Statement by Mr. Andrea Montanino, Executive Director for the Republic of San Marino and Ms. Marta Spinella, Advisor to Executive Director, April 23, 2014

This 2014 Article IV Consultation on the Republic of San Marino highlights global crisis and tense relations with Italy, which triggered a 30 percent GDP contraction since 2008 and a sea change in San Marino’s off-shore banking model. High liquidity in the system allowed banks to withstand the shock to deposits. Cassa di Risparmio della Repubblica di San Marino, the largest bank, has required 13 percent of GDP in public support. The deep recession and bank recapitalization costs are weighing heavily on public finances.


This 2014 Article IV Consultation on the Republic of San Marino highlights global crisis and tense relations with Italy, which triggered a 30 percent GDP contraction since 2008 and a sea change in San Marino’s off-shore banking model. High liquidity in the system allowed banks to withstand the shock to deposits. Cassa di Risparmio della Repubblica di San Marino, the largest bank, has required 13 percent of GDP in public support. The deep recession and bank recapitalization costs are weighing heavily on public finances.

The authorities thank staff for the far-reaching and open discussions held during the Article IV consultations. They are in broad agreement with the reasoned and comprehensive analysis reflected in the report; moreover, they will continue to draw on the Fund’s valued advice and, where necessary and feasible, on the IMF/WB technical assistance in the ongoing reform process to stabilize and diversify the economy of San Marino.


Starting from the financial crisis in 2008, the Sammarinese economy has undergone a remarkable adjustment necessitated by the convergence of profound shocks in the financial sector, a reduction of the demand for tourism and Sammarinese exports, and emerging tensions in the international community due to the country’s “tax-haven” image and an unfavorable lack of transparency. The effects of the crisis exacted a toll of a cumulative 30 percent GDP contraction since 2008 and a sizeable banking consolidation; a significant part of these effects is expected to be permanent. Notwithstanding the described difficult scenario and the inherent complexity of intervening on a very small, highly specialized, open economy such as the Sammarinese, the authorities at first drew heavily on the existing large fiscal buffers to respond to the emergency, and then started a profound reform process, carrying out unpopular and rough measures when necessary.

At this juncture, even though the country still faces potentially relevant downsize risks and future developments warrant a vigilant and pro-active approach, the situation is moving towards an improved outlook, thanks to several initiatives in the pipeline and to the much sought and awaited exit from the Italian fiscal “black list”1, a fundamental prerequisite to boost business with the neighboring Italian counterparts and the international community as a whole.

The authorities share the staff view that much still needs to be done to reform the business model of the country, pinpointing and pursuing new sustainable sources of income and growth and redesigning the financial sector structure. In the same vein, they are focused on identifying medium term expansionary projects and enhance San Marino’s openness and transparency also by promoting active participation in international fora to boost opportunities and partnerships. Furthermore, the authorities are committed to the adoption of international best practices in the banking and financial sectors and to a coherent transposition of the EU requirements. It is relevant to highlight that San Marino has been accepted into the Single Euro Payment Area (SEPA)2, that the efforts of the authorities in addressing the main weaknesses of the anti-money laundering framework have been acknowledged by MONEYVAL3 in its periodic reviews of the country’s compliance with the FATF requirements. Moreover, the EU Commission acknowledged the country’s legal framework compliance with the European AML/CFT Directives and regulation.

Macroeconomic Outlook

The baseline scenario presented by staff, though still weak, accounts for a better trend, registering a positive industrial growth and a marginal upturn of GDP in the second half of 2014, which will result in a 1 percent growth in 2015. Despite being coupled by a still very high level of unemployment (around 9 percent) these figure depicts a much better development than expected, as last year’s estimate projected growth at a disappointing -5 percent. Furthermore, the recent exit from Italy’s “black list” is a concrete upside risk since it will entail, as a direct consequence, that Italian firms doing business with Sammarinese partners will not be obliged anymore to comply with additional and costly paperwork connected with the difficulty for the Italian authorities to evaluate their compliance with VAT obligations and, therefore, will be more willing to engage in new activities and exchanges.

Having said that, the authorities are cognizant that the progression to broaden the economy’s scope and boost confidence in potential investors will need time and unrelenting efforts. Meanwhile, they remain committed to an ambitious reform agenda and to maintaining the momentum for greater openness and transparency.

Fiscal Policy

The important budget measures, affecting both the revenue and the expenditure side, generated a saving of 1 percent of GDP. San Marino’s Parliament approved in December a far-reaching reform of direct taxation, aimed at expanding the tax base while reducing marginal rates. The tangible effect is estimated in additional gross proceeds of 1¼ percent of GDP. Despite having repealed the extraordinary surtax on income introduced during the crisis and the real estate taxes, savings were generated by the necessary, if socially controversial, remuneration reductions, which only spared the lowest wages. The authorities are aware of the need to further consolidate; at the same time, they need to consider the burden imposed over the population and dilute the necessary cuts and tax increases in such a way as not to impinge too drastically on the citizens’ standard of living and avoid strong and persistent public opposition. The fiscal package already includes incentives for early retirement to be substituted with a contained 25 percent replacement ratio. The objective of this measure is twofold: downsize the public service sector and reduce its cumulative wages, as senior workers enjoy a higher average salary. At this juncture, some fringe benefits have already been reduced and more savings are expected to result from the spending review currently underway–with the help of TA from the IMF–focusing on wages and benefits, health costs and the public pension scheme.

With a view to restoring the country’s eroded fiscal buffers, having in mind that San Marino is still exposed to high vulnerabilities, the government, in the second semester of 2014, will start discussing the scope and terms to substitute the current levy on imports with a complete VAT regime. The authorities concur with staff that the technical implementation might prove challenging but will further reinforce credibility in the Sammarinese reform process.

The authorities are also prepared to start considering a painstaking pension reform aimed at ensuring the viability of the public pay-as-you-go pension system as long as possible and guaranteeing generational fairness. The authorities are conscious that the existing system is very generous and cannot be financed in the long term due to the after crisis reduced fiscal buffers; forthcoming actions will redefine the replacement ratio, the contribution rates and the prospective pension age. The reform is complex and sensitive and will need a high level of political consensus. In the meantime, the Parliament adopted a decision to cap the highest public pensions and impose–on the existing ones that exceed the cap–a solidarity subsidy in favor of the unemployed.

Financial sector

The banking sector shows positive signs of stabilization, with deposits remaining stable since early 2012 and liquidity buffers being back to a reassuring magnitude. The negative trend of little credit demand contributed to help the banks to restock their assets and coupled with the contingent credit lines at the central bank brought the liquidity risk to a comfortable low level. Capital requirements are largely met by all the banks, with the exception of Cassa di Risparmio della Repubblica di San Marino (CRSM). Nevertheless, the authorities are conscious that the crisis reduced profitability and left a heritage of high nonperforming loans; they agree on the opportunity to require higher resources against NPLs and to a revision of the provisioning mechanism. Moreover, the authorities are considering the suggested possibility of conducting an external asset quality review.

The recapitalization of Cassa di Risparmio della Repubblica di San Marino (CRSM), the largest systemic bank of the country, still poses relevant risks on the national accounts and therefore calls for replenishing the fiscal buffers and enhancing the economy resilience to negative shocks.

Despite the sizeable public contribution in 2012 and at the beginning of 2013, in the second half of 2013 parliament approved another injection of 85 million euro, driving total public support to 13 percent of GDP. The latest capitalization has been realized by means of a zero-coupon bond underwritten by CRSM. Despite not having yet completely resolved the intricate CRSM issue, much has been accomplished over the last year. The law protecting the foundation’s majority stake in CRSM was waived4, a difficult and important attainment that the authorities consider a milestone to the gradual dilution of the current shareholders of the bank. Indeed, the covenant between the financing state and the foundation is still undergoing negotiations and the final agreement to be reached will devise the best feasible arrangements to safeguard the injected public resources. The state is already nominating six board members out of nine, and being the CRSM governed by simple majority, it is effectively controlling the bank’s strategy and future development. The authorities are committed to recruit highly qualified experts with the clear mandate to restructure and revamp the bank’s business.

The authorities appreciated the fruitful discussions with staff aimed at improving the banking resolution framework and the supervisory requirements. The necessary improvements will need careful planning and major legal amendments; as a consequence, a medium term approach is warranted, also considering the current resource constraints and the challenging structural reforms underway.

Structural reforms

San Marino embarked on a cycle of comprehensive and ambitious reforms to profoundly revise and re-launch its business model. The founding scheme is to reinforce the credibility, openness and transparency of the country, at the same time developing a series of services and niche activities to attract foreign investment, tourism and specialized businesses.

Consequently, the starting point was to reform the tax system and exit from the Italian “black list”, simultaneously embarking in the spending review, budget consolidation and restructuring of the labor market.

In the meantime, a recovery plan based on the development of new activities and an upswing of selected tourism is underway. In particular, reinforcing the ties with neighboring Italian regions, first among all lively Emilia-Romagna, will offer the financial sector a great opportunity to provide services outside of the narrow country borders.

The advantageous Sammarinese tax system should be a key brick to attract investments and partnerships finalized to the development of several initiatives: the Rimini-San Marino airport, especially devoted to cargo services and touristic itineraries; a scientific and technological park, financed by high-innovative businesses and connected to researchers and universities; telecommunications and media.


The double taxation agreement (DTA) between Italy and San Marino entered into force on October 3, 2013, and paved the way for San Marino to be taken off the “black list” of countries that Italy considers to be “tax havens”. The exit was ratified on February 12, 2014. The DTA, signed in 2002, and the Amending protocol thereto, aligning the provisions on exchange of tax information with the 2005 OECD standards, were ratified in June 2012. San Marino’s Government has, for some time, been working to reduce the evasion of Italian taxes through its territory and has irrevocably chosen the path of international tax transparency and collaboration. DTAs or tax information exchange agreements (TIEAs) were also signed with a number of other countries, including, most recently, Singapore and Greece (DTAs) and India and China (TIEAs).


SEPA is a payment-integration scheme of the European Union to harmonize and increase the simplicity and reliability of bank transfers denominated in euro. As of February 2014, SEPA consists of the 28 EU member states, the four members of the EFTA (Iceland, Liechtenstein, Norway and Switzerland), Monaco and San Marino.


MONEYVAL is the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism of the Council of Europe.


In 2013, the law allowing the injection of new public capital into the bank also disciplined that, as a consequence, the State could be assigned the majority stake of CRSM.