Abstract
Spain has achieved impressive growth in recent years—reflecting favorable competitiveness, and the impact on interest rates and confidence of its successful road to monetary union. Despite several years of rapid growth, there are no unambiguous signs of overheating. Underlying inflation has varied within a range of 2 percent and 2.5 percent on a 12-month basis since January 1997, but has exceeded the euro area average. Three years of steeply falling unemployment have yet to trigger a material acceleration of labor costs.
On October 20, 2000, the Executive Board concluded the Article IV consultation with Spain.1
Background
Spain’s economic performance has been impressive in recent years, reflecting increased competitiveness, as well as the favorable impact on interest rates and confidence of decisive macroeconomic policies that reduced the general government deficit by nearly 4 percent of GDP between 1996 and 1999 and qualified Spain for Stage 3 of monetary union. Over the last three years real output growth has averaged more than 4 percent, with domestic demand growing by about 5½ percent in both 1998 and 1999. Although the pace of domestic demand growth has moderated slightly in recent quarters, this has been offset by a renewed pickup in exports. Nevertheless, both private consumption and investment growth remain robust.
Aided by significant labor market reforms and notable wage moderation, strong output growth has led to a sharp increase in employment. The unemployment rate has dropped from over 24 percent in 1994 to 14 percent in mid-2000. However, substantial disparities in unemployment rates exist across regions and age groups and between genders. New contract wages rose by about 3 percent through August 2000, compared to about 2½ percent in 1999.
As throughout much of the euro area, headline consumer price inflation has risen in recent months, reflecting in large part the impact of higher oil prices. Underlying consumer price inflation, which excludes energy and nonprocessed foodstuffs, has been relatively stable for the last year. However, inflation has exceeded the euro-area average by ½ to ½ percentage point since 1997. Much of the inflationary impulse comes from the services sector, where annual rates of price increase have averaged 3.5 percent over the last 12 months, compared to 1.6 percent for the euro area.
Nevertheless, despite higher than euro-area average CPI inflation, competitiveness in world markets remains strong, although a persistent inflation differential would erode competitiveness within the monetary union over the medium term. Both CPI and unit labor cost-based real effective exchange rates remain at the levels following the devaluations of 1992–93, although to some extent this reflects the weak euro. The continuing depreciation of the euro has left monetary conditions at their most accommodative level in many years. Asset prices have grown solidly in recent years, but more slowly than in some other euro-area countries.
The fiscal deficit fell to 1.1 percent of GDP in 1999, substantially better than the initial target of 1.6 percent. In 2000 fiscal consolidation is again running ahead of track, with the original deficit target of 0.8 percent of GDP having been officially revised down to 0.4 percent of GDP. The 2001 budget aims at fiscal balance, one year ahead of the schedule laid out by the authorities in their Stability Program. The improved fiscal position in recent years reflects not only cyclical factors but also tight expenditure control and strong revenue buoyancy.
Executive Board Assessment
Executive Directors praised the authorities for their impressive macroeconomic policy management since Spain’s entry into the EMU, which—along with labor and product market reforms and wage moderation—has allowed it to enjoy an unprecedented combination of rapid output and employment growth, with historically low inflation. While the authorities duly deserve praise for these achievements, Directors urged them to be alert to possible risks over the medium term, and to take the present opportunity to press ahead with fiscal consolidation and further structural reforms.
Directors noted that economic growth is expected to remain strong in the remainder of 2000 and in 2001. While there are risks of overheating in the economy, they agreed that such concerns are likely to abate somewhat in the coming year, as domestic demand growth slackens in response to higher oil prices and interest rates. Directors highlighted, however, that Spain’s persistent inflation differential relative to the euro-area average could erode the economy’s currently strong competitive position in the medium term. In this connection, they underscored the importance of continued wage moderation, noted the risks due to the extensive continued use of indexation, and recommended a progressive reduction in indexation practices.
Directors welcomed the authorities’ decision to reduce the fiscal deficit target for 2000 to half of its initial level and to achieve balance in 2001, ahead of the schedule established in Spain’s Stability Program. This accelerated fiscal consolidation prudently takes advantage of robust economic growth to realize medium-term objectives. It also serves as a counterweight against monetary conditions that are unduly accommodative from a purely Spanish perspective, despite recent interest rate increases by the European Central Bank. indeed, most Directors recommended that, if growth and revenues remain buoyant, the authorities should endeavor to achieve a small nominal surplus next year, i.e. approximately structural balance. Some Directors, however, stressed that further fiscal consolidation should not take place at the cost of needed infrastructure improvements.
Directors welcomed the progress that has been achieved in the labor market, as evidenced by the rapid growth of employment. Nevertheless, high unemployment and low participation rates remain a pressing economic problem, and labor mobility needs to be encouraged. The 1997 labor market reform demonstrated that reducing dismissal costs was key to stimulating employment growth, and Directors urged further progress in this direction. Reforms to encourage greater use of part-time employment would also be welcome, as it could prove an effective vehicle for increasing the participation of women and the young in the workforce. They also expressed concern about persistent disparities in regional unemployment rates, and recommended appropriate cooperative action by national and regional authorities and private sector agents, including wage bargaining that was more responsive to local market conditions; more effective training, which would be important in upgrading skills and easing integration in the labor force; and reforms to property markets and rental housing. While Directors praised the authorities’ commitment to a cooperative approach to labor market reform, they felt, however, that the search for consensus should not be allowed to unduly delay necessary reforms.
Directors welcomed the package of product market measures introduced in June 2000, which sends a clear signal of the authorities’ commitment to reform. These initiatives should enhance competition in such key sectors as telecommunications, energy, Pharmaceuticals and retail sales, and should encourage investment in new technologies, particularly among small and medium enterprises. Directors recommended that consideration be given to more fully liberalize opening hours and calendars and remove remaining restrictions on retail competition. Further measures to enhance competition in key sectors like electricity and water might also be required.
Directors noted that population ageing will put increasing pressure on spending—especially for pensions—in the coming decades. They considered that the prudent course will be to address these pressures through a combination of fiscal and structural policies that foster more rapid growth over the medium and long term. In this respect, Directors recommended that the social security system be allowed to continue to accumulate a surplus, with the rest of the public sector moving at least to overall balance. In addition, measures should be adopted to ensure a closer link between pension benefits and contributions, particularly in the context of the upcoming renewal of the Pacto de Toledo, the multi-year agreement that spells out pension reforms.
Directors also noted that—with the transfer of expenditure responsibilities to regional governments now largely complete—the upcoming renegotiation of financing arrangements with regional governments provides an opportunity to develop a more permanent financial framework for fiscal decentralization. They suggested that future reforms could usefully widen the revenue bases of regional and municipal governments, so as to reduce their variability and eliminate distortions in property markets resulting from the heavy reliance of municipal governments on revenues from property. Directors stressed that local autonomy— and adequate solidarity to safeguard public services throughout Spain—should be complemented by commitments to protect national fiscal goals. In this connection, they stressed the synergies that could be unlocked over the longer term by a forward-looking fiscal strategy that includes effective medium-term expenditure control.
Directors praised the commitment of regulators to keep pace with developments in financial markets. In particular, they welcomed the new provisioning requirements introduced by the Bank of Spain, and supported increased coordination with foreign supervisors. The provisioning requirements, together with a continued conservative accounting treatment of banks’ overseas assets, should allow banks’ balance sheets to weather declines in portfolio quality that may arise from economic cycles at home or abroad.
Directors encouraged the authorities to increase their funding for official development assistance towards the UN target.
Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. As part of a pilot project, the staff report for the 2000 Article IV consultation with Spain is also available.
Spain: Selected Economic Indicators
IMF staff projections.
In percent of GDP.
Equal to the general government balance excluding interest expenditure and adjusted for short-run deviations from long-run output growth. Expressed as percent of potential GDP. For 2000, excludes revenues from the auction of mobile telephone licenses (estimated at 0.1 percent of GDP).
Spain: Selected Economic Indicators
| 1996 | 1997 | 1998 | 1999 | 2000 1/ | |
|---|---|---|---|---|---|
| Real economy (change in percent) | |||||
| GDP | 2.4 | 3.9 | 4.3 | 4.0 | 4.1 |
| Domestic demand | 1.9 | 3.4 | 5.6 | 5.5 | 4.5 |
| CPI (average) | 3.6 | 2.0 | 1.8 | 2.3 | 3.2 |
| Unemployment (in percent) | 22.2 | 20.8 | 18.8 | 15.9 | 14.0 |
| Investment 2/ | 21.9 | 22.2 | 23.2 | 24.7 | 26.4 |
| Saving 2/ | 21.9 | 22.6 | 23.0 | 22.5 | 23.4 |
| Public Finance (in percent of GDP) | |||||
| Central government balance | −4.3 | −2.9 | −2.3 | −0.9 | −0.3 |
| General government balance | −4.9 | −3.2 | −2.6 | −1.1 | −0.4 |
| Structural primary balance 3/ | 1.8 | 2.6 | 2.0 | 2.3 | 2.4 |
| Gross general government debt | 68.1 | 66.7 | 64.6 | 63.3 | 62.8 |
| Interest Rates (annual average) | |||||
| Three-month interbank rate | 7.5 | 5.4 | 4.2 | 2.9 | … |
| 10-year government bond rate | 8.7 | 6.4 | 4.8 | 4.7 | … |
| Balance of Payments (in percent of GDP) | |||||
| Current account balance | 0.0 | 0.4 | −0.2 | −2.1 | −2.9 |
| Trade balance | −2.6 | −2.3 | −3.2 | −4.9 | −6.2 |
| Fund position (SDR billions, August 31, 2000) | |||||
| Holdings of currency | 2.1 | ||||
| Holdings of SDRs | 0.3 | ||||
| Quota | 3.0 | ||||
| Exchange rates | |||||
| Exchange rate regime | Member of the European Economic and Monetary Union | ||||
| Nominal effective rate (1990=100) | 80.9 | 77.2 | 76.9 | 75.6 | … |
| Real effective rate (1990=100) | 89.2 | 85.2 | 85.2 | 84.8 | … |
IMF staff projections.
In percent of GDP.
Equal to the general government balance excluding interest expenditure and adjusted for short-run deviations from long-run output growth. Expressed as percent of potential GDP. For 2000, excludes revenues from the auction of mobile telephone licenses (estimated at 0.1 percent of GDP).
Spain: Selected Economic Indicators
| 1996 | 1997 | 1998 | 1999 | 2000 1/ | |
|---|---|---|---|---|---|
| Real economy (change in percent) | |||||
| GDP | 2.4 | 3.9 | 4.3 | 4.0 | 4.1 |
| Domestic demand | 1.9 | 3.4 | 5.6 | 5.5 | 4.5 |
| CPI (average) | 3.6 | 2.0 | 1.8 | 2.3 | 3.2 |
| Unemployment (in percent) | 22.2 | 20.8 | 18.8 | 15.9 | 14.0 |
| Investment 2/ | 21.9 | 22.2 | 23.2 | 24.7 | 26.4 |
| Saving 2/ | 21.9 | 22.6 | 23.0 | 22.5 | 23.4 |
| Public Finance (in percent of GDP) | |||||
| Central government balance | −4.3 | −2.9 | −2.3 | −0.9 | −0.3 |
| General government balance | −4.9 | −3.2 | −2.6 | −1.1 | −0.4 |
| Structural primary balance 3/ | 1.8 | 2.6 | 2.0 | 2.3 | 2.4 |
| Gross general government debt | 68.1 | 66.7 | 64.6 | 63.3 | 62.8 |
| Interest Rates (annual average) | |||||
| Three-month interbank rate | 7.5 | 5.4 | 4.2 | 2.9 | … |
| 10-year government bond rate | 8.7 | 6.4 | 4.8 | 4.7 | … |
| Balance of Payments (in percent of GDP) | |||||
| Current account balance | 0.0 | 0.4 | −0.2 | −2.1 | −2.9 |
| Trade balance | −2.6 | −2.3 | −3.2 | −4.9 | −6.2 |
| Fund position (SDR billions, August 31, 2000) | |||||
| Holdings of currency | 2.1 | ||||
| Holdings of SDRs | 0.3 | ||||
| Quota | 3.0 | ||||
| Exchange rates | |||||
| Exchange rate regime | Member of the European Economic and Monetary Union | ||||
| Nominal effective rate (1990=100) | 80.9 | 77.2 | 76.9 | 75.6 | … |
| Real effective rate (1990=100) | 89.2 | 85.2 | 85.2 | 84.8 | … |
IMF staff projections.
In percent of GDP.
Equal to the general government balance excluding interest expenditure and adjusted for short-run deviations from long-run output growth. Expressed as percent of potential GDP. For 2000, excludes revenues from the auction of mobile telephone licenses (estimated at 0.1 percent of GDP).
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.