The International Monetary Fund (IMF) has issued a stern warning to Italy, highlighting the need for swift and decisive fiscal reforms to address its escalating public debt.
In its concluding statement following the 2024 Article IV consultation mission to Italy, the IMF noted that Italy's economy has demonstrated resilience by recovering from the dual impacts of the pandemic and rising energy prices. This recovery has been largely driven by a resurgence in tourism and substantial policy support.
The IMF mission, led by Rachel van Elkan, also stressed the urgent need for Italy to implement faster-than-planned fiscal adjustments to ensure long-term debt sustainability and bolster economic resilience.
Washing noted that Italy's economy has shown resilience, rebounding from the impacts of the Covid-19 pandemic and subsequent energy price shocks, thanks to the positive impact of a resurgence in tourism and substantial policy support.
Despite this recovery, Italy's gross domestic product growth has recently slowed to 0.9% in 2023 and 0.6% year-on-year in the first quarter of 2024, with a forecast of a 0.7% growth for 2025.
A bleak fiscal outlook
The IMF highlighted that expansionary fiscal policies have kept the deficit and public debt at high levels, increasing Italy's risk premium and impeding private sector investment.
The IMF forecasts that Italy's public debt will reach approximately 140% of GDP in 2024, and it is expected to continue rising to 145% of GDP by the end of the forecasted period.
"In recent years, Italy has recorded a relatively strong recovery which, together with the inflation surprise, has temporarily improved the fiscal outlook. But going forward, the dynamics are not favourable, with economic growth projected to slow down and then recover, but remaining lacklustre, at the same time that the effective cost of financing debt will go up," said Vitor Gaspar, Director of the Fiscal Affairs Department at the IMF.
Gaspar noted that Italy faces spending pressures similar to other countries, driven by an aging population and the need for priority investments in green technology and digital and information technology. He emphasised the importance of a credible and frontloaded fiscal adjustment to place public debt on a sustainable declining path.
Need for faster fiscal adjustment
The Fund urged that "faster-than-planned fiscal adjustment is warranted" to reduce the debt ratio with high confidence and mitigate financing risks.
Risks of inaction
The IMF warned that without such adjustments, Italy's limited fiscal space might be insufficient to handle potential supply shocks or volatility in commodity prices arising from regional conflicts or other global disruptions. This could lead to a repricing of Italian government bonds, exacerbating public debt dynamics and reviving concerns about sovereign-bank-corporate linkages.
In conclusion, the IMF's message to Italy is clear: immediate and decisive action is needed to address the country's fiscal vulnerabilities. Implementing the recommended fiscal adjustments and structural reforms will be crucial for reducing the public debt burden and ensuring sustainable economic growth in the long term.
