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

August 3, 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 Finland is also available.

Public Information Notice (PIN) No. 07/95
August 3, 2007

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


Economic developments in recent years have been enviable. Growth has outpaced the euro area average, inflation is among the lowest in the European Union, and the external current account and general government budget are both comfortably in surplus. Nevertheless, the onset of population aging will be felt more rapidly in Finland than elsewhere in the EU (with the working age population projected to begin declining at the end of the decade). Without fiscal and structural reforms, this threatens long-term growth prospects and fiscal sustainability.

The economy is set to grow by about 4 percent in 2007, lower than the 5½ percent recorded in 2006, although the 2006 outcome was boosted by the rebound from a labor-dispute in the paper sector that shaved off about 1 percentage point from 2005 growth. The decline is almost entirely attributable to a smaller contribution from net exports (similarly influenced by the labor dispute), with the contribution of domestic demand growth projected to increase by about ½ percent of GDP. Consumption growth remains robust, despite rising interest rates and household debt loads, boosted by strong employment growth, income tax cuts, and strong consumer confidence. With the economy operating slightly above its potential, economic growth is expected to cool somewhat in 2008 to about 2½ percent, with declining contributions from all components—consumption, investment, and net exports. Risks to the growth outlook are balanced.

The labor market has improved markedly since 2005, with rising participation rates and comparatively strong employment growth. The unemployment rate has dipped below the euro area average, and hovers near estimates of the structural unemployment rate. Labor shortages are increasing, especially in the construction sector and in the capital region.

Inflation has remained tamed, largely from comparatively high productivity gains that have limited unit labor cost growth, and a trend worsening in the terms of trade. However, other one-off effects that have also dampened price growth are waning, and inflation is slowly nearing the euro area average. Also, while the current multi-year, economy-wide wage compact (set to expire in the fall) has helped contain labor costs, a shift to sectoral agreements in the coming round may exacerbate wage and inflation pressures, though providing scope for useful pay differentiation.

Various estimates point to a benign external competitiveness position for Finland. The current account surplus has been in excess of 5 percent of GDP in recent years, contributing to a improved net international investment position.

The fiscal position strengthened markedly last year, with the general government surplus nearing 4 percent of GDP, a surplus expected to persist in 2007. The budget has benefited from higher-than-expected growth combined with a determined implementation of the authorities' multi-year spending limits on central government outlays. As a result, the debt ratio has fallen below 40 percent of GDP and the pension systems' assets now approach 70 percent of GDP. However, on the basis of official macro projections, the new government's program implies a sharp deterioration of the fiscal position, with the surplus declining to about 2 percent of GDP by the end of its mandate in 2011.

Executive Board Assessment

Executive Directors commended the authorities' stability-oriented macroeconomic policies that have underpinned a prolonged economic expansion. Growth and inflation developments have both outperformed euro area averages, and recent activity indicators suggest near-term growth prospects are favorable. The general government has recorded sizable surpluses, and is expected to do so again this year.

Directors concurred that the competitiveness of the Finnish economy is broadly appropriate. The external current account surplus is sizable at present, and some measures indicate comfortable competitiveness margins. However, rapid population aging, worsening terms of trade, and pressures on exporters' profitability suggest that the surplus is likely to decline over the medium to long term.

Despite this favorable background, Directors cautioned that Finland faces considerable challenges. They stressed that Finland's exceptionally rapid population aging and sluggish productivity in sheltered sectors raise concerns about long-term growth and soundness of its public finances. In addition, from a short-run perspective, the economy is estimated to be operating slightly above its growth potential, with rising geographic and skill-specific labor market shortages, which, with growing mismatches, could stoke wage and inflationary pressures. Indeed, the move from the traditional economy-wide wage agreement to sectoral, union-level wage negotiations for 2008 heightens inflationary risks, though holding promise of fostering much needed pay differentiation. Furthermore, the export base remains relatively narrow, posing risks to growth prospects.

In this light, and notwithstanding the already sizable general government surplus, Directors advised a somewhat tighter fiscal policy for both cyclical and sustainability reasons. They noted that, given positive output gaps expected in 2007-08 and tightening labor markets, some withdrawal of fiscal stimulus would be appropriate. Thus, Directors welcomed the authorities' intention to correct the fiscal stance envisaged for 2008-11, were signs of overheating to arise. In the period beyond 2011, Directors saw the need to target a uniform improvement in the primary surplus of about 2 percent of GDP, in order to prepare for the anticipated expenditure pressures from population aging.

Given already high revenue and expenditure levels, Directors stressed that fiscal adjustment efforts should concentrate on reducing the growth of public spending, preferably through increased efficiency, especially at the local level. To achieve this, they supported benchmarking to identify best practices, and redesigning and extending the system of expenditure ceilings. They also saw merit in greater recourse to outsourcing and well-designed public private partnerships, rebalancing user charges, and the reform of intergovernmental fiscal relations, to tighten municipal budget constraints.

Executive Directors noted that longer-term growth prospects and fiscal sustainability, would be bolstered by improvements in labor and product market performance. Greater utilization of human resources and strengthened competition in product markets were seen as vital components of boosting Finland's growth potential and placing its public finances on a sounder footing. Directors considered that efforts to increase employment rates by the young and older workers would be most useful. Increased wage differentiation was deemed to help "price-in" those with little labor market experience or low skills. Reducing the scope for early retirement and increasing activation requirements, along with the elimination of "poverty traps" through reform of tax and benefit schemes, could also foster greater employment, especially among older workers. Policies responding to these issues will need to take political economy considerations into account. Directors advocated measures to enhance competition, especially in sheltered sectors, to complement labor market reforms and boost productivity growth.

Directors welcomed the soundness and stability of the financial sector, as well as its diligent supervision. At the same time, they counseled vigilance, in light of rising international integration and rapidly evolving infrastructure. Enhanced cross-border cooperation among supervisors is crucial given the expanding foreign ownership of domestic banking operations. And heightened cooperation with both market participants and foreign supervisors was desirable to control the systemic risks arising from the adoption of new technologies or products.

Finland: Selected Economic Indicators
  2004 2005 2006 2007 1/

Real economy


GDP (change in percent)

3.7 2.9 5.5 4.0

Domestic Demand (change in percent)

3.0 4.3 3.1 3.6

Harmonized CPI (change in percent) 2/

0.1 0.8 1.3 1.5

Unemployment rate (in percent) 2/

8.8 8.4 7.7 6.7

Gross national saving (in percent of GDP)

26.5 25.7 26.6 27.5

Gross domestic investment (in percent of GDP)

18.8 20.6 20.7 21.0

Public finances (general government, in percent of GDP)


Overall balance

2.1 2.5 3.8 4.0

Primary balance 3/

2.1 2.5 3.7 3.9

Gross debt (Maastricht definition)

44.1 41.4 39.1 36.1

Money and credit (end of year, percentage change)


M3 (Finnish contribution to euro area) 4/

6.3 8.2 8.1 10.0

Total domestic credit 4/

10.5 12.9 12.1 12.0

Interest rates (year average)


Three-month money market 5/

2.1 2.2 3.1 3.9

Ten-year government bonds 5/

4.1 3.4 4.0 4.0

Balance of payments (in percent of GDP)


Trade balance

6.6 4.9 5.7 6.1

Current account

7.7 5.1 5.8 6.6

Fund position (as of end-April 2007)


Fund holding of currency (in percent of quota)


Holdings of SDRs (in percent of allocation)


Quota (in millions of SDRs)


Exchange rate


Exchange rate regime


Present rate (July 5, 2007)

US$ 1.36 per euro

Nominal effective exchange rate (increase in percent) 6/

2.2 -0.5 0.0 1.7

Real effective exchange rate (increase in percent) 7/

2.4 0.2 0.2 1.8

Sources: Finnish authorities; International Financial Statistics; and IMF Staff estimates.
1/ IMF staff estimates and projections, unless otherwise indicated.
2/ Consistent with Eurostat methodology.
3/ Defined as non-interest revenue minus non-interest expenditure.
4/ For 2007, 12-month increase to March.
5/ For 2007, monthly average for March.
6/ For 2007, average 12-month increase to May.
7/ Based on unit labor costs. For 2007, average 12-month increase to May.

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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