Category: IMF – Russia

Source: IMF – News in Russian

May 8, 2025

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with member countries on common policies of the Eastern Caribbean Currency Union (ECCU). The Board considered and endorsed the staff appraisal without a meeting.^[2]

The currency union has provided a strong anchor for macroeconomic stability. In 2024, strong tourism performance and continued infrastructure investments have supported robust growth of 3.9 percent, and inflation moderated to below 2 percent in tune with global trends. This has facilitated a moderate reduction in the currency union’s fiscal and external imbalances, although public debt remains high at above 71 percent of GDP and the post-pandemic trend of narrowing of sizable current account deficits has stalled. The ECCB’s stable reserves underpin a strong currency backing ratio. The ECCU financial system has remained stable, though exhibiting legacy asset quality and credit condition weaknesses.

The union’s recent growth momentum is projected to wane. Increasing constraints to tourism capacity and completion of major infrastructure projects are set to slow real GDP growth to around 2½ percent over the medium term. Modest growth prospects reflect weak productivity and local investment, as well as headwinds from ageing populations, a shrinking labor force, and constrained fiscal space for public investment in most union members. Fiscal and external imbalances are projected to narrow over the medium term, reflecting in part completion of import-intensive public investment projects.

Risks to the outlook remain mostly on the downside amid a highly uncertain external environment. As reported in the April World Economic Outlook, the escalation of trade tensions and high levels of policy uncertainty are a major negative shock to global economic activity. For ECCU economies, increased global trade and geopolitical tensions could give rise to disruptions to tourism and FDI inflows and renewed inflationary pressures. High public debt, persistent current account deficits and weaknesses in the local financial system amplify vulnerability to recurrent ND shocks alongside the uncertain outlook for future citizenship-by-investment inflows.

Executive Board Assessment^[3]

The ECCU has achieved a strong rebound from successive adverse shocks. Strong tourism performance and continued infrastructure investments have supported robust post‑pandemic growth, while inflation has moderated in tune with global trends. This has facilitated a moderate reduction in the currency union’s fiscal and external imbalances, although public debt levels and current account deficits remain high in several members. The ECCU’s external position is assessed as weaker than implied by fundamentals and desirable policies, but the current account deficits remain fully financed and the stability of the ECCB’s reserves underpin a strong currency backing ratio. The financial system has remained stable, albeit exhibiting continued asset quality and credit condition weaknesses. 

Growth momentum is nonetheless projected to wane and risks to the outlook remain mostly on the downside. Increasing constraints to tourism capacity and completion of major infrastructure projects are set to slow growth to around 2½ percent over the medium term. This modest growth potential reflects weak productivity and local investment, as well as headwinds from ageing populations, a shrinking labor force, and constrained fiscal space for public investment in most union members. Downside risks to the outlook are significant amid a highly uncertain external environment, where increased trade and geopolitical tensions could give rise to renewed inflationary pressures and disruptions to tourism and FDI inflows. High public debt, persistent current account deficits, and weaknesses in the local financial system amplify vulnerability to recurrent natural disaster (ND) shocks alongside the uncertain outlook for future Citizenship-by-Investment (CBI) inflows.

Achieving more robust, resilient, and inclusive long-term growth would support the currency union’s fiscal and external sustainability and raise living standards. To support this objective, common regional policies should be anchored in building economic, fiscal, and financial resilience and addressing supply bottlenecks that underpin the recent decades’ downward trend in the region’s growth potential.

A key policy priority is alleviating the region’s structural growth impediments, which calls for a coordinated multipronged approach. Addressing frictions to employment and skills development requires a renewed effort to attune human capital to economic needs and development priorities through vocational training and modernized education systems, complemented by active labor market policies and improved access to child and elderly care. Common policies can also enhance the scale, resilience, and efficiency of the region’s capital stock by helping to accelerate energy transition to local renewables, optimize the CBI funding model, and increase ND preparedness. Substantial productivity gains may also be achieved through cooperative efforts to address bottlenecks to innovation and allocative efficiency, including by digitalizing key services, streamlining licensing and administrative processes, and strengthening financial intermediation.

Fiscal policies should remain closely focused on rebuilding buffers, reducing public debt consistent with the regional debt anchor, and improving resilience to shocks. Region‑wide adoption of strong medium-term fiscal frameworks (MTFFs) embedded with well-designed fiscal rules and credible policy plans would support sustainability objectives and create policy space for growth-enhancing social and resilience investment. Comprehensive fiscal resilience strategies, including adequate disaster-financing frameworks, can help alleviate periodic ND disruptions to debt sustainability and support the region’s growth resilience. Strengthening fiscal management of uncertain CBI revenues can similarly alleviate risks and facilitate fiscal planning. These efforts can be supported by more institutionalized regional oversight and continued strengthening of national fiscal institutions.

Enhancing financial system resilience and reducing persistent credit-frictions can support a more conducive environment for growth-supporting local investment. Regional policy priorities include reducing vulnerabilities from legacy bank balance sheet weaknesses, mitigating risks from rapid credit union expansion, building readiness to manage risks from high dependency on global reinsurance, and strengthening national AML/CFT frameworks. Common minimum NBFI regulatory standards under the planned Eastern Caribbean Financial Stability Board (ECFSB) will be an important step toward their more unified oversight, although a more centralized supervisory structure would better facilitate management of regional stability risks. Coordinated efforts to reduce institutional frictions in local credit markets and support small ECCU businesses’ bankability can help address structural challenges in financial intermediation, revive local credit and investment, and foster development of a more vibrant private sector.

Strengthening economic data could significantly improve regional policy design and risk management. Priorities include addressing shortcomings in coverage, quality, and timeliness of key national and external accounts and reducing significant blind spots in areas such as the regional labor markets and CBI flows. Greater leveraging of synergies in regional data compilation and processing could help address persistent resource and capacity gaps.

Table 1. ECCU: Selected Economic and Financial Indicators, 2020-2026 1/
					Est.	Proj.
	2020	2021	2022	2023	2024	2025	2026
	(Annual percentage change)
Output and Prices
Real GDP	-17.6	6.5	11.8	3.7	3.9	3.5	2.7
GDP deflator	-2.2	4.4	4.1	3.3	2.7	1.7	2.1
Consumer prices, average	-0.6	1.7	5.6	4.0	2.3	1.9	2.0
Monetary Sector
Net foreign assets	6.1	16.5	-0.7	11.5	4.8	1.7	4.1
Central bank	3.6	11.6	-4.8	5.4	12.3	5.9	4.4
Commercial banks (net)	8.5	21.1	2.8	16.3	-0.5	-1.7	3.7
Net domestic assets	-16.5	1.2	13.0	-5.8	7.9	11.0	6.1
Of which: private sector credit	-0.9	1.5	1.6	3.6	4.7	5.1	2.5
Broad money (M2)	-4.7	10.1	4.6	4.3	6.0	5.3	4.9
	(In percent of GDP, unless otherwise indicated)
Public Finances
Central government
Total revenue and grants	29.0	30.5	29.7	30.0	30.8	28.3	27.3
Total expenditure and net lending	35.8	33.4	32.5	31.2	32.2	32.8	27.8
Overall balance 2/	-6.8	-2.9	-2.7	-1.3	-1.4	-4.5	-0.5
Of which: expected fiscal cost of natural disasters	0.5	0.4	0.5	0.7	0.7	0.7	0.7
Excl. Citizenship-by-Investment Programs	-11.5	-8.7	-9.3	-8.0	-7.3	-8.4	-3.6
Primary balance 2/	-4.3	-0.6	-0.5	0.9	1.1	-1.8	1.7
Total public sector debt	89.2	84.5	76.2	73.9	71.2	70.8	69.9
External Sector
Current account balance	-19.1	-18.5	-12.3	-10.3	-10.4	-9.9	-8.3
Trade balance	-29.5	-30.1	-33.3	-32.0	-34.2	-34.1	-32.7
Exports, f.o.b. (annual percentage change)	-28.5	31.5	40.5	21.9	-9.7	13.9	11.4
Imports, f.o.b. (annual percentage change)	-23.2	15.2	29.7	5.3	11.0	5.8	1.9
Services, incomes and transfers	10.4	11.6	20.9	21.8	23.9	24.2	24.5
Of which: travel	17.1	20.5	34.6	39.8	42.1	42.2	42.5
External public debt	47.9	47.6	42.6	42.7	42.1	43.7	44.8
External debt service (percent of goods and nonfactor services)	21.3	14.8	10.3	9.0	10.3	9.1	8.6
International reserves
In millions of U.S. dollars	1,747	1,952	1,869	1,972	2,202	2,332	2,435
In months of prospective year imports of goods and services	5.7	4.8	4.0	4.0	4.2	4.4	4.4
In percent of broad money	28.1	28.5	26.1	26.4	27.8	28.0	27.9
REER (average annual percentage change)
Trade-weighted 3/	-.07	-2.8	3.1	-1.1	-1.0	…	…
Sources: Country authorities; and IMF staff estimates and projections. 1/ Includes all eight ECCU members unless otherwise noted. ECCU consumer price aggregates are calculated as weighted averages of individual country data. Other ECCU aggregates are calculated by adding individual country data. The staff report projections are based on the information available as of March 31, 2025. It, therefore, does not reflect the impact of the escalation of trade tensions on and after April 2, 2025. 2/ Projections include expected fiscal costs of natural disasters. 3/ Excludes Anguilla and Montserrat.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Staff hold separate annual discussions with the regional institutions responsible for common policies in four currency unions—the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collects economic and financial information, and discusses with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the Executive Board. Both staff’s discussions with the regional institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member.

[2] The staff report reflects discussions with the authorities during January 8-16 and January 27-February 10, 2025, and is based on the information available as of March 31, 2025. It, therefore, does not reflect the impact of the escalation of trade tensions on and after April 2, 2025. Based on information available until April 29, 2025, and covered in the Staff Supplement, the thrust of the staff appraisal remains unchanged.

[3] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

https://www.imf.org/en/News/Articles/2025/05/08/pr-24135-caribbean-imf-concludes-2025-discussions-on-policies-of-east-carib-currency-union

MIL OSI

Source: IMF – News in Russian

May 8, 2025

San Marino: Mr. Kenji Okamura, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement today in San Marino at the end of his visit:

“I am delighted to be in San Marino. This is my first visit, and I would like to thank Captains Regent Bronzetti and Righi, Finance Minister Gatti, Minister of Foreign Affairs Beccari, Central Bank President Tomasetti, Central Bank Managing Director Vivoli, as well as other ministers and senior officials for their warm hospitality and for the productive discussions.”

“In the last decade, San Marino’s economy has transformed from overreliance on the financial sector serving non-residents and moved towards a diversified growth model, driven by the manufacturing and non-financial services. The economy is in a much stronger position today, thanks to the authorities’ stewardship. Prudent fiscal policies, moderate wage growth, and access to international capital markets have allowed the country to weather the pandemic and the energy crises. Despite the regional slowdown and high global interest rates, San Marino’s economy continues to be resilient, with employment levels at record highs.”

“I commended the authorities for their ongoing efforts to reduce public debt. Pension reform and prudent wage growth policy have strengthened the fiscal position. We discussed plans to continue building fiscal buffers by containing spending, advancing income tax reforms and introducing VAT. We also discussed the challenges of fiscal policy in the current context of trade tensions and heightened uncertainty.”

“In addition, we discussed the authorities’ efforts to reduce financial sector vulnerabilities, including resolving banking sector legacy issues and addressing nonperforming loans, via securitization and strengthened bank regulations. While banks’ liquidity, capitalization, and profitability have improved, banks will need to improve their cost efficiency to ensure long-term viability. I welcomed the progress in implementing the Anti-Money Laundering / Countering the Financing of Terrorism framework.”

“The conclusion of the EU association agreement negotiations is another milestone for San Marino. The agreement will help local businesses access the EU market and will enhance the quality of San Marino’s public administration as it adopts the EU regulatory framework.”

“I very much appreciate the excellent, long-standing relations between San Marino and the IMF. I look forward to strengthening our continued partnership through regular policy dialogue and technical assistance.”

https://www.imf.org/en/News/Articles/2025/05/08/pr25134-san-marino-statement-imf-deputy-managing-director-kenji-okamura-conclusion-his-visit

MIL OSI

Source: IMF – News in Russian

May 8, 2025

Kingston, Jamaica: An International Monetary Fund (IMF) team led by Mr. Mauricio Villafuerte held meetings in Kingston (and virtually) with Jamaica government counterparts, private sector, civil society, and development partners during April 30-May 7 to conduct the 2025 Article IV consultation. At the conclusion of the mission, Mr. Villafuerte issued the following statement:   

“Over the last decade, Jamaica has successfully reduced its public debt, firmly anchored inflation and inflation expectations, and strengthened its external position. It has built an enviable track record of investing in institutions and prioritizing macroeconomic stability. Jamaica has met recent global shocks and natural disasters in a manner that is agile, prudent, and supportive of growth.

GDP declined in FY2024/25 due to hurricane Beryl and tropical storm Raphael which damaged agriculture and infrastructure and undermined tourism. Nonetheless,  economic activity is projected to normalize as these effects wane. Unemployment has fallen to all-time low levels (3.7 percent in January 2025) and inflation has converged to the Bank of Jamaica (BOJ)’s target band of 4-6 percent. The current account has been in a modest surplus for the last two fiscal years with strong tourism revenues and high remittances. The international reserves’ position has continued to improve.

“The outlook points to growth settling at its potential rate once the FY2025/26 recovery is complete and with inflation stabilizing at the BOJ’s target range. Nonetheless, global developments require continued close monitoring. Global downside risks emanating from tighter global financial conditions, lower growth in key source markets for tourism, and trade policy disruptions remain high. Finally, extreme weather events—such as floods, hurricanes, or earthquakes—could negatively affect economic activity.

“The Jamaican authorities continue to implement sound macroeconomic policies, aided by robust policy frameworks. A primary surplus is expected for FY2025/26 leading public debt to fall towards 65 percent of GDP by the end of the fiscal year, the lowest level in 25 years and well below pre-pandemic levels. The Bank of Jamaica’s approach to monetary policy has anchored inflation around the mid-point of the inflation target band and inflation expectations have declined close to the upper band of the BOJ’s target range. The lowering of the policy rate in 2024 was justified in view of the temporary nature of the weather-related shocks and the expected convergence of inflation to the BOJ’s target. The current fiscal-monetary policy mix places Jamaica in a good position to respond to the various downside global risks, should they be realized.

“The policy frameworks are benefitting from ongoing improvements. A Fiscal Commission became operational in 2025 and is providing assessments of the macroeconomic and fiscal forecasts as well as the budget’s consistency with Jamaica’s fiscal rules. The wage bill reform has reduced distortions in public sector compensation, increasing both transparency and competitiveness of civil service salaries. Tax and customs administration improvements are increasing compliance. Progress continues with adopting the Basel III framework, introducing a “twin peaks” supervisory regime, expanding the BOJ’s supervisory perimeter, and enhancing consolidated supervision.

“Going forward the wage bill needs to be carefully managed to avoid crowding out other fiscal priorities. At the same time, there is room to improve the efficiency of public spending per recommendations of an Agile Public Expenditure and Financial Accountability assessment completed in June 2024. The fiscal responsibility law could benefit from the adoption of an explicit operational debt anchor below the current debt limit to help guide policies over the medium term, ensure that debt is kept at moderate levels, and build fiscal buffers. Implementing reforms to deepen foreign exchange market and allow greater exchange rate flexibility would strengthen the transmission mechanism of monetary policy. Financial stability should be further bolstered by passing the Special Resolution Regime law and making further improvements to the AML/CFT framework.

“The authorities are implementing policies to foster potential growth and tackle supply side constraints that inhibit growth. Low productivity has been worsened by structural impediments including high crime, barriers to competition, poor educational outcomes, inadequate infrastructure, and barriers to trade. The authorities are addressing these issues by increasing investments in policing and security (which has led to a sustained decline in major crimes). Efforts are also underway to establish an unemployment insurance and strengthen employment services (including job counseling and job matching). The authorities continue to introduce measures to reduce pollution and incentivize the adoption of low carbon technologies. Finally, a comprehensive action plan is being developed to improve statistics.  

“The IMF team is grateful to the Jamaican authorities and other counterparts for their hospitality and very productive discussions.”

https://www.imf.org/en/News/Articles/2025/05/08/mcs-05072025-jamaica-staff-concluding-statement-of-the-2025-article-iv-mission

MIL OSI

Source: IMF – News in Russian

May 7, 2025

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Guyana.[1]

Guyana’s economic transformation is advancing strongly and broadening in scale. Rapidly expanding oil production, strong non-oil output, and large-scale public infrastructure investment supported the highest real GDP growth rate in the world, averaging 47 percent per year since 2022. Real oil GDP increased by nearly 58 percent in 2024, while real non-oil GDP expanded over 13 percent, reflecting a solid broad-based performance across sectors. Inflation reached 2.9 percent by end-2024, from 2 percent at end-2023, driven largely by higher food prices (affected by international food prices and earlier floods). The overall fiscal deficit widened from 5.1 percent of GDP (11.7 percent of non-oil GDP) in 2022 to 7.3 percent of GDP (21 percent of non-oil GDP) in 2024 reflecting a large increase in capital expenditure. Driven by higher oil exports, Guyana’s current account surplus more than doubled in 2024, reaching about 24½ percent of GDP. By end-2024, gross international reserves surpassed US$1 billion, while the Natural Resource Fund (NRF) accumulated over US$1.1 billion in 2024, reaching US$3.1 billion (over 12½ percent of GDP). 

The economic outlook remains highly favorable. The economy is expected to grow on average 14 percent per year over the next five years, driven by robust oil production and strong non-oil GDP growth. Positive spillovers from the oil sector and improvements in infrastructure, productivity, and resilience are expected to boost the real non-oil GDP growth to an average of 6¾ percent over the medium term, about 3 percentage points higher than the pre-oil decade average. While inflation is projected to edge up to around 4 percent in 2025, the overall fiscal deficit and the current account surplus are expected to narrow in 2025. Over the medium term, the continued expansion of oil production will further strengthen the external position, with substantial savings accumulation in the NRF.

Risks to the outlook are broadly balanced. On the upside, additional oil discoveries and productivity-enhancing investments, including to strengthen energy resilience would further bolster Guyana’s long-term economic prospects, while expanding construction activity would support higher short-term non-oil GDP growth. Downside risks stem from overheating pressures which, if not contained, would lead to higher inflation and a real exchange rate appreciation beyond the level consistent with a balanced expansion of the economy. Commodity price volatility in a highly uncertain global environment, including from trade policy and climate shocks could also adversely affect inflation and alter the macroeconomic outlook.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Guyana’s remarkable economic progress to attain high-income status, supported by rapidly expanding oil production and robust non-oil growth. They noted that Guyana’s economic outlook remains highly favorable with balanced risks, strong fundamentals, and a strong external position supported by substantial accumulation of oil revenue in the Natural Resource Fund. They commended the authorities’ commitment to balancing development needs with prudent policies to entrench macroeconomic and fiscal stability.

Directors concurred that the current fiscal stance is appropriate given development needs. They welcomed the authorities’ commitment to eliminate the overall fiscal deficit over the medium term and further narrow the non-oil primary deficit to levels consistent with ensuring intergenerational equity and preserving fiscal and macroeconomic sustainability. They highlighted the need for a comprehensive medium-term fiscal framework with an explicit anchor and an operational target, along with regular assessments of expenditure related to reaching development objectives. They positively noted the authorities’ continued efforts to strengthen public financial management as well as the low risk of debt distress given low public debt.

Directors considered the monetary policy stance as appropriately tight to help contain inflation, while noting the need for further tightening if inflation risks escalate. They saw merit in enhancing the monetary policy toolkit and deepening financial markets to help strengthen the effectiveness of monetary policy transmission. They emphasized the need for maintaining consistent policies to support the stabilized exchange rate arrangement, which remains appropriate, and saw merit in assessing whether transitioning to a more flexible exchange rate regime over the medium term could be beneficial as Guyana’s economy continues to transform.

Directors welcomed the authorities’ commitment to maintain financial stability and continue enhancing financial supervision, including monitoring sectoral lending exposures and related-party lending. They supported the authorities’ efforts to further strengthen risk monitoring, strengthen the macroprudential framework, broaden regulatory coverage, and enhance statistics on balance sheets and real estate prices.

Directors welcomed the authorities’ efforts to foster inclusive growth and economic diversification, improve the business environment, strengthen climate and energy resilience, and enhance labor market skills. They commended progress in strengthening governance, anti-corruption, official statistics, AML/CFT frameworks, fiscal transparency, and transparency in extractive industries, and supported the continued efforts to strengthen them in line with international standards.

It is expected that the next Article IV consultation with Guyana will be held on the standard 12-month cycle.

Table 1. Guyana: Selected Social and Economic Indicators
I.  Social Indicators
Population, 2023 (thousands)	814
Life expectancy at birth (years), 2022	66
Under-five mortality rate (per 1,000 live births), 2023	14
Human Development Index rank, 2022	95
II.  Economic Indicators
			Prel.		Proj.
	2023		2024		2025
	(Year-over-year percent change)
Production and Prices
Real GDP	33.8		43.6		10.3
Real non-oil GDP	12.3		13.1		12.9
Real oil GDP	46.8		57.7		9.5
Consumer prices (end of period)	2.0		2.9		4.2
	(Percent of non-oil GDP)
Central Government
Revenue	39.3		43.7		49.9
Grants	0.2		0.2		0.4
Expenditure	52.7		64.9		63.4
Current	25.1		28.9		30.5
Capital	27.7		36.0		32.9
Overall balance (after grants)	-13.3		-21.0		-13.2
Non-oil primary balance (after grants)	-26.2		-38.4		-37.5
	(Percent of GDP)
Revenue	17.0		15.3		18.6
Grants	0.1		0.1		0.1
Expenditure	22.8		22.6		23.7
Current	10.8		10.1		11.4
Capital	12.0		12.6		12.3
Overall balance (after grants)	-5.7		-7.3		-4.9
Total public sector gross debt	26.7		24.3		28.0
External	10.5		9.0		13.6
Domestic	16.2		15.2		14.4
Table 1. Guyana: Selected Social and Economic Indicators (Concluded)
			Prel.		Proj.
	2023		2024		2025
	(Year-over-year percent change)
Money and Credit
Broad money	27.6		25.3		17.7
Domestic credit of the banking system	24.1		39.7		4.9
External Sector
Current account balance (US$ million)	1,679.9		6,067.9		2,306.2
(Percent of GDP)	9.9		24.6		8.9
Gross official reserves (US$ million)	896.4		1,010.1		1,571.4
(Percent of GDP)	5.3		4.1		6.1
Crude oil production (million barrels)	142.3		225.4		246.0
Memorandum Items:
Nominal GDP (GY$ billion)	3,527.5		5,141.3		5,383.9
Nominal non-oil GDP (GY$ billion)	1,524.6		1,793.7		2,010.7
GDP per capita (US$)	21,307.2		30,962.3		32,326.3
Guyana dollar/U.S. dollar (period average)	208.5		208.5		…
Sources: Guyana’s authorities; UNDP Human Development Report; World Bank; and IMF staff calculations and projections.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

https://www.imf.org/en/News/Articles/2025/05/07/pr-25132-guyana-imf-executive-board-concludes-2025-article-iv-consultation

MIL OSI

Source: IMF – News in Russian

May 7, 2025

Washington, DC—May 7, 2025: The Executive Board of the International Monetary Fund approved the Cabo Verdean authorities’ request for an extension of the country’s Extended Credit Facility (ECF) Arrangement until September 15, 2025, and for an extension of the Resilience and Sustainability Facility (RSF) Arrangement until September 11, 2025, to allow additional time for completing the sixth ECF and third RSF reviews.

The three-year ECF arrangement was approved by the IMF’s Executive Board on June 15, 2022, with access of SDR 45.03 million (190 percent of quota) (see Press Release no 22/202). The 18-month RSF arrangement was approved on December 11, 2023, with access of SDR 23.7 million (100 percent of quota) (see Press Release no 23/436).

The Executive Board’s decision was taken on a lapse-of-time basis^[1].

[1] The Executive Board takes decisions under its lapse-of-time procedure when a proposal can be considered without convening formal discussions.

https://www.imf.org/en/News/Articles/2025/05/07/pr-25133-cabo-verde-imf-approves-extensions-of-ecf-arrangement-and-rsf-arrangement

MIL OSI

Source: IMF – News in Russian

(As prepared for delivery)

May 7, 2025

Good afternoon. It is a pleasure to be with you here at this critical juncture for the global economy. Since early April, the US effective tariff rate has increased to levels last seen over a hundred years ago, and the uncertainty surrounding trade policy and geopolitics has surged.

The economic effects of these developments are expected to be sizeable. Our World Economic Outlook ‘reference scenario’ projects that tariffs will reduce both global and emerging market (EM) output growth by roughly 0.5 percentage points relative to our forecast prior to the April tariffs. Countries imposing high tariffs, or those that are heavily dependent on trade with those countries, will be hit the hardest. But no country is likely to emerge unscathed: we have downgraded our forecasts for 127 countries that account for 86 percent of global GDP.

The impact on inflation is more varied. For countries facing higher tariffs on their exports, the tariffs are expected to mainly operate as a negative demand shock and exert mild downward pressure on inflation.  For countries imposing much higher tariffs, notably the United States, the tariffs will likely act more as an adverse supply shock, boosting inflation while lowering growth.

There are several reasons why economic outcomes could be much worse than our WEO reference scenario. As of now financial conditions have not tightened much, including in emerging markets, and many EM currencies have remained surprisingly resilient against the dollar. If, however, trade policy discussions do not yield lower tariffs soon, financial conditions could tighten abruptly, with major effects on capital flows to EMs.  Knightian uncertainty abounds as the global economic order transforms. How should central banks in emerging markets steer through this fog? I will address this question in today’s lecture.

 

EM central banks have developed much stronger monetary policy frameworks since the late 1990s, often in the context of adopting inflation targeting. They have benefited from major improvements in governance, with clear mandates focused on price stability.  Their operational independence has also increased substantially — both de jure and de facto — and they have strengthened their public accountability, as well as transparency. These advancements were invaluable in helping them respond quickly both to COVID and to the subsequent inflation surge, raising interest rates sharply in the latter case to contain inflation and keep inflation expectations anchored.

Even so, significant differences remain between EMs and AEs, especially regarding the strength of the exchange rate channel and the degree to which global factors influence monetary transmission. Several features deserve particular attention: 

Transmission of policy actions and shocks differs in EMs

First, monetary policy transmission appears noticeably weaker in EMs than in AEs, and dependent both on global financial conditions and on the reliance of EM banks on external financing. In advanced economies, an easing of policy rates quickly translates into lower market rates — which is what matters for the borrowing decisions of households and firms — and this boosts the economy.

By contrast, my research with Sebnem Kalemli-Özcan and Pierre De Leo (De Leo, Gopinath and Kalemli-Özcan, 2024) shows that when EM central banks loosen policy, the transmission to short-term market rates depends critically on what happens to global financial conditions. If global financial conditions tighten enough – as often follows a surprise tightening in US monetary policy – then domestic market rates may even rise when the EM central bank lowers policy rates.  The implicit rise in the risk spread facing borrowers clearly blunts the effectiveness of monetary policy and makes it harder for EMs to cushion the effects of shocks. This is particularly relevant at the current juncture where trade shocks could play out as negative demand shocks in many EMs, calling for looser monetary policy. At the same time, they could play out as negative supply shocks in the US and call for tighter US monetary policy.

The changing mix of EM external financing also raises new vulnerabilities. EMs have become more dependent on external financing from foreign nonbank financial institutions, including insurance companies and investment funds, with their share of external portfolio financing growing to about 40 percent. While nonbanks help diversify emerging market funding sources and reduce borrowing costs, these types of capital flows are also very sensitive to the global financial cycle.[1] At times of financial stress, investment funds—such as exchange traded funds and open-end mutual funds in particular—are more susceptible to investors withdrawing their money, which in turn causes investment funds to withdraw from the riskiest markets.  Consequently, the volume and speed of exit of capital flows have increased over time, as was evident at the start of Covid-19.

This sensitivity of EMs to global stress may also increase given that crypto assets are playing a larger role in cross-border financial intermediation and payments, often spurred by the desire to achieve cost-efficiencies, but also to circumvent capital flow restrictions in some cases.  In most EMs, crypto asset use doesn’t yet appear high enough to present imminent systemic risks.  Even so, crypto assets are growing rapidly in many EMs, and overall usage has become a noticeable share of GDP in some EMs with high inflation and lower macroeconomic stability. For example, Cerutti, Chen and Hengge (2024) find that several EMs in Latin America and Eastern Europe fall in the upper quartile of countries in terms of the magnitude of their bitcoin inflows as a share of GDP, with monthly inflows in the range of 0.1 to 0.8% of GDP. Focusing on a wider set of crypto assets, Cardozo, Fernández, Jiang and Rojas (2024) find that cross-border crypto outflows have reached as much as a quarter of gross portfolio outflows in Brazil.

Use of crypto requires a careful understanding of the risks.  Crypto may increase capital flow volatility and exacerbate financial stress, including by allowing investors to easily shift their deposits out of domestic banks into foreign exchange-denominated stablecoins.  If crypto flows grow large enough, such disintermediation from the banking system and associated capital outflows could cause financial conditions to tighten and the exchange rate to weaken, and potentially spur a significant economic downturn.

Weaker policy credibility complicates monetary policy trade-offs

A second difference between AEs and EMs is the relatively weaker credibility of EM monetary policy to deliver low inflation. While EMs have improved their frameworks substantially, inflation expectations still tend to be less well-anchored than in AEs. Consequently, there is a higher passthrough of cost shocks to inflation, as they feed through much more into inflation expectations as well as through other channels such as wage indexation.  Oil price shocks tend to impact core inflation more than twice as strongly in a sample of emerging market economies, relative to advanced ones.[2] This high passthrough makes dealing with external shocks particularly difficult for EM central banks, as second-round effects could be sizeable, including from ongoing shocks to trade policy that could disrupt supply chains and raise input costs.

Inflation expectations also tend to be more sensitive to fiscal policy and debt in EMs. This likely reflects increased risks of fiscal dominance and political interference in central bank decisions, which can undermine the public’s confidence in the central bank’s ability to fight inflation. A surprise increase in government debt tends to boost medium-term expected inflation in EMs significantly, while having little effect in advanced economies.[3]

 

Exchange rates have a much larger imprint on price and financial stability

A third critical distinction between EMs and AEs is that the exchange rate has a much larger imprint on price and financial stability in EMs.  While passthrough of exchange rate changes to inflation has declined considerably for many EMs, it remains significantly higher than in advanced economies. A 10 percent depreciation of EM currencies against the dollar causes EM price levels to rise by about 2 percent, several times larger than in advanced economies.[4]

The presence of foreign exchange mismatches increases the financial stability risks from exchange rate depreciation. While many EMs have reduced FX mismatches – or lowered the risk through the development of derivatives markets that allow for better hedging — reliance on dollar funding within the financial system remains an important source of fragility for some EMs. This weakens monetary transmission, as lowering interest rates causes the balance sheets of corporates with unhedged FX liabilities to deteriorate and financial conditions to tighten, which offsets some of the stimulus from easing. EMs that have shifted to relying more on local currency financing also can experience sharp increases in currency premia and local borrowing costs when foreign investors exit these shallow markets. This makes it harder for EMs to deal with an environment of bigger external shocks: even if a tariff abroad would look like a demand shock from the standpoint of an AE economy, the exchange rate depreciation it induces raises risk spreads and makes it harder for the EM central bank to cushion the impact on the economy. 

Steering through the fog: How should policy respond?

Having outlined some of the unique challenges emerging market central banks face in the current global context, I will next lay out some broad principles that can help steer through the fog. EMs clearly will differ in how they respond to the shocks and the uncertainty depending on their cyclical conditions and on structural features such as the extent of their exposure to trade and financial disruptions.

This said, and despite the fog, EM central banks should respond forcefully to upside inflation risks if they materialize to ensure that high inflation does not get embedded into inflation expectations. While I’ve noted that we see the current configuration of tariffs as likely to be slightly disinflationary for many EMs in our reference scenario, there is a significant risk that inflationary pressures could emerge — from supply chain disruptions and higher input cost pressures in a fragmenting world or from exchange rate depreciations. 

Given the high passthrough of both exchange rate changes and cost shocks to inflation in EMs, a major risk is large and persistent second round effects, especially if inflation has been running persistently above target and the fiscal position is weak. History has shown that once inflation becomes embedded in expectations—often through wage and price indexation mechanisms—it becomes significantly more difficult to reverse. If the risk materializes, timely and firm action is critical to keep inflation expectations anchored and reassure the public of the central bank’s unwavering commitment to sound monetary policy and price stability.

Foreign exchange intervention should be used prudently

Second, in a more turbulent external environment, foreign exchange intervention (FXI) can help address disorderly market conditions that undermine financial stability. The Fund’s Integrated Policy Framework is helpful in identifying conditions when it may be possible to improve tradeoffs facing central banks using FXI and other tools (IMF, 2023; Basu, Boz, Gopinath, Roch and Unsal, 2023).

Notably, central banks can reduce exchange rate pressures by selling FX during episodes of capital flight when FX markets are shallow, allowing central banks not to have to hike policy rates sharply. This can improve macroeconomic outcomes as well as lower financial stability risks.

However, it is important that FXI is not used to reduce exchange rate volatility per se, or to target a particular level of the exchange rate, as such misuse could easily weaken confidence in the central bank’s commitment to stabilizing inflation.  Moreover, given the finite level of reserves, the bar for FXI should be high to ensure that FX liquidity can be provided when it is really needed. As of now financial conditions have tightened in an orderly manner, which means that when it comes to FXI the advice is to keep the powder dry.

Build financial and fiscal resilience

Third, efforts to build financial resilience through strengthening prudential policies are also desirable. As I have emphasized, EM financial systems remain quite exposed to geopolitical shocks and face growing risks from heightened external finance from foreign nonbanks and potentially crypto. Prudential policies can help them build adequate buffers as well as reduce vulnerabilities arising from high leverage, volatile capital flows, and FX mismatches. On the crypto side, it will be important to develop comprehensive legal, regulatory and supervisory frameworks for crypto assets, including through cooperative global efforts given their cross-border nature (IMF, 2023b).  The authorities should also ensure that capital flow management measures, when appropriate, remain effective and not undermined by the use of crypto.  And EMs should continue to strengthen macroeconomic frameworks to reduce the risk of currency and asset substitution into crypto assets (often called “cryptoization”).

Fiscal policy also plays a critical role in helping ensure macroeconomic stability. Uncertainty shocks have much bigger effects on sovereign spreads when EM debt servicing costs are relatively high. Ensuring that tax and spending policies adjust to keep debt on a sustainable path helps provide buffers to respond to downturns and lowers financial stability risks.

Improve central bank communication, governance, and policy strategy

Lastly, there is a high premium on further strengthening policy frameworks to continue building resilience in a more shock-prone environment. 

Clarity of communication has become more critical than ever. Effective communication about the central bank’s reaction function –in qualitative terms – is likely to be useful in helping better anchor inflation expectations and thus improve tradeoffs.

Improved governance – including to strengthen central bank independence – can increase public confidence that the central bank will have latitude to achieve its objectives. Central banks will inevitably make mistakes—no forecast is perfect. But what must be clear is that any deviation from target is the result of uncertainty, not political interference.

EM central banks, as for their AE counterparts, must also adapt their policy strategies to focus more on the distribution of outcomes rather than the modal outlook, and to take more account of risk management considerations. Monetary policy must navigate a world shaped by a multiplicity of shocks—some persistent, some temporary, and some with offsetting effects on inflation where it is difficult to assess the net impact.

Accordingly, many central banks should continue to take steps to revise their frameworks to move away from excessive reliance on central forecasts. This can be facilitated by increasing use of scenario analysis in decision-making.

Conclusion

To conclude, EMs have made major strides in improving their monetary policy frameworks, and this has enabled several of them to respond effectively to unprecedented shocks like the pandemic. They are now being tested again as the global economic order is reset and Knightian uncertainty prevails. This uncertainty does not, however, imply gradualism in all matters. If inflation pressures rise, EM central banks will need to respond quickly using policy rates to prevent higher inflation from getting entrenched as they did during COVID. We must recognize that the road ahead may have many unforeseen turns, which calls for further strengthening financial and fiscal resilience and navigating with monetary policy clarity, credibility, and discipline.

References

Baba, C., and J. Lee. 2022. “Second-round effects of oil price shocks – implications for Europe’s inflation outlook”. IMF Working Paper no. 2022/173.

Basu, S.S., Boz, E., Gopinath, G., Roch, F., and F.D. Unsal. 2023. “Integrated monetary and financial policies for small open economies”. IMF Working Paper no. 2023/161.

Brandão-Marques, L., Casiraghi, M., Gelos, G., Harrison, O., and G. Kamber. 2024. “Is high debt constraining monetary policy? Evidence from inflation expectations”. Journal of International Money and Finance 149(C).

Brandão-Marques, L., Górnicka, L., and G. Kamber. 2023. “Exchange rate fluctuations in advanced and emerging economies: Same shocks, different outcomes”, in Shocks and Capital Flows, edited by Gaston Gelos and Ratna Sahay, IMF.

Cardozo, P., Fernández, A., Jiang, J., and F.D. Rojas. 2024. “On cross-border crypto flows: Measurement, drivers, and policy implications“. IMF Working Paper no. 2024/261.

Cerutti, E.M., Chen, J., and M. Hengge. 2024. “A primer on Bitcoin cross-border flows: Measurement and drivers“. IMF Working Paper no. 2024/85.

Chari, A. 2023. “Global risk, non-bank financial intermediation, and emerging market vulnerabilities”. Annual Review of Economics 15: 549-572.

De Leo, P., Gopinath, G., and S. Kalemli-Özcan. 2024. “Monetary policy and the short-rate disconnect in emerging economies”. NBER Working Paper no. 30458.

IMF. 2023. “Integrated Policy Framework – Principles for use of foreign exchange interventions”. IMF Policy Paper no. 2023/061.

IMF. 2023b. “Elements of effective policies for crypto assets”. IMF Policy Paper no. 2023/004.

https://www.imf.org/en/News/Articles/2025/05/07/sp050725-science-of-monetary-policy-in-emerging-markets-gita-gopinath

MIL OSI

Source: IMF – News in Russian

May 7, 2025

Lusaka, Zambia: Mr. Nigel Clarke, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement at the conclusion of his visit to Zambia from May 4-6:

“I would first like to thank H.E. President Hakainde Hichilema, Minister of Finance and National Planning Situmbeko Musokotwane, and Central Bank Governor Denny H. Kalyalya for their warm hospitality and constructive discussions on my first visit to Zambia as Deputy Managing Director of the IMF.

“Progress on Zambia’s economic reform program supported by the IMF’s Extended Credit Facility has been strong, despite repeated external shocks. Since the program was approved in August 2022 and augmented in 2024 (See Press Release 24/242), it has provided critical support—both financial and policy-based—and helped to anchor Zambia’s landmark debt restructuring under the G20 Common Framework and navigate last year’s severe drought.

“Zambia’s remarkable progress has centered on restoring macroeconomic stability, including fiscal and debt sustainability, and implementing reforms. Notable reforms include the removal of fuel subsidies, strengthened debt management, and the roll-out of a reformed agricultural input subsidy—the e-voucher system—which increased competition in input delivery, reduced costs, and supported job creation.

“These achievements have been particularly impressing given the challenging external and domestic environment. In my discussions with the authorities, I also welcomed their commitment to strengthen governance and anti-corruption policies.

“Going forward, the policy environment remains challenging. As in many sub-Saharan African economies, Zambia must navigate weaker global trade, elevated uncertainty, and declining external assistance. Continued reform momentum will be essential to build resilience, mobilize domestic revenues, and create fiscal space to support inclusive growth. Structural reforms to improve productivity and support private sector activity will help boost inclusive growth, delivering the much-needed jobs for Zambia’s vibrant youth.

“I am also grateful for the opportunity to engage with University of Zambia students and faculty, representatives of the private and banking sectors, and Zambia’s development partners. I appreciated the candid discussions on the impact of recent global and domestic economic developments on Zambia and exchanged views on how we can best partner with Zambia on its journey towards a more resilient and inclusive future.

“I leave Zambia optimistic about the country’s future—encouraged by the authorities’ determination to continue on their reform path, and reassured by the Zambian people’s resilience. The IMF remains a close partner in supporting the country’s journey to lift the living standards of the Zambian people.”

https://www.imf.org/en/News/Articles/2025/05/07/pr-25131-zambia-statement-by-imf-deputy-managing-director-nigel-clarke-after-his-visit

MIL OSI

Source: IMF – News in Russian

May 6, 2025

• Economic growth continues to be strong in the WAEMU. Inflation has fallen back to its target range, and recent improvements in regional external imbalances are supporting a strong recovery in reserves.
• The Council of Ministers has agreed to submit for approval by Heads of State a proposal by the WAEMU Commission for a revised Convergence Pact maintaining the previous fiscal deficit and public debt ceilings of 3 and 70 percent of GDP, respectively.
• Rapid adoption of this pact would signal a stronger commitment to debt sustainability and help guide sound fiscal policies. The WAEMU’s institutions should also continue to promote regional integration.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the annual discussions on common policies of member countries of the West African Economic and Monetary Union (WAEMU)[1]. The authorities have consented to the publication of the Staff Report prepared for this consultation.[2]

Economic growth continues to be strong in the WAEMU, with heterogeneity across countries, while inflation has fallen. Economic growth rose above 6 percent in 2024, near the average of the past decade, although gaps in per capita income among member countries have continued to widen due to significant variations in economic growth. After rising above target for much 2024, inflation has also fallen back within its target range since November 2024, due to easing regional food price inflation and an appropriately tight monetary policy. The banking system remains resilient, although it maintains large exposures to regional sovereigns.

Recent progress in reducing the WAEMU’s external imbalances, albeit with notable divergence among members, is supporting a strong recovery in reserves. After widening in 2021-2023, the WAEMU’s current account deficit narrowed significantly in 2024. The Central Bank of West African States’ (BCEAO) response to external reserves pressures has also been broadly appropriate, by tightening monetary policy via raising rates and containing the quantities of liquidity injected into the regional banking system. Reserves rebounded in late 2024 and early 2025, and are back above minimum adequate levels due mainly to windfall revenues from the annual cocoa harvest, high commodity prices, several IMF disbursements, and exports of new hydrocarbon resources in Niger and Senegal. The WAEMU’s external position is assessed to have been moderately weaker than fundamentals and desirable policy settings in 2024.

Public debt ratios have increased significantly and heterogeneously in recent years due to large fiscal deficits and stock-flow adjustments. Ongoing progress in union-wide fiscal consolidation is welcome, although it is proceeding at a slower pace than anticipated mainly because of large data revisions in Senegal. Public debt continued to increase in 2024 beyond the level projected during the previous discussions on common policies, with considerable variation across the WAEMU (and particularly high debt in Senegal). Higher debt issuances are leading to heavier reliance on financing on the regional market, which has limited absorptive capacity and relatively high costs, and could pose a risk to external reserves.

 

Executive Board Assessment[3]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed that the WAEMU is benefitting from strong growth, inflation within the target range, and progress in reducing fiscal and external imbalances, while also noting the significant divergence within the region. Highlighting that the region remains vulnerable to a wide range of shocks, Directors stressed the importance of prudent policies to ensure macroeconomic and financial stability and structural reforms to foster inclusive growth. They looked forward to the Fund’s continued support through tailored policy advice and financial and capacity development assistance.

Directors stressed the importance of a commitment to debt sustainability, grounded in progress towards fiscal consolidation, measures to contain debt‑creating stock‑flow adjustments, and close monitoring of regional financing capacity. In that context, they commended the proposed reintroduction of the WAEMU Convergence Pact with the previous fiscal deficit and debt ceilings and called for its rapid adoption with a well‑designed escape clause, a correction mechanism, and credible enforcement. Fiscal adjustment should be driven by revenue mobilization to protect priority spending. Directors also stressed the importance of transparent and accurate reporting of fiscal data and enhanced debt transparency.

Directors welcomed BCEAO’s tight monetary stance which helped bring inflation back to the target range and support reserves. Directors agreed that monetary policy should continue to be closely calibrated to external buffers and inflation developments, and that a cautious stance remains appropriate until there is a sustained recovery in reserve adequacy.

Directors welcomed the resilience of the financial system but noted that the sovereign‑bank nexus continues to pose risks to financial stability. They encouraged the introduction of macroprudential regulatory measures to help restrain sovereign exposures, and capital surcharges to manage concentration risk. Directors stressed the importance of closely monitoring bank soundness indicators, addressing the remaining FSAP recommendations to strengthen financial stability and deepening, and taking the necessary additional steps to facilitate the removal of WAEMU members currently on the FATF grey list.

Directors agreed that prosperity in the WAEMU will depend on progress on political cohesion, economic integration, and strengthening the regional institutional framework and infrastructure. A planned stabilization fund to support members impacted by idiosyncratic shocks could demonstrate regional solidarity, but contingent liability risks through leveraging should be avoided. Directors welcomed progress on the new fast payment system, which would promote efficiency, inclusion, and regional integration. Policies to diversify the economy and strengthen resilience would also be important.

The views expressed by Executive Directors today will form part of the Article IV consultations with individual member‑countries that take place until the next Board discussion of WAEMU common policies. It is expected that the next regional discussions with the WAEMU authorities will be held on the standard 12‑month cycle.

Table 1. WAEMU: Selected Economic and Social Indicators, 2021–29
Social Indicators
GDP				Poverty (2021, latest available)
Nominal GDP (2024, millions of US Dollars)	219,784			Headcount ratio at $1.90 a day (2011 PPP, percent of population)								23.1
GDP per capita (2024, US Dollars)	1,447			Undernourishment (percent of population)							12.5
Population characteristics				Inequality (2021, latest available)
Total (2023, millions)	145.3			Income share held by highest 10 percent of population								28.4
Urban population (2023, percent of total)	40.6			Income share held by lowest 20 percent of population								7.7
Life expectancy at birth (2022, years)	61.1			Gini index							35.4
Economic Indicators
	2021	2022		2023	2024		2025	2026	2027	2028	2029
				Act.	SM/24/90. 1	Est.	Projected
	(Annual Percentage Change)
National income and prices
GDP at constant prices 2	6.2	5.9		5.3	6.8	6.3	6.4	5.8	5.9	6.0	5.9
GDP per capita at constant prices	3.2	2.9		2.4	3.8	3.3	3.4	2.8	2.9	3.0	2.9
Consumer prices (average)	3.6	7.6		3.7	3.2	3.5	2.9	2.3	2.0	2.0	2.0
Terms of trade	-6.3	-12.3		7.9	4.2	12.4	9.3	3.6	-1.3	-1.0	-0.7
Nominal effective exchange rate	1.2	-2.3		6.3	3.5	…	…	…	…	…	…
Real effective exchange rate	1.5	-3.6		3.9	3.0	…	…	…	…	…	…
	(Percent of GDP)
National accounts
Gross national savings	20.4	18.8		18.8	22.4	20.8	21.7	23.1	23.2	23.4	23.8
Gross domestic investment	26.5	28.8		28.7	27.5	26.9	26.2	26.3	26.7	27.3	27.7
Of which: public investment	6.8	7.8		7.7	8.8	6.8	6.7	7.2	7.5	7.8	8.2

	(Annual changes in percent of beginning-of-period broad money)
Money and credit
Net foreign assets	1.7	-7.9		-7.2	0.5	6.1	2.7	2.1	3.2	3.2	2.2
Net domestic assets	16.9	20.7		10.0	12.6	3.4	9.9	10.3	9.9	9.7	10.2
Broad money	18.0	11.4		3.5	12.4	8.9	11.4	12.4	12.8	12.6	12.1
Credit to the economy	8.1	9.0		6.8	6.7	2.7	7.2	7.0	6.6	6.5	6.3
	(Percent of GDP, unless otherwise indicated)
Government financial operations
Government total revenue, excl. grants	16.1	15.8		16.5	17.3	16.6	17.3	17.7	18.2	18.5	18.8
Government expenditure	23.9	24.7		23.8	22.6	22.4	22.0	21.8	21.9	22.2	22.5
Overall fiscal balance, excl. grants	-7.8	-9.0		-7.3	-5.3	-5.8	-4.6	-4.1	-3.7	-3.7	-3.7
Overall fiscal balance, incl. grants	-6.3	-7.8		-6.3	-4.2	-5.2	-3.8	-3.3	-3.0	-3.0	-3.0
External sector
Exports of goods and services 3	20.0	19.6		17.7	21.4	18.8	21.3	21.8	21.4	20.9	20.7
Imports of goods and services 3	25.9	29.7		27.5	26.5	24.6	24.4	23.8	23.4	23.3	23.2
Current account, excl. grants	-6.6	-10.7		-10.2	-5.4	-6.5	-4.9	-3.5	-3.7	-4.1	-4.1
Current account, incl. grants	-5.9	-9.8		-9.5	-4.8	-6.1	-4.5	-3.3	-3.5	-3.9	-3.8
External public debt	36.3	37.0		38.9	36.1	39.9	37.8	36.6	35.5	33.8	32.6
Total public debt	58.5	61.5		64.0	59.6	65.0	63.4	61.9	60.4	58.8	57.5
Broad money	40.7	40.8		39.1	40.6	38.8	39.4	41.0	42.8	44.6	46.3

 

Memorandum items:
Nominal GDP (billions of CFA francs)	100,963	112,343		121,414	131,429	133,227	145,965	157,833	170,313	183,993	198,973
Nominal GDP per capita (US dollars)	1,308	1,259		1,356	1,436	1,446	1,508	1,588	1,663	1,744	1,831
CFA franc per US dollars, average	554.2	622.4		606.5	606.2	…	…	…	…	…	…
Gross international reserves
In months of next year’s imports (of goods and services)	5.0	4.1		3.5	3.5	4.6	4.7	4.8	4.9	5.1	5.2
In percent of current GDP	13.9	10.1		7.8	8.2	10.1	10.0	10.1	10.3	10.6	10.7
In percent of the BCEAO’s sight liabilities	79.7	63.8		56.9	58.1	66.9	67.1	66.5	66.0	66.2	66.0
In millions of US dollars	24,172	18,398		15,764	17,872	21,593	24,165	26,254	28,967	32,156	35,185
Sources:  IMF, African Department database; World Economic Outlook; World Bank World Development Indicators; IMF staff estimates and projections.
All projections presented were prepared in April 2025.
1 Shows data from the IMF Country Report 24/90 issued on March 1, 2024.
2 The acceleration in GDP growth in 2024 is due to the start of production of large hydrocarbon projects in Niger and Senegal.
3 Excluding intraregional trade.

https://www.imf.org/en/News/Articles/2025/05/06/pr25130-imf-executive-board-concludes-2025-discussions-common-policies-member-countries-waemu

MIL OSI

Source: IMF – News in Russian

May 6, 2025

• Growth in North Macedonia is anticipated to reach 3.3% in 2025, driven by domestic demand and public investment projects, although heightened external risks and uncertainties may weigh on this outlook.
• The National Bank has effectively managed recent challenges including bringing down inflation after the energy cost shock and is cautiously easing monetary policy. However, risks remain particularly linked to persistent core inflation driven by strong wage growth.
• The fiscal budget recorded a deficit of 4.4% of GDP, while public debt rose to 63% of GDP in 2024. Fiscal consolidation is essential to abide by fiscal rules and build policy buffers in an uncertain environment.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for North Macedonia[1] and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis[2]. The authorities have consented to the publication of the Staff Report prepared for this consultation.

Economic growth in North Macedonia is gaining momentum in an environment of increased uncertainty. Growth is expected to reach at 3.3 percent in 2025, driven by stronger domestic demand as public investment projects (including the Corridor 8/10d road project) intensify and consumption is supported by government transfers and real wage growth. However, weak external demand, influenced by structural shifts in the European automotive sector and global uncertainties, is expected to weigh on growth.

Inflation has been volatile, increasing towards the end of 2024, but has fallen recently, in line with energy and food prices. Core inflation has become the main driver and remains persistent, fueled by strong wage growth. The National Bank of the Republic of North Macedonia (NBRNM), which has effectively managed recent challenges including the energy cost shock, has begun easing monetary policy more cautiously and with a lag following the European Central Bank.

The pace of fiscal consolidation in 2024 was slower than anticipated, in the context of an election year. Spending increases, including on wages and a new pension law replaced indexation with an ad-hoc 20 percent increase of the monthly average pension, resulting in a budget deficit of 4.4 percent of GDP. Public debt continues its upward trend, reaching 63 percent of GDP by end-2024. Fiscal rules include a limit on the budget deficit of 3 percent of GDP and a limit on general government debt of 60 percent of GDP, requiring the government to commit to a 5-year corrective plan when these limits are breached.

Domestic risks are elevated and the external outlook more uncertain. Weak public investment, stalled productivity reforms, emigration, and slowing activity of key trade partners threaten growth in the medium-term. Meanwhile, high real wage growth without productivity gains and increased fiscal transfers could further fuel inflation and erode competitiveness. Trade policy shifts and shocks to FDI may suppress exports and tighten financial conditions.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Chair, issued the following statement:

Executive Board Assessment

In concluding the 2025 Article IV consultation with North Macedonia, Executive Directors endorsed staff’s appraisal, as follows:

The economy is expected to gain momentum, though risks are tilted to the downside. Growth is projected to reach 3.3 percent in 2025, driven by stronger domestic demand as public investment projects, including the Corridor 8/10d road project, intensify and consumption is supported by government transfers and real wage growth. However, inflation has accelerated with high food inflation despite administrative price controls and other interventions. Core inflation remains persistent fueled by strong wage growth. Domestic risks from weak public investment, emigration and stalled productivity reforms are elevated, while the external outlook has become more uncertain due to shocks to external demand from structural shifts in key partners and trade policy tensions. The external position in 2024 was assessed as stronger than the level implied by medium-term fundamentals and desirable policies.

A credible fiscal strategy is essential to rebuilding buffers, reducing debt and ensuring compliance with fiscal rules. This is key to maintaining market confidence, ensuring access to international capital, creating room for investment, and enhancing resilience against future shocks. The focus should be on:

• Controlling current spending: Further pension increases in September 2025 should be omitted and the authorities should return to a rule-based pension system in 2026—indexing only to inflation—to support consolidation while protecting pensioners’ purchasing power. Public wage increases should be limited to inflation in the near term. The authorities should strengthen oversight to ensure public wage increases are consistent with achieving the fiscal rules. Over time, unifying the fragmented wage negotiating system will help prevent unexpected budget pressures.
• Mobilizing revenues. Tax reforms should focus on reducing tax expenditures, limiting reduced rates and exemptions, improving tax compliance, and revamping property tax.

Structural fiscal reforms are needed to strengthen fiscal governance and improve spending efficiency. Key steps include implementing the Public Investment Management decree and manual, adopting the PPP law, and conducting spending reviews to optimize budget spending. Managing fiscal risks, especially from SOEs and major projects like the Corridor 8/10d road, is crucial. The state-owned electricity generator, ESM, requires investments in technology and efficiency improvements to lower production costs and expand production, while gradually reducing its role in the subsidized, regulated market. Risks to the budget remain if production expansion falls short of the ambitious goal. The operationalization of the Fiscal Council is a positive step and it is encouraged to strengthen its independent assessments.

Administrative price controls will not stem long-term food inflation and may create distortions and hinder competition in the sector. Food inflation remained elevated in 2025, despite frequent use of administrative price controls. Future use may delay price increases, quelling short-term inflation, but does not solve underlying structural factors and can lead to large price increases once measures are removed. Additionally, continued reactionary interventions create uncertainty that may deter potential entrants hurting competition. To counter inflation, the authorities should instead focus on tightening fiscal policy and maintaining a tight monetary stance.

Policy rates should remain on hold and liquidity measures should be tightened until inflation steadily declines. Given the recent acceleration in both headline and core inflation, the NBRNM should remain on hold until there is clear evidence of sustained disinflation, including in core. At the same time, liquidity conditions should be tightened using tools such as reserve requirements to absorb excess liquidity. The NBRNM must stay alert to inflationary risks from domestic factors, including wage and pension increases, as well as heightened external risks from trade uncertainties. If these risks materialize, the NBRNM should be prepared to tighten rates to prevent inflation from becoming entrenched.

Macro prudential settings may need to be tightened to slow credit growth. The implemented loan-to-value and debt service-to-income ratios help safeguard financial stability by reducing pressures in the real estate market and preventing higher levels of indebtedness. Staff support the NBRNM’s gradual tightening of the countercyclical capital buffer and additional capital requirements to ensure banks maintain adequate loss-absorbing and recapitalization capacity, in line with EU regulations. Should lending and real estate prices continue growing briskly, further tightening of macroprudential instruments may be warranted.

Preserving central bank autonomy is crucial for maintaining price stability, exchange rate stability, and financial stability. The recent amendments to the National Bank law, adopted without prior consultation with the NBRNM, reallocate a larger share of NBRNM profits to the budget and revert the profit retention mechanism to a static core capital number instead of being dynamic, based on monetary liabilities. These changes undermine the previously established risk-based profit retention, which was designed with IMF advice to strengthen the bank’s reserves, and risk weakening the financial and policy autonomy, and credibility of the NBRNM.

Structural reforms are needed to boost productivity, offset the drag from emigration, and advance in the EU accession process. Reducing informality through streamlined business registrations and expanded digital public services is a priority to improving the business environment and supporting productivity growth. Capital expenditures should be safeguarded in the budget and public investment management should be strengthened to prioritize high-impact projects. The ongoing road projects should be completed. Investing in education, incentivizing higher participation, particularly among women, better matching of skills, and simplifying work permit procedures for foreign workers would help address labor shortages. Expanding affordable childcare and gradually raising the retirement age of women would help to offset workforce losses from high emigration. Ad hoc adjustments to minimum wages should be avoided to contain inflation and preserve competitiveness. Public resource efficiency, accountability, and transparency could be improved through increasing digitalization, reassessing state aid schemes, and strengthening procurement systems and management of SOEs.

Governance reforms to improve predictability of legal and regulatory environment, functioning of the rule of law, and anti-corruption efforts are crucial. Improving judicial independence and impartiality would strengthen contract enforcement and help reduce informality. The Criminal Code should be aligned with international standards and resource adequacy in key anti-corruption institutions further enhanced. The predictability of the legal and regulatory environment could be improved by limiting the use of expedited procedures in Parliament, increasing stakeholder consultation, and consistently applying regulatory requirements. The upcoming new national anti-corruption strategy is an opportunity to accelerate reforms through stronger accountability and coordination.

Republic of North Macedonia: Selected Economic Indicators, 2020–30 (Year-on-year percentage change, unless otherwise indicated)

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030       Projections         Output         Real GDP -4.7 4.5 2.8 2.1 2.8 3.3 3.2 3.2 3.1 3.1 3.0 Domestic demand -5.3 5.9 5.8 -1.7 4.1 3.8 3.6 3.6 3.5 3.6 3.4 Exports -10.9 14.3 10.6 -0.6 -3.8 3.2 3.7 3.6 3.8 3.8 3.8 Imports -10.9 14.8 9.3 -2.1 -0.6 3.9 4.1 4.0 4.1 4.2 4.1 Contributions to growth 1/                     Domestic demand -7.2 8.1 4.1 0.5 5.0 4.7 4.5 4.5 4.4 4.5 4.3 Net exports 2.5 -3.6 -1.3 1.6 -2.2 -1.4 -1.3 -1.3 -1.3 -1.4 -1.3 Output gap (percent of potential GDP) -3.3 -1.8 -1.5 -1.5 -0.7 -0.4 -0.3 -0.1 0.0 0.0 0.0 Consumer prices                       Period average 1.2 3.2 14.2 9.4 3.5 3.4 2.2 2.0 2.0 2.0 2.0 End-period 2.3 4.9 18.7 3.6 4.3 2.3 2.0 2.0 2.0 2.0 2.0                       Central government operations (percent of GDP)                       Revenues 28.4 30.0 29.8 30.9 32.3 34.1 34.0 34.2 34.4 34.6 34.8 Expenditures 36.4 35.3 35.0 35.5 36.7 39.2 38.5 38.2 37.9 37.6 37.8 Of which: capital expenditures 2.4 3.2 3.5 4.8 3.0 4.9 4.9 5.0 5.0 5.0 5.2 Balance -8.0 -5.3 -5.2 -4.6 -4.4 -5.0 -4.5 -4.0 -3.5 -3.0 -3.0 Gross general government debt 2/ 50.8 52.7 50.4 50.8 54.8 52.9 54.5 55.4 56.1 56.2 56.2 Public and publicly guaranteed debt 2/ 3/ 59.4 61.3 58.4 58.7 63.0 61.2 62.7 63.5 64.2 64.3 64.2                       Savings and investment (percent of GDP)                       National saving 27.0 29.4 30.0 30.0 26.3 26.8 27.3 27.7 28.0 28.3 28.9 Public -5.6 -2.1 -1.7 0.2 -1.4 -0.1 0.4 1.0 1.6 2.1 2.3 Private 32.6 31.5 31.7 29.8 27.7 26.9 26.9 26.7 26.4 26.3 26.6 Foreign saving 2.9 2.8 6.1 -0.4 2.3 2.4 2.5 2.5 2.5 2.5 2.5 Gross investment 29.9 32.2 36.0 29.6 28.6 29.3 29.8 30.2 30.5 30.8 31.4                       Credit                       Private sector credit growth 4.9 8.0 9.3 5.3 10.3 9.2 8.7 8.1 7.0 6.8 6.6 Balance of payments Current account balance (percent of GDP) -2.9 -2.8 -6.1 0.4 -2.3 -2.4 -2.5 -2.5 -2.5 -2.5 -2.5 Foreign direct investment (percent of GDP) 1.4 3.3 4.9 3.3 7.1 4.7 4.0 4.0 4.0 4.0 4.0 External debt (percent of GDP) 78.7 80.9 81.5 77.9 79.9 76.7 76.8 76.6 75.6 75.1 74.7 Gross official reserves (millions of euros) 3,360 3,643 3,863 4,538 5,029 4,966 5,214 5,407 5,464 5,555 5,742 in percent of IMF ARA Metric 113 110 101 114 120 111 113 112 110 108 107 in percent of ST debt 102 109 82 100 97 93 101 101 111 110 113 in months of prospective imports 4.2 3.5 3.9 4.7 5.0 4.7 4.7 4.6 4.4 4.3 4.2                       Memorandum items:                       Nominal GDP (billions of denars) 669 729 816 898 949 1022 1082 1146 1208 1272 1343 Nominal GDP (millions of euros) 10,852 11,836 13,243 14,583 15,411 16,604 17,583 18,619 19,621 20,668 21,819                       Sources: NBRNM; SSO; MOF; World Bank; and IMF staff estimates and projections. National accounts are revised by SSO using ESA 2010. 1/ The inconsistency between real GDP growth and contributions to growth results from discrepancies in the official data on GDP and its components. 2/ The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local currency GDP. 3/ Includes general government and non-financial SOEs.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.  

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

https://www.imf.org/en/News/Articles/2025/05/06/pr-25129-republic-of-north-macedonia-imf-concludes-2025-article-iv-consultation

MIL OSI

Source: IMF – News in Russian

May 6, 2025

Washington, DC: An International Monetary Fund mission, led by Magnus Saxegaard and comprising Thomas Gade, Amit Kara, and Yurii Sholomytskyi, conducted discussions for the 2024 Article IV consultation with Iceland virtually during April 7-11, 2025, and in Reykjavik, Iceland, during April 28 to May 5, 2025. At the conclusion of the visit, the mission issued the following statement:

A successful tightening of macroeconomic policies has slowed the economy and reduced imbalances accumulated after the pandemic. The challenges now are to fully return inflation back to target while ensuring a soft landing for the economy; to build resilience by gradually increasing fiscal buffers; and to strengthen productivity and further diversify the economy to support medium-term growth and reduce Iceland’s vulnerability to shocks.

The economy slowed sharply in 2024, but growth is expected to pick up in 2025 and medium-term prospects remain favorable. Growth slowed to 0.5 percent in 2024 (from 5.6 percent in 2023) due largely to idiosyncratic factors (e.g., a disappointing fishing season and constraints on energy supply) that reduced exports, as well as subdued consumption growth. Growth is expected to rise to 1.8 percent in 2025 and 2.4 percent in 2026 supported by a recovery in exports, higher real wages, and continued monetary easing. The direct impact of escalating global trade tensions is projected to be limited given that most goods exports are destined for Europe; this projection assumes that the pharmaceutical sector, which is more reliant on the US market, remains exempt from tariffs. However, Iceland will be indirectly affected by lower growth in its trading partners. Inflation is projected to remain sticky due to elevated inflation expectations and still high wage growth, declining gradually to the Central Bank of Iceland’s (CBI’s) 2.5 percent inflation target in the second half of 2026. The medium-term growth outlook is positive, with the expansion of higher value-added export-oriented sectors expected to boost productivity growth, and migrant labor inflows facilitating a modest increase in employment.

Risks to growth are tilted to the downside while risks to inflation are broadly balanced. The impact of rising trade tensions could be larger than projected if US tariffs are extended to pharmaceuticals products, or if Iceland is affected by potential EU retaliation. Also, a reduction in the number of tourists travelling to and from the US could negatively impact tourism. Inflation could rise if trade tensions trigger supply chain disruptions or capital flight weakens the exchange rate. Conversely, capital inflows could put upward pressure on the exchange rate and weaken competitiveness. On the domestic side, attacks on physical or digital infrastructure could disrupt payment flows and thus economic activity and financial stability. A continuation of recent years’ dry weather could curtail energy supply and weaken exports. Second-round effects from higher wage growth could keep inflation elevated, while a premature loosening of monetary policy could further de-anchor inflation expectations. Upside risk include a reduction in household savings that would bolster consumption, and a faster-than-anticipated expansion of activity in pharmaceuticals and aquaculture.

Fiscal Policy: Building Buffers to Bolster Resilience

The authorities’ fiscal targets are suitably ambitious. The Medium-Term Fiscal Strategy (MTFS) projects a general government deficit this year of 1.3 percent of GDP, close to staff’s projection of 1.2 percent of GDP and down from 3.5 percent of GDP in 2024. The resulting 0.6 percentage point contractionary fiscal impulse is appropriate given still elevated inflation. The authorities’ medium-term fiscal targets, which entail turning the fiscal deficit into a surplus by 2028, are suitably ambitious considering that Iceland’s public indebtedness is higher than that of most Nordic countries despite the economy being more shock prone.

The consolidation measures in the MTFS will help the authorities achieve their fiscal targets. Staff welcomes that this year’s MTFS identifies all fiscal measures planned by the authorities to achieve their medium-term fiscal targets; this significantly increases the credibility of the consolidation. Measures appropriately include a combination of expenditure reductions (e.g., streamlining operations and merging of institutions) and revenue measures (e.g., expanding kilometer-based taxation to all vehicles and increasing natural resource rent taxation on tourism and fisheries). Staff projections that only include measures that have been presented to Parliament in a legislative proposal, indicate that about 0.5 percent of GDP in additional measures will be needed over the next five years to meet the authorities’ targets. The measures outlined in the MTFS would cover this gap, but additional fiscal effort could be necessary if spending increases more than anticipated or if the yield from revenue measures falls short of expectations (see below).

Increasing infrastructure spending while safeguarding fiscal sustainability would bolster Iceland’s growth prospects. The government’s intention to scale up public investment is welcome given infrastructure gaps in transport and energy. However, the MTFS projects a medium-term decline in government investment as a share of GDP compared to recent years. Staff recommends to, at a minimum, maintain the current level of government investment within the MTFS deficit targets. As noted in the MTFS, identifying opportunities for Iceland’s pension funds to scale up their financing of infrastructure in a manner consistent with their fiduciary duties could help complement these efforts, though care should be taken to contain any increase in fiscal risks. Partnering with multilateral investment banks or international infrastructure funds could provide useful expertise with private financing of infrastructure projects. Streamlining permitting and licensing procedures would help speed up infrastructure deployment.

Additional fiscal effort could be required if planned measures fall short of expectations, or to scale up government investment. In such a scenario, the authorities could consider: (i) increasing the preferential VAT rate and/or limiting the items that benefit from it; (ii) increasing housing taxation (see below); (iii) streamlining R&D incentives including by reassessing the 2020 increase in the ceiling on eligible business R&D expenditure (see below); and (iv) carrying out a comprehensive review of public expenditure to identify potential savings.

Activation of revised fiscal rules in 2026 is welcome; however, their credibility would be enhanced by strengthening the Fiscal Council.

• The revised fiscal framework—which broadly aligns with staff’s recommendations in the 2024 Article IV—includes a net expenditure growth rule instead of the previous budget balance rule. It preserves the 30 percent of GDP net debt ceiling though the speed at which this is to be achieved will be more flexible than in the past. The revised framework will allow the authorities to factor in the state of the economy in their consolidation plans and reduce procyclicality.
• The Fiscal Council, which will be responsible for monitoring compliance with the fiscal rules, should be tasked with evaluating the macroeconomic and fiscal projections underpinning the MTFS. The intention is also that the Council will be responsible for monitoring productivity developments and for making proposals for reforms. This would require a significant increase in the capacity and resources of the Fiscal Council.
• To bolster transparency and enable the Fiscal Council to monitor fiscal developments and compliance with the fiscal rules on an ongoing basis, the authorities should start publishing fiscal data corresponding to the coverage of the fiscal rules on a quarterly rather than annual basis as is currently the case, and ensure that these data are independently verifiable. Expanding the coverage of the budget and the fiscal rules to encompass the entirety of the central government would facilitate these efforts. This would also reduce incentives to shift spending and borrowing to parts of the government not covered by the fiscal rules.

Monetary Policy: Calibrating the Pace of Monetary Easing

As inflation declines toward the target, the policy rate should be reduced. The current monetary stance is appropriately tight given still elevated inflation and inflation expectations. Staff’s inflation forecast, which envisions reaching the 2.5 percent target in the second half of 2026, is in the IMF’s view consistent with a 250 basis points reduction in the policy rate over the next 4–5 quarters. This policy trajectory, which maintains a tight policy stance (but progressively less so) until inflation expectations become reanchored to the inflation target, would balance the trade-offs between bringing inflation sustainably to target and the risk to the economy from an overly restrictive policy stance. Persistent wage increases above productivity growth or a rise in imported inflation would warrant a more gradual easing of the monetary policy stance, while indications that inflation is likely to undershoot the target on a sustained basis would call for a more rapid reduction in the policy rate. The current elevated uncertainty suggests the pace of monetary easing should be guided more than usual by incoming data. As uncertainty declines the CBI should transition to a more forecast-based inflation targeting environment to increase predictability and reduce financial market volatility.

The CBI’s decision to commence regular purchases of foreign exchange is opportune given current favorable market conditions and will strengthen its ability to stabilize the foreign exchange market during times of stress. The purchase program, which will be revised as conditions warrant, will help offset a projected decline in reserve coverage over the next two years. Staff agree that, given the current uncertain external environment and the shock prone nature of the economy, it is prudent to maintain a level of reserves well above the lower end of the 100-150 percent of the Fund’s Reserve Adequacy (ARA) range. As noted in the 2024 Article IV consultation, the authorities should also explore options to gradually deepen the foreign currency derivatives market when conditions allow, to encourage greater participation of foreign investors in the domestic bond market and to facilitate hedging of foreign currency risk.

Financial Sector: Maintaining a Robust Financial System

The banking system remains resilient and systemic risks are contained, but pockets of vulnerabilities remain that require continued vigilance. Financial institutions are well capitalized and have ample liquidity buffers, while non-performing loans remain low compared to their pre-pandemic average. The financial cycle has decelerated but remains somewhat elevated, while the CBI’s domestic systemic risk indicator has increased slightly although it is below its long-term average. These indicators suggest risks are primarily concentrated in the housing market. An abrupt fall in house prices combined with higher-for-longer interest rates and an economic slowdown could result in a deterioration in asset quality. Risks are partially mitigated by conservative loan-to-value ratios and the strong equity position of most borrowers. Corporate credit risk has increased modestly, including in the hospitality sector, and could rise further if rising trading tensions trigger a decline in tourist arrivals. Meanwhile, cybersecurity threats are an increasing concern, and staff welcomes the authorities’ efforts to enhance operational security and enhance the resilience of the domestic payment system.

The current macroprudential stance is broadly appropriate, though there may be scope for some easing if financial conditions improve as anticipated. Overall capital requirements on Icelandic banks are relatively high compared to other European countries, bolstering banks’ resilience in a shock prone economy. While these requirements are broadly appropriate given still elevated risks in the housing market, there may be scope for some easing if systemic risks recede. It would be prudent to defer such a decision until the impact of the Capital Requirements Regulation (CRR) III—expected to take effect by mid-2025—is clear. Any easing of the macroprudential stance should take care to safeguard the availability of releasable capital under the countercyclical capital buffer (CCyB). Borrower-based measures (BBMs) have contributed to contain household credit risk and should remain on hold for now. The government’s plans to reduce the prevalence of CPI-indexed mortgage loans should be carefully timed given the beneficial impact indexation has had on borrower resilience and financial stability.

Sustaining the momentum in implementing Financial Sector Assessment Program (FSAP) recommendations will require continued efforts. Staff welcomes the significant progress achieved in implementing the recommendations from the 2023 FSAP. Since the 2024 Article IV, progress has been made on operationalizing an Emergency Liquidity Assistance (ELA) framework, while efforts are ongoing with technical assistance from the Fund to enhance AML/CFT supervision of banks. Steps have been taken to strengthen the supervision of pension funds, but more progress is needed on legislative changes to enhance pension fund governance, internal risk controls, and risk management. Focusing on incremental changes rather than comprehensive reforms may facilitate progress moving forward. Further steps are also needed to safeguard the independence and effectiveness of the CBI’s supervisory activities, including through a streamlined and independent budgetary process for financial supervision and improved legal protection for supervisors. Lastly, efforts should continue to strengthen the CBI’s and the financial sector’s operational risk management capacity.

Structural Policies to Boost Productivity and Diversify the Economy

Investments in physical and human capital, along with continued efforts to promote innovation and improve allocative efficiency are needed to sustain productivity growth.

• While the level of labor productivity is high, productivity growth has slowed since the global financial crisis due to lower total factor productivity (TFP) growth and decreasing capital intensity. Staff analysis suggests this is largely the result of a lower share of jobs in high productivity sectors (likely due to the financial sector shrinking to more sustainable levels and the expansion of the tourism sector) rather than a decline in within-sector productivity growth. Meanwhile, the share of fast-growing firms that can drive economy-wide productivity gains is below the EU average.
• The authorities’ ambition to increase productivity growth is welcome. To achieve this they should: (i) focus on improving infrastructure to facilitate firms’ access to domestic and international markets; (ii) continue their efforts to promote innovation and the creation of more high-growth businesses; (iii) work with stakeholders in the labor market to strengthen incentives for pursuing higher education in fields where there is a shortage of skills; and (iv) streamline professional licensing requirements for foreign nationals.

Incentives to promote innovation and diversification of the economy are bearing fruit, but there is scope to improve the efficiency of R&D support schemes. Generous tax incentives have made Iceland one of the most attractive jurisdictions in the OECD for R&D investment and contributed to the emergence of several fast-growing innovative firms. However, the sharp increase in public R&D spending has raised concerns about budgetary costs and efficiency. Plans to revise the R&D legislation provide an opportunity to clarify eligibility criteria and thus increase the predictability of the scheme. Also, as noted previously, there may be merit in reassessing the 2020 increase in the ceilings on eligible business R&D expenditures given that it primarily benefits medium and large firms where research suggests R&D support has less impact. Allowing businesses to deduct R&D expenses from payroll taxes could bolster the impact of the scheme given evidence that payroll tax offsets have a greater impact on firms’ R&D tax expenditure. This would also reduce administrative costs by eliminating the need for refunds to loss-making companies.

Integration of Artificial Intelligence (AI) could bolster productivity growth. Iceland’s strong digital infrastructure, relatively high levels of human capital, and robust legal framework suggest that it is well placed to benefit from AI. Staff analysis indicates that the proportion of jobs that are well positioned to take advantage of productivity gains from AI is higher than in other advanced economies. Conversely, the share of jobs at risk of displacement from AI is smaller, though still significant. To mitigate potential disruptions to the labor market the authorities should provide opportunities for re-skilling and scale up active labor market policies to facilitate the movement of workers between sectors and provide support to the most vulnerable.

Further efforts are needed to develop a housing strategy that meets the needs of Iceland’s growing population. The government’s plans to tighten control over short-term rentals and increase the supply of housing could help improve housing affordability. Targeted homeowner assistance programs can play a complementary role, though such programs would need to be designed in a way that minimizes fiscal risks and risks to macroeconomic and financial stability. Housing taxation can also play a supportive role in reducing housing market imbalances. For instance, increasing capital gains taxation on secondary homes and investment properties and raising the tax rate on vacant lots in urban areas could not only raise revenue but also play a supportive role in curbing speculative demand and incentivizing supply.

The IMF team would like to thank the authorities and other interlocutors for their generous hospitality and constructive dialogue.

https://www.imf.org/en/News/Articles/2025/05/05/mcs-iceland-staff-concluding-statement-of-the-2025-article-iv-mission

MIL OSI