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IMF raises 2024 GDP growth forecast for Spain to 1.9% from 1.5%

People walk past a grocery shop in central Barcelona, Spain

By Belén Carreño

MADRID (Reuters) -The International Monetary Fund raised its forecast for Spain's economic growth this year to 1.9% from 1.5% on Friday, citing the country's "strong resilience" amid a general weakening in the euro zone.

The IMF said the higher growth should be driven by increased domestic consumption, the effects of the European Union's post-pandemic recovery plan and an expected slowdown in inflation coupled with a relaxation of interest rates.

However, it added that private investment remained weak and consumption had only recently managed to recover the levels of late 2019, "indicating subdued domestic demand overall since the pandemic".

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The IMF also reiterated its prior projection of 2.1% growth of the country's gross domestic product in 2025.

Last year, Spain's GDP expanded by 2.5%.

In March, the Bank of Spain also upped its 2024 GDP growth outlook to 1.9% from 1.6%.

Meanwhile, the Spanish government has said it sees GDP growing 2% this year.

The IMF's mission chief to Spain, Romain Duval, told reporters that risks were now more balanced than months ago, but added that political fragmentation could undermine the government's reform agenda.

Duval said the lack of affordable housing was one of the main structural problems that Spain needed to address. He recommended that Madrid scupper the rent controls imposed by the Catalonia region, which he described as "counterproductive", and instead boost housing supply rather than distort demand.

WINDFALL TAX REDESIGN

As part of its recommendations on the banking sector, the IMF said there was room to redesign the Spanish windfall tax should it become a permanent levy.

In December, the Spanish government extended the levy by another year to 2024 and wants it to become a permanent.

The tax - challenged in courts by lenders that have complained that it is unfair, distorts competition and hurts the economy and lending - carries a charge of 4.8% on their net interest income and net commissions.

"Should the authorities decide to turn the temporary levies on banks and energy companies into permanent taxes, their bases should be aligned to a clearer definition of exceptional profits to minimize their distortionary effects," the IMF said.

The head of Spain's banking association AEB, Alejandra Kindelan, said separately on Friday a permanent tax would make Spain an outlier in Europe, representing a competitive disadvantage.

The IMF proposed a tax credit proportional to the size of a positive neutral counter-cyclical buffer to reduce the liability for banks from higher levies.

Italian lenders have chosen to forego a one-off levy the government imposed on the sector last August, making use of an option allowing banks to boost cash reserves instead of paying the levy.

(Reporting by Belén Carreño and Jesús Aguado; Writing by David Latona; Editing by Andrei Khalip and David Evans)