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San Marino Impacted By Crisis

Tuesday, March 2, 2010

The International Monetary Fund, in its Article IV consultation with San Marino, has reported that the territory’s economy has been severely affected by the global financial crisis, and the recent international developments in tax information exchange and transparency.

The San Marino economy was first struck by the effects of the global financial crisis in the second half of 2008, and, according to the Fund, will continue to feel its effects through 2009-10. The economy contracted by 1.1% in 2008, and it is estimated that it has contracted a further 5% in 2009. Economic growth is expected to again deteriorate during the course of this year. Unemployment is also on the rise and inflation is declining.

The IMF’s report observes that short-term vulnerabilities in the financial sector have increased due to exposure of the largest bank to a troubled Italian banking group and to liquidity pressures from a tax amnesty adopted by the Italian government. The authorities have responded with a range of policy measures, which have so far resulted in the orderly unwinding of the banks’ positions, but the IMF warned that significant vulnerabilities remain.

In its analysis of the economy, the IMF observed that the future prosperity of San Marino is pinned to the policy approach of the San Marino authorities to adapt the new international environment of greater transparency.

The IMF Executive Board, in its recommendations, welcomed the authorities’ commitment to strengthening international cooperation in economic and financial matters and for their efforts to reach a double taxation agreement with Italy, noting that this would help facilitate a repositioning of the economy. They also commended the authorities’ efforts to comply with international regulation on anti-money laundering and combating the financing of terrorism.

The Board noted that while the financial sector has suffered, it has withstood pressure relatively well. The authorities efforts to tackle emerging liquidity pressures, were also noted, but in light of continued uncertainties the Board stressed that the central bank should maintain the safeguards it has adopted. The Board also agreed that as soon as liquidity pressures abate, mandatory deposits should be replaced by a conventional reserve requirement system. They noted that recapitalization of the largest bank would also enhance its financial strength.

The Board expressed concern about the dismissal of the head of banking supervision at the central bank and the ensuing resignation of its top management. They stressed that these developments impact the effectiveness of financial supervision and undermine the credibility of the reform process in the financial sector and the reputation of the country’s financial authorities. The Board has urged the authorities to resolve this issue urgently and to take the necessary action to rebuild the reputation and credibility of the central bank, and ensure its independence and accountability.

The IMF Executive Board considered the authorities’ fiscal policy stance to be broadly appropriate, but emphasized the importance of ensuring fiscal sustainability. To this end, the Executive Board recommended the introduction of consolidation measures that in the public sector and the resumption of pension reforms.

On the territory’s financial centre, the Board underscored the need for greater product and labour market flexibility to improve the country’s business model.