San Marino: Staff Concluding Statement of the 2025 Article IV Mission

San Marino: Staff Concluding Statement of the 2025 Article IV Mission

September 26, 2025

San Marino's economy maintains positive momentum, as its new growth model proved to be resilient to successive shocks. Prudent fiscal policy helped rebuild buffers and, together with important progress in banking sector reforms, reduced legacy vulnerabilities. However, significant challenges remain. Safeguarding macro-economic stability, still high public debt, and significant contingent liabilities require larger-than-usual fiscal buffers and further fiscal consolidation. In the banking sector, additional measures are needed to enhance asset quality and improve banks' capitalization and profitability. Heightened global uncertainty underscores the need to accelerate structural reforms, including those aimed at the implementation of the EU association agreement.

San Marino's growth accelerated, supported by the strength of domestic demand. GDP growth reached 1.0 percent in 2024, after a slowdown in 2023. Strong private consumption, driven by a robust labor market, gains in real income, and lower interest rates, offset weak goods exports. Manufacturing continued to normalize from elevated post-pandemic levels, in part due to the phase-out of fiscal incentives in Italy. The strong service sector performance, benefiting from the regional tourism boom and healthy domestic demand, kept employment growing at a robust pace.

Growth is projected to strengthen in 2025-26, driven by recovering external and robust domestic demand. Rising real wages and easing financial conditions and political stability will boost private investment and consumption. External downside risks are elevated, including geoeconomic risks, trade tensions, commodity price volatility, and prolonged uncertainty. San Marino's direct exposure to US tariffs is limited, but rising trade tensions could have adverse indirect impact via trade partners. Domestically, risks stem from contingent liabilities in the financial sector and a potential reversal of fiscal consolidation. The underlying strength of the manufacturing sector, healthy private sector balance sheets, and prompt implementation of the EU association agreement constitute upside risks to the baseline.

The fiscal position was stronger than expected in 2024. Prudent management of public expenditure together with one-off revenues from State-Owned Enterprise (SOE) dividends and direct taxation contributed to better-than-expected performance of public accounts in 2024. However, spending pressures are increasing in 2025, reflecting a further expansion of private transfers and accelerating public sector hiring. The debt-to-GDP ratio continued to decline, but at 62.8 percent of GDP remains high.

Additional fiscal consolidation is essential to mitigate financing risks, build fiscal buffers, and ensure the debt-to-GDP ratio continues to decline. San Marino is an euroized small open economy with a vulnerable financial sector and limited fiscal buffers. In the context of elevated global uncertainty and the eurobond rollover next year, prudent macroeconomic policies are key to boosting investors' confidence. The government's goal of reducing public debt below 60 percent of GDP over the medium term is an important anchor to guide fiscal policy. To this end, a moderate additional fiscal effort of around 0.8 percent of GDP over the next two years is recommended through:

• Implementing the income tax reform. High deductible expenses, including San Marino Card (SMaC) incentives, lead to low effective personal income tax rates by international standards. The proposed reform expands the tax base and improves tax administration. Greater use of tax credits instead of deductible expenses would also help mitigate regressivity.
• Introducing a Value Added Tax (VAT). A well-designed and carefully implemented VAT will improve tax efficiency, reduce economic distortions, and facilitate integration with the EU's single market. To ease implementation and minimize administrative burden, it is important to keep the system simple, by avoiding too many differentiated rates, limiting exemptions, and carefully calibrating registration thresholds for small businesses.
• Advancing government digitalization. Continuous progress in e-government initiatives would improve the business environment and generate fiscal savings. Additionally, expanding electronic invoicing domestically in 2026 will reduce transaction costs for firms and improve tax compliance.
• Improving the efficiency of public spending. San Marino should shift from across-the-board real expenditure compression to strategic prioritization based on social returns. Key actions include: i) reviewing interest rate subsidies and the effectiveness of private sector transfers; ii) improving education spending efficiency through rationalizing the teacher-to-student ratio; iii) ensuring rigorous cost-benefit analysis for the selection and sequencing of major investment projects; and iv) upgrading monitoring of general government expenditures.
• Keeping public wages and pensions growth in check. Prudent public wage and pension policies were key to improving the primary balance. Going forward, it remains critical to avoid public wage and pension growth above inflation.

The remaining long-term challenges of the pension system need to be addressed through recalibrating pension benefits and the retirement age. The 2022 pension reform has increased contributions, delaying the depletion of the pension fund for a decade. However, ensuring long-term sustainability will require further parametric calibrations. The diversification of pension fund investments is welcome. Going forward, further gradual diversification could be considered to reduce concentration of risks and increase returns, provided system's liquidity remains robust.

Strengthening debt management capacity is essential to reduce refinancing risks and diversify financing sources. To smooth the debt amortization profile, the authorities could consider smaller international issuances with longer maturities and diversify funding sources. It is also important to grant more autonomy to Ministry of Finance to implement the financing plan approved in the budget. We welcome regular publication of the government's fiscal strategy (Budget at a Glance), which facilitates communication with investors and enhances predictability. Timely publishing of early estimates for General Government Statistics would be an important next step.

Recovering confidence and continuing financial reforms improved banks' liquidity and asset quality-however, significant legacy vulnerabilities remain.

• Asset quality. Bank asset quality is improving, driven by calendar provisioning and the gradual replacement of perpetual bonds in the state-owned bank. The non-performing loans (NPLs) ratio declined to 16.9 percent by the end of 2024, from 21 percent in 2023. To further prompt banks to improve asset quality, it is key to reduce any remaining forbearance. The risk weights for junior securities should be increased faster to reflect the difference between the net book value and the real economic value of NPLs on banks' balance sheets. Accelerating the risk weights increases of real estate from debt recovery will encourage banks to sell and improve banks' liquidity and profitability.
• Capitalization remains tight in some banks. Additional capital buffers will be crucial to absorb losses and accelerate the sector's transformation while preserving systemic stability. The recent repeal of legal limits on bank ownership has strengthened supervisory authority. Staff welcomes Central Bank of San Marino's (CBSM) guidance for banks with tight capital to retain profit. Any undercapitalization that could arise from the securitization process, the implementation of calendar provisioning, and alignment with EU regulatory standards should be promptly addressed with credible capitalization plans, followed by strengthened use of supervisory actions. The ongoing efforts by the CBSM to thoroughly review new investors to ensure their suitability should continue.
• Banks' profits remained stable in 2024, but declining interest margins and high operating costs pose risks going forward. High share of non-income generating assets (above average European banks), high personnel costs and dense bank branch network continue to weigh on profitability. A speedy adjustment of banks' costs is a priority to improve long-term viability and capital positions.

The asset recovery process by the Asset Management Company (AMC) has exceeded expectations. As of the first half of 2025, €41.7 million of the €70 million government-guaranteed senior tranche has been paid off, reducing fiscal contingent liabilities. It will be important to improve dissemination of the information about the AMC asset recovery to anticipate and address any bottlenecks. Upgrading the insolvency and creditor rights framework is critical to support NPL resolution and enhance the effectiveness of the AMC operations.

San Marino should continue to make progress to strengthen its Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework. The domestic legal framework was amended in 2023 to incorporate the 5th EU AML Directive and improve technical compliance with the Financial Action Task Force (FATF) standards. The National Money Laundering and Terrorist Financing (ML/TF) Risk Assessment will be updated during 2025-26 with a focus on preventing the misuse of legal entities. In light of that, San Marino should continue enhancing the accuracy of its central beneficial ownership registry. Finally, the authorities should ensure continuously that the FIA has adequate resources to carry out its functions.

The EU association agreement will improve regulatory standards and require an ambitious reform agenda for the financial sector. To secure the compliance with EU standards, including by expanding and training staff, CBSM will need additional financial resources. This underscores the necessity of strengthening the financial autonomy of CBSM. The upgrades of the regulatory framework should be coordinated with solving existing issues in banks. In particular, to boost the quality of the state bank's capital, the perpetual bond used to recapitalize it, should be converted into a liquid instrument with market interest rates. This process should be gradual, considering its potential impact on public debt and debt service. While the financial system has 15 years to meet the requirements of the EU Association Agreement, early engagement with the EU regulatory institutions will reduce uncertainty, for example, on regulatory treatment of deferred tax assets. A comprehensive plan and acting early promise high payoffs and will boost confidence.

More broadly, the finalization of EU association agreement offers an opportunity to accelerate reforms and sustainably lift growth. The benefits of the EU agreement are expected to become tangible in the medium term by improving confidence in the economy, helping to mobilize domestic reforms (see below), and enhancing the quality of public administration. The authorities should ensure sufficient resources and staff are available to support implementation without undermining the fiscal consolidation path. Better communication with the public about the implications of EU association agreement will help build consensus and accelerate reforms. Additionally, progress in the timeliness and quality of data publication needs to be improved by expanding the capacity of the statistics office.

San Marino's diversified economy supports its resilience to external shocks, and horizontal reforms aimed at increasing productivity could help solidify these gains. For a high-income country like San Marino, further diversification offers limited economic growth gains. Instead, horizontal reforms aimed at boosting economy-wide productivity should be prioritized. These include: i) increasing labor market flexibility by easing restrictions on the operation of temporary work agencies; ii) resolving banking-real estate distortions and facilitating real estate market functioning by empowering real estate observatory to collect data from market participants; iii) increasing energy efficiency and reducing cross-subsidization in the energy market; iv) investing in digital upgrades and improving network connectivity. Enhancing public sector efficiency and modernizing tax system would further reinforce these efforts.

The mission would like to thank the authorities and other counterparts for their warm hospitality as well as candid and productive discussions.