IMF Executive Board Concludes the 2020 Article IV Consultation with the Republic of San Marino
April 2, 2020
– On March 27, 2020 the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
(see below an important note on the timing of the report which precedes the
outbreak of COVID-19).
San Marino is now facing very significant challenges owing to the
recent COVID-19 outbreak, which has taken a heavy toll on local
population and businesses. The authorities’ near-term efforts are
rightly focused on limiting and containing the adverse social and
economic effects, including by re-directing resources to the health
Medium-term growth prospects are projected to remain weak as tight credit
conditions and a substantially weaker external environment will constrain
the recovery. The high uncertainty around the extent and length of the
COVID-19 spread, the current lack of external market access, and the
limited central bank liquidity buffers suggest that the balance of risks is
heavily tilted to the downside. San Marino’s key medium term challenge is
to address the elevated macro-financial vulnerabilities emanating from the
weak banking system liquidity and capital positions, poor asset quality,
and high cost-to-income ratios as well as low government’s liquidity
buffers and an excessive accumulation of fiscal liabilities.
Executive Board Assessment
In concluding the Article IV consultation with the Republic of San Marino,
Executive Directors endorsed the staff’s appraisal as follows:
Banking sector weaknesses continue to pose stability risks and hinder
economic recovery. Significant deposit outflows and weak risk management
have left the banking system with low liquidity, poor asset quality, and
considerable recapitalization needs, while multiple bank failures and
continued state support to the banking system have eroded government
liquidity buffers and led to an excessive and unsustainable accumulation of
the implicit public debt. Absent a significant policy change, growth
prospects are projected to remain subdued over the medium term with risks
heavily tilted to the downside. The recent outbreak of COVID-19 in San
Marino and Italy has significantly increased uncertainty. The external
position is weaker than implied by fundamentals and desirable policy
A comprehensive and credible stabilization plan is urgently needed.
Shifting the economy to a higher medium-term growth path requires
implementation of a coherent and credible strategy that restores banking
system viability, ensures fiscal sustainability, and addresses structural
impediments. The recent general elections and establishment of a four-party
coalition government provides an opportunity to build a broad consensus for
the necessary reforms.
Sustained efforts are needed to increase banking system liquidity and boost
CBSM reserves. The CBSM should further enhance its liquidity management,
including by aligning the ELA framework with international best practice,
and restrict budget financing to only exceptional needs and on a temporary
basis. Attracting bank ownership participation by reputable banking groups
and selling non-performing loans (NPLs) and banks’ real estate portfolios
to strategic investors would also support liquidity in the system.
A deep banking system restructuring is critical to restore its
profitability and sustainability. Banks’ capital shortfalls should be
promptly addressed, following a fresh asset quality review and upfront
loss-recognition while laws that allow banks to spread losses over time
should be repealed. The CBSM should quickly intervene in undercapitalized
banks that fail to raise capital while state support should be provided
only to systemically-important and viable banks, following burden sharing.
Reducing banks’ high operating costs by rationalizing the oversized branch
network and staffing levels, and increasing the share of income-generating
assets, including by converting the tax credits into coupon-bearing assets,
would improve their profitability.
Accelerating NPL resolution by strengthening supervisory oversight and
streamlining judicial procedures should support these efforts. Plans to
establish an AMC should be carefully considered to avoid potential risks to
public finances and delayed recognition of bank losses.
Strengthening the CBSM institutional framework and mitigating financial
integrity risks would support financial stability. Bank supervisors need
adequate resources and sufficient powers to monitor systemic risks, carry
out frequent bank inspections, and promote compliance with regulations.
Reviewing the CBSM law with a view to enhance its institutional and
financial independence would increase its effectiveness as a supervisory
authority. Continued efforts to strengthen the anti-money laundering
framework, including in the context of the ongoing preparations of the
second National Risk Assessment and Moneyval review, are welcome.
Undertaking a credible and ambitious fiscal consolidation and restricting
state support to the banking system would safeguard public finances.
Putting public debt on a downward and sustainable path requires an
implementation of VAT and pension reforms along with measures to
rationalize the tax exemptions, better target social benefits, and increase
spending efficiency. Limiting state contributions to bank recapitalization
is also necessary. The government’s plan to access external markets and
increase liquidity should take into account debt sustainability
considerations and be accompanied by development of debt and cash
Steps to remove supply-side bottlenecks and increase economic integration
would promote sustained growth. Addressing the lingering distortions in the
labor market and mitigating the skill mismatch are necessary to promote job
seeking and efficient allocation of labor while improving the business
climate and closing the infrastructure gaps would help attract foreign
investment, boost productivity, and increase external competitiveness.
Concluding the association agreement with the EU would simplify procedures
for domestic firms and support their expansion into new markets.
Efforts to improve data reporting and provision should continue. San
Marino’s adherence to the IMF’s e-GDDS is an important step in improving
data dissemination. Further steps to improve data quality, coverage, and
reporting frequency, including by allocating additional resources to the
Statistical Office, would support policy-making process.
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
The Executive Board takes decisions under its lapse-of-time
procedure when it is agreed by the Board that a proposal can be
considered without convening formal discussions.
The staff report reflects discussions with the Sammarinese
authorities in January 2020 and is based on the information
available as of January 31, 2020. It focuses on San Marino’s near-
and medium-term challenges and policy priorities and was prepared
before COVID-19 became a global pandemic and resulted in
unprecedented strains in global trade, commodity, and financial
markets. It, therefore, does not reflect the implications of these
developments and related policy priorities. The outbreak has
greatly amplified uncertainty and downside risks around the
outlook. Staff is closely monitoring the situation and will
continue to work on assessing its impact and the related policy
response in San Marino and globally.
IMF Communications Department
PRESS OFFICER: Andreas Adriano
Phone: +1 202 623-7100Email: MEDIA@IMF.org