San Marino—2014 Article IV
Consultation Concluding Statement of the Mission
February 7, 2014
Last year saw some important
policy achievements. Nonetheless, the economy suffered another large
contraction due to the combined effects of the black list and weak demand from
abroad; a recovery in 2014 will depend on these factors reversing. While recapitalizing
Cassa di Risparmio della Repubblica di San Marino (CRSM) was important,
governance reforms will also need to be enacted in order to return the bank to
profitability. The government should build upon the significant savings
delivered by the 2014 budget to put public finances on a sound path. Finally,
sustained growth and job creation will require rebuilding the economy on new
foundations, and this will be best achieved with a continued commitment to
greater openness and transparency.
1. Last year saw some
important achievements. The double taxation treaty with Italy has finally
entered into force, clearing one hurdle for San Marino’s removal from the black
list; deposits in the banks have stabilized and even increased in some cases,
meaning that banks now have comfortable liquidity; and parliament recently
passed an important tax reform.
2. Still, the challenges
remain daunting. The economy is estimated to have suffered a circa
5 percent contraction last year, as many firms continue to suffer from the
effects of the black list and weak external demand. While there are tentative
signs of stabilization in a few specific sectors, a recovery will be difficult
despite the authorities’ efforts as long as relations with Italy are not fully
normalized and banking sector vulnerabilities remain. More generally, San
Marino faces modest medium-term growth prospects, as the task of rebuilding the
economy on new foundations after the demise of the old economic model will take
time.
3. An immediate priority is to
bring CRSM back to profitability. Recapitalizing CRSM was
important, as the bank is a cornerstone of the financial system and the economy
at large. Nonetheless, the State needs to go further than simply providing
funds. Now that legal provisions protecting the Foundation’s majority stake in
the bank have been removed, the State should demand a majority stake in line
with its capital contributions, something that did not happen in previous
recapitalization rounds. This would protect taxpayers’ interests, and be in
line with best international practice. Moreover, the new CRSM board members
should be appointed primarily on the basis of their banking expertise, so that
the board can develop and execute a credible plan to turn around the bank’s
fortunes.
4. The crisis has also put
significant pressures on other banks in the system. While these
banks meet prudential requirements, non-performing loans will continue to put
pressure on their capital bases. At this crucial time, the central bank needs
to be given appropriate resources to scale up its on-site supervisions, to
ensure banks are quickly identifying and tackling any emerging troubles and
provisioning adequately for losses. More generally, an external review of
banks’ asset quality, in line with what is being done in other European
countries, could increase confidence among external investors about the
soundness of the Sammarinese banking system.
5. The 2014 budget contains
courageous measures that deliver significant savings. The recent tax reform makes the system more efficient by reducing
exemptions, and is expected to generate more revenue for the State despite
lower nominal tax rates. Furthermore, the budget contemplates significant cuts
in public sector wages, cuts which are undoubtedly painful to many but which
will lead to a much-needed reduction in expenditure, consistent with the
smaller post-crisis Sammarinese economy. All in all, we expect the central
government deficit to fall from -2.3 percent of GDP in 2013 to -1.3 percent
this year.
6. However, further fiscal
consolidation will be required. As a small open economy, San
Marino needs fiscal space to respond to potential shocks, all the more given
limited access to foreign financing. Yet lower tax revenues due to the crisis
together with bank recapitalization costs have pushed public debt up from 11
percent of GDP in 2007 to 30 percent now, while government reserves have been
exhausted. Moreover, debt is expected to continue rising in the foreseeable
future despite the savings in the 2014 budget. To arrest these trends, the
government must aim to gradually move towards a 2—2½ percent of GDP surplus,
equivalent to €30—40 million in additional savings.
7. Initiatives underway could
and should deliver significant additional savings. The reform of
indirect taxation slated for discussion in mid-2014 would present a welcome
opportunity to not only make the tax system more efficient but also to generate
additional revenue, as the reform of direct taxation did. In parallel, the
ongoing expenditure review will help identify potential savings in the areas of
public wages, pensions, and health and social benefits. Attention will need to
be paid to ensure that cuts are well targeted and equitable.
8. San Marino has made
important strides in shedding the legacy of the past. All stakeholders in Sammarinese society understand that the future lies in
diversifying beyond banking, and in integrating more deeply with Emilia
Romagna—one of the most dynamic regions in Italy—but also with Europe and the
world. Despite San Marino’s comparative advantages, notably a competitive tax
environment and a relatively flexible labor code, achieving these goals will
take time; it will also require a normalization of relations with Italy, in
particular the exit from the black list. Continued actions to underscore San
Marino’s commitment to openness and transparency, exemplified by the
ratification of the double taxation treaty and by the country’s acceptance into
the Single Euro Payments Area, will remain the key to success.
We would like to
thank the authorities and other interlocutors for the frank and open
discussions and their warm hospitality.