Public Information Notice: IMF Concludes Article IV Consultation with Sweden

September 8, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On August 22, 2000, the Executive Board concluded the Article IV consultation with Sweden.1


Sweden is currently enjoying a robust economic recovery with low inflation. Real GDP growth accelerated to 3.8 percent in 1999, as a result of a strengthening of private consumption and a firming in net exports. Since early 1999, employment has increased by over 4 percent with the open unemployment rate (which excludes labor market programs) falling to 4.1 percent in May 2000. Consumer price inflation has been exceptionally low in Sweden since early 1996, invariably below the EU average and within the lower part of the Riksbank’s inflation target of 2 percent plus or minus 1 percent. The core rate of inflation (which excludes the effects of interest rates, indirect taxes, and petroleum prices) has fallen in recent months to 0.4 percent year-on-year in May.

While output growth is strong, the economy is not particularly advanced in the cycle. The recent period of growth still reflects the rebound from the severe recession of the early 1990s when output fell by 5 percent. Moreover, one of the main drivers of economic growth is the high-tech sector, which has contributed about ½ percentage point to output growth over the past five years. This sector is not an intensive user of labor resources; growth in labor productivity has contributed most of the output increase of this sector over this period, averaging over 30 percent per annum. Thus some economic slack remains. In particular, while the ratio of employment to the working age population (aged between 16 and 64) has increased over the past few years it is still 10 percentage points below its previous cyclical peak. Moreover, although the open unemployment rate is low, a broader measure of those available for work including those on labor market programs and education initiatives totals over 8 percent of the labor force. Unfilled vacancies are only about half of their previous cyclical peak and labor shortages are only visible in specific areas such as high-tech engineers and construction workers in the main urban centers. Wage pressures are largely absent.

In 2000 and 2001, the rate of economic growth is expected to remain firm with subdued inflationary pressures. The staff project that the economy will grow by about 4½ percent this year, and 3½ percent in 2001, with contributions from all demand components (Table 1). Employment growth should sustain its recent momentum, with the open unemployment rate dropping below 4 percent. The core inflation rate should rise only gradually to 1½ percent in 2001 with real wages remaining at or below productivity growth.

Executive Board Assessment

Executive Directors agreed with the broad thrust of the staff appraisal, arguing that sound macroeconomic management had made significant contributions to the rebound in the Swedish economy from the deep recession of the early 1990s. Public finances were strong, inflation was low and the unemployment rate was on a declining trend. However, sustaining the expansion would require additional structural reforms—in tax policy and in the wage formation and unemployment insurance systems—to help expand the supply side of the economy.

On fiscal policy, Directors urged the authorities to stick to their nominal expenditure ceilings and resist using the existing budgetary room for increased spending especially since the tax burden in Sweden was the highest in the OECD area. The authorities should even go further and stay below the expenditure target in the event of savings in unemployment benefits during the current cyclical upswing. Overruns in sickness and disability benefits were a concern and needed to be analyzed; the authorities should ensure that these overruns were short lived and covered by savings elsewhere in the budgetary envelope.

Provided that the expenditure ceilings were respected, Directors felt that there was considerable room for lowering the tax burden over the next few years as the underlying fiscal position was already in very substantial surplus. To err on the side of caution, tax cuts should be spread evenly over the medium-term and measures planned for the period beyond 2001 should be reviewed on the basis of economic and fiscal developments in 2001. The tax cuts should encompass both labor and capital incomes and could include maintaining the government’s current strategy of offsetting employee pension fees through income tax credits, lowering state income tax rates and capital tax rates, and raising the wealth tax threshold.

Directors considered that such a fiscal policy should be consistent with the need to avoid overheating. In particular, Sweden was not yet particularly advanced in the cycle, the tax cuts would coincide with a corresponding decline in cyclically adjusted expenditures and automatic stabilizers were stronger in Sweden than in other countries. The type of tax cuts envisaged would also expand the supply of resources in the economy because of their incentive effects. However, there would also be a need for supportive monetary and structural policies.

Directors noted that through its inflation targeting framework, the Riksbank had successfully managed to control inflation in recent years without raising interest rates too aggressively early in the business cycle. A less accommodative stance would likely be required by Fall 2000. However, as long as wage developments were moderate in the new wage round, a gradual return to a cyclically neutral level of interest rates in the first half of 2001 would probably be sufficient to keep inflation prospects in line with the inflation target over a 2 year horizon.

On structural issues, while changes were becoming evident, more needed to be done to prevent the current upswing from ending prematurely. Directors acknowledged that the wage formation process was placing increased emphasis on mediation procedures and differentiation based on effort, but pressed the authorities to remain vigilant to avoid returning to the wage inflation of the 1970s and 1980s. Wage differentiation needed to become more widespread on sectoral and skill levels while maintaining an aggregate ceiling for the wage bill.

Directors noted that the authorities were considering a reform of the unemployment insurance system with the laudable aim of tightening the relationship between the the benefit level and the intensity of job search. However, the current system was already fairly strict; the problem with the system was that the rules were not being implemented properly, associated with the difficulty in assessing whether an individual is actively searching. Directors were therefore supportive of the staff’s suggestion to introduce a generous initial level of unemployment benefit that would then decline with the duration of unemployment. Directors commended the authorities for their pension reform, but recommended raising the current statutory retirement age to fully utilize the enhanced retirement age options embodied in the new reform.

Sweden: Selected Economic Indicators

  1997 1998 1999 2000 1/ 2001 1/

Real economy (change in percent)          
Real GDP 2.0 3.0 3.8 4.4 3.4
Domestic demand 0.9 3.8 3.6 3.6 3.5
CPI 0.5 -0.1 0.4 1.4 1.8
Total unemployment rate (in percent) 8.0 6.5 5.6 4.6 4.0
Of which: Labor market programs 4.3 3.9 3.1 2.9 2.6
Gross national saving 2/ 18.6 19.6 19.5 19.8 20.2
Gross national investment 2/ 15.0 15.8 16.6 16.8 17.3
Public finance (in percent of GDP)          
General government financial balance -1.7 1.9 1.9 3.4 4.1
General government debt 75.0 72.4 65.5 56.7 52.4
Money and credit (end-year, percent change)          
M0 3.0 5.1 12.0 7.3 3/ ...
M3 1.3 2.1 9.9 11.2 3/ ...
Interest rates (year average)          
Three-month interbank rate 4.4 4.4 3.1 4.0 3/ ...
Ten-year government bond yield 6.7 5.0 5.0 5.1 4/ ...
Balance of payments (in percent of GDP)          
Trade balance 7.3 7.0 6.7 7.1 6.9
Current account 3.2 3.0 2.7 2.6 2.5
Reserves (gold valued at SDR 35 per ounce 8.2 10.2 11.2 11.4 3/ ...
end of period, in billions of SDRs)          
Exchange rates          
Exchange rate regime Floating exchange rate
Present rate (July 21, 2000) US$1 = SKr 8.946
Nominal effective rate (1995=100) 105.5 103.2 101.8 103.6 4/ ...
Real effective rate (1995=100) 5/ 104.8 101.7 10.2 96.7 6/ ...

Sources: IMF, International Finance Statistics; the Riksbank; and IMF staff projections.

1/ Staff projections, except where noted.
2/ In percent of GDP.
3/ May 2000.
4/ June 2000.
5/ Based on relative normalized unit labor costs in manufacturing.
6/ March 2000.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


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