San Marino
Recent Economic Developments

This paper reviews economic developments in San Marino during 1990–98. San Marino has enjoyed rapid growth in the 1990s, as the expansion in output has outstripped that experienced in Italy as a whole and the surrounding regions of Emilia–Romagna and the Marche. Real GDP rose by an average of about 10 percent per year in 1992–94 and an estimated 5 percent in 1996 and 1997. Employment rose sharply in the early 1990s before slowing down to an average of 3 percent in 1996–97.

Abstract

This paper reviews economic developments in San Marino during 1990–98. San Marino has enjoyed rapid growth in the 1990s, as the expansion in output has outstripped that experienced in Italy as a whole and the surrounding regions of Emilia–Romagna and the Marche. Real GDP rose by an average of about 10 percent per year in 1992–94 and an estimated 5 percent in 1996 and 1997. Employment rose sharply in the early 1990s before slowing down to an average of 3 percent in 1996–97.

I. Introduction

1. Economic developments in San Marino have been shaped by its unique situation as a small enclave neighbored by the North-Central Italian regions of Emilia-Romagna and the Marche. Its resident population is about 26,000, inhabiting a land area of 61 square kilometers. Given the currency union with Italy (on January 1, 1999 San Marino adopted the euro) and the absence of barriers in trade and goods markets, San Marino has participated in the vigorous economic growth of the neighboring regions of Italy, and has developed niche areas of specialization that have provided the basis for a well-diversified high-income economy. Prudent fiscal policies have allowed for a modest tax burden and a comfortable net creditor position, contributing to the achievement of macroeconomic stability and an economic environment conducive to productive private investment.

2. Given San Marino’s small size and its very recent membership in the Fund, the country is just at the initial stages of constructing the traditional macroeconomic yardsticks used to gauge economic performance. In addition, relatively little information and analysis are available from other international organizations on the institutional details and functioning of the economy.

3. This paper is designed to help fill this void by providing the reader with a description of the institutional details of the economy and recent economic developments. The paper is organized as follows. Chapter II provides a description of the real sector; Chapter III explores developments in fiscal policy, including industrial policy; Chapter IV assesses recent activity in the financial sector; and Chapter V addresses developments in the external sector. (Appendix I provides a description and comparison of the tax systems of San Marino and Italy.

II. The Real Sector

4. San Marino enjoys a surprisingly diverse economic base for its small size, with manufacturing, financial services, tourism, and the public sector comprising the main pillars of economic activity. Living standards are high, with GDP per capita estimated at $31,500 in 1996, above the average for countries of the European Union and about 10 percent higher than the per capita income level prevailing in neighboring Emilia-Romagna.1 While GDP data are not available for periods before the 1980s, the current high level of per capita income is due to rapid growth experienced since the 1960s.

5. A key development in this regard was the blossoming of tourism, which grew as a consequence of the expansion of seaside resorts in nearby Italy; by the 1990s, about 3 million tourists were visiting San Marino per annum. In the mid-1980s, a booming financial sector, spurred on by favorable withholding tax differentials with respect to Italy, also contributed to higher growth; by the 1990s, foreign deposits in the banking sector had reached more than 400 percent of GDP. The customs union agreement with the European Union (EU) and the monetary union with Italy have served to maintain the economy’s openness (with merchandise exports and imports each equivalent to about 220 percent of GDP), which has facilitated the close integration of manufacturing with the industrial sector in Italy.

6. Manufacturing employed about 33 percent of the labor force in 1997 (Figure 1), a somewhat smaller share than in 1980. Firms are small (averaging about nine workers per firm), which has helped them adapt rapidly to the changing nature of comparative advantage. Workers engaged in transport, commerce, and services—including those involved in tourism—together accounted for some 28 percent of employment in 1997. The number of tourists climbed from about 2.8 million in the late 1980s to 3.3 million in 1995, but has plateaued since then. As a consequence, the growth of tourism has failed to keep pace with the other more dynamic sectors of the economy, and its share of GDP is estimated to have fallen from over 20 percent in the early 1990s to 15 percent in 1996.2 The financial sector, while spawning few jobs, has generated sizable capital incomes; for example, profits in the banking sector averaged over 17 percent of GDP in 1995–96. The public sector (including the public enterprises) continues to account for a sizable share of economic activity, and its share of employment has remained stable since 1980, at about 25 percent.

Figure 1.
Figure 1.

San Marino: Employment by Sector

Citation: IMF Staff Country Reports 1999, 029; 10.5089/9781451834819.002.A001

Source: Data provided by the Sammarinese authorities.

A. Aggregate Supply and Demand

7. San Marino has enjoyed rapid growth in the 1990s, as the expansion in output has outstripped that experienced in Italy as a whole and the surrounding regions of Emilia-Romagna and the Marche (Figure 2). Real GDP rose by an average of about 10 percent per annum in 1992–94 and an estimated 5 percent in 1996 and 1997 (Table 15).3

Figure 2.
Figure 2.

San Marino: Real GDP Growth 1/

Citation: IMF Staff Country Reports 1999, 029; 10.5089/9781451834819.002.A001

1/ The growth rate for 1997 for San Marino is a joint estimate of the Fund staff and the Sammarinese authorities.
Table 1.

San Marino: National Accounts in Current Prices 1/

(In billions of lire)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Due to the adoption of ESA95 starting in 1995, figures for 1995–97 and earlier years are not directly comparable.

Includes errors and omissions.

Table 2.

San Marino: National Accounts in Constant Prices 1/

(In billions of lire at 1992 prices)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Due to the adoption of ESA95 starting in 1995, figures for 1995–97 and earlier years are not directly comparable.

Includes errors and omissions.

Table 3.

San Marino: Growth in National Accounts in Constant Prices 1/

(Changes in real terms over the previous year)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Due to the adoption of ESA95 starting in 1995, growth figures for 1995 cannot be computed.

Includes errors and omissions.

Table 4.

San Marino: Contributions to Growth of National Accounts in Constant Prices 1/

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Due to the adoption of ESA95 starting in 1995, growth figures for that year cannot be computed.

Includes errors and omissions.

Table 5.

San Marino: National Accounts Shares in Current Prices 1/

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Due to the adoption of ESA95 starting in 1995, figures for 1995–96 and earlier years are not directly comparable.

Includes errors and omissions.

8. Economic developments have been influenced by those in Italy and Europe as a whole. For example, the 1993 recession in Italy and the rest of Europe resulted in a drop in tourism of 4 percent and a decline in the exports of goods. These adverse developments were more than offset, however, by an expansion of public consumption and investment, as well as growth in the financial sector, as total deposits in the banking system rose by 22 percent in response to political uncertainty in Italy. In the event, economic growth exceeded 8½ percent in 1993. Growth slowed in 1994 to about 7 percent, as the stimulus from public consumption and investment abated and the influx of foreign assets to the banking system slowed, reflecting the decline in political uncertainty in Italy following the 1994 elections. Exports of goods rebounded in 1994 in response to the economic recovery in Italy and elsewhere in Europe and the lagged effect of the real depreciation of the lira in 1993 (Figure 3). Tourist activity remained tepid, with only a 1 percent increase in the number of visitors.

Figure 3.
Figure 3.

Italy: Effective Exchange Rates

(1990 = 100)

Citation: IMF Staff Country Reports 1999, 029; 10.5089/9781451834819.002.A001

9. Growth in recent years has slowed relative to the blistering pace achieved earlier in the decade, and is estimated at 5 percent for both 1996 and 1997. The number of tourists rose to 3.3 million in 1995 but has stagnated at this level since then. Offsetting this development was the brisk increase in deposits handled by the commercial banks (an increase of about 70 percent of GDP) between 1994 and 1996, contributing to a surge in their profits of over 50 percent. Deposits continued to grow in 1997, rising to more than 650 percent of GDP. Manufacturing growth remained strong, spurred on by favorable cyclical conditions in Europe. Although no official data are available for manufacturing output, the Sammarinese Industrial Association (ANIS) estimates that sales volumes rose by 4 percent in both 1996 and 1997. Employment data (see below) also provide corroborating evidence of continued strong growth, as well as figures on the formation of new businesses, which indicate the number of firms is increasing about 5 percent per annum (Table 7).

Table 6.

San Marino: Gross Domestic Product by Source of Income

(In billions of lire)

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Source: Data provided by the Sammarinese authorities.
Table 7.

San Marino: Number of Firms by Sector at Year-End

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Source: Data provided by the Sammarinese authorities.

10. San Marino’s vigorous economic growth has been driven by a level of investment that is strikingly elevated for a high-income country. Fixed capital formation averaged about 28 percent of GDP in 1995 and 1996. Public investment has risen markedly in recent years, climbing to about 5 percent of GDP in 1996.4

B. Labor Markets

Employment

11. San Marino’s robust economic growth has been accompanied by strong job creation. Employment rose sharply in the early 1990s before slowing down to an average of 3 percent in 1996–97 (Figure 4; and Table 8 and Table 9). Unemployment has hovered between 31/2 and 5 percent since the early 1990s, compared with about 6 percent in neighboring Emilia-Romagna in 1996–97.

Figure 4.
Figure 4.

San Marino: Employment and Unemployment

Citation: IMF Staff Country Reports 1999, 029; 10.5089/9781451834819.002.A001

Sources: Data provided by the Sammarinese authorities; Italian data from Rapporto 1998 Sull’economia del Mazzogiorno.
Table 8.

San Marino: Labor Market Developments 1/

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Source: Data provided by the Sammarinese authorities.

Unless otherwise noted, date refers to December 31 of each year.

September 30, 1998.

1998 figure refers to 12-month change through September.

Table 9.

San Marino: Change in Employment by Sector 1/

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Source: Data provided by the Sammarinese authorities.

Data refer to December 31 of each year.

12. A distinctive characteristic of the Sammarinese labor market is the heavy reliance on cross-border workers (frontalieri), primarily Italians living in neighboring regions working mainly in commerce, construction, and manufacturing.5 The share of cross-border workers in total employment rose from 11 percent in 1991 to about 18 percent in 1994 and 21 percent in 1997. This was associated with a rise in the share of construction and services in total employment during the 1990s (Table 10 and 11). Resident Sammarinese workers are largely concentrated in government, finance, and, as self-employed entrepreneurs, in commerce.

Table 10.

San Marino: Total Employment 1/

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Source: Data provided by the Sammarinese authorities.

Data refer to December 31 of each year.

Table 11.

San Marino: Employment by Sector as a Proportion of Total Employment 1/

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Source: Data provided by the Sammarinese authorities.

Data refer to December 31 of each year.

13. The share of self-employment in total jobs has declined in the 1990s, falling from 21 percent in 1990 to 17 percent in 1994 and 16 percent in 1997. The absolute number of the self-employed also fell during this period. The value added generated by the self-employed is estimated at less than 5 percent of GDP in 1995 and 1996, although these data are thought to be underestimated.

14. The growing share of cross-border workers in total employment is driven by a number of factors. In one sense it reflects the healthy demand for labor by Sammarinese firms and their willingness to pay wages above those prevailing in surrounding regions of Italy. At the most fundamental level, however, it mirrors the mismatch between the reservation wages of Sammarinese labor force entrants and those prevailing in the most dynamic sectors of the economy. In this context, employers prefer cross-border workers to fill positions at prevailing wages, rather than raise compensation to attract Sammarinese worers. The high reservation wages of Sammarinese citizens and their willingness to experience a spell of “wait” unemployment are driven by a number of factors. Among these are (i) the important role of the state in providing attractive jobs to Sammarinese residents; the public sector continues to soak up about one fourth of the labor force, and remuneration levels exceed those in the private sector; and (ii) the high income level of Sammarinese households, which provides a type of “private safety net” to supplement the income of the unemployed while they wait for openings in high-paying sectors. The willingness of these workers to experience this “wait” unemployment is also borne out in figures regarding the characteristics of the unemployed: 98 percent were new labor force entrants in December 1997, and 77 percent were female, with only about half of the unemployed seeking full-time jobs.

15. Sammarinese labor law also encourages a degree of “wait” unemployment through regulations governing the hiring process. In order to find a job, Sammarinese citizens are required to register with the Ministry of Labor on an employment list, which provides information on each unemployed worker regarding their targeted sector of employment and level of education and skill. Individuals on each list are ranked by the Ministry of Labor, based, inter alia, on a worker’s need (as determined by family size and length of unemployment) and qualification level. Employers with job vacancies are required to interview workers from the list by their ranking. If all willing candidates are interviewed and found unacceptable, firms may then conduct an open search for new applicants, including those already employed and cross-border workers.6 Once workers have found a job, they are removed from the employment list.

16. The system contributes to wait unemployment by restricting hiring to those on the employment list, rather than the entire labor force. In this context, many workers choose a bout of unemployment, rather than lose the opportunity for employment in their preferred sector at higher wages.

17. San Marino’s labor market restrictions impede its flexibility and add to private sector labor costs. Given the time involved in certifying that no Sammarinese workers are available, vacancies that are eventually filled by cross-border workers can remain open for long periods of time. The authorities recognize the need to further liberalize the labor market and the employment list, and measures in this area are expected to be proposed by the government during 1999.

18. The costs of wait unemployment to the budget have been contained by the modest level of social benefits. Two types of unemployment benefit are available: the regular unemployment benefit (which new labor market entrants are eligible for) and the benefit for redundant workers (Indennitá Economica Speciale (IES)). Workers are eligible for the regular unemployment benefit for only 100 days. Unemployed workers on the employment list for the public sector are only eligible for the regular benefit, whose level has been unchanged for many years; the maximum payment is only Lit 4,000 per day. As such, the majority of the unemployed do not apply for this benefit, and total benefit payments in 1997 equaled just Lit 5.2 million.

19. The IES is targeted to redundant workers in the private sector. For the first six months, eligible workers receive 70 percent of their salary earned in the six months immediately prior to unemployment, and 65 percent for another six months. Total payments under the IES have been modest; the full-time equivalent number of beneficiaries averaged about 60 per annum during the 1993–97 period. In 1997, payment of these benefits equaled Lit 1.3 billion (0.1 percent of GDP).

20. San Marino has also used employment subsidies to support incomes and prevent higher rates of open unemployment. The Cassa Integrazione Guadagni (CIG) is designed to provide support to workers who are temporarily unemployed owing to reductions in product demand, poor weather, and restructuring. The benefit is paid directly to firms to maintain existing employment levels in the face of these adverse events. Firms are eligible for the payment for six months; an extension of benefits is only possible with approval, from the Ministry of Labor, of a restructuring plan involving the retraining of employees. About 70 percent of these benefits have been paid to firms in the manufacturing sector. The full-time equivalent number of beneficiaries averaged around 230 persons a year during 1993–97 (equivalent to about 2 percent of the resident labor force), and has remained broadly at this level over time. The cost of these benefits in 1997 equaled about 0.3 percent of GDP.

Wages

21. Collective bargaining plays an important role in wage formation in San Marino, given the highly unionized labor force and sizable share of the labor force in the employ of the public sector. In practice, it appears that these agreements have only provided wage floors, as brisk labor demand in the private sector has provided room for large nominal and real wage increases (Table 12). Thanks to the rapid growth in private sector wages, public/private differentials have declined sharply in recent years.

Table 12.

San Marino: Wage, Price, and Employment Developments

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Sources: Data provided by the Sammarinese authorities; and Fund staff calculations.

Comprises the central administration, Social Security Institute, and public enterprises.

Based on the Italian consumer price index.

22. The indexation of labor contracts was abolished in the private sector in 1995–96, and in the public sector in 1997 in the context of the four-year labor agreement covering 1997–2000. In return for conceding the elimination of indexation, workers were granted a wage increase (5 percent per annum) which is large in relation to expected inflation.7 8 Some contracts still provide for additional upward adjustment if inflation exceeds the wage increase, although the 5 percent increment is far above the expected inflation rate.

23. Data on wages and productivity by sector are not available, and thus the competitive position of Sammarinese firms cannot be readily assessed. Although Sammarinese wages tend to exceed those in Italy, the fact that its social contribution rates are about half of those in Italy has resulted in lower labor costs than those facing their Italian counterparts.9

C. Prices and Inflation

24. As a result of the currency union with Italy, inflation developments in San Marino largely mirror those in Italy; most differences can be explained by the use of a different basket of goods in the Sammarinese and Italian price indices. Sammarinese rates have, on average, exceeded those in Italy by about 0.4 percentage points during 1992–97. Inflation hovered near 5 percent per annum during 1992–96, before declining sharply in 1997 to 2 percent. During the first three quarters of 1998 inflation remained at a low level, with a seasonally unadjusted year-on-year increase of 2.2 percent.

III. Fiscal Developments

A. Overview

25. The state has an important presence in San Marino. The central government is estimated to spend about 34 percent of GDP, while the overall public sector, including public enterprises, employs about one-fourth of the labor force. Moreover, the government engages actively in industrial policy to limit unemployment and to promote the economy’s development.

26. Tax rates in San Marino are generally lower than in Italy (see Appendix I for a description of the Sammarinese tax system, and a comparison with that in Italy). This gives Sammarinese firms a competitive edge over those in neighboring Italian regions. For example, the standard value-added tax (VAT) rate is set 4 percentage points below the Italian level; public utilities are provided at rates 10–20 percent below those in Italy; most forms of personal and corporate income are taxed at rates that are substantially lower than in Italy; and social security contributions are about one-half those in Italy.

27. The budget has traditionally run small surpluses. The last few years, however, have seen some deterioration in the fiscal balances. Part of the problem lies in a rigid budgetary system, which leaves little room for flexibility in fiscal policy within a given fiscal year. The government has limited control over its overall volume of spending and taxation: key tax and spending decisions by both the central administration and the public enterprises are embodied in legislation and must be accommodated by the administration in various ways, including resource transfers to social security and the public enterprises whenever necessary. Expenditure monitoring and control has had limited effectiveness, although new reforms have recently been adopted in this area. The following sections provide a general description of San Marino’s public sector as well as a discussion of the most important recent developments in the public finances.

B. Data Availability

28. Relevant data on government finance statistics are compiled by the authorities, but the way they are presented limits their usefulness. Six problems stand out. First, the official accounts are presented on a “payment-order” basis,10 and embody the authorities’ estimates of the value of taxes that will eventually be collected. However, these initial estimates are subject to considerable uncertainty, and are often substantially revised over time; this applies especially to the amount of VAT (monofase tax) collected and refunded on goods that are imported and subsequently re-exported.11 Second, under the payment order system, all expenditures authorized in the budget in a given year are measured as actual expenditures in that year, even if this spending is postponed to subsequent years. In light of both of these problems, the economic significance of fiscal developments on a payment order basis is unclear. At the request of Fund staff, the authorities provided revenues and expenditures on a cash basis for the period through 1997. Both the 1998 estimates and the 1999 budget are only available on a payment-order basis.

29. Third, and more critically, there are long and variable lags in settling many transactions; this applies especially to VAT tax collections and refunds for goods that are imported and subsequently re-exported. As a result, the stocks of outstanding unsettled receipts and reimbursements have been of the same order of magnitude as GDP. Given variable settlement lags, the cash-basis fiscal balance varies widely from year to year and is difficult to interpret.

30. Fourth, budget data provide a misleadingly pessimistic outlook, as the authorities’ characteristic fiscal prudence is in part manifested in intentionally conservative revenue estimates. As a result, in recent years the final accrual-basis balances and, to a greater degree, the staff-estimated cash-basis balances, have been significantly more positive than budgeted payment-order basis balances. Fifth, for some specific transactions the length of the fiscal year has varied over time in an arbitrary way, affecting the comparability of data across years.

31. Finally, consolidated data for the central government and more broadly for the nonfinancial public sector are not readily available; there are financial statements and balance sheets for each component, but these are released only after a long delay. Fund staff produced estimates for the central government accounts by taking central administration revenue and expenditure, and adding to both the social security contributions paid by the private sector.12It is expected that the new system of budgetary accounting to be implemented for the year 2000 will provide data on a more timely basis, and will facilitate program monitoring and evaluation (see Section F).

32. The Government Finance Statistics database includes annual data for 1995 for the consolidated central government. These data were compiled by the 1997 IMF Multisector Statistics mission, and were published in the 1997 Government Finance Statistics Yearbook (GFSY). San Marino has not provided updates for publication in the 1998 GFSY.

C. Central Government

33. The central government in San Marino comprises: the central administration; the ISS (or Istituto per la Sicurezza Sociale); the Public Works Company (AASP, or Azienda Autonoma Servizi Pubblici); the Olympic Committee (CONS, or Comitato Olimpico Nazionale Sammarinese); and the University of San Marino. There is no local government as commonly understood.

Estimated cash accounts of the central government, 1993–97

34. Table 13 and 14 present the central government (more precisely, central administration adjusted for social security contributions); accounts on a cash basis (see also the top panel of Figure 5). While San Marino had run an average budget surplus of 2½ percent of GDP in 1989–92, this surplus disappeared in 1993 and a small deficit emerged in 1994. However, this deterioration may to some extent reflect changes in accounting procedures. Specifically, in the early 1990s the fiscal years for indirect taxes had varying lengths. Instead of end-February (the usual date), central administration accounts for such taxes were closed at end-April in 1991 and at end-March in 1992. These delays produced a 14-month fiscal year in 1991, and two 11-month fiscal years in 1992 and 1993. As a result, in 1993, with two 11-month fiscal years in a row,13 revenues were very low. In 1994, revenues probably continued to be biased downward by the lagged effect of the previous 11-month fiscal years.

Table 13.

San Marino: Central Administration Operations, Cash Basis, Adjusted for Contributions Collected by Social Security Institute

(In billions of lire)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Data since 1995 are not comparable with those for previous years, owing to changes in the treatment of transfers to public enterprises.

After 1995, includes transfers to the University of San Marino.

Table 14.

San Marino: Central Administration Operations, Cash Basis, Adjusted for Contributions Collected by Social Security Institute

(In percent of GDP)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.

Data since 1995 are not comparable with those for previous years, owing to changes in the treatment of transfers to public enterprises.

After 1995, includes transfers to the University of San Marino.

Figure 5.
Figure 5.

San Marino: Fiscal Policy Indicators

(In percent of GDP)

Citation: IMF Staff Country Reports 1999, 029; 10.5089/9781451834819.002.A001

35. By 1995, such problems with data comparability had disappeared, and the economy again recorded a surplus, of almost 3 percent of GDP. This turned into an average deficit of 3 percent of GDP over 1996–97. A number of factors were responsible. On the revenue side, falling receipts from indirect taxes, and especially from the VAT, may have reflected a weakening in tax administration. On the expenditure side, a new public investment program led to a substantial rise in capital outlays, albeit from a relatively low level. Also, net transfers to social security grew by 27 percent in 1996, partly reflecting higher health-care costs. The increase in transfers was reversed in 1997, but at the same time the central administration wage bill grew by more than 12 percent, partly reflecting the new public sector wage agreement.

36. Total revenue, which in 1995 was estimated at 36.2 percent of GDP, fell to 32 percent of GDP in 1997. In that year, direct taxes accounted for 31 percent of all revenues (9.9 percent of GDP), with a large contribution from the corporate income tax.14 Indirect taxes represented 37 percent of all revenues (11.7 percent of GDP), of which the VAT accounted for about half. San Marino also received an annual transfer from the Italian Government (Canone Doganale),15 and one from the EU as reimbursement for tariffs levied on non-EU products imported into San Marino. Finally, social security contributions paid by the private sector stood at 6.2 percent of GDP.

37. VAT collections in 1997, at 5.7 percent of GDP, were sharply below the average 8.3 percent of GDP recorded over 1993–95. This decrease, which accounts for about half of the reduction in aggregate revenue, occurred even though the VAT was levied only on imports until January 1996. Then, and as required by the Agreement on Cooperation and Customs Union with the EU (see Chapter V), the government started imposing a complementary VAT (Imposta Complementare) on domestic products consumed domestically. Hence, one would have expected VAT receipts to actually increase. There are three possible explanations for the decline. First, there could have been a weakening in tax administration; for instance, the introduction of the complementary VAT might have overwhelmed the tax authorities.16 Second, over 1995–97, gross VAT receipts actually rose (as a share of GDP) by more than 31 percent, but the growth of VAT refunds was even faster, exceeding 125 percent. Hence, the overall decline in VAT may be the transitory result of a speeding up in refund procedures. However, there were no major changes in these procedures over the period. Finally, there could have been a sharp reduction in the value of the economy’s external trade. Unfortunately, this hypothesis cannot be verified, because national accounts data on external trade before and after 1996 are noncomparable. Nevertheless, there is little a priori justification for this view.

38. Total expenditure, which stood at 33.4 percent of GDP in 1995, increased by 5 percentage points in 1996 but then returned to 34.1 percent of GDP in 1997. A similar pattern—a sharp increase followed by a decrease—prevailed for both current and capital expenditure. Current expenditure in 1997 consisted mainly of wages and salaries (10.6 percent of GDP),17 transfers to other levels of government (14.4 percent of GDP), and purchases of goods and services (3.5 percent of GDP). Interest subsidies, mainly on loans for industrial investment, residential housing, and agriculture, accounted for 1 percent of GDP. Debt service was small since government debt is virtually nonexistent (gross public debt stood at 3.9 percent of GDP at end-1997), and nonfinancial public enterprises actually provided net current transfers to the central administration of almost 2 percent of GDP.18

39. Net intragovernment current transfers were directed primarily to the ISS (12 percent of GDP) and the Public Works Company (1.8 percent of GDP).19 Just over half the transfers to the ISS corresponded to social security contributions paid by the private sector. The rest included the government’s matching contributions to the various pension funds, and financing for the national health program.20 These last items have fluctuated substantially over time, rising from 7.3 percent of GDP in 1995 to 9.4 percent in 1996, before falling to 5.8 percent of GDP in 1997. Such fluctuations do not reflect changes in underlying health and pension expenditures, which in real terms have increased steadily over time, but rather the timing of replenishments to the health and pension reserve funds.

40. Capital expenditure, which stood at 2.3 percent of GDP in 1995, rose to almost 5 percent of GDP in 1996, reflecting a new three-year public investment program.21 It then returned to 2.4 percent of GDP in 1997.

Central administration accounts on a payment order basis

41. Table 15 and 16 show the central administration accounts on a payment order basis. On this basis, tax collection lags do not affect the fiscal balance. Furthermore, VAT revenues are reported on a gross basis, rather than net of refunds. As indicated earlier, the gross VAT revenues grew sharply, and hence, the revenue in GDP ratio increased in 1996–97. Since estimates of future VAT refunds were included among other current expenditures, total expenditure also increased sharply in 1996 and 1997. Overall, comparing the period 1994–95 with that of 1996–97, there is still an increase in the average fiscal deficit, from 0.8 percent to 2 percent of GDP. Nonetheless, this represents a far less marked deterioration than the outcome of the cash accounts, and only slightly exceeds the increase in capital expenditure.

Table 15.

San Marino: Central Administration Operations, Payment Order Basis

(In billions of lire)

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Sources: Data provided by the Sammarinese authorities; and Fund staff estimates.