An International Monetary Fund (IMF) mission led by Borja Gracia visited San Marino during April 4-8, 2022, to discuss with the Sammarinese authorities recent economic developments. San Marino enjoyed a robust recovery last year supported by booming exports and a rebound in tourism.
According to the preliminary findings , San Marino’s economic performance has been remarkable over the last two years. However, higher energy prices —below neighbouring countries— weakening external demand and tighter international financial conditions will affect growth going forward. This challenging context combined with the rollover of the Eurobond, calls for further building up of buffers. Preserving healthy levels of fiscal and financial sector buffers is key to preserve stability and confidence in a euroized economy like San Marino. In particular, an ambitious fiscal consolidation, and further efforts to address high nonperforming loans and improvements in banks’ capitalization should be approved and implemented without delay.
The Sammarinese economy has experienced robust growth with a tight labour market, increased confidence, and remarkable stability over the last two years. With growth projected at 8.3 percent for 2021, the strong momentum has been kept so far this year resulting in a level of economic activity significantly above pre-pandemic heights.
Strong external demand boosted manufacturing and a rebound in tourism led to strong economic activity that combined with increased confidence, led to higher government and banking sector deposits and international reserves. In this context, employment reached the highest level in over a decade and the tight domestic labor market led the authorities to liberalize cross-border employment. At the same time, the banking sector experienced a continued deposit increase and improved liquidity, profitability, and capitalization.
However, with higher energy prices, tightening financial conditions, and growing global uncertainty, activity is expected to slow down. The energy price increases are eroding households’ real income and firms’ profit margins. Combined with weakening external demand, these developments are expected to contribute to a marked deceleration of economic activity and deterioration of the current account surplus and international reserves as the economy adjusts to the negative terms of trade shock.
As activity slows down, fiscal revenues will be impacted while inflation can increase spending pressures adding to pre-existing fiscal challenges. Downside risks related to Russia’s invasion of Ukraine, particularly a further disruption of energy supplies in Europe, continue to dominate the outlook although the remarkable resilience of the economy in the last few years could provide some upside risk. In this connection, the cautious wage increases agreed in the recent collective bargaining agreement in the industrial sector will help preserve employment as the economy weakens, providing welcome flexibility to the labour market. The rollover of the Eurobond in early 2024 remains a risk.