Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with the Kingdom of the Netherlands--Netherlands

June 22, 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 Kingdom of the Netherlands-Netherlands is also available.

Public Information Notice (PIN) No. 07/70
June 22, 2007

On June 13, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the NetherlandsNetherlands.1


Economic performance has been strong. The economic recovery is firmly entrenched and compares favorably in a European context. The unemployment rate has declined significantly while inflation has stayed in checkthough resource constraints are emerging. Economic expansion and rising stock prices have contributed to a cyclical strengthening of the financial sector, especially pension funds and insurance companies.

With the large current account surplus, and exports and overall growth doing well, external competitiveness would appear to be satisfactory. Improvements in the macroeconomic and business environments and technological innovation have contributed positively to Dutch competitiveness. Though domestically produced exports have lost some market share in recent years, the growth of reexports has been very strong, and the external sector is contributing positively to economic growth.

Recent fiscal performance was impressive. The general government balance shifted from a deficit of 3.1 percent of GDP in 2003 to a surplus of 0.6 percent of GDP in 2006. This adjustment had a large structural component, reflecting contributions from expenditure cuts and revenue measures; larger gas revenues also contributed.

A major challenge for policymakers is addressing population aging. As in other countries in the region, the Netherlands faces a rising dependency ratio in coming decades. The Netherlands is comparatively well placed to address aging, in the sense of having the advantages of a favorable initial fiscal position and a large, fully funded, second pension pillar. Nevertheless, ensuring fiscal sustainability still requires a combination of further fiscal consolidation and other sustainability-enhancing structural reforms.

The financial sector has benefited from the economic recovery, but some vulnerabilities remain. Bank capital adequacy is well above minimum requirements, and pension funds and insurance company's coverage ratios have recovered to around 2001 levels. Nonetheless, low profit margins in the banking sector and EU measures to promote pension mobility suggest that foreign penetration of the Dutch financial system could increase, posing challenges for supervision. High indebtedness in both the non-financial corporate and household sectors make them vulnerable to rising interest rates. It has also led to the introduction of a code of conduct setting limits on mortgage lending to prevent households from over-borrowing, but the code's effectiveness remains to be seen. The housing market, more broadly, is affected adversely by distortions, including the tax deductibility of mortgage interest payments and rent controls.

Against this background, the consultation focused on the near-term economic outlook; fiscal policy during the new government's term, including with a view to addressing population aging and securing fiscal sustainability; safeguarding financial stability; and structural reforms to raise participation and productivity, which would also have favorable effects on potential growth and fiscal sustainability.

Executive Board Assessment

Executive Directors commended the authorities for the significant fiscal adjustment achieved in recent years and for their implementation of difficult structural reforms. They also welcomed the continued strong and broad-based growth performance of the Dutch economy. In the current situation of robust economic growth and a tightening labor market, Directors stressed the importance of further fiscal consolidation, not only to reduce potential overheating risks, but also to further efforts to address the fiscal implications of population aging. In addition, they underscored the benefits of additional structural reforms to enhance labor supply and flexibility.

Directors observed that this year's fiscal stance could add stimulus at a time of emerging resource constraints. They accordingly encouraged the authorities to tighten the fiscal stance as soon as possible, locking in any unexpected saving in 2007, and ensuring that the 2008 budget makes decisive progress toward securing the medium-term fiscal surplus target.

Directors emphasized that continued improvement in the underlying fiscal position requires tight spending control. They recommended that the authorities implement offsetting expenditure-reducing measures before putting in place envisaged spending increases; set prudent expenditure ceilings through 2011, in the context of preparing the 2008 budget; and carefully monitor health care, in order to counter a tendency toward overruns in the sector.

Directors supported the new government's target of a general government structural surplus of 1 percent of GDP by 2011. They also commended the authorities' commitment to maintaining the fiscal framework, which is anchored in multiyear real expenditure ceilings and has imparted discipline and transparency. However, with planned measures closing only part of the fiscal sustainability gap, Directors underscored the importance of identifying and implementing additional sustainability-enhancing measures, in order to provide a larger margin for addressing the aging problem and better protecting intergenerational equity. In the same vein, Directors encouraged the authorities to err on the side of a higher-than-targeted surplus in executing fiscal policy.

Directors welcomed the strength and stability of the financial sector, stemming both from the macroeconomic upswing and from improvements in supervision and risk management. In this context, they commended the risk-oriented, cross-sectoral approach to financial sector supervision, pointing out that, in many respects, the design and implementation of supervision in the Netherlands are international best practice. While welcoming the adoption of the mortgage code of conduct, intended to limit excessive household indebtedness, Directors nevertheless observed that it does not address the underlying tax incentive to maximize mortgage debt. In addition, Directors generally saw benefits from rectifying distortions adversely affecting both the supply and demand side of the housing market.

Directors attached considerable urgency to efforts to increase labor supply, both to ease the tight labor market and to address aging-related challenges. They noted that the elimination of the transferability of the general tax credit would have a more significant near-term impact if phased out over a shorter period than the envisaged 20 years. Directors also encouraged consideration of other policies to boost the supply of laborincluding a shorter duration for unemployment benefits and raising the retirement age in line with increases in life expectancy. Measures to enhance labor supply would contribute to a continuation of wage moderation, needed to maintain competitiveness and take full advantage of the favorable external economic outlook.

Directors saw scope to boost productivity and the sustainable growth rate. They welcomed actions to increase the role of market forces in various sectors, strengthen the investigative powers of the competition authority, and reduce administrative burdens. They urged further efforts to make employment protection legislation less stringent, with a few Directors highlighting the benefits of greater wage differentiation.

Directors commended the authorities for their commitment to Official Development Assistance.

The Kingdom of the Netherlands - Netherlands: Selected Economic Indicators

  2003 2004 2005 2006 20071/ 20081/

Real economy (change in percent)


Real GDP

0.3 2.0 1.5 2.9 2.9 2.7

Domestic demand

0.4 0.6 0.9 2.7 2.5 2.5

CPI (harmonized)

2.2 1.4 1.5 1.7 1.8 2.1

Unemployment rate (in percent)

4.1 4.9 5.0 4.1 3.4 3.3

Gross national saving (percent of GDP)

24.8 28.2 25.7 26.7 27.5 28.5

Gross domestic investment (percent of GDP)

19.3 19.3 19.3 19.7 20.5 21.1

Public finance (percent of GDP)


General government balance

-3.1 -1.8 -0.3 0.6 -0.1 0.7

Structural balance

-2.5 -1.2 0.5 1.0 -0.1 0.5

General government debt

52.0 52.7 53.8 53.2 53.3 52.7

Interest rates (percent)


Money market rate 2/

2.3 2.1 2.2 3.1 3.8 ...

Government bond yield 2/

4.2 4.1 3.4 3.8 4.0 ...

Balance of payments (in percent of GDP, unless otherwise indicated) 3/


Trade balance

6.6 7.1 7.0 7.7 8.2 8.2

Current account

5.4 8.9 6.3 7.1 7.4 7.3

Official reserves, excl. gold (US$ billion) 2/

11.2 10.7 9.0 10.8 10.4 ...

Reserve cover (months of imports of GNFS)

0.4 0.4 0.3 0.3 ... ...

Exchange rate


Exchange rate regime

Member of EMU

U.S. dollar per euro

1.13 1.24 1.25 1.26 1.30 1.31

Nominal effective rate (2000=100) 2/

106.3 107.6 107.7 108.2 109.1 ...

Real effective rate (2000=100) 2/ 4/

110.9 113.0 112.6 113.0 114.1 ...

Sources: International Financial Statistics; OECD; information provided by the Dutch authorities; and IMF staff estimates.

1/ Staff projections, unless otherwise indicated.

2/ As of March for 2007.

3/ Transactions basis.

4/ Based on relative normalized unit labor costs.

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.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100