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IMF Executive Board Concludes 2013 Article IV Consultation with Spain

Author(s):
International Monetary Fund. European Dept.
Published Date:
August 2013
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On July 26, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.1

The Spanish economy accumulated large imbalances during the long boom that ended with the global financial crisis. Unemployment soared, the fiscal position deteriorated sharply, and funding conditions tightened for both the public and private sectors.

Key imbalances are correcting rapidly. Sovereign yields fell sharply since the European Central Bank’s announcements about Outright Monetary Transactions (OMT), the current account swung into surplus, the fiscal deficit fell sharply in 2012 despite the recession, private sector debt declined, and the banking system is stronger. But the adjustment process is proving slow and difficult. Growth has been negative in the last seven quarters, unemployment has reached unacceptably high levels, and financing conditions remain tight for small firms.

The reform process has accelerated and deepened. Decisive reforms in the labor, financial, and fiscal sectors, in line with past staff recommendations, is helping stabilize the economy. Determined action has been taken to help clean up banks in the context of a financial sector program from the European Stability Mechanism, for which the IMF is providing technical assistance. Provisions and capital were greatly increased following an independent stress test and asset quality review in summer 2012. Weak banks are being restructured and much of their real estate assets have been transferred to an asset management company (SAREB). Regulation and supervision was also enhanced.

Fiscal frameworks and transparency have been substantially upgraded. An independent council is being introduced and a commission of experts has issued a proposal to ensure pension system sustainability. Early and partial retirement rules were further tightened. Monthly reports are now available for all major levels of government.

On labor market policy, a major reform was instituted in July 2012 to improve firms’ ability to adjust working conditions (including wages), reduce duality, and promote job matching and training. Unemployment insurance was reduced by 17 percent after 6 months of benefits, and hiring subsidies were reformed. In February 2013, the government announced more flexible hiring arrangements for youth and tax incentives to support youth employment and entrepreneurship.

Product and service market reforms are underway. The government liberalized the establishment of small retail stores and retail business hours. Further reforms have been announced to remove regulations that fragment the domestic market, to liberalize professional services, and to foster entrepreneurship.

Executive Board Assessment

Executive Directors commended the authorities for strong progress on critical reforms amid challenging conditions, which is helping to stabilize the economy. External and fiscal imbalances are correcting rapidly. However the economy remains in recession, with unacceptably high unemployment, and the outlook remains difficult. Directors stressed the need for decisive further action to generate growth and jobs, both by Spain and Europe, and continued strong commitment to the reform effort.

Directors welcomed the 2012 labor market reform, which appears to be gradually delivering results. However, they underscored that labor market dynamics need to improve further in order to reduce unemployment sufficiently, including by enhancing internal flexibility, reducing duality, and improving active labor market policies. Many Directors generally saw merit in exploring a social agreement between unions and employers to bring forward the employment gains from structural reforms, while they noted that it would be difficult to achieve. However, such an agreement should not delay the needed structural reforms. Directors also underscored the need to improve the business environment and boost competition, including through product and service markets reform. They looked forward to timely implementation of the plans envisaged under the National Reform Program.

Directors welcomed the authorities’ commitment to fiscal consolidation and agreed that the new medium-term structural targets strike a reasonable balance between reducing the deficit and supporting growth in the short term. They encouraged the authorities to specify how the targets will be achieved and to ensure that the measures are as growth-friendly as possible. In this context, they looked forward to the tax and expenditure reviews. A number of Directors also recommended flexibility in meeting the targets should growth disappoint. Directors welcomed progress on structural fiscal reforms, such as the fiscal council, and highlighted the need to follow through with ambitious legislation and rigorous implementation. Many Directors also looked forward to further progress on developing the enforcement of the Organic Budget Stability Law, and securing the sustainability of the pension system.

Directors stressed the importance of facilitating private sector deleveraging. The insolvency regime should continue to be improved. A number of Directors encouraged the authorities to consider in the future introducing a personal insolvency regime. Directors highlighted that banks also need to play their part by promptly recognizing losses and selling distressed assets. They welcomed the progress made in the clean-up of the financial system but stressed the need to remain vigilant to risks to financial stability and to protect the hard-won solvency. Priority should be given to removing supply constraints, supporting access to credit to small and medium enterprises , implementing scenario exercises on bank resilience to guide supervisory action, and determining, in the context of the forthcoming European balance sheet review, any needs for further capital reinforcement. Directors stressed that actions at the European level, including initiatives aimed at improving monetary transmission, reversing financial fragmentation, and making progress toward a banking union are essential to support Spain’s adjustment effort.

Spain: Main Economic Indicators(Percent change unless otherwise indicated)
Projections
2009201020112012201320142015201620172018
Demand and supply in constant prices
Gross domestic product-3.7-0.30.4-1.4-1.60.00.30.60.91.2
Private consumption-3.80.7-1.0-2.2-2.7-0.9-0.10.10.30.7
Public consumption3.71.5-0.5-3.7-3.8-2.9-3.8-3.6-2.4-2.3
Gross fixed investment-18.0-6.2-5.3-9.1-7.0-2.5-0.70.51.32.0
Construction investment-16.6-9.8-9.0-11.5-8.7-3.8-2.5-1.00.21.0
Machinery and equipment-24.53.02.4-6.7-4.9-0.32.43.33.44.0
Total domestic demand-6.3-0.6-1.9-3.9-3.8-1.6-0.9-0.50.00.4
Net exports (contribution to growth)2.90.32.32.52.11.51.11.10.90.9
Exports of goods and services-10.011.37.63.13.75.25.25.15.25.3
Imports of goods and services-17.29.2-0.9-5.0-3.20.62.32.53.54.0
Savings-Investment Balance (percent of GDP)
Gross domestic investment23.622.321.119.117.617.016.816.716.716.8
Private19.118.318.217.416.315.715.515.415.415.5
Public4.54.02.91.71.31.31.31.31.31.3
National savings18.817.817.318.019.019.920.821.422.323.1
Private25.523.523.926.924.424.524.624.424.324.0
Public-6.7-5.7-6.6-8.9-5.4-4.6-3.8-2.9-2.0-1.0
Foreign savings4.84.53.71.1-1.3-2.9-4.0-4.7-5.6-6.2
Household saving rate (percent of gross disposable income)17.813.111.08.17.87.77.67.67.88.1
Private sector debt (percent of GDP)289294277264254247244241239236
Corporate debt198202189178172168167165163161
Household debt91928886827877767675
Potential output growth0.60.0-0.2-0.3-0.6-0.40.00.10.40.5
Output gap (percent of potential)-2.2-2.5-1.9-3.0-3.9-3.4-3.1-2.6-2.1-1.4
Prices
GDP deflator0.10.41.00.10.60.81.01.11.11.2
HICP (average)-0.22.03.12.41.41.21.21.21.21.2
HICP (end of period)0.92.92.43.00.71.01.21.21.21.2
Employment and wages
Unemployment rate (percent)18.020.121.725.027.227.026.926.626.025.3
Labor productivity 1/3.02.22.02.91.70.80.30.20.10.1
Labor costs, private sector5.00.82.71.10.70.40.40.50.60.6
Employment growth-6.8-2.3-1.9-4.5-4.0-0.80.00.40.81.2
Labor force growth0.80.20.1-0.2-1.2-1.0-0.20.00.00.1
Balance of payments (percent of GDP)
Trade balance (goods) 2/-4.0-4.6-4.0-2.4-0.70.51.32.12.63.1
Current account balance 2/-4.8-4.5-3.7-1.11.32.94.04.75.66.2
Net international investment position-94-89-91-93-92-88-82-75-67-59
Public finance (percent of GDP)
General government balance 3/-11.2-9.7-9.0-7.0-6.7-5.9-5.1-4.2-3.3-2.3
Primary balance-9.4-7.7-7.0-7.7-3.3-2.3-1.4-0.40.61.7
Structural balance-9.5-8.3-8.3-6.5-5.3-4.7-3.8-3.1-2.4-1.7
General government debt546169849298102104106106
Sources: IMF, World Economic Outlook; data provided by the authorites; and IMF staff estimates.

Output per worker (FTE).

Data from the BdE compiled in accordance with the IMF Balance of Payments Manual.

The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 3½ percent of GDP for 2012.

Sources: IMF, World Economic Outlook; data provided by the authorites; and IMF staff estimates.

Output per worker (FTE).

Data from the BdE compiled in accordance with the IMF Balance of Payments Manual.

The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 3½ percent of GDP for 2012.

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 Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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