted instruments out there to soak up shocks,
heightened worldwide uncertainty and elevated volatility in monetary
markets. As anticipated, worldwide reserves have fallen as banks deposits
at CBSM moved overseas to make the most of larger charges, a development that’s
anticipated to proceed within the close to time period..

San Marino ought to proceed to make progress in strengthening
implementation of the AML/CFT framework

. The AML/CFT evaluation report by MONEVYAL indicated satisfying ranges of
effectiveness in lots of areas however highlighted some areas the place additional
efforts are wanted together with supervision, preventive measures (i.e.
buyer due diligence), transparency of authorized individuals and authorized
preparations, cash laundering investigations, and focused monetary
sanctions for terrorism and proliferation financing. Taking this into
account, the authorities are within the technique of transposing the V AML
directive into the home authorized framework.

Reforms that protect and help macroeconomic stability must be
complemented with structural reforms wanted to spice up long-term development.

Progress in direction of the EU affiliation settlement and the labor market reform
are welcome however must be accomplished and carried out. Specifically, labor
market reform ought to make everlasting the latest liberalization of
cross-border employees and enhance flexibility of momentary employment.
Plans to enhance the enterprise local weather are important and additional efforts are
wanted to enhance an outdated insolvency framework.

The mission want to thank the authorities and different counterparts
for his or her heat hospitality in addition to open and productive discussions.

IMF Communications Division


Telephone: +1 202 623-7100Electronic mail: [email protected]


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