On March, 2, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Belgium.
The economy has shown considerable resilience but the outlook is weighed down by weak demand in Europe. Healthy private balance sheets, integration with Germany, and employment support schemes have helped sustain employment and economic activity. However, output is still well below potential and with, subdued growth prospects, job creation remains insufficient.
The critical domestic policy challenges are preserving competitiveness and addressing the looming fiscal cost of ageing. The wage policies of the previous government reversed in part a loss in cost competitiveness relative to main trading partners, but the economy has also been losing ground in terms of innovation and productivity growth. Age-related government spending is projected to increase sizably by 2040 (an added annual cost of 6 percent of GDP). This reflects the combination of demographics and a low effective age of retirement.
The new federal government has announced ambitious reforms to address these challenges. Its focus is on improving competitiveness through temporary de-indexation of wages and a modest shift of taxation away from labor, and activating working age population by tightening eligibility to pension, pre-pension and unemployment benefits. The program should be complemented by reforms to increase productivity growth and employment creation, by opening sheltered sectors to competition, lowering the cost of regulation, increasing labor market flexibility and improving education and professional training.
Fiscal adjustment is expected to resume after a pause in 2014. The pace of adjustment targeted by the authorities for 2015–16 is appropriate given the level of debt and related risks. It is underpinned by pro-growth expenditure measures, which should enhance its sustainability. Coordination between the levels of government still needs strengthening across a range of issues.
Banks need to adapt further to a challenging operational environment of low growth and low interest rates, and a more demanding regulatory framework. The banking sector fared relatively well by the ECB’s comprehensive assessment, but additional efforts will be needed toward Basel III capital standards.
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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.