Washington, DC – April 9, 2024: An International Monetary
Fund (IMF) mission visited San Marino during April 3-9, 2024, to discuss
with the Sammarinese authorities’ recent economic developments and the
challenges that weakening activity and higher interest rates will pose for
San Marino. At the conclusion of the visit, Borja Gracia, IMF mission chief
for San Marino, made the following statement:
Growth slowed down in 2023 from historical heights despite weaker
activity in the manufacturing sector.
Manufacturing growth, a key driver during 2021-22, slowed last year due to
weak external demand and higher costs. Nevertheless, manufacturing exports
have stabilized at high levels. Following the trend in Italy, the service
sector showed resilience and the labor market remains tight with close to
full employment. Growth in 2024 is projected to be around 1 percent,
showing a moderate recovery, but uncertainty related to the volatile
international environment weighs on the growth outlook.
Prudent fiscal policy continued in 2023, but further
consolidation efforts are needed to sustain these gains and ensure a
strong fiscal position.
The government has appropriately saved inflation revenue windfalls and
prudently indexed public sector wages and pensions below inflation
containing spending pressures. However, San Marino is a euroized small open
economy with remaining vulnerabilities in the financial sector and limited
fiscal buffers. Thus, further consolidation is needed through tax policy
reforms and improvements of spending efficiency. At the same time, a
further recalibration of the pension system focused on addressing the
challenges of an aging population, generous benefits and low penalties for
early retirement will be needed to ensure the long-term sustainability of
the pension system.
Efforts to reduce banks’ nonperforming loans (NPLs) reached a milestone
with the establishment of the Asset Management Company and the
introduction of calendar provisioning consistent with the European
framework.
The securitization and Cassa di Risparmio della Repubblica di San Marino’s
decision to write off legacy assets have substantially reduced NPLs. At the
same time, the establishment of the government guarantee below expected
recovery values minimizes fiscal risks. Nevertheless, any
undercapitalization that could arise from these developments should be
promptly addressed with credible capitalization plans.
Higher interest rates have significantly improved the profitability of
banks without deteriorating the quality of the loan portfolio so far. The liquidity of the banking system increased last year too. However, the
structural profitability of most banks remains low. Looking ahead, with
increasing deposit rates, interest margins will decrease impacting
profitability. Profitability can also be affected by increasing NPLs given
weak economic activity. In line with the recommendation of the Central Bank
of San Marino, banks should use profits earned last year to increase
capital buffers and should improve structural profitability by restarting
efforts to reduce high operational costs that have stalled over the last
few years.
The EU association agreement offers an opportunity to further integrate
San Marino’s economy in Europe and attract foreign investment by
reducing costs.
This agreement could increase economic integration with the EU and expand
market access by simplifying procedures and reducing legislative barriers.
It is also an opportunity to strengthen Sammarinese public institutions as
they adopt European standards and deepen their relations with EU
counterparts. At the same time, adopting the European financial framework
will impose significant costs on the Central Bank of San Marino that will
have to be addressed.
Discussions will continue in the context of the Article IV consultation
scheduled to take place in September.
We would like to thank our counterparts for excellent discussions.
