IMF Executive Board Concludes 2021 Article IV Consultation with Belgium
September 15, 2021
Washington, DC: On September 8, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Belgium.
Belgium entered the pandemic with an economy running at full capacity, unemployment at historic lows, and a resilient financial sector, but also with long-standing fiscal and structural challenges unaddressed. The fiscal deficit widened in 2019, eroding buffers. Public debt was high and on an upward path with aging pressures despite a favorable interest-growth differential. Other long-standing challenges included labor-market rigidities, difficulties integrating vulnerable groups, slowing productivity growth, and weak business dynamism.
Belgium has navigated the challenges of Covid-19 well, with a timely, strong, and sustained health and economic policy response containing the impact on activity. Support to households and firms cushioned income and job losses and prevented a sharp rise of bankruptcies. A coalition government took office in October 2020, ending a prolonged period of policy uncertainty, and prioritizing the Covid-19 crisis.
A strong recovery is now underway, underpinned by a well-targeted vaccination strategy that facilitated reopening and boosted confidence, and continued policy support. Growth is expected to remain robust as domestic and external demand recovers, reaching 5.4 and 3.1 percent in 2021-22 before returning to potential of 1.3percent over the medium term. Uncertainty remains high, dominated by Covid-19 dynamics. Near-term risks are balanced, with a stronger recovery as vaccination/reopening proceeds an important upside and a prolonged pandemic, tighter financing conditions, and post-pandemic loss of policy momentum key downsides. Scarring will likely be more contained than initially feared. However, resource reallocation is hampered by deep-rooted labor and product market rigidities, while the pandemic deepened pre-existing fiscal and structural challenges.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the timely, strong, sustained policy response to the pandemic that cushioned impacts on households, firms, and activity. Noting that uncertainty remains high, Directors called for targeted support to remain in place until the crisis abates and recovery is firmly entrenched. Policies should then refocus on long-standing fiscal and structural challenges, steering the recovery towards a greener, more inclusive economy.
While welcoming continued, targeted support in the near term, Directors stressed the importance of rebuilding buffers, anchored on a credible, expenditure-led adjustment plan. They called for ambitious and steady deficit reduction, carefully calibrated over the medium term, to put debt on a firmly downward path, while also protecting critical social spending and creating space for additional growth-enhancing public investment outlays. Directors agreed that this effort should be underpinned by spending reviews and concrete reforms aimed at containing aging and benefits pressures and improving efficiency. They also welcomed tax reforms under preparation, including those aimed at enhancing compliance.
Directors noted the resilience of the financial sector, and the timely adoption of micro- and macroprudential polices to support intermediation. They stressed the need to avoid premature policy tightening to allow for use of available buffers to bolster the recovery. They called for vigilance to real estate risks, including possible macroprudential measures. They emphasized the role of policymakers to assist the financial sector in adapting to challenges from low interest rates, digitalization, and climate change. Efforts to continue strengthening the AML/CFT framework were also encouraged.
Directors noted the disproportionate impact of the pandemic on vulnerable groups, deepening labor market fragmentation. While commending efforts to preserve jobs, they stressed that policies should pivot to fostering reallocation and participation, as the recovery firms, through active labor market policies. They called for more fundamental reforms of social benefits, wage-setting, and employment-protection to ease rigidities and meet ambitious employment objectives.
Directors agreed that complementary reforms are needed to limit scarring, boost productivity, and enhance business dynamism. While welcoming recent insolvency reforms, they called for further enhancing debt-restructuring and insolvency frameworks and reducing regulatory barriers to firm entry and competition. Directors welcomed investment and reform initiatives in the National Resilience and Recovery Plan and encouraged ambitious labor and product reforms. Finally, they noted that meeting the country’s climate targets will require substantial additional effort, federal-regional coordination, and speedy policy execution.
It is expected that the next Article IV consultation with Belgium will be held on the standard 12-month cycle.
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Table 1. Belgium: Selected Economic Indicators, 2019-22
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[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.
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