Statement by Pier Carlo Padoan, Executive Director for San Marino

This 2004 Article IV Consultation for San Marino reports that the economy has slowed considerably since 2000 with the fading of key competitive advantages that had contributed to past rapid development. To restore a positive net asset position and the ability to buffer adverse external shocks, the authorities aim at maintaining the budget in balance or in surplus over the medium term while preserving tax rate advantages. To sustain fiscal consolidation with unchanged or lower tax rates, remaining tax administration problems need to be addressed and generous entitlement programs reformed.

Abstract

This 2004 Article IV Consultation for San Marino reports that the economy has slowed considerably since 2000 with the fading of key competitive advantages that had contributed to past rapid development. To restore a positive net asset position and the ability to buffer adverse external shocks, the authorities aim at maintaining the budget in balance or in surplus over the medium term while preserving tax rate advantages. To sustain fiscal consolidation with unchanged or lower tax rates, remaining tax administration problems need to be addressed and generous entitlement programs reformed.

At the outset, I want to convey my authorities’ deepest appreciation for the work done by the mission headed by Mr. Prati. As with previous missions, my Sammarinese authorities have greatly benefited from Staff advice and continue to enjoy a fruitful relationship with the Fund.

Recent Developments

Recent data suggest that the economic recovery is under way, reflecting an improved international economic environment. In May, unemployment decreased to 3.17 percent against 4.09 in the same period of 2003 while imports have picked up increasing to 6 percent in the first quarter of the year against the same period in 2003.

Recently, the authorities have started a thorough discussion in the country and with their international partners on how best to promote economic growth in San Marino in light of ever-increasing international cooperation that could benefit their small and open economy by strengthening its competitiveness vis-à-vis its current and potential trading partners.

Along these lines, the administration has been very active in the area of international cooperation, and has pursued a number of agreements in the area of economic cooperation with Austria, Croatia, Italy and Ukraine. Other agreements with the aim to avoid double taxation are currently being pursued with Belgium, Austria, Croatia and Malta, while negotiations are about to start with Cyprus, Luxembourg and Slovenia.

With reference to the taxation of savings of non residents, an agreement – whose main aspects are described in the Staff report – has been reached, in principle, with ECOFIN, which will be finalized in the months ahead with the EU Commission and the member States.

Fiscal Policies

Following a decade of budget deficits resulting in a deterioration of the underlying fiscal position, the authorities have enacted a fiscal adjustment plan bringing the central government balance into surplus to 2.4 percent of GDP in 2003 against a deficit of 2.2 percent the year before. This outcome is part of a wider strategy aimed at ensuring a fundamentally sound fiscal position of the central government as the fiscal adjustment will continue in the years ahead with essentially balanced-budget targets.

In this setting, the authorities have been considering a series of measures aimed at strengthening tax administration and collection while improving the management of public expenditures. In this respect, they are establishing an accounting inspectorate body for strengthening the management of the public administration.

The Financial Sector and Anti-Money Laundering Surveillance

The authorities envisage a greater role for the financial sector in contributing to the Sammarinese economic growth. As noted by Staff, its currently limited dimensions are indicative of a potentially likely expansion in the future that the authorities encourage in full compliance within the current international regulatory framework.

The authorities envisage the development of the Sammarinese financial sector on three pillars. First, they have proceeded to strengthen the institutional framework, by merging the supervisory agency with the Central Bank, as outlined in the Staff report. The hiring of new human resources is expected to further strengthen the role of the Central Bank vis-à-vis the supervision of banking and financial markets.

The second pillar is centered on the adequacy of the supervisory framework. The Central Bank introduced early this year a new supervisory framework on capital adequacy based on Basle I to be complemented later this year by a regulation on market and derivates risks. The latter is being currently developed by the Central Bank’s supervisory wing and it is expected to be completed by the end of the summer.

The third pillar refers to opening the system to a greater international scrutiny in order to benefit from the introduction of international best practices. In this setting, the authorities see as potentially helpful an FSAP mission, as noted in the Staff report. This issue has been preliminary discussed within the Finance Ministry and the Central Bank and it has been brought on the agenda of the forthcoming general meeting of the Government (Congresso di Stato) on August 2, at which time the authorities will be able to provide a formal response to the Staff invitation to undertake an FSAP.

Importantly, the development of the Sammarinese financial sector has occurred in the context of a strengthened Anti-Money laundering surveillance. The authorities have subscribed to all the relevant international agreements like the 1990 Strasbourg Convention and are a member of the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. They are constantly engaged with other international partners to support initiatives aimed at anti-money laundering and have opened themselves up to greater scrutiny. Just recently, a report from a Moneyval mission hosted by San Marino in 2003 has been finalized and will be discussed in January 2005.

The authorities are currently extending the notification requirements for anti-money laundering purposes to a number of parties other than banks and financial firms in accordance with the EU regulation (Directive 97/2001). Furthermore, the Central Bank – with the assistance of Italy’s anti-money laundering agency Ufficio Italiano Cambi – has applied for membership to the Egmont Group. It is expected that such a membership will become operational by mid-2005.