Press Release No. 21/43

Republic of San Marino: Staff Concluding Statement of an IMF Staff Visit

February 17, 2021

Washington, DC: An International Monetary Fund (IMF) team, led by Mr. Borja Gracia, held virtual meetings during February 8–12, 2021, to discuss recent economic and financial developments and progress on the structural reform agenda. At the end of the visit, Mr. Gracia issued the following statement:

The COVID-19 pandemic has had a significant impact on San Marino’s economy that has, however, shown resilience despite pre-existing challenges. Traditional sectors like tourism and retail have been particularly affected. In this difficult context, the policy support provided by the government has been appropriate and has helped the economy cope with the fallout from the pandemic. The authorities intend to provide further support until the recovery is on a strong footing. While the exact details of the new policy support are currently being discussed, the continuation of some of the measures adopted last year appears reasonable. Financing has been secured by a one-year loan issued in December and a three-year Eurobond issued on February 16 for a total of EUR490 million.

The government’s fiscal strategy is ambitious and will require broad political and social support, and proper sequencing and prioritization to maximize its chances of success. Having accessed international capital markets for the first time, restoring fiscal sustainability remains a challenge and a key priority. In this regard, introducing a well-designed VAT in a timeline that is consistent with the tax administration capacity is critical to boost revenue collection. At the same time, rationalizing tax exemptions could further help efforts to raise revenue. The unsustainability of the pension system requires urgent reform and it is encouraging that specific reform proposals will soon be discussed with social partners. The intention to pursue other structural fiscal reforms in public financial management and tax administration while continuing previous efforts to achieve efficiency in spending, is welcome.

The resilience of the financial sector during the pandemic has been remarkable. While deposits have remained stable, the impact of the crisis on non-performing loans (NPLs) has been limited so far. The moratoria on principal repayments on loans, and public guarantees on specific loans have had a limited take-up but have been helpful in providing economic relief to those most affected. However, the crisis is not over and its long-term impact on some businesses and individuals might result in a deterioration of banks’ loan portfolios. Banks will need to take a proactive approach in analyzing these potential losses and start provisioning accordingly while the Central Bank of San Marino should remain vigilant in its supervisory role.

The authorities have made significant progress to address structural problems in the financial sector. The recent recapitalization of Cassa di Risparmio di San Marino (CRSM) with a perpetual interest-bearing bond combined with a significant reduction in operating costs recognized the urgent need to strengthen its capital position as well as its profitability. More generally, efforts need to continue to ensure the successful implementation of a deep restructuring in the financial sector to increase banks’ efficiency and profitability. Accelerating the resolution of NPLs will also support these efforts and can benefit from the new securitization law being discussed in parliament. The authorities plan to develop a vehicle for NPL resolution should be carefully considered to avoid potential risks to public finances and delayed recognition of bank losses.

Structural reforms would strengthen external competitiveness, improve the business environment, and limit the scarring effect of the crisis while improving growth prospects. Timely implementation of other legislation, including those related to corporate insolvency, the labor market and limiting red tape, remain essential to promote higher growth.

We are grateful to the authorities for open and constructive discussions during the visit. The team met with Governor of the CBSM Tomasetti, Secretaries of State for Finance, Marco Gatti, of Foreign Affairs Luca Beccari, of Industry, Fabio Righi, of Labour, Teodoro Lonfernini, other senior officials and representatives of the private sector. We look forward to continuing our regular dialogue with the authorities.”