Public Information Notice: IMF Concludes Article IV Consultation with Switzerland

March 1, 1999

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 February 22, 1999, the Executive Board concluded the 1998 Article IV consultation with Switzerland1.


Following an unusually protracted period of stagnating real GDP during 1991–96, a recovery started in early 1997. A progressive loosening of the monetary stance beginning in 1995, a significant real effective depreciation of the Swiss franc, and a shift toward fiscal stimulus in 1997 helped spark a strong expansion early in that year. However, with the drag from the Asian crisis beginning to feed through to export demand, GDP growth slowed during 1998.

The long recession during the first half of the 1990s came on the heels of an already sub-par long-run GDP growth performance since the mid-1970s. Switzerland’s average real per capita GDP growth rate of about 1 percent during this period was only roughly half the growth rate of most other advanced economies, mainly on account of slower productivity growth in the sheltered sectors of the economy including agriculture, construction, and many services.

Unemployment, which had risen sharply from ½ percent of the labor force in 1990 to 5¼ percent in 1997, fell to 3¼ percent toward the end of 1998. The decline reflected the upswing in activity and increased participation in active labor market programs, which was made a condition for benefit eligibility.

The CPI inflation rate has remained below 1 percent since 1996 and was close to zero throughout 1998. Price stability has been underpinned by subdued nominal wage growth at around 1 percent, a sharp decline in import prices driven mainly by falls in world prices of raw materials, and low nominal interest rates, which, coupled with persistent over-capacities in the housing market, served to stabilize the large rent component of the CPI.

The external current account surplus rose to almost 9 percent of GDP in 1997, a record level by Switzerland’s own historical standards and by far the largest current account surplus among industrial countries, and remained at that level in 1998. The current account surplus mainly reflects net investment income (which rose to 7 percent of GDP in 1997-98) on Switzerland’s large net foreign asset position (about 125 percent of GDP at end-1998); the primary current account surplus has been stable at about 2 percent of GDP in recent years.

The Swiss National Bank’s (SNB) monetary policy framework aims at keeping the price level stable in the medium-term. A five-year (1994–99) target path for the monetary base was designed to serve as the primary indicator of whether the supply of money conforms to the economy’s production potential and medium term price stability. Owing to instabilities in the demand for base money, the SNB announced in December 1997 that M3 would serve as an additional indicator to assess its monetary stance. While M3 grew at an average rate of about 4½ percent during 1995–97, which was considered consistent with medium-term price stability, M3 growth slowed sharply during 1998 to only about 1 percent. Nonetheless, nominal short-term interest rates of only about 1 percent continued to signal relaxed monetary conditions.

The Swiss franc was subject to periods of upward pressure during 1997–98, particularly in the context of international financial market tensions. The nominal Sw F/DM exchange rate fluctuated in the more appreciated half of its normal trading range, but the SNB injected substantial liquidity into the banking system in response to appreciation pressures. Concerns that the introduction of the euro in January 1999 would trigger further appreciation pressures have not materialized, and so far the Swiss franc has fluctuated in a relatively narrow band around 1.60 Sw F/euro.

The general government deficit in 1998 was almost 2 percent of GDP, compared with a deficit of 2¼ percent in 1997. The deficit is set to decline further in 1999 in the context of a constitutional mandate to balance the confederation budget by 2001.

As regards the economic outlook, real GDP growth is projected by IMF staff to slow temporarily from 2 percent in 1998 to 1¼ percent in 1999. This projected slowdown mainly reflects the drag from the Asian crisis. By contrast, final domestic demand is envisaged to hold up, expanding by about 2 percent, reflecting improved consumer sentiment and rising investment in machinery and equipment. The outlook for inflation is benign, with CPI inflation in 1999 likely to pick up only to ¾ percent, in part reflecting an increase in VAT by 1 percentage point.

Executive Board Assessment

Executive Directors commended the authorities for their successful macroeconomic management that had contributed to Switzerland’s improved economic performance since 1997 after a prolonged period of stagnation. They welcomed the recovery of output and the fall in unemployment, accompanied by price stability. Looking ahead, continued skillful macroeconomic policy implementation would be needed to sustain recovery in a challenging external environment, while also addressing the demands of medium-term fiscal consolidation. Directors also emphasized the need, in parallel, for more vigorous implementation of structural reforms—especially of Switzerland’s product markets—both to improve Switzerland’s long-term growth performance and to establish conditions for a narrowing of the large external surplus.

Directors expected growth to slow moderately in 1999 in response to weaker external conditions. There were, however, downside risks, including those associated with a sharper-than-expected weakening of trading partners’ activity. Directors therefore supported the accommodative monetary policy posture of the Swiss National Bank (SNB). The clear signs of continued economic slack, low prospective inflationary pressures, and the shift to fiscal restraint, all suggested that monetary conditions, particularly the level of short-term interest rates, were in tune with the requirements of medium-term price stability. Directors also saw scope for a temporary relaxation of monetary conditions if short-term growth prospects were to weaken further.

Directors observed that Switzerland’s monetary and exchange rate policy framework faced important challenges. They considered that the arrival of the euro represented a major shift in the external environment that could trigger pressures on the Swiss franc. Directors noted, in this context, that the large current account surplus suggested a limited scope for resisting upward pressures consistent with medium-term price stability. They agreed that the SNB should, in light of the behavior of base money, continue to pay close attention to other indicators, including M3, the exchange rate, and the cyclical position, and to explain its policy actions clearly to the public. It was desirable to ensure that market participants understood that Switzerland’s monetary policy framework is not geared to a particular exchange rate threshold against the euro, and that policy remains oriented to price stability. Directors welcomed the SNB’s quarterly updates of its interpretation of monetary developments and its policy intentions as a valuable enhancement of transparency. Directors also supported the proposed updating of the legal framework for monetary policy, with a mandate for price stability. Nonetheless, they saw scope for further clarification of the framework for monetary policy implementation, and some speakers suggested an explicit commitment to inflation targeting in this regard. Some others, noting the openness of Switzerland’s economy, considered that an eventual peg to the euro might be more appropriate.

Directors commended the constitutional commitment to balance the Confederation budget by 2001 as an important step toward sustainable public finances. They called for firm implementation of the associated medium-term fiscal consolidation plans. While many Directors thought that the shift to modest fiscal contraction in 1999 was warranted from a medium-term perspective, some argued that an appropriate balance had to be struck between these considerations and the need to support economic activity in the short term. In this vein, theyconsidered that the automatic stabilizers should be allowed to operate if there were an unexpectedly sharp slowdown in activity. The framework for fiscal policy beyond 2001 should also, Directors agreed, allow for the operation of the automatic stabilizers over the cycle.

Directors observed that demographic pressures on social spending would result in a difficult long-term battle to contain fiscal deficits. The proposed measures to stabilize the finances of the social insurance funds through the next decade were therefore welcome. Directors called for early consideration of the design of further measures to cope with the demographic peak after 2010.

Directors underscored the desirability of further reforms of Switzerland’s complex and cyclically unresponsive tax system. Recent progress on harmonizing personal income tax collections on a current-year basis by 2001 was welcome, as it would strengthen fiscal stabilizers and enhance real revenue collection. Directors called for new initiatives to promote the convergence of tax base definitions, and noted that globalization and increasing integration in Europe were likely to create pressures on the Swiss tax system.

Directors voiced concern over Switzerland’s disappointing productivity growth performance since the mid-1970s, and urged further action to reduce structural rigidities. They viewed the authorities’ main reform initiatives in labor and product markets as notable steps in the right direction. However, the speed and scope of reforms needed to be accelerated and broadened, especially with regard to a number of sheltered sectors—in particular, in agriculture, where protection remained exceptionally high, and in utilities, where the pace of deregulation was relatively slow—and recent changes in competition laws should be rigorously enforced. Directors welcomed the successful conclusion of the bilateral negotiations on Switzerland’s closer integration with the European Union, which they expected would help catalyze Switzerland’s structural reform agenda.

Directors observed that, while Switzerland’s banking system remained well capitalized, more attention needed to be paid to avoiding excessive risk-taking and ensuring adequate risk management. Directors therefore welcomed recent initiatives to review and strengthen bank supervision, and stressed that these should focus on the assessment of risks that may not be captured by standard capital adequacy measures. Directors also welcomed the new money laundering law.

While commending the authorities’ provision of official development assistance, Directors encouraged Switzerland to raise such assistance to at least its own target of 0.4 percent of GDP.

Directors urged further efforts to improve the coverage and reliability of Swiss economic statistics.

Switzerland: Selected Economic Indicators

1994 1995 1996 1997 19981

(Change in percent, unless otherwise noted)
Real economy
Real GDP 0.5 0.6 0.0 1.7 2.1
Real domestic demand 2.7 1.8 0.0 1.4 3.0
CPI (year average) 0.9 1.8 0.8 0.5 0.1
Unemployment rate (in percent of labor force) 4.7 4.2 4.7 5.2 3.9
Gross national saving (percent of GDP) 27.8 28.4 27.8 29.2 30.3
Gross national investment (percent of GDP) 21.1 21.5 20.3 20.3 21.2
(Percent of GDP)
Public finances (percent of GDP)
Confederation budget balance2 -1.9 -1.3 -1.6 -1.5 -0.7
General government balance2 3 -2.8 -1.9 -1.9 -2.2 -1.9
Gross public debt 45.0 46.9 49.4 51.4 53.5
(Change in percent, unless otherwise noted)
Balance of payments
Trade balance 0.6 0.3 0.3 -0.1 -0.3
Current account (in percent of GDP) 6.7 7.0 7.4 8.9 9.1
Official reserves (end of year, US$ billion)4 34.7 36.4 38.4 39.0 41.2
Money and interest rates
Monetary base (end of year) 0.4 1.4 5.2 2.8 4.4
M3 (end of year) 3.7 3.1 6.8 3.0 0.1
Three-month euro rate (in percent) 4.0 3.0 1.9 1.6 1.5
Government bond yield (in percent) 5.0 4.8 4.2 3.6 2.7
Exchange rate
Exchange rate regime Managed float
Present rate (February 22, 1999) SwF 1.45 per US$
Nominal effective exchange rate (1990 = 100) 106.3 113.3 111.6 104.3 106.6
Real effective exchange rate (1990 = 100)5 105.3 112.0 108.4 100.3 101.1

1IMF staff estimates.
2Excluding privatization revenue.
3Including Confederation, cantons, communes, and social security.
4Excluding gold.
5Based on consumer prices.

1Under 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 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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