Spain
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
08 Jul 1996
eISBN:
9781451811995
Language:
English
Keywords:
ISCR; CR; investment funds; market share; exchange rate; capital formation; indirect tax; budget deficit; private sector; fixed capital
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This paper describes economic developments in Spain during the 1990s. Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993. The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992–93, and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround.

Abstract

This paper describes economic developments in Spain during the 1990s. Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993. The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992–93, and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround.

I. Domestic Economy

1. Overview

Spain emerged from a recession in 1994, as real GDP increased by 2 percent, following a decline of 1.1 percent in 1993 (Tables 1-3). The recovery was triggered by a surge in exports that started in mid-1993, in turn spurred by the sharp depreciation of the peseta in 1992-93 and the incipient recovery of domestic demand in other European countries. Private consumption picked up in early 1994 but provided only a moderate contribution to the turnaround. The recovery was consolidated in 1995 by the continuation of the growth in exports and bolstered by an upturn in private investment. However, toward the end of 1995 the growth rate slowed somewhat; year-on-year GDP growth in the first half of 1995 averaged 3.1 percent, but fell to 2.7 percent in the second half. For the year as a whole the increase in GDP was 3.0 percent.

Table 1.

Spain: Demand and Output, 1990-94

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 2

Spain: Quarterly Evolution of GDP, 1993-95

(Year-on-year percentage change at constant prices)

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Source: Ministry of Economy and Finance.

Changes at constant prices in stockbuilding are expressed in percent of real GDP in the previous period.

Table 3.

Spain: Contribution to the Growth of Real Aggregate Demand, 1990-94

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Sources: Ministry of Economy and Finance; and staff estimates.

Consumer price inflation averaged just over 4½ percent a year in 1993-95, as against over 6 percent a year in the preceding three years. Underlying inflation, which excludes energy and nonprepared food, declined steadily in 1993-94; both indicators jumped temporarily in early 1995 following the implementation of a 1 percentage point increase in the VAT, before resuming their downward trend. year-on-year CPl growth declined to 3.7 percent by February 1996; while underlying inflation stood at 4.1 percent. The lowering of inflation, despite the significant effective exchange rate depreciation that occurred in 1992-93 and the recovery of the economy in 1994-95, reflected the slowdown of wage increases since 1994 and, more generally, the effects of a tight monetary policy.

The turnaround in the economy was felt in the labor market with a lag. Overall employment continued to decline in early 1994 after falling very sharply in 1993. Although net increases in employment started in the second quarter, average employment dropped 0.9 percent in 1994, before increasing some 2½ percent in 1995. The unemployment rate peaked at over 24 percent in 1994 before declining to 22.9 percent in late 1995.

2. Demand and expenditure developments since 1993

a. Exports

Helped by the boost to competitiveness from the cumulative 20 percent effective depreciation of the peseta in 1992-93, exports increased 8.3 percent in 1993, with the external sector contributing almost 3 percentage points to GDP growth. The export upsurge strengthened further in 1994 as the increase in partner country demand coupled with the improvement in Spanish external competitiveness permitted export growth rates to almost double. Although the rate of expansion of exports slowed in 1995, year-on-year volume growth still exceeded 10 percent at the end of the year. The sustained growth in exports reflected not only increases in exports of goods, but also a significant growth in tourism.

b. Private consumption

Real private consumption, after a fall of 2 percent in 1993, increased by only 0.8 percent in 1994 and 1.8 percent in 1995. The fall in 1993 can be attributed largely to the impact of rising unemployment on household income, as veil as to high interest rates. The wage bill increased only 2.2 percent in 1993 from 7.3 percent in 1992, although real wages still increased due to collective agreements made in previous years (Tables 4 and 5). The decline in wage income was only partially offset by increases in social security transfers and lower direct taxes resulting from a reform in the personal income tax (approved in 1991); real household disposable income rose only 1.6 percent. At the same time, the personal saving rate increased significantly in 1993, reflecting high interest rates and—perhaps—expectations of wage moderation in coming years.

Households dissaved in 1994 contributing to a modest increase in consumption despite a decline in real household income (the fall in the saving rate appears to have reflected not only lover interest rates, but also households’ desire to smooth consumption in view of the improvement in prospects suggested by the pickup in economic activity). Among the factors contributing to the decline in household income were the reduction in government social benefit outlays resulting from the 1992-94 unemployment system reform, wage moderation and a weakening in investment income (dictated in part by the fall in interest rates initiated in the second half of 1993).

Table 4.

Spain: Factors Accounting for Growth in Private Consumption, 1990-94 1/

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Source: Staff calculations on Ministry of Economy and Finance data.

Income includes those of households and unincorporated business.

Direct taxes plus social security contributions minus transfers received.

Table 5.

Spain: Household Disposable Income, 1990-94

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Source: Ministry of Economy and Finance.

Gross savings in percent of disposable income.

As in several other European countries, consumption growth was subdued for most of 1995. This vas foreshadowed by the stagnation of the consumer confidence index in late 1994 at a level 10-15 percentage points below those recorded in 1990-91 (the index showed nevertheless a sustained improvement in the year). The forward-looking components of the index turned down quite significantly in late 1994, and the overall index started to fall in early 1995.

c. Gross fixed investment

Investment was strongly affected by the recession, declining sharply in 1993, bottoming out in the fourth quarter. Although the fall in investment was strongly influenced by the weakening of external demand in 1992 and the contraction in domestic demand in 1993, a decrease in firms’ profitability also played a significant role.

Investment picked up in the second half of 1994, as residential investment recovered, helped by the fall in long-term real interest and mortgage rates in 1993-94. Nevertheless, investment for the year as a whole increased only marginally, in part because investment in machinery had dropped very sharply in 1993 and recovered less rapidly in 1994. Public investment held more or less steady in 1993-94.

The sustained growth in exports in 1993-94, the increase in capacity utilization and a significant improvement in profitability in 1994-95 contributed to the recovery of investment in the last two years. Capacity utilization recovered by 10 percentage points while, according to surveys published by the Bank of Spain, operational margins in the manufacturing sector increased 80 percent in 1994, after being compressed by 18 percent in the previous year. Also the average before-tax income in the business sector increased by 30 percent in 1994. Gross investment continued to accelerate in the first three quarters of 1995, rising by over 10 percent (annual rate) in the period. Even so, overall investment in late 1995 still remained below its 1992 level. The new investment in manufacturing has largely been targeted at increasing productivity rather than expanding capacity, in contrast to the previous cycle.

d. Stockbuilding

After a sharp inventory adjustment in 1993, the acceleration of domestic and foreign demand, together with lower short-term interest rates, induced a recovery in inventory investment during 1994. Stockbuilding slowed down following the tightening of monetary policy in early 1995, contributing only modestly to GDP growth in that year.

e. Imports

After declining by 5 percent in 1993, imports of goods and nonfactor services rebounded strongly in 1994 and 1995. The recovery was concentrated mainly in imports of intermediate goods and equipment, while imports of consumption goods remained moderate. The recovery in imports reduced the contribution of the external sector to GDP significantly in 1994, turning it negative in 1995.

f. Saving-investment balance

The decline in investment in 1993 was substantially larger than that of saving, leading to a sharp reduction in the external current account deficit. Government investment remained relatively stable at around 4 percent of GDP, but private investment dropped from 19.2 percent of GDP in 1992 to 15.7 percent in 1993, before recovering to 16.2 percent of GDP in 1994 and 17.5 percent of GDP in 1995. On the savings side, the decline in enterprise saving in 1993 was more than offset by a significant increase in household saving. However, the emergence of a substantial public sector current deficit led to a slight overall reduction in national saving that year. National savings fell again in 1994, despite a 1/2 percentage point of GDP improvement in government saving and the increase in firms’ profitability, as household saving weakened. These trends were reflected in a marginal deterioration of the current account balance of payments after the sharp improvement the previous year. Preliminary estimates for 1995 suggest a strong improvement in the external current account to a surplus of 1/2 percentage point of GDP. This reflected the strengthened financial situation of firms, which offset a decline in household saving, and a further strengthening in the government accounts, helped in part by a bunching of transfers from the European Union.

g. The composition of output

Output in the agricultural and fishing sector declined in 1991 and 1992 (Table 6), recovered slightly in 1993 but fell sharply in 1994 and 1995 mainly as a result of adverse weather conditions and the effects of the Common Agricultural Policy (CAP). A drought and a switch in the calculation of agricultural subsidies in the European Union (from a policy based mainly on minimum prices toward one making transfers proportional to farm’s sizes) were reflected in declines of 4 percent and 10.5 percent, respectively, in the sector’s output in 1994 and 1995. Disputes on fishing rights with certain countries (e.g., Canada and Morocco) also had negative repercussions in the fishing sector in 1994-95.

Table 6.

Spain: GDP by Sectors, 1990-94

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Sources: INE. and Ministry of Economy and Finance.

Output in the manufacturing sector declined by a cumulative 4.4 percent during 1992 and 1993, but recovered by 3.5 percent in 1994 led by the strong growth in exports (Table 7). Industrial production, which had declined by a cumulative 9 percent during 1990-93, increased by 7.3 percent in 1994 with all sectors growing strongly. In 1995, manufacturing production rose by only 4.7 percent, exhibiting a pronounced slowing trend in the course of the year and ending with a year-on-year decline of 0.5 percent in the fourth quarter. Automobile production accounted for a substantial part of the increase in industrial production in 1994. However, a special cash incentive program for new car sales, which started in April 1994 and helped to boost sales by 21 percent that year, was discontinued in June 1995, leading to a 7 percent decrease in car sales in 1995.

Table 7.

Spain: Production Indicators, 1990-95

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Sources: Bank of Spain, Statistical Bulletin; Ministry of Economy and Finance, Sinteais Mensual de Indicadores Economicos.

Corrected for unequal number of working days in the month.

Industrial sector excluding construction.

The construction sector was among the sectors hardest hit by the recession, with output declining by 10 percent in 1992-93. This sector has not yet recovered fully, despite the 19 percent increase in housing starts in 1994 and an additional 30 percent increase in the first half of 1995. The recovery in housing construction was partly offset by lower public investment in road construction and infrastructure.

Value added in the service sector continued to increase throughout the past few years, although the growth rate slowed to only 1/2 percent in 1993, from over 3 percent a year in the preceding three years. Value added accelerated to over 2 percent in 1994 and 1995 despite the fiscal consolidation, with output of nonmarket services increasing noticeably less than market services.

3. Prices

The rate of consumer price inflation, measured in terms of period averages, dropped from almost 6 percent a year in 1991-92 to 4.6 percent in 1993, and continued at a similar rate in 1994 and 1995. The declining trend in consumer price inflation was interrupted in early 1995 by a temporary upsurge resulting from increases in indirect taxes and the effects of drought conditions. However, the downward trend resumed by midyear, and by February 1996, as the effect of the increase of the VAT rate disappeared, the annual rate of change in consumer prices had fallen to 3.7 percent, the lowest year-on-year increase of the past two decades. The GDP deflator declined to 4.0-4.5 percent a year in 1993-95, from around 7 percent a year in the three preceding years (Table 8). This slowdown occurred despite the devaluation of the peseta in 1992-93 and a marked escalation in international prices of intermediate goods in 1994. The pass-through of the 1992-93 devaluations contributed to about half of the increase in the final demand deflator in 1994, but its effect was negligible in 1995 despite the fluctuations of the peseta in the early part of the year.

Table 8.
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Source: Bank of Spain, Statistical Bulletin.

Underlying inflation is measured by excluding energy and the unprocessed food groups from the total CPI.

Reflecting the relatively weak growth in private consumption, price increases of nonfood products showed a decelerating trend during most of 1993-95, except for the temporary effects of the 1 percent increase in the VAT in early 1995. Food prices, however, were relatively volatile during this period due to fluctuations in weather conditions and the effects of the CAP, which led to an increase in support prices in Spain in late 1993 reflecting the devaluation of the peseta and the decision to raise the minimum prices of Spanish agricultural products (expressed in ECUs) to levels close to those prevailing in other EU countries. In addition, drought conditions put upward pressure on food prices during most of 1994 and early 1995, but with abundant rains food prices decelerated significantly in the second half of 1995 and early 1996.

Although increases in excise duties and the devaluation of the peseta contributed to a relatively high increase in oil prices in 1993, their effect was moderated by a fall in international oil prices. Energy prices have also reflected the below-inflation increases in electricity rates in the more recent past.

Industrial prices, which had risen very modestly during the recession and immediately preceding years, grew more rapidly in 1994 and 1995, rising by about 5 percent a year. This acceleration appears to reflect an increase in profit margins at the end of the recession in addition to the effect of increases in the price of intermediate goods in 1994-95. With the modest slowdown in activity in the second half of 1995, the year-on-year rate of increase in industrial prices slackened to 4.4 percent by the last quarter of 1995.

4. Labor market

a. Recent developments in employment, unemployment, and wages

The economic recovery in 1994-95 affected the labor market with a lag: overall employment continued to decline in 1994, bringing the cumulative decline since 1990 to almost 850,000 workers or close to 7 percent. In 1995, however, employment creation was strong with 312,000 new jobs produced, an increase of some 2½ percent over 1994 (Table 9). This turnaround reflected the effects of the strong growth in activity for the second year in succession, as Well as the effects of the labor market reforms undertaken in 1993 and 1994. The statistics also reflect the effects of a revision in data collection procedures by the National Statistics Institute (INE), which may account for nearly one third of the “new” employment reported. 1/ Labor force growth remained fairly steady (about 1 percent a year), with the participation rate virtually unchanged. The combination of strong job creation with weak labor force growth resulted in a reduction in the unemployment rate, which dropped from an average 24.2 percent in 1994 to 22.9 percent in late 1995. This fall in unemployment was concentrated in the first half of 1995, as job creation moderated in the third and fourth quarters while labor force participation tended to accelerate from the low levels reached during the 1992-93 recession.

Table 9.

Spain: Population and Unemployment, 1990-95 1/

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Source INE, Labor Force Survey.

Annual averages.

Data for January-October.

Table 10.

Spain: Contribution to Total Employment Growth by Sectors and Categories, 1990-95

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Sources: Minister of Labor and Social Security; and Bank of Spain, Statistical Bulletin.

In 1995, job growth was concentrated in the construction and services sectors, particularly in areas related to the tourism industry (Tables 11 and 12). Employment in the industrial sector, which had declined by 17 percent during the period 1991-94, remained stagnant, despite strong output growth in the sector, reflecting continued industrial restructuring. Agricultural employment continued its long-term decline, falling to only 8.9 percent of the labor force by year-end, a trend undoubtedly exacerbated by the continuation of drought conditions in much of Spain.

Table 11.

Spain: Employment by Sectors, 1990-95

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Sources: Ministry of Labor and Social Security; and Bank of Spain, Statistical Bulletin.
Table 12.

Spain Indicators of Labor Costs, 1990-95

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Sources: Bank of Spain, Statistical Bulletin; and Ministry of Economy and Finance.

Percentage change from the immediately preceding quarter.

Based on collective wage agreements.

Excluding social security contributions; data from the wage survey by INB, excluding agriculture.

Deflated by the private consumption deflator.

National accounts definitions.

Data on employment are those from the Encuesta de Publacion Activa (EPA).

Including construction.

After three years of increases averaging close to 8 percent a year, wage increases declined to 5½ percent in 1993, and to less than 4 percent a year in 1994 and most of 1995. Wage settlements in collective bargaining agreements averaged 3.9 percent through the third quarter of 1995, as against 3.6 percent in 1994. For the economy as a whole, wages fell slightly in real terms in 1994 and further in 1995, after more than a decade of upward movement, while unit labor costs, which had risen very strongly in the beginning of the decade, were virtually unchanged in 1994, and rose by only a small amount, if at all, in 1995 (Table 12). 2/

Among the jobless, the share of the long-term unemployed continued to rise in 1995, after falling in 1992-93 as a result of the influx of newly unemployed during the recession. Those unemployed for more than one year comprised 57 percent of all unemployed in 1995, compared with 56 percent in 1994 and 49 percent in 1993. Unemployment rates continue to be highest among youth, although the rates declined somewhat during 1995, falling from 45.1 percent to 42.5 percent for the 16-24 age group. Job creation affected men and women roughly equally, although the unemployment rate for women fell less quickly due to the increase in the female labor participation rate.

Unemployment varied sharply by regions: the unemployment rate fell sharply in low unemployment regions like the Balearic Islands, Asturias, and Navarra, with more modest falls in the high unemployment areas of Andalucia and Extremadura.

b. The effects of the labor reforms

During 1995, the labor market began to feel the full effects of the reforms undertaken in 1993 and 1994. These reforms made significant changes in four areas: hiring and firing, workplace flexibility, collective bargaining, and unemployment benefits. 1/ Hiring was facilitated by the authorization of private nonprofit employment agencies, by the legalization of temporary employment firms, and by the introduction of new apprenticeship contracts. Some steps, albeit minor ones, were also taken to make dismissals less costly by simplifying dismissal procedures and expanding the acceptable reasons for less costly “justified” redundancies. In the area of workplace flexibility, functional mobility was enhanced by the replacement of the antiquated Ordenanzas Laborales with collective bargaining arrangements on workplace practices and geographic mobility made somewhat easier. Measures were also introduced to encourage part-time employment. Collective bargaining agreements were given a more prominent role in determining wages and working conditions, with restrictions placed on the legal application of contract provisions beyond their specified life as well as regulations to allow bargaining to become more decentralized. Finally, eligibility for unemployment benefits was tightened and benefits were reduced in both generosity and duration. The only new initiative undertaken in the labor market in 1995 was the reduction of 1 percentage point in social contribution rates, compensated by a one point increase in the VAT rate.

During 1995, 25 employment agencies began operation, ending the monopoly of the National Employment Institute (INEM) on job placements. The Ministry of Labor reported that an additional 27 agencies had been approved and would start operations in 1996. Although official figures are unavailable, temporary employment services have also become fairly widespread. The last of the Ordenanzas Laborales were slated for elimination on December 31, 1995, with binding arbitration imposed on those sectors where collective agreements on their replacement had still not been reached.

The reforms in unemployment benefits have produced a significant reduction in outlays by INEM. After a sharp rise in benefit payments during the recession, spending fell by 14 percent in 1994 and by more than 15 percent in the first 11 months of 1995—savings well in excess of the changes in unemployment. These savings reflected both reductions in the average benefit level and in the proportion of unemployed receiving benefits. While not all of the decline is attributable to the labor market reforms, they have clearly played an important part. 1/

The evidence on simplifications in dismissal costs is distinctly less clearcut. While procedures have been simplified, the average severance payment for dismissals with previous trade union agreement declined by only 3 percent between 1993 and the first 9 months of 1995, while dismissals processed by the social tribunals rose by 6 percent. 2/ There is also some evidence of an increasing recourse to the Judicial process, with the number of workers whose cases were decided by tribunals up by 14 percent in the first 9 months of 1995, while those whose individual dismissal has been agreed fell by 12 percent.

The modifications in modes of contracting—the introduction of apprenticeship contracts and measures to encourage part-time employment—have played an important role in the recent evolution of employment and the moderation of wages. Although permanent full-time employment increased for the first time in nearly a decade during 1995, rising by 75,000 workers; more flexible terms of employment applied to the vast bulk of new contracts. Part-time employment grew by nearly 11 percent in 1994, and by an additional 15 percent in 1995, the first full year of the reforms. Part-time employment averaged 640,000 for 1995 as a whole, while 209,000 apprenticeship contracts were initiated in 1994, and another 150,000 more signed in the first 10 months of 1995.

The incentives for greater flexibility and greater responsibility in collective bargaining may have played a role in the moderation of wages, although it is difficult to quantify this effect. The level of conflict in collective bargaining has also declined noticeably, with days lost to industrial action falling by 36 percent in 1994 and remaining roughly constant in 1995. The level of strike action is usually highly cyclical. Thus, strike days declined by 54 percent during the recession years of 1992 and 1993. The further drop in 1994-95 is particularly striking since it came on top of reductions during the recession.

II. Public Sector

1. Performance of the general government 1/

After widening steadily to 7.5 percent of GDP in 1993, the budget deficit of the general government narrowed to 6.7 percent of GDP in 1994, and preliminary data indicate a further reduction to roughly 5.9 percent of GDP in 1995 (Table 13). The decline in the deficit in 1994 and 1995 was consistent with the revised convergence program released by the authorities in July 1994, which called for a progressive reduction of the deficit to attain the 3 percent Maastricht target by 1997.

Table 13.

Spain: General Government - Overall Balances, 1990-95 1/

(In percent of GDP)

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Sources: Bank of Spain, Cuentas Financier as: Ministry of Economy and Finance; and staff estimates.

Deficit (-); national accounts basis.

Estimates are from the Ministry of Economy and Finance.

Includes the State and Central government autonomous organizations.

Regional and local governments.

Includes INEM.

The deficit increase in the early 1990s had been largely the result of the short but sharp recession, which increased the cyclical deficit by about 3 percent of GDP between 1992 and 1993. However, the structural balance also deteriorated in 1993 as a result of the large increase in the burden of interest payments on the growing debt. The deficit reduction achieved in 1994 was structural in nature—weak economic growth meant that the cyclical deficit actually worsened—while in 1995 the cyclical recovery of the economy accounted for most of the deficit reduction. Nevertheless, due to a temporary pause in the growth of interest payments as a share of GDP in 1995, there was a significant improvement in the primary balance. The following table presents estimates of the cyclical and structural deficits for recent years.

Spain: Breakdown of the General Government Deficit

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Sources: Ministry of Economy and Finance; and staff estimates.

Both revenues and expenditures declined as a share of GDP during 1994 and 1995 (Table 14). On the revenue side, tax collections fell in 1994 as a result of the slump in consumption and income tax revenues in the recession. An expected rebound in these revenues did not materialize in 1995, as consumption growth remained moderate, while the bulk of new employment was confined to part-time work and apprenticeship schemes which generated little personal income tax revenues or social security contributions. On the expenditure side, spending was cut sharply on current transfers, largely due to improved performance by the social security system (particularly unemployment benefits). Public consumption and subsidies were also cut significantly, while investment spending fell in both 1994 and 1995 as a share of GDP.

Table 14.

Spain: General Government Nonfinancial Operations, 1990-95 1/

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Sources: Bank of Spain, Ministry of Economy and Finance, and staff estimates.

National accounts basis.

The financial liabilities of the general government have increased rapidly in recent years (Tables 15 and 16). The gross debt stock (on a national accounts basis), rose from 55 percent of GDP to 66 percent between 1992 and 1993, with an additional rise to 70 percent in 1994. Using Maastricht criteria definitions, the net debt of Spain also rose above the 60 percent threshold in 1993, with the debt reaching 60.4 percent of GDP and climbing further to 63 percent in 1994.

Table 15.

Spain: General Government Financing, 1988-1994

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Source: Bank of Spain, Cuentas Financieras.

Includes changes in cash and deposit balance.

Table 16.

Spain: General Government Financing by Debt Holder, 1988-1994 1/

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Source: Bank of Spain, Cuentas Financieres.

Not computed according to Maastricht definition.

The large increase in indebtedness in 1993 was due in part to the issue of additional debt to cover a change in the relations between the Treasury and the Bank of Spain which took effect at the beginning of 1994. The new system (imposed by the European Union Treaty) prohibited government recourse to central bank financing of the deficit—even temporary financing within a given fiscal year. This change made it necessary for the government to build up a substantial cushion of deposits at the Bank of Spain to eliminate the need for temporary loans. As can be seen in Table 15, this resulted in a buildup of nearly Ptas 2.3 trillion in government deposits at the central bank, of which Ptas 1.3 trillion were drawn down in 1994, reducing substantially the net financing needed in that year. These debt dynamics also explain the sharp jump in interest costs to the government in 1993, followed by relative stability in 1994 and 1995.

The increase of debt in 1993 was primarily long-term in nature and constituted a significant shift in the maturity profile of government debt compared with the period of 1988-1990, when most debt was short term. Since 1990, there has also been a notable increase in the debt held by nonresidents. In fact, most of the “extra” indebtedness incurred by the government in 1993 was to nonresidents in pesetas, despite the exchange rate turmoil in late 1992 and early 1993. In 1994, in contrast, foreign debt holdings dropped by 5 points of GDP, with peseta-denominated debt held by foreigners falling even more steeply as investors responded to falling peseta interest rates early in the year and to some weakening of the peseta at the end of 1994 (which culminated in the devaluation of March 1995).

Financing and debt data available for 1995 for the State (Table 21) show a sharp reduction in financing operations, reflecting negative net lending by the central government (Table 17) and a further reduction in deposits at the Bank of Spain. As in 1993 and 1994, the preponderance of net financing came from long-ten instruments, but for the first time the majority of net State financing came from foreign currency loans. The low level of financing and the shift to foreign exchange instruments was part of a strategy by the Treasury to avoid what was perceived to be an abnormally high interest rate differential induced by exchange rate turbulence early in the year and sustained by the anti- inflation policy of the newly independent Bank of Spain.

Table 17.

Spain: State Nonfinancial Operations, 1990-94

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Sources: INE, Bank of Spain and Ministry of Economy and Finance.

Property income, gross operating surplus and transfers from other governments.

Net lending is defined as the change in the state government financial assets (excluding cash and other deposits).

Table 18

Spain: State Financing. 1988-1994

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Source: Bank of Spain, Cuantas Financieres.

Includes changes in cash and deposit balances.

Table 19.

Spain: Recent State Operations—National Accounts Basis 1/

(In billions of pesetas)

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Source: Ministry of Economy and Finance, Sintesis Menusa1 de Indicatores Economicos.

Cumulative amounts for the year.

Table 20.

Spain: Details of Recent State Operations Transactions Basis 1/

(In billions of pesetas)

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Source: Intervencion General de la Administration del Estado.

Cumulative amounts for the year.

Table 21.

Spain: State Recent Financing Operations, 1993-95

(In billions of pesetas)

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Source: Bank of Spain, Statistical Bulletin.

Includes nonnegotiable securities and the assumption by the government of nongovernment securities.

2. Performance of the central administration

a. State operations

During 1993, the State budget deficit nearly tripled as a share of GDP, rising from 2.3 percent of GDP to 6.1 percent (Table 17). While some of this increase (around 1.5 percent of GDP) was attributable to payments for operations which took place in previous years, the majority of the deterioration reflected the cyclical effects of the recession on the budget, plus some discretionary increases in spending which were implemented to counteract the economic downturn; the rise in interest costs of the expanding government debt accounted for the rest of the increase. Revenues fell by 0.4 percent of GDP while current expenditures rose by 2.7 percent of GDP, with increased transfer payments to the Social Security system (pensions, health care, and especially unemployment compensation) accounting for nearly 1 point of the rise, and higher interest payments on the debt responsible for another 0.9 percent of GDP. An increase in capital spending was also undertaken in an attempt to boost economic activity.

The jump in spending in 1993 created an urgent need for fiscal consolidation in 1994 as the economy moved out of recession. The authorities responded with a restrictive budget designed to curb expenditure without increasing the tax burden. This budget largely attained its goal, with the overall deficit of the State narrowing by 1 percent of GDP to 5.1 percent of GDP in 1994, despite a reduction in revenues of 0.8 percent of GDP in the aftermath of the recession. The latter reflected the delayed effect on income tax revenues of the recession, due to lower corporate profits and lower employment which generated reduced personal income tax receipts. Indirect tax revenues recovered somewhat, but were held back by weak consumption. In addition, there was a drop in revenue from EU transfers and other revenues (see below).

Given the weak revenue performance, the fiscal consolidation in 1994 had to be attained exclusively through expenditure reductions. These were concentrated in two main areas—public consumption and investment spending. On the consumption side, a multiyear agreement was negotiated with the public sector trade unions restricting wage increases to the targeted rate of inflation, which turned out to be somewhat below the actual rate in 1994. In addition, an attrition policy was implemented to reduce public employment, which declined by 2.8 percent. The policy was to replace only one half of all vacancies arising from attrition in the State. Public sector consumption of goods and services was also compressed by 0.2 percent of GDP, returning it to pre-1993 levels. Public investment was slashed, with gross fixed capital formation down by 0.1 percent of GDP and capital transfers halved, from 2.6 percent to 1.3 percent of GDP.

The 1995 budget was designed to continue the fiscal consolidation process begun in 1994, and targeted a 1.1 percent of GDP cut in the State deficit. On the revenue side, based on projected GDP growth of 2.6 percent, the authorities forecast a recovery in revenues, from 20.0 percent of GDP in 1994 to 20.8 percent of GDP in 1995. The only significant modification of the tax system (beyond adjusting income tax rates and excise taxes for inflation) was a reduction of one point in social contribution rates, compensated by a one point increase in VAT rates. The remainder of the reduction in the deficit (0.3 percentage point of GDP) was to be achieved via the continuation of the tight expenditures policies of 1994, augmented by a new monthly expenditure monitoring system to control spending overruns. In addition to the continuation of the wage agreement with civil servants, further modest cuts were set for goods and services spending and current transfers, the latter deriving mainly from reduced unemployment benefit payments. Capital spending was slated for a modest increase of 0.1 percent of GDP.

The preliminary outturn for 1995 indicates that the deficit target was reached (Tables 19 and 20), although not in the manner originally intended in the budget. The revenue yield was significantly lower than expected, as revenues remained about constant as a share of GDP instead of rising as had been expected. However, since nominal GDP growth was higher than projected, revenues on a cash basis turned out fairly close to their targeted levels. Indirect tax revenues, while up in nominal terms, failed to grow as a share of GDP despite the increase in the VAT rate. Weak private consumption plus larger-than-expected negative effects from the implementation of a quicker VAT refund system were to blame for the poor performance. Direct taxes increased their share of GDP, but failed to grow as much as had been expected in the budget.

Expenditure performance in 1995 was estimated to be quite close to the original budget target in nominal terms, although the composition differed somewhat from that originally envisaged. Expenditures fell by roughly 0.5 percent of GDP (slightly less on a national accounts basis and slightly more on a cash basis). With interest payments rising by 0.2 percent of GDP, the reduction in other spending was even more significant. Public consumption declined as a share of GDP, albeit by less than had been programmed in the budget. Current transfers saw the largest reduction, aided by the better-than-expected performance of unemployment and the controls on health care spending. Subsidies also fell sharply, in part reflecting better economic conditions and in part as a result of government policy. In contrast to the increase that had been budgeted, investment declined as a share of GDP (Table 19). 1/

b. Social security system 2/

From a position of near equilibrium in the late 1980s, a substantial deficit opened in the social security system in 1991 and 1992, as increases in contributions and central government transfers failed to keep pace with growing payments obligations (Table 22). Government transfers were increased substantially in 1993, in part to cover deficits for the health care system from previous years. As a result, the overall deficit was reduced to 0.1 percent of GDP in 1993, but rose again to 0.5 percent of GDP in 1994 despite a reduction in current spending, as capital transfers declined. Preliminary data for 1995 show a significant improvement in the cash balance of the system (Table 23), although the year-end deficit was expected to be unchanged at 0.5 percent of GDP on a national accounts basis (Table 13). The following table provides some selected statistics on the evolution of contributions and benefits for the pension system and for unemployment compensation.

Table 22.

Spain: Nonfinancial Operations of the Social Security System, 1990-94 1/

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Sources: INE; and Bank of Spain, Cuentas Financieres.

National accounts basis.

Table 23.

Spain: Social Security System—Recent Operations 1/

(In billions of pesetas)

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Source: Bank of Spain, Statistical Bulletin.

Transactions basis.

Includes social security transfers to regional governments.

Spain: Selected Statistics of the Social Security System

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Sources: Ministry of Economy and Finance; and Bank of Spain.

January-September.

January-December.

The growth of revenues from social contributions slowed in 1993 and 1994 due mainly to the decline in employment; the further deceleration in 1995 reflected the reduction of social contribution rates by 1 percentage point, despite an increase in employment. 1/ The growth of average pension benefits moderated in 1994 and 1995, as the government restricted increases in pensions to the projected inflation rate. Payments for disability pensions grew by a modest 6.5 percent during the first 11 months of 1995, after a reduction in 1994 which reflected a reform of temporary disability pensions which tightened the eligibility criteria and shortened the period before a permanent decision is made regarding disability.

Reforms were also undertaken in health expenditures. After a 25 percent increase in 1992, the growth in health spending has moderated significantly since then, with growth rates of 5.1 percent and 8.2 percent in 1993 and 1994, respectively. In 1994, a new financing arrangement was implemented for the health care system designed to eliminate chronic cost overruns. The new system involved a step-increase in central government transfers, coupled with the elimination of the health care system’s automatic access to additional spending authority (the so-called creditos ampliables) and an agreement to limit the growth of health care spending to the growth rate of nominal GDP. Despite this accord, for the first 11 months of 1995 spending was 13 percent higher than in 1994.

It was in the area of unemployment compensation that the largest changes were noted in 1994 and 1995. As noted in Chapter I, significant modifications were made in unemployment benefits in 1993 and 1994 which both reduced the generosity of benefits and shortened eligibility periods. These changes, combined with the reduction in the unemployment rate, produced a decline of 14 percent in outlays in 1994 and a further reduction of 15 percent in 1995, with the number of beneficiaries falling even more sharply as many of those who lost their jobs in the recession exhausted their eligibility for benefits.

3. Performance of regional and local governments

The overall deficit of the territorial governments narrowed by 0.2 percent of GDP in 1994 to 1.1 percent of GDP (Table 13). Based on very preliminary numbers, it is estimated that a further improvement to a deficit of 0.8 percent of GDP was attained in 1995. With current revenues constant as a share of GDP and net capital transfers falling, the deficit reduction was attained almost entirely via expenditure reductions. While there have been reductions in current transfer payments, the adjustment was largely achieved by cuts in investment spending (Table 24). The following

Table 24.

Spain: Territorial Governments Nonfinancial Operations 1990-94

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Source: Staff estimates.

National accounts basis. Territorial governments include the regional and local governments. Data for 1992 have recently been revised.

table presents a breakdown of the activities of the territorial governments between the regional and local authorities. As can be seen, the bulk of the consolidation effort has been made by the regional governments, whose deficits were much larger at the outset of the 1990s.

Spain: Operations of Rational and Local Governments 1/

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Source: Bank of Spain, Cuentas Financieres. Boletin Econóaico.

The totals of ragional tovaroaanta and local governments do not equal those of Table 24 due to intragovernmental transfers.

This deficit reduction reflects the results of a multiyear agreement with regional and municipal authorities reached in 1992 which set specific debt limits for regional governments and for municipalities to contribute to the fiscal consolidation required for the authorities’ convergence program. This agreement by and large has been adhered to, aided by the fact that central government approval is required for all bond issues by territorial governments.

4. Relations with the EU

There was a substantial increase in net transfers to Spain from the EU during 1995 due to lower contributions by Spain and an increase in receipts (Table 25). As a share of GDP, net flows more than tripled, from 0.5 percent of GDP in 1994 to 1.6 percent of GDP in 1995. Several factors were behind this sharp rise. On the one hand, the 1994 transfers had been unusually low, as exceptional payments were made and a significant amount of Cohesion Fund and EU investment money disbursements were delayed due to bureaucratic difficulties. This resulted in abnormally high net transfers in 1995, when EU disbursements included a substantial amount of delayed transfers from 1994. Capital transfers led the way, with Cohesion Fund disbursements up by 180 percent, and other capital transfers up by 117 percent. Overall, receipts from the EU climbed from 1.8 percent of GDP in 1994 to 2.5 percent in 1995. Spanish transfers to the EU, on the other hand, were affected adversely by the weak performance of VAT revenues and the speeded up procedure for VAT refunds, declining from 1.2 percent of GDP in 1994 to 0.9 percent of GDP in 1995.

Table 25.

Spain: Financial Relations with the EC, 1990-95

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Source: Bank of Spain, Statistical Bulletin.

5. The 1996 budget rollover

The government produced a draft 1996 budget, presented to parliament in September 1995, which was designed to continue the fiscal consolidation of the convergence plan by achieving a reduction in the general government deficit from 5.9 percent to 4.4 percent of GDP without increasing tax rates. To achieve this objective, the budget relied on holding expenditures roughly constant in nominal terms. Taking into account the unavoidable increases in interest payments, entitlement spending on health care and pensions, and the wage increase agreed under the multiyear contract with civil servants, the budget implied substantial cuts in the remaining discretionary components of expenditure.

The budget was rejected by the parliament without even coming up for debate, implying automatically that the 1995 budget would be rolled over into 1996. However, the government supplemented the rollover with a series of decree laws which granted the necessary spending authority for cost of living increases for pensions and wages and for the payment of the higher 1996 interest burden. The decrees also implemented the inflation adjustment of income tax brackets and excise taxes that had been proposed in the rejected budget. The outcome of this ad hoc procedure differed little from the original budget proposal.

The resulting 1996 fiscal program, which was drawn up on a forecast GDP growth of 3.4 percent in 1996, includes cuts in expenditures of nearly 1 percent of GDP, that are concentrated in the same areas which suffered the brunt of the reductions in 1995, i.e., public consumption, current transfers, and capital expenditures. Expenditure on wages and salaries is slated to fall by 0.1 percent of GDP, reflecting the continued effects of the policy of reductions in public employment and the limited wage increases. Consumption of goods and services is targeted for a cut of 17 percent in nominal terms, reducing it by 0.2 percent of GDP. Current transfers are set to rise by less than 2 percent in nominal terms, reducing their participation in GDP by 0.7 percentage point. This would reflect continued savings in unemployment benefits, transfers to public enterprises, and slower growth of health spending. Finally, capital spending is to be cut by nearly 8 percent in nominal terms, falling from 2.8 percent of GDP in 1995 to 2.4 percent in 1996 on a budget basis.

The revenue side of the 1996 fiscal program called for an increase in revenues of 0.3 percent of GDP, most of which was to come from a recovery in tax revenues as private consumption growth accelerates. These increases in current income are expected to more than offset an expected fall in capital income as EU transfers return to more normal levels from the high inflows of 1995.

III. Monetary and Exchange Rate Developments

1. Overview

The medium-term objective of the Bank of Spain, which became autonomous in 1994, is to achieve an inflation rate (measured by the CPI) of below 3 percent during 1997, with an intermediate reference range of 3 percent in early 1997. In pursuit of this objective, the Bank of Spain tightened monetary conditions in early 1995, raising its reference rate on three occasions by a total of 190 basis points to 9.25 percent.

The turbulence of 1992-93 in the foreign exchange market was followed by a year of calm, during which the peseta stayed well within the 15 percent margins from its new central rate in the European Monetary System (EMS). In early 1995, however, the peseta again suffered strong downward pressures and its central rate was devalued by 7 percent. Nevertheless, largely due to the firm stance of the Bank of Spain, the peseta recovered in the following months, standing at a stronger rate vis-à-vis the deutsche mark in early 1996 than in late 1994. The monetary stance, as well as improvements in the fiscal position can be ascribed also among the reasons explaining the narrowing of long-term interest rate differentials vis-à-vis Germany since mid-1995. After a considerable widening in the previous 18 months, long-term differentials fell about 150 basis points in recent months.

2. The autonomy of the Bank of Spain and the objectives of monetary policy

In June 1994 the Bank of Spain became independent in the conduct of monetary policy, with the pursuit of price stability as its primary objective. Under the new law, the government retained the ultimate responsibility for deciding the parity of the peseta within the Exchange Rate Mechanism (ERM) of the EMS, but it is required to consult with the Bank on this issue, and the Bank is the institution in charge of putting this policy into effect. Also, and in accordance with the conditions of the Maastricht Treaty, the Bank of Spain is prohibited by law from financing the public deficit. The Bank has to announce the overall objective of monetary policy and its main procedures at least once a year.

In the policy announcement for 1996, the Bank of Spain reaffirmed its goals with regard to inflation for 1996-97 and highlighted as the main impediments to a continuous lowering of inflation, the fiscal stance and barriers to free competition still existing in various sectors. It stated that the framework for monetary policy decision-making will continue to be based on the examination of a broad range of price, fiscal, income, and financial indicators (targeting monetary aggregates was abandoned in 1995). 1/

In addition to the medium-term inflation objective, the Bank initially had a shorter-term reference: the 12-month growth rate of the CPI should be running at 3.5-4.0 percent in the early months of 1996. More recently it has pointed that year-on-year inflation should be 3 percent by early 1997 for the medium-term target to be achievable. As a form of guidance to the market, the Bank of Spain publishes an “inflation report” twice a year (in March and September) which provides a general analysis of the factors affecting prices and an assessment of overall trends, but the Bank does not publish inflation forecasts.

3. Instruments and monetary aggregates

a. Instruments

There have been few changes in the set of instruments and its use for conducting monetary policy since a major reform undertaken in 1990. 2/ The rate announced by the Bank of Spain for the 10-day repurchase agreements continues to be the major policy variable. Since 1993, the day-to-day rate refers only to the average rate at which bids are accepted. Market makers are required to bid prices and volumes early in the morning which encourages banks to reveal an accurate estimate of their liquidity requirements, while the Bank of Spain chooses the offers to be accepted throughout the day. This tends to reduce the volatility of interest rates, although some spikes at the close of 10-day repo periods related to needs for satisfying reserve requirements still occur. This procedure does not preclude standard open-market operations by the Bank.

b. Monetary aggregates

The year-on-year rate of growth of the intermediate monetary target (ALP) fell in early 1994 to around 7 percent, but it increased subsequently to over 10 percent by mid-1995 before slowing down in the second half of the year. Even so, ALP growth exceeded the upper bound of its projected range in 1995 (Tables 26-28). Fluctuations in ALP growth have been difficult to interpret in terms of changes in aggregate expenditure, and have largely been attributed to variations in the yield curve and associated changes in the funding strategy of the Treasury, and portfolio choices of the private sector. Savers have also shown a preference for time deposits, which increased at rates exceeding 10 percent in 1995, while firms have made large-scale use of repurchase agreements (mainly backed by government securities), which have expanded at rates in excess of 20 percent in the recent past. Indeed, repos were among the main factors explaining the growth of M3 and ALP in 1995. Although households and firms own two thirds of the marketable government debt, they use about half of their holdings to back repo operations vis-à-vis the banking system.

Table 26.

Spain: Monetary Survey, 1990-95

(Stocks: in billions of pesetas: end of period)

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Source: Bank of Spain, Statistical Bulletin.

Through November 1995.

Institute de Credito Official.

Includes short-term government securities and repurchase operations with public and private papers.

Table 27.

Spain: Monetary Survey, 1990-95

(Stocks; year-over-year percentage chance)

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Source: Bank of Spain. Statistical Bulletin.

Through November 1995.

Institute de Credito Official.

Includes short-term government securities and repurchase operations with public and private papers.

Table 28.

Spain: Monetary Aggregates, 1990-95

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Source: Bank of Spain. Statistical Bulletin.

November.

Annual GDP; end of period monetary aggregate.

Credit to households and firms decelerated sharply in 1993 to a year-on-year rate of less than 1 percent in early 1994, but picked up in the following months to about 6 percent in 1995. By contrast, credit to the government increased at a much faster pace, by 32 percent in 1994 and 12 percent in 1995 (Table 27). This increase was due in part to the shift in government financing from long-term to short-term debt in 1994. The rate of growth of credit to the government, including medium- and long-term debt, has been stable since 1993.

4. Developments in exchange and interest market

a. Exchange markets

After the sharp depreciation experienced in 1992-93 (when the central rate vis-à-vis EKS currencies was changed twice and the intervention margin widened to 15 percent), the peseta showed little fluctuation for most of 1994. At the end of the year, however, following the announcement of a government budget perceived by markets as less-than-ambitious and in reflection of growing fears of a pickup in inflation subsequent to the increase in VAT rates, the peseta started to depreciate despite the increase in official interest rates early in the year (Tables 29-31).

The turbulence in European exchange markets associated with the weakening of the U.S. dollar vis-à-vis the deutsche mark led to an additional depreciation of the peseta in February-March 1995, that was followed by a 7 percent change in the central rate. In the following months, however, the peseta recovered and by the end of the year had returned to its levels of late 1994 vis-à-vis the deutsche mark and had appreciated by 10 percent in nominal terms vis-à-vis the U.S. dollar.

Table 29.

Spain: Main Interest Rates, 1990-95

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Source: Bank of Spain. Statistical Bulletin.

Starts in May 1990.

Secondary markets.

Table 30

Spain Financial Markets Developments, 1990-95

(In billions of pesetas)

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Source: Bank of Spain, Statistical Bulletin.

Excludes nonmarketable bonds.

Table 31.

Spain: Exchange Rate Indicators, 1990-95

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Source: Bank of Spain.

Countries which currency was subjected to the EMS narrow band before August 1993.

Trade weighted using Bank of Spain weights. Based on CPI indices.

January-November.

Trade weighted using Bank of Spain weights. Based on unit labor costs in manufacturing.

January-June.

MERM.

b. Short-term interest rates

The intervention rate was cut six times in the first eight months of 1994, falling from 9 percent to 7.35 percent, continuing the trend started in late 1992, when it had peaked at 13.75 percent. However, in January 1995 the rate was raised to 8 percent, in the aftermath of the increase in the VAT and further to 9.25 percent over the following six months. Despite cuts in German short-term interest rates later in the year and a slowdown in inflation and activity in Spain, the Bank of Spain followed a cautious path, lowering short-term official interest rates by a cumulative 50 basis points during December 1995-January 1996 and by a further 50 basis points in March 1996 to 8.25 percent. Reflecting the relatively tight monetary stance, the differential of short-term interbank rates vis-à-vis Germany increased by around 250 basis points during 1995, standing at 5½ percent by the end of the year.

c. Long-term Interest rates

The differential between Spanish and German long-term rates started to widen in early 1994, increasing from 2 percent to a peak of almost 5 percent during the exchange-market turbulence of early 1995, largely reflecting market concerns regarding inflation and fiscal consolidation in Spain. The firm stance of the Bank of Spain and the subsequent narrowing of the fiscal deficit were among the reasons permitting the 150 basis point narrowing of the long-term differential to 3½ percent by end-1995. Nevertheless, the yield curve in Spain still implies 6-month forward rates above 10 percent by year 2000, significantly above the rates implied by the German yield curve.

5. The banking sector and other financial institutions

a. Main trends

The modernization and consolidation of the banking sector, started in the late 1980s in preparation for the advent of the European single market, has continued in recent years, with mergers resulting in the creation of 3 of the 5 largest financial institutions in Spain in the early 1990s. Despite the turbulence in exchange markets in recent years, the collapse of the fast growing Banes to bank in late 1993, and the effects of the recession, the Spanish financial sector in general has remained in a strong financial condition. Among the major recent developments have been (1) further mergers and alliances between financial institutions; (2) participation by banks and saving institutions in the privatization process, which has allowed them to invest in new areas, such as telecommunications; and (3) increased wholesale operations with residents and nonresidents in the secondary market, and in the exchange markets.

b. Structural consolidation

On the eve of the introduction of the European single market in 1992 the merger of four banks resulted in the creation of BBV and BCH (currently the second and third largest banks in Spain, respectively). In addition, the government brought together all the state-owned institutions under the umbrella of the Argenteria group, which was partially privatized in 1993. 1/ Further consolidation took place in 1994 when, after rescuing Banes to (see below), the Bunk of Spain put it up for sale and Banco Santander paid Ptas 281 billion for a controlling 60.2 percent stake (later reduced to 46.5 percent through resales to other shareholders), in the process forming the biggest banking group in Spain. Another strand in the consolidation trend has been the growth and diversification of savings banks (cajas de ahorro), some of which have close ties with regional governments. Among the most successful sales has been the Catalan saving institution (la Caixa), which established a strategic alliance with Banco Santander in 1994. Although banks are effectively barred from acquiring saving institutions, the latter have since 1990 spent about US$2 billion in the acquisition of banks and credit cooperatives.

c. The Banesto crisis and developments in banking supervision

The Bank of Spain intervened in Banesto on December 28, 1993, following a motion of censure voted by Banesto’s shareholders three months after the board of Banesto agreed to restructure Ptas 41 billion (US$290 million) of Banesto’s loans as bad loans. The collapse of Banesto only seven months after it had raised US$700 million in new equity did not, however, have a systemic impact on Spanish banking sector—in part because Spanish banks historically have been highly capitalized (see table below) and 1993 was a very profitable year for the sector as a whole (three of the largest Spanish banks ranked among the world’s top ten most profitable banks in 1993).

The rescue operation mounted by the Bank of Spain comprised an injection of capital of Ptas 180 billion (US$1.3 billion) and the absorption of Ptas 142 billion (US$1 billion) of bad debts by the Spanish Deposit Guarantee Fund. The major part of these funds were recovered when Banesto was auctioned off in May 1994. Soon after acquiring the control of the bank, Banco Santander sold off Banesto’s industrial holdings (some of which had posted losses in previous years). The main companies sold were a chemical group (Carburos Metilicos), a battery manufacturer (Tudor), and a zinc producer (Asturiana de Zinc), all of which were sold to foreign investors. Banesto posted modest profits in 1995.

Banesto’s collapse underscored the need for strengthening the supervisory powers of the Batik of Spain, as well as for increasing the accountability of auditors. Measures adopted to avoid similar problems in the future included more frequent auditing by the Bank of Spain and new disclosure rules that require banks’ managers to inform their boards of directors about any reprimand or opinion following such inspections.

Spain: Banking Capital to Asset Ratios (1992)

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Source: The Banker (1993).

d. Banking profitability and financial operations

The profitability of Spanish banks improved in 1993, helped by a widening of lending margins, the depreciation of the peseta (and the volatility of exchange markets), as well as by the increase in operations with public debt (in part financed by liquidity rejected by the Bank of Spain) that partially offset the contraction of credit to firms. It, however, narrowed somewhat in 1994 with the increase in long-term interest rates which led to a deterioration in both operating margins and pre-tax returns (see table below), despite a reduction in provisions for doubtful credits and a strong increase in deposits. Results in 1995 were somewhat mixed, in part owing to increases in provisions for bad loans, notably by BCH.

Spain: Banks’ Aftar-tax Income

In billions of assetes)

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Sources: Bank of Spain, Annual Report: and Spanish Banking Association.

Excluding Banesto.

IV. External Sector

1. The current Account and its components

Reflecting the effects of the recession and the depreciation of the peseta, 1/ the external current account balance switched from a deficit of more than 3 percent of GDP in 1992 to a small surplus in 1995 (Tables 32-34), as the trade deficit declined from 5½ percent of GDP to 3½ percent of GDP over this period, while the surplus on tourism increased to 4¾ percentage points of GDP.

Table 32.

Spain: Balance of Payments in Spanish Pesetas. 1990-95

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Source: Bank of Spain. Boletin estadiatico.

January-September.

A negative sign indicates an decrease in foreign reserves.

Table 33.

Spain: Balance of Payments in U.S. Dollars. 1990-95

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Source: Bank of Spain. Boletin estadiatico: and staff estimates.

January-September.

A negative sign indicates an decrease in foreign reserves.

Table 34.

Spain: Current Account Balance, 1990-95

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Source; Bank of Spain.

January-September.

Exports rose by about 20 percent a year in 1993-94, following only 6 percent growth in 1992 (Table 35). Overall, Spain’s market share increased 4 percent in 1994, after cumulated losses of 25 percent in 1990-93. Imports contracted markedly in 1993 with the onset of the recession and the change in relative prices brought about by the depreciation of the peseta. While the improvement in the trade and current accounts in 1993 resulted partially from weak domestic activity, the trade performance in 1994 was spurred mainly by an expansion in foreign demand for Spanish exports which outpaced the recovery in imports. Sustained growth of domestic demand and a somewhat slower growth of exports were reflected in a slight widening of the trade deficit in 1995.

Table 35.

Spain: External Trade, 1990-94 1/

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Sources: Ministry of Economy and Finance. Sintesis Menaual de Indicadores Economicos: and staff estimates.

Customs basis.

Calculated on the basis of the movement in non-oil import volumes of Spain’s major trading partners.

Particularly noteworthy in the strong pickup in exports in 1994 was the performance of the manufacturing sector, with the volume of sales of manufactured goods abroad increasing 25 percent relative to 1993 (Tables 36 and 38). Increases in export volumes of food products were well below the growth of total exports, owing largely to the constraints imposed by the Common Agricultural Policy (CAP) of the European Union and weather conditions—average prices, however, increased 6 percent, after several years of declining support prices.

Table 36.

Spain: Trade Composition by Products, 1990-94 1/

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Source: Ministry of Economy and Finance, Sintesis Mensual de Indicadores Econotnicos.

Based on customs statistics.

Table 37.

Spain: Direction of Trade, 1990-94

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Source: Ministry of Economy and Finance.
Table 38.

Spain: Selected Indicators of Export Performance, 1990-94

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Sources: Bank of Spain; IMF, World Economic Outlook, and staff estimates.

Calculated on the basis of the growth of non-oil import volumes of Spain’s major trading partners.

Non-oil exports

The decline in imports in 1993 can in part be ascribed to the 21 percent fall in imports of investment goods. The increase in imports in the following years was due to a surge in imports of food, intermediate goods, and the strong recovery of investment; imports of investment goods increased 20 percent 1994 and 11 percent in 1995 in volume, well above the 4.5 percent increase in imports of consumer goods in 1995. Imports of energy products increased 3.2 percent in volume in 1994, after falling 4.2 percent during the recession.

The geographic distribution of trade has changed significantly since 1992 (Table 37). Despite the economic recovery in Europe and buoyant exports to the United States and Japan, exports to OECD countries as a share of total exports decreased by 2 percentage points, while the share of Exports to Latin America Jumped from 2.9 percent to 4.0 percent of total exports, reflecting the increasing openness and stability of several Latin American economies. The decline in the share of Europe in total exports was largely due to declines in the share of exports to Germany and Italy. The share of imports coming from the EU increased 0.6 percentage points in 1992-94, mainly due to an increase in the share of imports from France, largely parts and intermediate goods used by the manufacturing sector.

The surplus on the services account increased substantially in 1992-94, largely due to a sharp increase in receipts from tourism. Starting from strong results in 1992 (when the Barcelona Olympic Games and the Sewille Fair took place), the tourism sector has sustained continuous strong growth in recent years, helped by favorable exchange rates.

Investment income fluctuated in line with changes in interest rates, the share of public debt held by nonresidents, and changes in official reserves. The increase in investment income outflows in 1994 reflected higher interest payments on the large issues of public debt made in 1993-94. At the same time, interest receipts declined in 1994 in part reflecting the substantial decline in official foreign reserves in 1992-93. Investment income figures for 1994 were also affected by the widespread sale of securities to nonresidents shortly before the payment of coupons followed by their repurchase ex-coupon. This practice aimed at avoiding the payment of withholding taxes on interest (nonresidents are exempt from them) has, nonetheless, been curbed in recent months, helping to reduce net outflows in 1995.

Net official transfers remained level during 1992-94. A delay in receiving certain transfers from the EU in 1994 was reversed in 1995, resulting in a sharp increase in the surplus on official transfers that year. Official development assistance has steadily increased since 1989, despite the downturn in economic activity in 1993 and fiscal consolidation thereafter, and amounted to 0.3 percent of GDP in 1995 (Table 39).

Table 39.

Spain: Official Development Assistance, 1990-95

(Disbursement in millions of U.S. dollars)

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Source: Ministry of Economy and Finance, Information Commercial Bapanola; and data provided the Spanish authorities.

Forecasts before the inclusion in the budget for 1995 of possible new credits that could take ODA figures up to 0.35 percent directly or to 0.5 percent of GDP with approval by the Cabinet. Final figures will be available by mid-year, and they are likely to increase significantly from forecasts.

Includes food and emergency aid.

2. The capital account

Capital flows have fluctuated considerably in recent years. Net foreign investment fell sharply in 1993, increased only marginally in 1994, and declined again in 1995 (Table 33). The pickup of the European economy in 1994 appears to have provided weaker inducements to foreigners for investing in Spain than to residents (e.g., firms) for investing abroad. Although the economic uncertainty prevailing in 1995 affected both inflows and outflows, the completion of major projects in Spain (particularly in the auto industry) led to a decline in foreign direct investment that year.

Large inflows of portfolio investment in 1993 were followed by large outflows in 1994 and in the first quarter of 1995. Overall, however, inflows exceeded outflows in 1995. A large part of portfolio inflows is usually covered against exchange rate risk, through forward positions and repurchase agreements, that are reflected among “other” capital flows, which to some extent have been the mirror image of the fluctuations in portfolio investment. Net foreign assets of the Bank of Spain declined by US$7.5 billion in February-March 1995, and remained broadly unchanged in the remainder of the year. This followed declines of US$22 billion in 1992-93 and no change in 1994.

3. Competitiveness and the real exchange rate

External competitiveness improved markedly in 1993-94, as the peseta depreciated almost 30 percent in nominal terms against the U.S. dollar and by one fourth against the deutsche mark. Unit labor costs fell about 20 percent relative to industrial countries during this period and slightly more relative to the group of countries subjected to EMS narrow bands before 1993 (Table 38). Overall, the real effective exchange rate against industrial countries fell by 20 percent in the period. With the slowdown in inflation and the moderation in wages in 1994-95, most of these gains have been maintained. The resulting increase in profitability in the export sector was translated into a significant increase in Spanish market share in Europe and elsewhere and a surge in investment in the export sector in 1994-95.

V. Structural Issues

1. Introduction

The Convergence Plan announced by the Spanish authorities envisaged a number of structural reforms to underpin the macro policies geared toward preparing Spain for European Monetary Union. The Plan called for the liberalization not only of the labor market, but also those markets targeted by the European Commission, such as telecommunications and energy. Along these lines, the Spanish authorities in recent years have partially liberalized the telecommunication market and implemented a major reform of the regulations governing the electricity sector. The government has also pursued an aggressive privatization program, and is in the process of restructuring a number of public enterprises. In other areas (e.g., the land use, the organization of professions and retail trade, and the reform of ports), as pointed out by the Competition Tribunal, 1/ progress has been less rapid, despite efforts made by the government. Indeed, a Retail Trade Law passed by parliament in 1995 represented a step backward in terms of increasing restrictions on opening hours and on the location of supermarkets.

The Spanish authorities are also increasingly aware of the problem posed by growing social security commitments, in particular the rapid expansion of pensions in face of the progressive aging of the population. Although specific reforms have not yet been proposed, a political breakthrough was achieved in 1995 when the major political parties agreed (in the Toledo Pact) on a general diagnosis, and called for a reform of the pay-as-you-go system, as well as the expansion of prefunded private pensions. Although the Toledo Pact did not provide details, it indicated the overall direction of reforms and was well received by the public.

This chapter reviews recent developments regarding public enterprises and privatization; the new legal framework for the electricity sector; and the substantial growth of pre-funded pensions and other long-term financial saving instruments in Spain.

2. Public enterprises and the privatization process

Public enterprises have a long tradition in Spain, providing 6 percent of total employment and generating revenues corresponding to about 10 percent of GDP. While state participation in the capital of these enterprises has decreased over the last 10 years, the government still retains substantial control over major enterprises in key sectors, including those where monopolies are being broken down under the effect of European Community regulations. This policy was formalized in the 1995 Privatization Framework Law, which allows the government to retain special powers in companies where it is a minority shareholder, and has led the government to seek core shareholders for strategic enterprises.

a. The budgetary impact of public enterprises

As in some other European countries, electricity and telecommunication companies are among the most profitable firms in the economy; several financial companies (under the umbrella of the Argentaria group) also generate profits. Others (formerly grouped mainly in INI) made losses. The fast expansion of public enterprises in foreign markets has brought mixed results. While Telefónica has profited handsomely from the companies it owns in Latin America, IBERIA was overburdened by the purchase of several air companies in the early 1990s.

Spain: Profitability of State Enterprises 1/

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Sources: Sanchez (1995), Cuadernos de Informaci6n Economica; and staff estimates.

Before-Tax Income/Total Revenues.

Average profitability of firms in the survey published by the Bank of Spain.

The sale of shares in the most profitable enterprises has also generated significant receipts to the government. In 1995 the government raised Ptas 400 billion from privatizations of part of its holdings in the oil company REPSOL, Telef6nica, and the paper company ENCE; it expects to raise another Ptas 250 billion in the first quarter of 1996 from new sales of shares of Argenteria and REPSOL.

Over the last few years, the government has carried through several reorganizations of the public enterprise sector, in the process dissolving the former INI (Instituto National de Industrie) and replacing it with two large holding companies—the State Industrial Agency (AIE), which includes companies in the coal, steel, defense, and shipbuilding sectors, and the Sociedad Estatal de Participaciones Industriales (SEPI). SEPI, in turn, owns the government’s remaining shares in REPSOL as well as the holding company TENEO, which comprises a range of enterprises in the energy, transportation, electronics, and engineering sectors, including IBERIA (Table 40). The holding companies are responsible for restoring the financial health of their subsidiaries, or merging or liquidating them. This reorganization did not affect certain directly owned enterprises belonging to the government property group (Patrimonio), such as Telefónica, or RENFE.

Table 40.

Spain: Main Public Sector Entities - Publicly Owned Companies 1/

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Source: National Industry Institute. Teneo. National Oil Institute. Government Property Branch. Ministry of Public Works, Transportation and Environment, Fomento de a Produceion and internal figures.

Figures for 1993 except in case of Teneo Group AENA which are for 1994.

Part of the INI Group, until its dissolution in 1995.

Made up to ENDESA, ENHER. UNELCO. ENCASUR, GESA. ERZ. Gas Aregon, Viesgo. ESVA and ERSA. Minority participations at 31-12-93 in FECSA (46.98 percent). Sewillana (33.48 percent) end Union FENOSA (9.99 percent). In 1994 it acquired 11.50 parcant of Aguas da Barcelons.

Following public offer of sale in April 1995.

Gas Natural holds additional participation of 91 percent acquired in July 1994.

REPSOL holds additional participation of 45.26 percent.

Made up, under name “Argentaria”. of Banco de Credito Agricola. Banco de Crtdito Local. Banco Bipotecario de Espafta. Caja Postal. Banco Exterior and other financial companies.

Tabacalera holds additional participation of 20.82 percent.

If we add the Ptas 268.7 billion in subsidies and compensation to the book loss the overall losses of the Group rise to Ptas 326.7 billion.

If we add the Ptas 31.8 billion received in subsidies to the book loss the overall losses of the Group rise to Ptas 127 billion.)

The spending budget for 1995 amounts to Ptas 182.2 billion.

The scope for savings is large: the latest estimates indicate companies in the AIE portfolio alone had global losses of about US$3 billion (½ percent of GDP) in 1995. In accordance with European Union rules, AIE expects to establish detailed financial plans for each enterprise, aimed at a gradual reduction in transfers to public enterprises. However, by the end of 1995 few among the loss-making enterprises had yet announced detailed plans. Concerns about the social implications of downsizing were heightened by the resistance of shipyard workers following the announcement of plan involving the elimination of 5,000 jobs in the sector and the closure of two shipyards. Redundancies were subsequently revised down and it was agreed that the shipyards would be kept open. Other cuts in the workforce are planned in the coal industry (HUNOSA), where a 25 percent cut of the 30,000-strong workforce is to be Bade by the end of 1997; and the steel industry, where 40 percent of the 27,000 workforce is to be cut before the year 2000. In addition, the TENEO-owned IBERIA is supposed to cut 3,500 jobs before the end of 1997.

Also in line with EU policies, the government has established a contract with the state-owned railway (RENFE), separating the maintenance and upgrading of the railway infrastructure (to be financed by the State), from the operation of the trains (which is to be opened to private competition). Under this contract the State still will subsidize mass transportation and costs associated with the consolidation of RENFE.

Government Funds Received by Public Companies or Corporations

In billions of pesetas)

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Source: INI and Bank of Spain.

b. Financial relations between SEPI and the government

Financial relations between the state enterprises and the government are complex. SEPI, which controls TENEO and REPSOL, took over the Ptas 700 billion debt of INI, which has been abolished. While SEPI’s statute prohibits any state funding, there is an understanding that SEPI will use part of the dividends paid by the profitable companies under its control to gradually repay the inherited debt. The government uses privatization receipts at its discretion, which includes permitting SEPI to retain them.

c. Industrial policy issues

The reorganization of public enterprises, as veil as the new privatization law, have provided a framework for an industrial policy aimed at strengthening the position of the Spanish private sector in anticipation of the break-up of state monopolies in areas such as telecommunications and electricity. In the areas of telecommunications, cellular phones are already open to competition and most of the remainder of the telecommunications sector, including voice telephone, will be opened by 1998 (Spain declined the 5-year waiver offered by the European Commission). The government had an important role in these developments, encouraging major financial institutions to invest in the sector. To strengthen Telef6nica (which vas granted the first cellular phone license for free and is currently only 20 percent public-owned), the government negotiated the entry of major banks (BBV, Argentaria and la Caixa) into the core shareholding structure of the company. A license for a second operator of cellular phones was von by the Airtel consortium, (comprising BCH, five regional savings banks, and U.S. phone companies). The winning bid was not the one offering the highest purchase price, but that performing better on a number of criteria such as job creation, and investment and R&D expenditure in Spain. Endesa (the major electricity company, partially owned by the government) also plans to participate in the cellular-phone business, which will call for BCH ceding a substantial part of its shares in the Airtel consortium to Endesa, in exchange for a stake in Endesa. 1/ These plans also called for Endesa and BCH to form a controlling block in Union Fenosa, Spain’s third largest electricity generator; the launching of joint ventures in cable and broadcast TV; and the delivery of part of BCH’s shares in Cepsa (the second oil company in Spain, partially owned by Elf-Aquitaine) to Endesa.

3. The electricity sector

The legal framework in which the electricity sector operates vas significantly changed in 1994, With the aim of fostering competition in the sector. However, the implementation of these objectives will require extensive accompanying legislation. Moreover, the new framework left the underpinnings of the pricing policy more or less intact, notwithstanding the reduction in industrial electricity tariffs agreed by the government and the electricity companies in 1993 and continued in the following years.

The change in the legal framework vas dictated by the increasing liberalization in the electricity sector in Europe, as well as by the partial privatization of the main electricity company (Endesa). It vas the first major change since the unification of the distribution network in 1984 and the moratorium in the construction of nuclear plants included in the National Electricity Plan of 1983. The electricity sector faces several structural and financial difficulties, including the large debt incurred by firms that invested in nuclear power, which now stands at same Ptas 700 billion (1 percent of GDP) despite the surtax paid by consumers with the aim of repaying it.

a. Market size and distribution

Production of electricity increased by one-third in the decade to 1994 as the share of nuclear power increased from less than 10 percent to more than 35 percent of total generation of electricity, while output from hydro-electrical and thermal plants stagnated. Per-capita consumption in Spain is still only 71 percent of that in the European Union. The 10-year plan established in 1991 has been revised downward, following the decline in consumption during the 1992-93 recession. Some investments were postponed, and planned imports from France contemplated in the original plan were pushed back to the end of the decade.

The market is heavily dominated by two companies, Iberdrola and Endesa—the latter being a subsidiary of TENEO. These two companies share 80 percent of the market, with Endesa and its subsidiaries accounting for more than half of production and about 45 percent of the distribution of electricity. All companies are connected to the national grid (REE).

Main Electrical Power Companies in Spain (1993)

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Source: Caja de Ahorros y Pensiones de Barcelona (la Caixa).

Banco Bilbao Vizcaya

Banco Central Hipotecario

b. Price policies

Electricity tariffs in Spain are high relative to those in other EU countries, although comparisons are complicated by fluctuations in exchange rates. This in part reflects the surcharges earmarked to service the debt arising from the nuclear program, as well as to fund subsidies for research and the nuclear and coal industries. More generally, it results from policies implemented under the so-called Stable Legal Framework (MLE), which is the set of regulations aimed at guaranteeing uniform prices and adequate profitability of electricity companies, which has hovered around 10 percent since the early 1990s. Under the MLE, companies are reimbursed for their fixed and marginal costs, and plants with low marginal costs are given preference to sell electricity to the national distribution network. Although theoretically providing the most efficient resource allocation, this mechanism has encountered a number of practical difficulties, particularly as regards measuring the actual costs incurred by electricity companies.

Electricity prices charged to industrial firms have fallen since 1993, while household prices have risen by less than the increase in the CFI. In addition, a special rate for large buyers was created favoring off-peak consumption. Industrial rates were cut further in 1995 by 2-3 percent, while rates charged to households again increased somewhat less than the CPl. These real declines in electricity prices were related less to improved efficiency of the sector than to the effect of the fall in long-term interest rates since 1992, since interest rates are an important element in the pricing formula.

c. Main features of the new framework

The new framework (the Ley de Ordenación del Sistema Eléctrico Nacional-LOSEN), formally admits the establishment of independent suppliers and distribution networks and abolishes the monopoly on importing or exporting electricity enjoyed by the national integrated network. Nevertheless, it does not provide details on how independent networks would operate and prohibits any change that could hurt the integrated network or upset the market.

The LOSEN also established a formal separation between the generation and distribution activities, and provided new rules for the authorization of the construction of new plants. In addition, it opened the possibility of new compensation mechanisms being introduced within the sector and established a regulatory body (Comisión del Sistema Electrico Nacional) to oversee the sector. The extent to which this commission has executive powers (in addition to its advisory role) has not been fully clarified.

4. Pension funds and other long-term collective saving instruments

Private pension funds have expanded significantly in Spain since 1991—their total assets have more than doubled and now correspond to about 3 percent of GDP. In addition, the Basque country (which enjoys some privileges regarding fiscal and social security laws) has introduced its own type of pre-funded schemes which differ somewhat from ordinary private schemes. Although the volume of savings represented by these instruments is still very small compared to the pensions paid by social security (9 percent of GDP per year), they provide an indication of the willingness of Spanish households to complement their pay-as-you-go pensions with income from pre-funded schemes. Investment funds also expanded significantly. This section provides background material on these long-term saving instruments.

Spain: Private Fanaion Ponds (1995)

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Source: Asociatión de Instituciones de Invertiones Coleetives - Invarco.

a. Pension schemes

Spanish regulations distinguish between pension schemes sponsored by financial institutions, groups, and employers. Schemes offered by financial institutions to individuals can only be of the defined-contribution type, while those sponsored by groups to their members and employers to their workers can also be of the defined-benefit type. Under current regulations, contributions to schemes can be deducted from taxable income up to the limit of Ptas 1 billion (about US$7,500) a year or 15 percent of net earnings from working activities, whichever is smaller. Benefits are paid either in lump sum or as a pension. Withdrawals are not generally allowed before retirement age (except in the case of disability or death), but participants can transfer assets between plans at their discretion, which fosters competition among fund managers. In some cases assets can also be used as collateral for loans, up to a limit of 80 percent of total assets.

The law establishes that pension funds are to be managed by professionals and overseen by a board of directors comprising representatives of investors. It also requires a separation between managerial functions and depositary functions (exercised by any recognized depositary institution registered in Spain). Funds can be managed by corporations (with at least Ptas 100 million of capital) or insurance companies. Despite relatively intense competition, management fees are most often close to their legal ceiling of 2.6 percent of the value of managed assets per year. Pension funds’ portfolios are subject to certain restrictions, the most important being that 90 percent of assets are to be invested in marketable securities and at least 1 percent of total assets is to be kept in cash; there are also some limits on the share of individual assets in a given fund portfolio.

Fluctuations in bond prices have led to the introduction of several “minimum-return” funds, i.e., funds enhanced by an insurance policy guaranteeing a certain return by an agreed date. Policies guaranteeing a minimum-return are underwritten by an independent bank, thus not affecting the solvency of the fund.

Discussions on the need to reform the social security system, as well as the view expressed in the Toledo Pact that complementary pre-funded pensions should be encouraged, suggest that the coverage of private pension plans is likely to expand rapidly from its current share of less than 15 percent of the labor force.

The EPSV existing in the Basque country are nonprofit entities supervised by the regional government entitled to manage their own portfolio or subcontract with financial institutions. Tax incentives associated with them are slightly different from those in the rest of the country. In addition to the tax deductibility of contributions below Ptas 1 million, investors in EPSV benefit from a small reduction on income tax rates and, in a number of cases, savings are exempt from inheritance taxes up to a ceiling of Ptas 1.6 million per year, with lump sum payments limited to Ptas 6.5 billion. The funds offer “minimum-return” options without relinquishing the usual tax advantages. Also in contrast to ordinary pension schemes, savings can be withdrawn or transferred after 10 years.

b. Investment funds

Long-term savings have also been channeled increasingly through investment funds, whose total assets amount to more than 15 percent of GDP. With the drop in bond prices in 1994, the market value of assets managed by investment funds stagnated; by contrast, the amount of savings in investment funds increased 9 percent in 1995.

Contributions to investment funds are not deductible from taxable income. However, reinvested income is not subject to withholding taxes and the final return is considered as a capital gain, being tax exempt if funds are not withdrawn before 15 years. 1/ Although there are several types of funds, the vast majority are fixed-income schemes. Despite the relatively high capitalization of the Spanish stock market, more than 95 percent of funds’ portfolios are invested in fixed-income assets (57 percent in monetary instruments and 39 percent in bonds). Banks are the major players in this market, controlling 60 percent of managed assets. Saving institutions manage about one third of assets, but their market share has steadily decreased. As in other countries, the market for investment funds is relatively concentrated—the market share of the 10 largest groups exceeds two thirds. The majority of the funds are Spanish, but there has been a marked increase in the number of funds originating outside Spain (mainly Luxembourg and Ireland) and funds controlled by foreign banks, although their market share is still limited to about 10 percent.

1/

Messrs. J. Franks and J. Levy.

1/

INE has been revising the sampling weighting used in its labor force survey to reflect the results of the 1991 census. These changes are being phased in over 6 quarterly rounds of the survey. INE has estimated that these revisions have resulted in an increase in reported employment of around 25,000 per round, or 100,000 during 1995.

2/

Alternative measures of unit labor costs for the manufacturing sector indicate a net decline during 1994-95.

1/

A full discussion of the reforms can be found in SM/95/25 (2/6/95).

1/

The coverage rate normally would decline following a recession; as many people who lost their jobs in the downturn and remain unemployed exhaust their eligibility.

2/

Average payments declined by 10 percent in 1994, and then rose by 8 percent in the first 9 months of 1995.

1/

The Government of Spain is organized as follows: (i) the State; (ii) the central government, comprising the State plus certain small administratively autonomous agencies; (iii) the territorial governments, comprising the regional governments (Comunidades autdnomas) and local governments (Corporaciones locales); and (iv) the general government, comprising the central government plus the Social security system and territorial governments.

1/

As shown in Table 20, there was an increase in capital spending on a transactions basis; however, this increase was primarily in capital transfers, the bulk of which are invested by regional and local government. Part of the discrepancy is also the result of an upturn in investment late in the year which will be registered in the data on a national accounts basis for November and December.

2/

The social security system includes pensions, the health care system, and the National Employment Institute (INEM).

1/

As already noted, this reduction in rates was compensated by an increase of one point in the VAT rate, the additional revenues from which are to be transferred to the social security system from the central government.

1/

The discontinuation of monetary-aggregate targeting was due to increasing difficulties in interpreting fluctuations in the former intermediate target (liquid assets at the hands of the public, or ALP). Nevertheless, the ALP aggregate continues to be closely monitored and a reference medium-term growth rate, set at 8 percent in the formulation of the objectives for 1995, was maintained in 1996 even though ALP growth exceeded the reference rate in 1995. This growth rate is based on an estimated income elasticity of 1.6 (Bank of Spain, Economic Bulletin. October 1995).

2/

See SM/91/178 (8/30/91) for a description of the changes introduced in 1990; and Bank of Spain, Boletin Economico. March 1993 for an update on these reforms.

1/

The most important institutions controlled by Argentaria are the Banco Exterior (BEX), Caja Postal (Postal Savings), and Banco Hipotecario (Mortgage Bank). In 1993, the government sold 44.5 percent of the capital in two tranches; in early 1996, a further 25 percent of shares were offered for sale by the government.

1/

Four realignments of the central parity of the peseta have taken place since mid-1992: -5 percent on September 17, 1992; -6 percent on November 23, 1992; -8 percent on May 15, 1993; and -7 percent on March 6, 1995. The current central parity of the peseta is Ptas 85.0718 per deutsche mark.

1/

The Tribunal (Tribunal de la Competencia) is a government body charged with studying the impediments to the functioning of free markets. It produces periodic reports pointing out areas requiring reforms, as well as assessing the progress of structural reforms proposed by the government.

1/

The Banco Central Hipotecario (BCH) is a shareholder in the second and third largest electricity companies.

1/

Although funds withdrawn before this period are taxed, many investors consider the current tax schedule a low enough price to pay for the enhanced liquidity of investment funds vis-à-vis pension funds. The schedule is a function of the number of years assets were untouched—after the second year, the taxable amount is reduced by 7.14 percent of total assets for every “untouched” year.

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Cover IMF Staff Country Reports
Spain: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 056
Publisher:
International Monetary Fund
ISBN:
9781451811995
ISSN:
1934-7685
Pages:
80
DOI:
https://doi.org/10.5089/9781451811995.002