Public Information Notices
Switzerland and the IMF
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On May 29, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1
Following a protracted period of stagnation, average GDP growth recovered to 2.3 percent a year in 1997-2000, and unemployment dropped to 1.8 percent. The output gap was closed and shortages started to appear in the labor market. Nonetheless, inflation remained well below 2 percent, the lowest in Europe. The external current account surplus reached a record 13 percent of GDP in 2000. Fiscal consolidation brought the budget into structural surplus.
The economy cooled in 2001 as business investment fell and exports were hit by the global slowdown and an appreciation of the Swiss franc. Real GDP growth dropped to 1.3 percent, unemployment edged up, and the external current account surplus declined to 10 percent of GDP. Inflation remained low at around 1 percent.
A benign inflation outlook allowed the Swiss National Bank (SNB) to cut interest rates aggressively in 2001, especially after September 11, and real short-term interest rates are currently below their historical average. However, exchange rate appreciation has blunted the easing of monetary conditions. Fiscal policy was expansionary in 2001 and is expected to remain moderately so in 2002. Next year, Switzerland's new fiscal framework will go into effect—encompassed in the so-called "debt brake," which requires the federal budget to be in balance after adjustment for the economic cycle.
IMF staff project real GDP will grow by just under 1 percent in 2002 on the back of a global recovery in the second half of the year and the effects of the monetary easing in 2001. Inflation is projected to remain under 1 percent for most of 2002 and to rise only moderately in 2003.
Executive Board Assessment
Executive Directors commended the authorities for their sound macroeconomic policies, which have put the economy in a good position to benefit from the global recovery following last year's economic slowdown. Looking forward, the continued adherence to a stability-oriented and transparent macroeconomic policy framework, together with an acceleration of structural reforms, will underpin prospects for higher, sustained growth.
Noting that inflation risks remain low, output is below potential and signs of recovery are still tentative, Directors considered that monetary policy can afford to remain accommodative in the period immediately ahead. The latest interest rate cut was therefore welcome and an appropriate response to the recent upward pressure on the exchange rate. Looking forward, Directors considered a wait-and-see approach to be appropriate, but noted that the SNB may need to begin tightening the monetary stance later in the year, depending on the strength of the economic recovery.
Directors considered that the monetary policy framework, with its focus on medium-term inflation, has allowed the SNB to respond flexibly to business cycle conditions and exchange rate developments. The framework has provided an effective vehicle for communicating policy intentions, and the SNB should continue expanding information to the public about its inflation forecast and the rationale for policy decisions.
Directors agreed that the role of fiscal policy in supporting recovery will need to be constrained. While the current mildly stimulative stance of fiscal policy is not problematic from a cyclical perspective, slippages in budget implementation should be avoided, as this would add to adjustment strains next year when constitutionally mandated fiscal consolidation will be required. Directors also encouraged the authorities to use unbudgeted one-time revenues to reduce government debt.
Directors welcomed the adoption of the new fiscal framework requiring balanced budgets over the cycle, and saw the principle of a brake on public debt accumulation as prudent planning for longer-run demographic strains. They noted, however, that savings are likely to be needed at the federal level in coming years to ensure compliance. In this context, Directors emphasized that priority should be given to restraining expenditure growth over raising taxes. This will require scaling back demands for supplementary appropriations, as well as greater flexibility in redirecting expenditure items, which, Directors noted, would be facilitated by a reduction of the currently pervasive earmarking of revenues. Given the limited scope for the federal budget to play a counter-cyclical role under the new framework and the often procyclical behavior of lower levels of government, they also encouraged the authorities to pursue their objective of building up a reserve in the unemployment insurance fund to prevent procyclical changes in contribution rates. More generally, it will be important to implement the debt brake in a manner that prevents shortfalls in erratic revenue items from forcing expenditure cuts at times of weak economic activity.
Directors welcomed Switzerland's participation in the Financial Sector Assessment Program, and endorsed the main findings and recommendations of the Financial System Stability Assessment. While the financial sector is well capitalized and the lines of defense against potential problems appear to be functioning properly, continued vigilance will nevertheless be warranted in the current challenging economic environment. In this regard, Directors supported moves to further strengthen cooperation among financial supervisors, to introduce a more formalized quality assurance program for external auditors, and to increase onsite inspections by the Banking Commission. They also encouraged the authorities to review the preferential treatment of the cantonal banks, pursue further integration of banking and insurance supervision, move ahead with plans to introduce mandatory deposit protection, and address the problems related to the mandatory minimum return on pension accounts. Directors commended the authorities for their efforts to combat money laundering and their initiatives to track down terrorist financing.
Directors agreed that an acceleration of product market reforms will be key to improve Switzerland's productivity performance and growth record. The challenge is therefore to inject more competition into sheltered domestic sectors, which would enhance economic efficiency and benefit consumers. In this regard, Directors welcomed proposals to strengthen the powers of the Competition Commission, and they encouraged the authorities to complete the liberalization of the telecommunications sector, speed up the opening of the electricity sector, and phase out distortive subsidies and high tariffs in agriculture. They also looked forward to the implementation of bilateral agreements with the European Union, and highlighted the importance of addressing shortages of skilled labor. Directors underscored the need for high standards of corporate governance, and considered the proposed codes of conduct a useful first step in this area.
Directors commended the authorities' initiative to eliminate trade barriers for the poorest countries, while encouraging them to bring forward their plans to raise official development assistance.
Directors noted that available statistics are adequate for surveillance purposes, but saw scope for further strengthening statistical infrastructure in key areas such as the national accounts, wages, and fiscal data.
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.
IMF EXTERNAL RELATIONS DEPARTMENT