The IMF urges Spain to accelerate reforms and diversify exports to address trade tensions.

The International Monetary Fund (IMF) believes that, given the risks posed by increased trade restrictions, Spain should "accelerate internal structural reforms" to boost productivity and facilitate the diversification of export products and destinations.

In its Foreign Sector Report , the institution considers the country's external position in 2024 to be "stronger" than the level implied by medium-term fundamentals and desirable policies, adding that, while the significant negative net international investment position (NIIP) continued to narrow, it would be necessary to maintain relatively high current account surpluses in the coming years to further strengthen it.

In this regard, although the current account balance is expected to exceed the norm in the short term, the IMF projects that this positive gap will narrow in the medium term as tourist flows normalize, non-energy imports regain strength due to stronger domestic demand, and private savings slowly decline toward pre-Covid levels.

Thus, while the projected path of Spain's current account surplus will continue to allow for a reduction in the negative investment position, the Fund emphasizes that policies that deviate from this path, including those that weaken competitiveness, must be avoided.

The Washington -based institution also believes a similar path can be achieved with a better policy mix that maintains a balance between savings and investment, allowing for better support for growth and fiscal sustainability, noting that sustained fiscal consolidation efforts "would rebuild fiscal space and increase aggregate savings."

Despite its projected improvement, the Fund warns that a "still very negative" net international investment position entails external vulnerabilities, such as those arising from large gross financing needs and potential adverse effects on valuations due to volatile global financial conditions and policy responses.

However, the IMF highlights as relief factors the relatively long maturities for outstanding sovereign debt, averaging nearly eight years, and the limited proportion of debt denominated in foreign currency (11.4% of total external debt).

For its part, to address the downside risks posed by increased trade restrictions, the IMF suggests that Spain should accelerate domestic structural reforms that boost productivity and facilitate the diversification of export products and destinations.

These reforms include greater efforts to complete the Spanish single market, as well as investing in innovation, improving educational outcomes, and reducing energy dependence.

Progress on these fronts should be complemented by policies that facilitate the reallocation of workers across sectors, while providing an adequate social safety net, the IMF adds.

On the other hand, the institution argues that any fiscal support for companies and sectors most affected by trade restrictions "should be temporary and targeted," addressing externalities or market failures that could impede effective market solutions.

Furthermore, it believes that "a similar approach" should be applied to industrial policies, which should also be coordinated at the EU level and avoid favoring domestic producers over imports in order to minimize trade and investment distortions.