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San Marino Urged To Consider New Economic Model

by Ulrika Lomas,, Brussels

11 May 2012

Despite a 15% decline in tax revenues in San Marino over the past two years, authorities have been able to maintain a comparatively low deficit. However, the most significant challenges relate to the stability of the nation's banking sector, which has suffered capital flight as tax transparency initiatives gain ground, a new International Monetary Fund (IMF) report says.

Commenting on the nation's financial services sector, which has suffered at the hands of new tax transparency rules being forced through by high-tax nations, the IMF reported that financial sector balance sheets have continued to compress on the back of steady outflows of deposits. Banks' profitability and capital have weakened slightly, mainly due to rising non-performing loans.

In presenting recommendations, the International Monetary Fund Executive Board highlighted the importance of normalizing relations with Italy. The Board underlined that the financial sector needs to adapt to the new environment for small nations operating as international financial centres, including by searching for new areas of competitive advantage. Against that background, the IMF underscored that to ensure the future success of the financial services sector, the development of a sustainable business model for the financial sector is critical.

The Fund recommended that this should include promotional efforts to attract foreign investment, and the removal of obstacles which prevent the employment of skilled non-resident workers. To strengthen the territory's reputation, the IMF also encouraged authorities to address remaining deficiencies in the nation's regime to combat money laundering and the financing of terrorism.

To stabilize the San Marino economy in the short-term, the IMF encouraged authorities to push ahead with plans to recapitalize the territory's largest bank, Cassa di Risparmio della Repubblica di San Marino, with the Fund observing slow progress to-date towards this goal. The IMF welcomed efforts taken by the authorities to strengthen the supervisory functions and independence of the central bank, and recognized their efforts to lower barriers to international regulatory cooperation, in addition to broader transparency initiatives.

On fiscal policy, following an increase in the deficit from 2% of gross domestic product in 2010, to 3% this year, the Board said measures in the 2012 Budget were appropriate but highlighted that the territory needs to establish robust medium-term plans on budget consolidation. The IMF suggested that this effort should comprise of permanent measures, such as public sector reform.

TAGS: tax | investment | offshore confidentiality | banking | international financial centres (IFC) | offshore | offshore banking | asset protection | banking secrecy | Italy | tax reform | San Marino | services

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