On March 5, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Belgium.
The strong financial position of the non-financial private sector and economic integration with Germany dampened the impact of the crisis, but recovery from the stagnation of 2012–13 has been slow, as in much of Europe. As private consumption and investment should respond positively to improved external conditions, real GDP is expected to grow by just over 1 percent and the negative impulse from fiscal consolidation is expected to be limited in 2014. However, projected economic growth would still be insufficient to reduce the unemployment rate. The reduction of value-added tax on energy should keep headline inflation at around 1 percent, below core inflation.
Notwithstanding its resilience, the economy has lost competitiveness since 2005, due to lower productivity and higher wage growth than in peer countries. In response, the government has taken measures to close the wage gap relative to the three main trade partners (Germany, France, and the Netherlands). In order to make the economy more productive and adaptable, the government has also taken steps to reform unemployment, pension, and pre-pensions benefits. But there is scope for further and deeper reforms of labor and product markets.
Fiscal consolidation continues at a steady pace. In 2012–13, the structural fiscal deficit was reduced by 1.1 percent of GDP and the headline deficit is expected to come down to 2.7 percent of GDP in 2013. The government’s sale of its 25 percent share in BNPP Fortis helped keep the debt ratio just below the 100 percent in 2013. Additional structural adjustment of 3.3 percent of GDP is needed to meet the government’s medium-term fiscal objective. A burden sharing agreement clarifies the fiscal adjustment responsibilities of the federal and regional governments toward that objective.
Banks have largely completed the process of balance sheet repair but face the challenge of low profitability and adaptation to regulatory changes. Reductions in cross-border exposures and sales of foreign subsidiaries have reduced the balance sheet of banks from 410 percent of GDP in 2008 to 268 percent in mid–2013. Improved liquidity and solvency positions have strengthened banks’ capacity to absorb shocks, but profitability has been weak due to low interest margins and high operating costs. The supervisory and regulatory frameworks are being strengthened, notably with a new draft banking law which restrains trading activities and improves the recovery and resolution framework, including by increasing buffers for depositor protection.
Executive Directors commended the efforts undertaken by the authorities to restore financial stability, consolidate public finances, increase labor market participation, and strengthen cost competitiveness. Notwithstanding these efforts, Directors noted that significant challenges remain, and called for a comprehensive strategy to overcome remaining impediments to sustainable growth, risks to debt sustainability, persistently high unemployment rates, and the deterioration in external competitiveness. They recommended measures to put the public finances on a sustainable footing, including by making social spending more efficient, inclusive of pensions; reducing labor and product market rigidities; and safeguarding financial stability.
Directors suggested that a steady pace of structural fiscal adjustment would help to create fiscal space to address the cost of an ageing population and undertake productivity enhancing investment, while placing the debt ratio on a sustainable path. They recommended rebalancing consolidation toward expenditure measures, with emphasis on reducing current spending and safeguarding critical investment spending, and away from taxation of labor income toward indirect and environmental taxes. Directors welcomed the adoption of new fiscal rules, consistent with the European Union fiscal compact, which entail appropriate burden sharing between national and sub-national governments.
Directors commended the recent improvement in financial sector stability and resilience through the strengthening in the supervisory and regulatory framework of the banking system, in line with Financial Sector Assessment Program (FSAP) recommendations. They welcomed the tightening of capital requirements on mortgage lending, which will help dampen upward pressure on real estate prices, and the considerable efforts undertaken to repair and strengthen bank balance sheets. In light of the current low-profit environment, Directors called for regular monitoring of banks’ business models and asset portfolios, with a view to ensuring that capital positions are strengthened in line with Basel III requirements. They looked forward to prompt parliamentary approval of the draft banking law, designed to curtail risky trading activity and improve the recovery and resolution framework.
Directors underscored the critical role of structural reforms for restoring external competitiveness and increasing potential growth. They advised that wage setting should better reflect productivity developments and domestic and regional labor market conditions.
Directors encouraged continued reforms to promote labor mobility and adaptability, raise employment rates, eliminate barriers to competition, further reduce utility costs, and lighten the heavy burden of regulation.