27 March 2013

IMF: Belgium - Concluding statement of the 2013 article IV mission

The economy in Belgium has entered a second year of near zero growth amid persistent vulnerabilities. While an improvement in external conditions should support the recovery, the economy's capacity to rebound and create jobs is constrained by structural rigidities and a loss of competitiveness.

I. Outlook and Risks [abridged]

1) IMF projects real GDP to grow by only 0.2 per cent in 2013 and by just over 1 per cent in 2014, with downside risks linked to the unsettled external environment and a loss of competitiveness.

2) Risks to macro-economic stability remain elevated on account of fiscal and financial vulnerabilities, which are related to public debt sustainability and the substantial cross-exposures between the government and the financial sector.

3) The government undertook important efforts in 2012 to reduce fiscal risks, but continued fiscal consolidation needs to confront a number of rigidities.

4) Ongoing financial sector repair has reduced risks to financial stability.

5) Still, the financial sector remains vulnerable.

6) The strategic reorientation of banks onto the domestic market combined with high private sector savings creates new challenges.

7) The FSAP Update found that the new supervisory structure is functioning well, with few remaining gaps.

II. Policy Challenges [abridged]

8) Against this background, the government should capitalise on the current state of political stability to maintain the momentum of reform and fiscal adjustment ahead of the 2014 elections

Sustaining Quality Fiscal Adjustment

9) In view of the significant risks created by the level of public debt, the mission recommends that the government lock in, before the elections, a cumulative reduction of the structural primary deficit of 1½ percentage points of GDP over 2013-14.

10) The quality of budgetary adjustment has an important impact on the growth potential, and therefore the effort should be redirected to expenditure containment, rather than tax increases

11) A clearer rule-based multi-year fiscal policy framework is needed to increase policy efficiency, as well as to ensure adequate burden sharing across all levels of government and consistency with fiscal targets agreed at the European level

Reforming the Labour Market to Boost the Growth Potential

12) The structural reforms agenda should focus on raising growth by restoring cost competitiveness, raising labour market participation rates, and boosting productivity.

13) Wage and price indexation continue to create risks of cost misalignment and lost growth.

14) Belgium’s target of raising the employment rate to 73.2 per cent by 2020 calls for continued pension and labour market reforms before 2014, including activation and training.

15) The cost of labour market rigidities adversely affects the economy’s competitiveness and employment creation.Financial sector: from stability to sustainability.

16) Important policy actions have helped to safeguard financial stability but the legacy of the crisis and euro area vulnerabilities require continued attention.

17) The evolving EU-wide landscape underscores the need for continuing domestic supervisory reforms.

18) The crisis has highlighted the need for increased cross-border supervisory cooperation and potential benefits of a common resolution framework and deposit guarantee scheme in the euro area.

Full article

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