Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Switzerland

June 4, 2007

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with Switzerland is also available.

Public Information Notice (PIN) No. 07/63
June 4, 2007

On June 1, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1


The economy is performing well. The expansion moved into its fourth year with above average growth and employment, and few signs of inflation. This favorable outcome can be traced to a vibrant external environment, including in global financial markets, strong macropolicies and key structural reforms in retailing and labor markets.

The economy gathered speed in 2004-2005 and growth is estimated to have accelerated to 2.7 percent in 2006—thereby closing the output gap. Growth became broadly based in 2006, with a pickup in consumption and investment and a marked increase in exports linked to the EU recovery and weakness in the franc. With business and consumer confidence indicators remaining high, economic growth is expected to remain strong but at a somewhat slower pace—in line with developments in main trading partners—of about 2 percent. While the outlook is favorable, the authorities need to remain vigilant to global economic and political developments that could affect the economy, including through oil prices, and to (mostly external) risks that could impact on Switzerland's large financial sector.

Inflation was 1 percent in 2006 and is expected to be slightly lower in 2007. The opening of the labor market to EU workers, reduced exchange rate pass through, increased productivity, lower oil prices, and increased domestic competition and policy interest rates are containing inflation. Although unemployment has fallen to 3 percent, wage growth pressures are expected to remain contained. As a result, competitiveness has improved and the current account surplus has now reached over 17 percent of GDP.

The SNB continued to normalize interest rates in 2006 and early 2007. With five quarterly step increases of 25 basis points, the policy rate now stands at 2¼ percent or about 1¾ percent in real terms, slightly above average for past cycles.

Aided by strong cyclical revenue, the 2006 fiscal balance exceeded the budget target. The general government achieved a surplus of 0.8 percent of GDP with balance in the social security accounts and small surpluses in federal, cantonal and local governments. Together with asset sales, gross debt fell to 48.2 percent of GDP.

The financial sector is performing well in a favorable cyclical setting. Bank profitability is strong and financial soundness indicators have improved. The two large Swiss banks are global players in wealth management and derivatives markets, and as prime brokers to hedge funds and private equity firms--they need to watch global financial market volatility. Insurance and pension sectors are recovering from previous balance sheet pressures and low interest rates.

Executive Board Assessment

Executive Directors commended the Swiss authorities for their prudent economic management and sound policy frameworks. In this setting, Switzerland's economy continues to perform well, with low inflation and strong employment growth backed by flexible labor markets, and the short-term growth outlook is strongly positive. The main policy challenge going forward is to seize the opportunities provided by these favorable developments to further strengthen potential economic growth, and to address long-term structural and fiscal issues given population aging.

Directors commended the Swiss National Bank's success in keeping inflation well under control in recent years, and considered the recent gradual tightening appropriate. They recognized the importance of ensuring that inflation expectations remain well anchored, especially in view of the strong run-up in capacity utilization. In this context, Directors agreed that monetary policy will need to remain flexible to respond appropriately to inflation signals. With the economy possibly transitioning to a higher level of potential growth, and absent signs of inflation, Directors considered that the Swiss National Bank (SNB) should continue to monitor economic conditions closely, and be prepared to adapt policy as necessary. Directors also recommended a removal of the regulated link between interest rates and housing rents, noting its distortionary effects on inflation signals and for publicly-owned banks. Directors noted that the SNB's communications strategy, with its rolling three-year inflation forecast, continues to serve Switzerland well.

Directors reviewed the factors affecting the recent weakness of the Swiss franc, despite rising policy rates and strong fundamentals. They noted that carry-trades could be temporarily weakening the franc to a level below its equilibrium, and considered that the present independent floating exchange rate regime is best to handle these uncertainties. These developments in carry-trades could also imply important spillover risks for other countries, especially in Eastern Europe, where the Swiss franc—by virtue of its low volatility and the low Swiss interest rate—is the currency of choice for loans that are contributing to rapid credit expansion. Directors accordingly supported close monitoring of such lending to limit related risks.

Directors noted that Swiss external competitiveness is strong. In addition, the large stocks of foreign assets of domestic pension funds and high-earning multinational corporations in Switzerland have contributed to a structurally large current account surplus. Thus, Directors noted that interpreting the surplus is complex and its connection to domestic demand is not straightforward. Going forward, Directors considered that deeper internal structural reforms could strengthen domestic demand and potential growth, and make a contribution—appropriate to Switzerland's size—to an orderly resolution of global imbalances. In this context, Directors noted the importance of further liberalization of sheltered sectors, including agriculture.

Directors welcomed the conclusions of the FSAP update that reaffirm the soundness of the Swiss financial system, and supported its recommendations. The crucial importance of the Swiss financial sector to both the domestic economy and the global financial system—as well as its large size and increasing complexity—heighten the need for continued vigilance and for the highest standards of financial supervision. In this context, several Directors welcomed the tripartite arrangement for supervisory cooperation between Switzerland, the United Kingdom, and the United States.

With regard to actions to strengthen financial sector supervision, Directors emphasized that the new supervisory authority, the Financial Market Supervisory Authority (FINMA), should be assured both financial and regulatory independence. Continuing efforts will also be important to evaluate large banks' operating models and to ensure that liquidity and capital regimes remain appropriate to changing circumstances. Directors also encouraged the authorities to take the opportunity of current favorable cyclical conditions to strengthen supervision for some insurance companies for which heightened risks were identified in last year's Swiss Solvency Test and to address underfunding in selected pension funds.

Directors commended the authorities for their strong fiscal performance guided by the valuable debt brake fiscal rule. Looking forward, they stressed that fiscal stimulus should be avoided and the integrity of the debt brake maintained. In this regard, many Directors were concerned about the large one-time expenditures in 2008 that would be treated outside the debt brake. They therefore welcomed the authorities' commitment to compensate for this spending in the medium term. Also, several Directors suggested that, in the current conjuncture, it would be appropriate that the cantons use their strong tax receipts to build up reserves to absorb future expenditure needs related to population aging—rather than to cut taxes. Directors looked forward to the publication of the long-run fiscal sustainability report, which should help to develop a consensus on the key fiscal challenges and the needed actions.

Directors encouraged the authorities to improve the timeliness and quality of some key data sources.

Switzerland: Selected Economic Indicators

  2003 2004 2005 2006 1/ 2007 1/

Real economy


Real GDP

-0.2 2.3 1.9 2.7 2.0

Real total domestic demand

0.4 1.6 1.2 2.2 2.2

CPI (year average)

0.6 0.8 1.2 1.0 0.7

Unemployment rate (in percent of labor force)

3.4 3.5 3.4 3.3 2.8

Gross national saving (percent of GDP)

34.2 34.9 37.9 39.0 38.2

Gross national investment (percent of GDP)

20.9 20.9 21.3 21.5 20.9

Public finances (percent of GDP)


Confederation budget balance 2/

-0.9 -0.6 -0.2 0.5 0.3

General government balance 2/ 3/

-1.4 -1.0 -0.1 0.8 0.6

Gross public debt

53.7 53.4 51.4 48.2 46.2

Balance of payments


Trade balance (in percent of GDP)

1.0 1.5 0.7 1.0 1.4

Current account (in percent of GDP)

13.3 14.0 16.6 17.5 17.3

Official reserves (end of year, US$ billion) 4/

47.7 55.5 36.3 38.1 ...

Money and interest rates


Domestic credit (annual average) 5/

0.6 2.3 4.5 6.3 ...

M3 (annual average) 5/

8.3 3.2 4.2 3.0 ...

Three-month Libor rate (in percent)

0.4 0.5 0.8 1.5 ...

Government bond yield (in percent)

2.5 2.6 2.1 2.5 ...

Exchange rate


Exchange rate regime


Managed float

Present rate (April 3, 2007)


SwF 1.22 per US$1

Nominal effective exchange rate (1990=100)

110.0 110.4 109.8 108.4 ...

Real effective exchange rate (1990=100) 6/

106.4 105.6 104.0 101.7 ...

Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

1/ Staff estimates and projections.

2/ Including privatization revenue.

3/ Including Confederation, cantons, communes, and social security.

4/ Excluding gold.

5/ Figures for 2006 refer to a change from December 2005 to December 2006.

6/ Based on consumer prices.

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.


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