San Marino showed enviable growth performance. Despite the positive economic developments, the central government budgetary balance has moved into a substantial deficit on an accruals basis, because of tax collection difficulties and rapidly rising outlays on generous entitlement programs. Executive Directors noted that reforms of the pension and health care systems were required to maintain the country's sound fiscal position. They welcomed the authorities' plans to strengthen banking supervision, adopt a legal framework to fight against money laundering, and improve statistics and accounting.

Abstract

San Marino showed enviable growth performance. Despite the positive economic developments, the central government budgetary balance has moved into a substantial deficit on an accruals basis, because of tax collection difficulties and rapidly rising outlays on generous entitlement programs. Executive Directors noted that reforms of the pension and health care systems were required to maintain the country's sound fiscal position. They welcomed the authorities' plans to strengthen banking supervision, adopt a legal framework to fight against money laundering, and improve statistics and accounting.

At the outset, I wish to convey my authorities’ appreciation for the excellent set of papers prepared by the Fund’s mission team. Since San Marino joined the Fund in 1992, it has enjoyed an extremely fruitful relationship with the Staff.

Background

San Marino is a small but highly dynamic economy that has achieved substantial growth in recent years, about 8 percent, well above that in neighboring Italian regions. With inflation subdued, the economy has been able to experience a steady employment growth of 4.1 percent in 2000 against an EU average of 2 percent, while unemployment has decreased to 2.8 percent compared with 8.1 percent recorded within the EU last year. San Marino has been very effective in creating a favorable business environment conducive to growth and development, attracting substantial flows of workforce and capital from abroad. Despite its dimension, the economy is highly diversified and the manufacturing, the services and the financial sectors all share a substantial role in promoting the growth of the San Marino economy. In June, a new government was elected with a mandate to implement appropriate policies designed to sustain the competitiveness and the development of San Marino in the years ahead.

Fiscal Policies

The authorities share the Staff’s view that a budget deficit may be detrimental to the competitiveness of an economy with high mobile factors of production, by signaling possible future fiscal adjustment. In this regard and consistent with the aim of strengthening the competitiveness of our economy, some measures have been devised for 2002 since the new government has come into power, while more structural actions will be implemented starting from 2003. It is also expected that the budget will revert back to balance by 2003.

Immediate action has already been taken in the suspending of all new applications for tax relief by companies. Tax relief has been growing significantly over the last decade and is partly responsible for the deterioration of the fiscal stance, as the Staff Report correctly points out. Furthermore, a revision of the tax regime on financial instruments is under way, aimed at smoothing the fiscal pressure across the whole range of instruments held by investors in their portfolios, not only on bank deposits as the current framework envisages.

These measures will be coupled with other structural actions on current expenditures. A hiring freeze has already been put in place in the civil service, the size of which will also be streamlined. In addition, greater attention will be devoted to determining how to make the civil service more effective. In this regard, reforms are being implemented with the aim of encouraging mobility within the administration and streamlining procedures and red tape. In the same spirit, it is envisaged that, after the above-mentioned reforms have been implemented, public sector wages should be set in line with – and not above – market benchmarks.

Another important area of intervention is the pension system, which needs to provide entitlements more closely related to lifetime contributions. While a thorough reform will be presented later next year, the authorities have already increased the age limit for the retirement of new employees (currently 60 years of age) to 65 years of age. In addition, the management of pension contributions will be separated from that of the healthcare system. The move towards greater transparency is an important factor in fostering a pervasive market-oriented management of pension contributions.

Financial Sector Development and Anti-Money Laundering Surveillance

As the Selected Issues paper points out, San Marino’s banking sector compares very favorably with those of the Italian and the Luxembourg economies in terms of profitability and efficiency. The challenge ahead consists of implementing policies to maintain its traditional strength. In this regard, a more diversified ownership structure has been encouraged, allowing the establishment of two new banks with a more internationally-oriented shareholders base. Some domestic banks are already owned by major Italian players and have been integrated into their wide and diversified financial groups. Looking ahead, the development of a payment system for the San Marino banks would allow for a gain in efficiency.

Preserving the competitiveness of the banking sector requires changes in the legal framework. As of today, insurance companies and mutual funds may not be established in San Marino. In the near future, the authorities plan to change the legal framework to enable the banking system to gain substantial economies of scale and scope, while strengthening its customers base, by entering these profitable areas of business.

The growth of the financial sector has been accompanied so far by the development of an affective anti-money laundering framework. San Marino has signed all the relevant international agreements such as the 1990 Strasbourg Convention, the European Convention on Mutual Assistance on Criminal Matters and the European Convention on Extradition. San Marino is also a member of the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. The authorities are firmly committed to continue supporting, in cooperation with other governments, major international initiatives aimed at improving and making more effective the fight against money laundering. The authorities stand ready to provide relevant support to the Office of Banking Supervision to improve further its effectiveness in carrying out these important tasks in an evolving financial system.

Statistical Issues

Given the restricted physical dimension of San Marino and the absence of formal borders, the compilation of statistics is obviously challenging. Nonetheless, since San Marino joined the Fund in 1992, the production of statistics has greatly improved, thanks also to Fund technical support in the form of several surveillance missions and a multi-sector assistance mission from the Statistics Department. The authorities share the Staff view that the statistical database needs to be improved further. In this respect, starting in 2002, consumer price data will be collected directly at the source and the results will then be published on a monthly basis. Improvements in the production of monetary statistics are currently under way and they will be made available on a monthly basis soon.

Importantly, San Marino authorities envisage substantial improvements in the production of government finance statistics with reference to the central government budget. Starting in 2002, the budget will be produced on an accrual basis and according to the EUROSTAT methodology. The authorities see the improvement in the production of their statistics as a pre-requirement for compiling the items prescribed by the International Financial Statistics guidelines.