Country Reports
2019
February 12, 2019
Republic of Croatia: Selected Issues
Description: This Selected Issues paper explores how intersectoral vulnerabilities and risks have shifted over 2001–17, and especially after the Global Financial Crisis. It analyzes financial positions at the sectoral levels deposit taking institutions and non-financial corporations, households, the public sector, and the Croatian National Bank by disaggregating them into instruments, currencies, and maturities. The paper has employed balance sheet analysis (BSA) to gauge cross-sectional exposures and risks. The BSA approach is a method to study an economy as a system of interlinked sectoral balance sheets. The policies to reduce the remaining vulnerabilities have also been discussed in the paper. Standard macroeconomic indicators demonstrate that Croatia’s overall external vulnerabilities have declined since 2010. However, the balance sheet matrix shows little improvement in reduction of important cross-sectoral dependencies and liabilities to the rest of the world over 2010–17. One of the recommendations made is to encourage deleveraging through specific policy options and strategies.
February 12, 2019
Republic of Croatia: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Croatia
Description: This Article IV Consultation highlights that the economic expansion continues, driven primarily by private consumption and exports of goods and services. Discussions primarily focused on increasing the economy’s flexibility and resilience. Fiscal performance has been strong, however, the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration appear to weigh on medium-term growth prospects. Downside risks in the near-term stem could be due to possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. The IMF staff advocated for a moderately faster fiscal adjustment. The report recommends accelerating the pace of debt reduction that would build fiscal space and help reduce downside risks. The Central Bank may need to address potentially tighter external conditions while continuing with strong bank supervision and macroprudential policies. Additional measures to prevent excessive household borrowing could be considered if needed.
February 6, 2019
Republic of Poland: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Alternate Executive Director for the Republic of Poland
Description: This 2018 Article IV Consultation discussions with the Republic of Poland focused on the strong growth upswing since 2017, which has been supported by three coincident cycles: a rebound in euro-area activity, a substantial increase in European Union transfers, and new large social benefit programs. It has been highlighted in the report that risks to the outlook for the Polish economy from external developments are elevated, while any slippage from prudent policies and sound governance principles could dent investors’ risk appetite. Substantial adjustment in recent years has brought the medium-term objective within reach. Remaining adjustment should rely on sustainable, growth-friendly measures. The team recommended that independent and well-resourced financial supervision is essential for effective and even-handed oversight, particularly in a state-dominated financial system. Sustaining rapid income convergence as working-age population declines calls for durable increases in investment and productivity. Reforms should focus on removing existing barriers to investment, facilitating more reliable access to skilled labor, enhancing predictability of policy changes, and providing a level playing field for all investors by protecting the rights of minority shareholders and ensuring competition.
February 6, 2019
Republic of Poland: Financial System Stability Assessment
Description: This Financial System Stability Assessment discusses the findings of the IMF mission regarding assessing stability and performance of Polish financial systems. The banking system in the aggregate shows resilience to adverse shocks, although some medium-sized banks appear weak. For the financial system, sovereign-financial institution linkages have increased, while exposures to foreign-exchange mortgages have declined. Important shortcomings have been identified in prudential oversight reflecting budgetary constraints and a governance framework that compromises operational independence. Arrangements for crisis management are generally sound, although measures are required to strengthen the independence of the Bank Guarantee Fund and powers of the Polish Financial Supervision Authority. The Polish authorities have welcomed the IMF’s and World Bank’s comprehensive review of the supervisory and regulatory framework in Poland and provided feedback for every recommendation made in the report.
February 6, 2019
Republic of Poland: Selected Issues
Description: This Selected Issues papers review factors that drive wage growth in Poland and studies structural characteristics and firm-level total factor productivity (TFP) in Poland and Emerging Europe. The increase in real unit labor costs (RULC) occurred alongside an unprecedently tight labor market. The study highlights that the more subdued RULC dynamics compared with the pre-crisis period, despite the now-lower unemployment rate, may reflect the recent influx of foreign workers. In order to more systematically identify the long- and short-term drivers of Polish wages, an Error-correction model has been used. Analyses presented in the paper using both Statistics Poland and Orbis data show that foreign-owned firms are associated with strong TFP performance through above-average TFP levels and growth rates. The findings suggest the need to create an environment conducive to entrepreneurship by reducing barriers to entry and ensuring a level playing field between state owned and private firms, while also avoiding barriers to scaling up businesses while encouraging investments in innovation and research and development.
February 6, 2019
Italy: Selected Issues
Description: This Selected Issues paper uses the tax-benefit microsimulation model for the European Union (EUROMOD) to evaluate possible reforms to modernize Italy’s social safety net as well as ways to lower the tax wedge on labor. With a social safety net centered on pensions and the elderly and an array of income support schemes as well as a heavy tax burden falling on labor income, there is significant scope to improve Italy’s system of taxes and transfers to promote growth and inclusion. The paper also simulates the cost of a modern safety net using EUROMOD. The paper also provides an overview of Italy’s personal income tax regime, simulates the cost of moving toward a flatter regime that has previously been proposed by the government coalition and discusses some key reform principles. It is concluded that Italy needs a modern social safety net and a lower tax wedge on labor as part of a growth-friendly and inclusive fiscal consolidation package.
February 6, 2019
Italy: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Italy
Description: This 2018 Article IV Consultation highlights that Italy has been struggling with low economic growth and poor social outcomes and structural weaknesses have been at the core of this economic underperformance. Growth is projected to slow further, and the risk of recession has risen. The extent to which risks materialize depends largely on Italy’s policies. The authorities felt strongly that a fiscal stimulus is needed to promote economic growth and improve social outcomes. The authorities are also seeking to reduce temporary employment and support job search. The report suggests that faster potential growth is the only durable way for Italy to improve outcomes and enhance resilience. A package of structural reforms, a credible fiscal consolidation based on growth-friendly and inclusive measures, and bank balance sheet strengthening structural reforms, fiscal policy, and financial stability are also recommended. As by facilitating re-alignment of wages with productivity at the firm and regional levels, Italy’s high structural unemployment would fall, as would the continued heavy resort to temporary employment.
February 5, 2019
Republic of Armenia: Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision
Description: This detailed assessment of observance has been conducted against the standard issued by the Basel Committee on Banking Supervision in 2012. The report also highlights that the Central Bank of Armenia has made significant progress in its approach to banking supervision with adoption of the risk-based program (RBS) framework and addressing gaps in the regulatory framework identified in the 2012 Basel Core Principles assessment. Improvements have been made in the regulatory regime regarding requirements for risk management, stress testing, corporate governance, country risk and consolidated supervision. Although the supervisory regime has recently transitioned from a rules-based to an RBS, there is a need for continued refinement of the program for more granular assessments of firms’ capital needs. The process for conducting risk assessments of each firm has identified a need for building a stronger and more structured (system-wide) understanding of the level and magnitude of risk and the risk management capabilities across banking firms.
February 5, 2019
Republic of Palau: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Palau
Description: This Article IV Consultation discussions with the Republic of Palau focused on ensuring long-term fiscal sustainability, making potential growth more resilient and sustainable, and preserving financial stability and facilitating credit extension. The consultation discussions also highlight that the main economic policy priorities for Palau are to develop a medium-term fiscal framework and strategy to help manage fiscal risks and the expiration of the Compact grants, to raise public investment, to protect social spending, to make growth more resilient and sustainable through other reforms, and to preserve financial stability and integrity. The current fiscal policy approach is based on the legal requirement to maintain a balanced or surplus cash flow for various parts of the budget. While this fiscal policy strategy has resulted in overall budget surpluses and a decline in net debt, the move to a medium-term fiscal framework and strategy would help Palau to address future challenges.
February 4, 2019
Bosnia and Herzegovina: Technical Assistance Report-Report on Government Finance Statistics Technical Assistance Mission
Description: This technical assistance report (TA) report specifies mission’s efforts to support the Bosnia and Herzegovina authorities, with a specific focus on the Republic of Srpska (RS), in improving government finance statistics (GFS) for decision making. This mission’s focus has been to continue developing reconciliation processes, to develop a compilation process for nonbudgetary public sector units, and to discuss classification questions in context of GFS compilation per the European System of National and Regional Accounts 2010 and the Government Finance Statistics Manual 2014. This mission initiated the development of a standardized compilation procedure for nonbudgetary public sector units, and, more specifically extra-budgetary units. The August 2017 mission mapped out flows between the budget, the health fund, the health institutions, and patients (household), concerning the provision of health care and its funding. This mapping is expected to help serve the classification of functional expenditure of the health fund and the health care providers.