Republic of San Marino: IMF Executive Board Concludes 2015 Article IV Consultation

Press Release No. 15/163 April 8, 2015

On March 25, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the Republic of San Marino.

Over the last five years, San Marino has weathered the implosion of its offshore banking system, the global crisis, and difficult relations with Italy. These shocks resulted in a loss of a third of output since 2008. Nonperforming loans in the banking system have risen to high levels, and the largest bank in the system has required 13 percent of GDP in public support.

The economy is now stabilizing, reflecting San Marino’s improved relations with Italy and stable bank deposits. As a consequence, modest positive growth is expected this year. However, risks remain tilted to the downside, as the weak financial sector continues to cast a shadow over the medium-term outlook.

More needs to be done to ensure the banking system can support the recovery. The incomplete restructuring of the largest bank needs to be accelerated. The authorities should conduct in-depth asset quality assessments of the other banks, followed by plans to increase bank capital where needed.

Fiscal policy should aim at rebuilding the buffers that served San Marino well during the crisis. Gradual consolidation of 2½ percent of GDP over five years would be appropriate. Structural policies need to facilitate the reallocation of resources to the nonbanking sectors of the economy by further improving the business environment.

San Marino has recently achieved important milestones in international cooperation, including in the area of anti-money laundering. A continued focus in this area is essential for a new growth model to emerge.

Executive Board Assessment²

Executive Directors welcomed signs that the economy is stabilizing and the greatly improved international relations, but noted that challenges remain, particularly in the banking sector.

Directors noted the improving liquidity conditions in the banking system, but stressed the importance of dealing with the very large stock of nonperforming loans. They underscored that a plan including reviews of banks’ asset quality, higher provisions, and contingency plans to deal with any capital shortfalls would help put the banking system in a position to support the economic recovery. In this context, Directors urged the authorities to accelerate the incomplete restructuring of Cassa di Risparmio della Repubblica di San Marino, improve its governance, and implement a strong and credible business plan to limit the risk of further public support.

Directors welcomed the authorities’ initial progress toward rebuilding the fiscal buffers that served the country well in the past. They stressed, however, that additional measures over the medium term are needed. Directors recommended a strategy aimed at lower expenditure and modestly higher revenue. Expenditure policy should focus on curtailing the public sector wage bill, public pensions, and health benefits, while creating space for capital spending. Directors also noted that establishing access to international capital markets would provide additional buffers to deal with shocks.

Directors commended the authorities for achieving important international cooperation milestones such as the inclusion of San Marino in Italy’s tax white list. They considered the conclusion of a memorandum of understanding with the Bank of Italy and an association agreement with the European Union to be key short- and medium-term priorities, respectively. Directors welcomed recent improvements in the business environment, and noted that continued progress along this path will help San Marino diversify its economy and develop a sustainable growth model.