San Marino: In Search of New Routes of Growth

Financial sector downsizing and weak external demand harmed growth

Bank balance sheets under reparation, fiscal buffers to be rebuilt

IMF technical assistance key to ease capacity constraints

IMF Survey sat down with the outgoing and incoming San Marino mission chiefs, Alexander Tieman and Kazuko Shirono, to discuss the economic fortunes of the oldest constitutional republic in the world.

IMF Survey : What are some of the challenges of working on a small country?

Tieman: Working on a microstate like San Marino, with 32,000 inhabitants living on some 61 square kilometers, presents challenges but also opportunities. One of the issues, which we usually do not consider in other advanced economies, is capacity bottlenecks. Because of the small population, most government departments as well as the central bank are small by international standards. This implies that broad areas of work tend to land on the shoulders of just a few people, particularly now that the country is committed to follow wide-ranging international legislation and regulations. In addition, it can be really challenging to find people with a specific area of expertise.

On the bright side, the small size of the country makes a consensus-based decision-making process easier, which, in turn, allows for relatively fast policy implementation once decisions are made.

IMF Survey : How did San Marino fare during the global crisis and what are the issues left unresolved?

Shirono: San Marino has lost one-third of its output since the start of the global financial crisis, which is the largest output loss in Europe. The main cause was the sharp downsizing of San Marino’s large financial sector, which came about in part due to a massive outflow of nonresident deposits. The other main source of the loss was weak external demand from trading partners in Europe. Although this year we see the economy bottoming out after six years of recession, the global financial crisis nevertheless left a number of challenges to handle. Dealing with nonperforming loans and repairing the balance sheets of banks are in progress. Fiscal buffers, which served San Marino well in the past, need to be rebuilt to strengthen the economy against future shocks. Importantly, San Marino also needs to diversify its economy so that growth relies less on the financial sector and more on industry and nonfinancial services.

IMF Survey : What has IMF technical assistance meant for the country?

Tieman: Technical...