Spain IMF Staff Concluding Statement of the 2017 Article IV Mission

Source: IMF
Type of item: Recommendation / Analysis
Date: 18/7/2017

Spain's economic recovery remains strong, with consumption, investment, and net exports all contributing to a more balanced growth pattern. A shift in resources toward Spain's competitive export sector, with the services sector creating most new jobs, has played an important part in the rebound. Banking sector balance sheets are stronger, private sector debt is coming down, and credit availability is improving. 


The views in this statement also reflect the findings of the 2017 Financial Sector Assessment Program (FSAP), which was conducted by the IMF over the period October 2016-July 2017. 

This document includes the following recommendations in the corresponding reform areas


1.1   R&D and the knowledge society

- Policies that support firms' capacity to grow and innovate (e.g., more research and development spending) will be important to raise growth and competitiveness going forward.

1.3   Entrepreneurship

- Policies that facilitate access to equity financing for startups will be important to raise growth and competitiveness going forward.


2.3   Red tape Red tape and business environment regulation

- Policies that lower barriers to competition (e.g., implementation of the Market Unity Law), support firms' capacity to grow and innovate (e.g., fewer size-related regulations) will be important to raise growth and competitiveness going forward.


3.1   Labour market regulations

- Youth and long-term unemployment rates are still among the highest in Europe, temporary hires have continued to outnumber permanent ones and involuntary part-time employment has remained high.

- It will be important to keep the economy competitive, which requires working conditions to be set flexibly in line with firm- and sector-specific conditions

- Tackling the long-standing issue of labor market duality.

3.2   Active labour market policies

- Well-designed and targeted active labor market policies can play a greater role in helping low-skilled youth and long-term unemployed return to work. To be the most effective, active labor market policies should complement efforts to improve the quality of formal education and training. This would also help to address skills mismatches and to raise productivity.


4.1 Recapitalization and Restructuring

- Non-performing and foreclosed assets have come down notably but remain relatively high in a few banks weighing on their earnings. 

- Addressing banks' remaining weaknesses and legacy issues (Financial Sector Assessment Program, FSAP). A more proactive approach in dealing with legacy issues would help prepare the banking system for new challenges. Banks' property value assumptions should be carefully analyzed and supervisory actions applied to enhance progress.

- Preparing to handle financial stability headwinds (Financial Sector Assessment Program,FSAP). Spanish banks need to continue improving profitability, further building capital buffers, and adjusting funding positions.  Some banks also need to further increase regulatory capital or capital buffers to compensate for the phase-out of regulatory exemptions and to protect their business against unexpected shocks. Moreover, some banks may need to adjust their liability structures to fulfill new regulatory requirements, and be prepared for an eventual gradual tapering of the ECB's accommodative monetary policy. And finally, building on the recent steps taken, a comprehensive reform of the credit cooperative sector is essential, particularly to strengthen corporate governance and improve resolvability.

- Strengthening and modernizing institutional arrangements. (Financial Sector Assessment Program,FSAP). Establishing an interagency Systemic Risk Council would enhance systemic risk surveillance and macroprudential decision making. It would help address the gradually rising intra-system connectedness of the financial system. Expanding the macroprudential toolkit to possibly include limits on loan-to-value and debt service-to-income would strengthen the Bank of Spain's ability to deal with future build-up of risks in exposures to real estate sectors. The fragmentation of resolution arrangements should be addressed by reviewing the current set up that separates preventive and executive resolution responsibilities of banks and investment firms.

4.2 Other financial measures

- Policies that facilitate access to equity financing for startups will be important to raise growth and competitiveness going forward.


5.1  Economic governance

- Expenditure review should be closely tied to reforms of the regional financing framework.

5.2  Fiscal consolidation and fiscal reform

- VAT collections in Spain are still significantly lower as a share of GDP than in other European countries, in part because of a large share of consumption that benefits from reduced rates. Gradually shifting more consumption to standard VAT rates would provide resources for debt reduction and create space to properly shield vulnerable groups

- Bringing environmental taxes and levies more in line with EU peers and reducing inefficiencies in the tax system could also help reduce the deficit and debt. 


6.1 Social Security and pensions

- Thirty years from today the average pension of a Spanish pensioner relative to the average wage in the economy (the benefit ratio) would still be well above the projected EU average. It is critical that the reforms be implemented in full and one-off adjustments, such as in the pension indexation rate, should be avoided. If changes are deemed necessary to ensure the continued smooth transition to a financially sustainable and socially acceptable pension system, the burden of adjustment should be spread across and within generations.

- Measures to incentivize longer work lives and encourage supplementary savings.

- Full transparency about how the financial sustainability of the pension system is achieved and the implications for retirement income will be critical. 

6.2 Health system

- Planned expenditure reviews, including for pharmaceutical spending, could raise the quality and efficiency of service provision.