- The signing of the EU Association Agreement is a historic opportunity to raise productivity, strengthen institutions, and support integration into the European market; implementation should be carefully sequenced to reflect economic priorities and administrative capacity constraints.
- Growth remains resilient while prudent fiscal policy has brought public debt below 60 percent of GDP while the 2026 Eurobond issuance has reduced rollover risk; continued discipline is needed to build buffers and implement reforms.
- Banking system liquidity and asset quality have improved. However, further efforts are needed to address remaining vulnerabilities, boost profitability and capitalization.
San Marino: An International Monetary Fund (IMF) mission met with the Sammarinese authorities during October 26 – November 5, 2026, to discuss recent economic developments, the outlook, risks, and policy priorities. At the conclusion of the visit, Mr. Trevor Lessard, IMF mission chief for San Marino, made the following statement:
San Marino’s efforts at economic diversification have helped it remain resilient to successive external economic shocks and to maintain growth. Prudent fiscal policies are yielding results, with public debt falling below 60 percent of GDP, while the successful Eurobond issuance has locked in financing at competitive rates, longer maturity and significantly reduced near-term rollover risk. The EU Association Agreement provides a unique opportunity to deepen integration with the European market, strengthen institutions, and raise productivity. While fiscal prudence has delivered tangible gains and the financial-sector supervisory and regulatory framework continues to strengthen, elevated global uncertainty, long-term demographic pressures, and remaining banking-sector vulnerabilities underscore the need to increase financial and fiscal buffers, which will require continued policy discipline, reform implementation, and decisive action to address remaining vulnerabilities in the banking sector.
The historic signing of the EU Association Agreement is an opportunity to catalyze higher productivity, strengthen institutions, and implement reforms that will facilitate San Marino’s full integration into the European market. Implementation should be carefully sequenced to reflect economic priorities and the capacity constraints of the microstate’s administration. High-priority reforms include regulatory alignment, implementation of the EU acquis, public-administration modernization, and strengthening the resilience of the banking system. A strategic roadmap outlining institutional responsibilities and a clear understanding of the additional resource needs will provide a strong foundation for sequencing and implementing reforms.
The economy gained momentum in 2025 and has remained resilient. Real GDP growth is estimated at 1.5 percent in 2025, supported by strong domestic demand, manufacturing exports, and tourism. Despite some softening of activity in the first months of the year, growth is projected at 1.3 percent in 2026 benefiting from the resilience of manufacturing exports and untargeted fiscal support to cushion the impact of increases of fuel and commodity prices on domestic demand. The fiscal package of subsidy measures on fuel prices, implemented in March and extended until November 30th, 2026, and the easing of prices in tourism-related activities have helped mitigate price pressures in the first half of 2026, with inflation averaging 1.6 percent as of end-June. But the fiscal intervention came with a cost of additional budget expenditures that has reduced fiscal space for other priority spending, such as needed increases in investment. Following a strong post-pandemic recovery, employment growth has eased while unemployment remains at historical lows. In this context, cross-border workers continue to provide a pressure valve to alleviate labor supply constraints given a tight domestic market.
The outlook remains favorable, but risks are tilted to the downside given continued international uncertainty and domestic vulnerabilities. Growth is projected to slow to 1.0 percent in 2027 amid persistent global uncertainty, higher inflation, and tighter financial conditions, before gradually returning to its medium-term potential of 1.3 percent. Inflation is expected to accelerate after the summer to average 2.5 percent in 2026, before accelerating to 3.5 percent in 2027, as higher energy prices pass-through to core components and untargeted fiscal subsidies are phased out. A further escalation of geopolitical tensions could raise energy prices more, weakening domestic and foreign demand, investment, and bank profitability. Domestic risks mainly stem from remaining financial-sector vulnerabilities and pressures to loosen fiscal policy. Faster implementation of reforms under the EU Association Agreement signed on October 19th, 2026, and continued gains in investor confidence represent upside risks to the outlook.
Prudent Fiscal policy has enabled the rebuilding of needed buffers and keep debt firmly on a downward path. The primary surplus net of bank support increased to 3.8 percent of GDP in 2025, marking a fourth consecutive year of primary surpluses, which has reduced public debt to 59.8 percent of GDP, an important milestone. Maintaining a primary surplus of around 2.5 percent of GDP over the medium term will facilitate further debt reduction, rebuild fiscal space, help safeguard resilience against external shocks, and hedge against financial-sector risks. The income tax reform implemented in 2026 broadened the tax base, strengthened compliance and improved the progressivity of the system, consistent with staff’s recommendation to improve the targeting and progressivity of fiscal revenues and expenditures. Additional reforms to tackle rising age-related spending are also important to support medium-term resilience, growth, and sustainability. A medium-term debt anchor tailored to San Marino’s unique attributes would strengthen fiscal resilience by preserving buffers against future shocks while providing a clear medium-term guide for fiscal policy, while supporting credibility and continued access to external financial markets, which itself is source of resilience for San Marino.
The successful Eurobond issuance provides an opportunity to strengthen debt management. In April 2026, San Marino successfully issued a €350 million five-year Eurobond to pre-finance the Eurobond maturing in January 2027, which was several times oversubscribed and closed with a competitive coupon of approximately 3.6 percent, a significant reduction compared to the previous Eurobond issuance. The successful Eurobond issuance meaningfully reduced medium-term rollover risk, improved financing conditions, reduced dependence on the domestic banking system for budget financing and extended the maturity to 2031. Debt management should build on the new legal framework by diversifying funding sources, lengthening maturities, smoothing debt service, and continuing the shift from non-marketable toward marketable instruments.
Over recent years, San Marino has demonstrated impressive fiscal performance, facilitating debt reduction and improving investor confidence. Sustaining this strong track record of fiscal performance will require advancing structural reforms to improve the tax system, expenditure efficiency, and create space for growth enhancing public investment. Key policy priorities should include:
- Finalization and implementation of a modern VAT that meets international and EU best practices. The VAT should be simple, limit exemptions and differentiated treatment, and minimize transition costs and opportunities for avoidance.
- Expenditure reforms should increasingly prioritize improving the efficiency of public spending, improve targeting of benefits, and provide space for critical public investments to support private sector led growth. Reviews of extra-budgetary funds, subsidies, tax expenditures, and transfers should aim to identify areas where spending can be redirected to high areas with high economic or social returns. Public wage increases should remain consistent with medium-term fiscal sustainability and the need to attract talented individuals to the public sector. The signing of the EU association agreement will require targeted additional hiring to support reforms, which the authorities are planning for in their medium-term budget forecast.
- Scaling up public investment to support long-term growth. Stronger fundamentals create room to address infrastructure needs, including health infrastructure and energy resilience, provided projects are transparently selected, rigorously costed, and do not jeopardize the authorities’ debt-reduction strategy
- Data driven parametric pension reform to place the pension fund on a sustainable long-term path. Building on the success of the previous reform, further parametric reform of the pension system is likely needed to address population ageing and avoid depletion of reserves of the pension fund. Options include adjustments to retirement ages, early-retirement penalties, and benefit parameters while protecting benefit adequacy.
- Estimating and budgeting for increased fiscal costs associated with implementing the EU association agreement. Administrative and institutional costs associated with the EU Association Agreement should be fully budgeted and accommodated within the medium-term fiscal framework. Implementation of the EU association agreement should be sequenced, taking into account capacity constraints and ensuring adequate transition time for sectors to prepare to fully integrate into the European single market while parliamentary adoption of most EU acquis could be fast tracked to allow greater focus on key issues.
- Public Sector Modernization and Investment. Continuing reforms to accelerating digitalization, e-government services, and modernization of legislation to align with EU where applicable would improve public-sector effectiveness and support readiness for further integration into the European single market. Public capital investment should remain a priority, including investments in energy resilience via increased solar generation, and potentially battery storage. Public-sector hiring should be closely aligned with priority skill needs, while containing broader employment growth would help limit current expenditure and preserve space for priority public investment.
Banking-sector indicators continue to improve, but the transition to a more resilient system is not complete. Efforts to clean up bank balance sheets have continued, with further progress in reducing NPLs, although progress has been uneven across banks. Systemwide liquidity has improved, but with heterogeneity across financial institutions, while profitability has encountered some headwinds in 2026 amid less favorable global financial market conditions. Meanwhile, recoveries by the Asset Management Company (AMC) exceeded expectations, supporting full repayment of the government-guaranteed senior tranche. However, sizeable mezzanine and junior exposures remaining on banks’ balance sheets continue to pose risks. Banking-sector vulnerabilities remain elevated, with NPLs still high, capital and liquidity buffers constrained in some banks, and legacy assets, including repossessed real estate and illiquid securities, continuing to weigh on profitability. Policy priorities going forward should include:
- Improving asset quality and capital buffers. Calendar provisioning should continue. Modernization of the century-old Insolvency Law would support more efficient NPL resolution and strengthen banks’ ability to manage distressed exposures. Greater alignment with international accounting standards, including IFRS 9, would enhance transparency, comparability, and asset valuation. Banks should continue to strengthen their capital positions to enhance resilience and prepare for gradual alignment with EU banking-sector regulations. Any additional capital needs that may emerge should be addressed through sound capitalization plans, primarily relying on private-sector solutions. Rapid progress should continue toward a durable, long-term solution for the capital and ownership of domestic banks seeking new investments and while supervisory scrutiny of prospective owners should remain rigorous to ensure the investors are both fit and proper and have strong business plans for a sustainable path to profitability.
- Enhancing the efficiency and profitability of the banking system. Banks should accelerate efforts to improve operational efficiency, reduce operating costs, rationalize branch networks, and dispose of legacy real-estate assets. Plans for banks to coordinate on IT infrastructure is a welcome initiative that should if operationalized help reduce costs and support EU financial-sector integration. Opportunities for broader collaboration, including on cybersecurity, should also be explored.
- Improving banking sector liquidity and financial safety nets. The 2026 agreement providing the Central Bank of San Marino (CBSM) with standing access to the ECB’s EUREP repo facility, mediated through the Bank of Italy, marks an important enhancement of CBSM’s liquidity-support framework. The planned gradual implementation of the Basel III liquidity standards (LCR and NSFR) starting in 2027 is welcome and will enhance banks’ liquidity risk management. Building on Law No. 102, the bank resolution framework should be further strengthened through enhanced recovery and resolution planning and gradual alignment with the EU Bank Recovery and Resolution Directive (BRRD).
- Preparing the financial sector for EU convergence through a well-sequenced approach that safeguards effective implementation and financial sector resilience. Regulatory alignment with EU standards, including CRD/CRR, should proceed at a staged pace consistent with implementation capacity and financial institutions’ readiness, beginning with sectors that are more advanced in their preparations for integration into the single market, while alignment with the EU AML/CFT framework should continue in parallel. The authorities’ efforts to deepen cooperation with European supervisory authorities are welcome and provide a strong foundation for convergence. Successful implementation of this reform agenda will require a judicious increase in staffing, alongside investments in technical capacity and IT systems. Staffing policies should also provide sufficient flexibility to attract and retain specialized expertise needed for the implementation of the EU standards and to meet the increasing demands of financial-sector supervision.
Improving data quality and timeliness remains important for effective monitoring economic developments, policymaking, and benchmarking to EU. Improving the timeliness, accuracy, and comprehensiveness of national accounts and external-sector data would greatly improve the ability to assess current economic conditions and to better evaluate economic policy proposals. Similarly, strengthening financial-sector data would support more effective monitoring of emerging risks and the development of a macroprudential framework. Achieving this objective will require implementation of previous recommendations, including the establishment of an independent, professional, statistical agency with adequate resources that enables the scaling up of both personnel and IT infrastructure for the storage and dissemination statistics databases and collection of vital economic and social statistics. The authorities’ plans to strengthen the statistical office’s staffing, resources, and independence are therefore welcome as part of their medium-term plan to improve the quality of San Marino’s economic and social statistics.
