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Kingdom of the Netherlands-Netherlands and the IMF

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Press Information Notice (PIN) No. 98/42
June 24, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Article IV Consultation with Kingdom of the Netherlands - Netherlands

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 12, 1998, the Executive Board concluded the Article IV consultation with Kingdom of the Netherlands - Netherlands1.


Economic performance has continued to be impressive, featuring strong output growth and job creation. The fiscal deficit has been cut to well below the Maastricht 3 percent limit, while the structural reform program of the past decade and a half has continued to move forward, contrib-uting to a favorable supply response in the economy. Growth is set to accelerate further in 1998.

Economic activity was again buoyant in 1997, with GDP growth reaching close to 3 percent. Employment rose by 2 percent in full-time equivalents, and the unemployment rate fell to 6 percent. Inflation accelerated somewhat, with the 12-month rise in the CPI touching 2 percent in November before easing back, on average, in recent months. In late 1997, the labor unions committed to continued wage moderation, while agreeing on a need for greater differentiation to improve incentives. Competitiveness at present is very favorable, and the current account surplus rose somewhat further in 1997, to some 6 percent of GDP. With the economy well into a third year of above-potential growth, capacity utilization and vacancies are near previous peak levels. Unemployment is low by historical standards, and recent reports suggest that some acceleration in wage costs is underway. Emerging bottlenecks in the labor market could be mitigated by higher participation, but the extent to which there is a pool of labor resources that can be called on in the short term is not wholly clear.

Monetary policy in 1997 and into 1998 has continued to be geared to the deutsche mark link. Given cyclically-low interest rates in Germany, and the real effective depreciation in recent years, monetary conditions are relatively easy—particularly in light of the domestic cyclical situation. While short-term interest rates increased in 1997, and the negative differential with Germany was eliminated, long-term rates declined in line with those on deutsche mark instruments—a trend that continued in early 1998. Household borrowing, especially through mortgages, has been expanding rapidly, and there have been sharp increases in house prices and the stock market index.

Fiscal developments in 1997 reflected stronger-than-expected revenues, particularly from profits taxes, and continued spending restraint within the medium-term framework. The general government deficit was cut to 1.3 percent of GDP. Overall, in 1994–97, firm spending control allowed a sizable reduction in the deficit and the tax burden—both by some 2 percent of GDP, while the debt ratio fell by almost 6 points to 72.1 percent of GDP. However, the most recent projection of the deficit in 1998 is 1.6 percent of GDP, implying a structural widening of some percentage point of GDP.

The structural reforms of the past decade and a half—significant reductions in government spending and taxes in relation to GDP, and lower real benefits and minimum wages (particularly for youths)—have borne fruit in job creation and sharply lower youth unemployment. Reforms are continuing, with a new emphasis on product market competition as well as further action to improve the functioning of the labor market. Employment growth in recent years has mainly absorbed new young and female entrants to the labor force, rather than those drawing social benefits, and thus the level of benefit claimants has remained high during the current expansion. This has helped to catalyze awareness of problems on the supply side of the labor market, and current thinking is shifting to focus on ways to change incentives for benefit recipients.

The short-term outlook for the economy is highly favorable. In 1998, growth is expected to remain strong, with domestic demand expanding by more than 3 percent. Exports should benefit from stronger activity in other EU economies, the lagged effects of real effective depreciation, and the disappearance of swine fever. On present projections, these developments would broadly offset the impact of the crisis in Asia. There is an upside risk for the growth of domestic demand, particularly if asset prices remain buoyant; on the other hand, the global impact of Asia could prove more serious than allowed for, and any significant reversal in asset prices would result in some negative wealth effects. In addition to uncertainty about asset markets and their impact on the economy, a key risk is that generalized wage pressures could develop, dampening employment growth and complicating public spending restraint.

Executive Board Assessment

Directors commended the authorities on the impressive performance of the economy in recent years. With high growth and job creation, and low inflation, they noted that 1997 had been another successful year for the Netherlands. The key factor underlying this success, Directors considered, had been the pursuit over many years of sound macroeconomic and structural policies, including the deutsche mark peg, firm public spending restraint, and structural reforms in the labor and product markets. With strong support from the social partners, notably through continuing wage moderation, these policies had stabilized and reinvigorated the economy, bringing it successfully to membership in the Economic and Monetary Union (EMU).

However, Directors stressed that the structural fiscal deficit, debt ratio, and tax burden were still too high, and hidden unemployment was widespread. Furthermore, while recognizing that there were no signs of inflationary pressures at present, many Directors also saw a risk of overheating. They pointed out that growth was expected to remain above potential in 1999, and, while structural reforms had undoubtedly improved the flexibility of the economy, recent information on wage costs and the tightness of the labor market was worrisome. Financial markets, meanwhile, were buoyant, with asset prices rising sharply. In view of the limited role that monetary policy could play on the eve of EMU to address these risks independently, these Directors considered that the burden of any needed policy action would have to fall on fiscal policy.

In this light, many Directors considered that a more restrictive fiscal stance would have been preferable for 1998. They encouraged the authorities to hold spending below budgeted levels in the remainder of 1998, with a view—at a minimum—to avoiding any expansionary fiscal impulse. In this context, some Directors suggested that any revenue overperformance in 1998 be used for deficit reduction. Some other Directors, however, expressed a more nuanced view, and, while sharing some of the concerns on possible overheating, considered that they were mitigated by several factors. In particular, they noted that recent structural reforms were likely to yield further supply and productivity gains, and drew confidence from the past commitment of the social partners to wage moderation. They, therefore, considered that a "wait and see" policy response was more appropriate, with resort to fiscal tightening only if signs of overheating were to materialize.

Over the medium term, Directors encouraged the authorities to continue fiscal consolidation and to aim for a significant reduction in the structural budget deficit. This would require firm expenditure restraint, and would likely imply also some backloading of tax cuts in the next government period, which would be consistent with implementing a supply-side-oriented tax reform in the course of 2000-01.

Directors viewed a structural reduction in the fiscal deficit as appropriate not only on cyclical grounds but also for longer-run reasons, and in this connection they encouraged the authorities to aim for structural balance in the general government finances over the medium term. This would be consistent with the EMU Stability and Growth Pact, and would create comfortable room for fiscal stabilizers to operate. It would also help reduce the debt ratio and interestburden well ahead of population aging. To underpin this strategy, and ensure scope for a further reduction in the tax burden, Directors urged the authorities to develop new structural expenditure reforms, notably in health care and social security.

Further social security reforms were considered necessary also to improve labor market performance, and Directors welcomed the measures taken recently to manage sickness and disability benefits more effectively. They stressed the need to strengthen incentives to seek work or training. Directors noted that the planned tax reform should aim to improve the supply side of the market by widening the gap between net salary and benefit income.

Directors praised the authorities’ action to further strengthen product market competition. In addition, they welcomed the initiative to promote stronger corporate governance.

Turning to financial sector issues, Directors stressed that it would be essential to ensure effective oversight of strategies in financial conglomerates during this period of vigorous expansion into new markets. Also, further action to pare back tax deductions for interest payments on household borrowings would be desirable from both structural and cyclical points of view.

Directors congratulated the authorities on their generous record in official development assistance in the face of budgetary stringency.

Netherlands: Selected Economic Indicators

  1994 1995 1996 1997 1998 1/

Real economy (change in percent)  
Real GDP 3.2 2.3 3.3 3.4 3.8
Domestic demand 3.0 2.0 3.5 3.7 3.7
CPI (year average) 2.7 2.0 2.1 2.2 2.0
Unemployment rate (in percent) 8.6 8.3 7.6 6.6 5.6
Gross national saving (percent of GDP) 24.6 24.7 25.7 26.2 26.1
Gross domestic investment (percent of GDP) 19.1 19.1 19.9 20.3 20.4
Public finance (percent of GDP)  
Central government balance -3.2 -3.8 -1.6 -2.5 -2.0
General government balance -3.8 -4.0 -2.3 -1.3 -1.6
General government debt 78.0 79.1 77.2 72.1 70.0
Money and credit  
(End of year, percent change)  
Domestic credit 6.8 9.7 10.0 13.1 ...
M3 0.3 5.9 5.6 6.8 ...
Interest rates (percent)  
Money market rate 2/ 5.1 4.2 2.9 3.1 3.3
Government bond yield 2/ 7.2 7.2 6.5 5.8 5.1
Balance of payments (percent of GDP) 3/  
Trade balance 5.5 5.5 5.5 4.9 4.5
Current account 5.3 6.1 5.8 5.9 5.5
Official reserves (US$ billion) 4/ 34.5 33.7 26.8 24.9 24.4
Reserve cover (months of imports of GNFS) 2.6 2.1 1.6 1.6 ...
Exchange rate  
Exchange rate regime Member of ERM
Present rate (June 18, 1998) f.2.01 per US$1
Nominal effective exchange rate (1990=100) 2/ 105.1 109.3 107.1 102.2 101.0
Real effective exchange rate (1990=100) 2/ 5/ 100.4 102.3 97.3 91.1 90.4

Sources: Information provided by the Dutch authorities; and IMF staff estimates.

1/ Staff projections.
2/ For 1998, average of first four months.
3/ Transaction basis.
4/ Excluding gold.
Based on relative normalized unit labor costs in manufacturing.

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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