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Switzerland and the IMF

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Public Information Notice (PIN) No. 04/64
June 18, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with Switzerland

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with Switzerland is also available.

On June 2, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1

Background

After the Swiss economy flirted with recession for two out of the past three years, there are signs that it has started to grow again on the back of stronger exports and domestic investment and supported by accommodative monetary and fiscal policies. Unemployment has risen, but at 4 percent is low by international standards. Inflation remains negligible and the current account is running a large surplus.

With inflation very low and economic activity weak, the Swiss National Bank (SNB) has relaxed monetary conditions considerably, keeping short-term interest rates close to zero and allowing a rapid expansion of monetary aggregates. The partial reversal of the earlier sharp appreciation of the Swiss franc has reinforced the monetary stimulus. Fiscal policy has been supportive of the recovery, with a projected rise in the general government deficit to 2.5 percent of GDP in 2004, largely reflecting the operation of automatic stabilizers. Assuming that the recovery in Switzerland's main trading partners strengthens, IMF staff projects growth to gather momentum and rise to just over 2 percent in 2005. Inflation is expected to remain very low.

Executive Board Assessment

Executive Directors commended the authorities' sound macroeconomic policies that have placed the Swiss economy in a good position to benefit from the nascent global recovery. Directors noted, however, that a more ambitious approach to tackle structural rigidities would strengthen competitiveness and longer-term growth performance.

Directors welcomed indications that real GDP growth was rebounding. With inflation expected to remain subdued and activity below potential, they supported the Swiss National Bank's decision to maintain low interest rates and encouraged it to keep the current accommodative monetary policy stance until the recovery is fully secured. Some Directors suggested that the authorities should take appropriate expansionary monetary policies in the near term should deflationary pressures emerge.

Directors noted that the current level of interest rates cannot be maintained indefinitely and, with liquidity building up rapidly, the monetary policy stance would need to be monitored closely and modified proactively. In this respect, they commended the SNB's clear communication strategy and welcomed its new policy of updating the inflation forecast at regular intervals. Directors observed that the monetary policy framework, with its focus on medium-term price stability, has allowed the SNB to respond flexibly to the changing economic environment.

Directors approved of the accommodative fiscal policy and welcomed the commitment to restoring balance in the federal government's accounts. They noted that the transparent and realistic time-table for phasing out the unanticipated structural deficit is appropriate from the current cyclical perspective and preserves the credibility of the debt-brake rule, which requires balance in the federal accounts, after adjustment for the business cycle. Some Directors, however, saw scope for strengthening the rule to counter pressures for sustained fiscal deficits. Directors considered that the additional measures, beyond the 2004 consolidation plan, that are likely to be needed to balance the fiscal position, should focus primarily on cuts in current expenditure, rather than tax increases. They also emphasized the need for enhancing coordination between the federal government and cantonal and communal governments to ensure medium-term fiscal consolidation.

In this connection, Directors underscored the importance of addressing aging-related pressures, and encouraged the authorities to consider new initiatives for old-age and disability pension reform following the rejection of the current reform proposals in the recent referendum. Directors considered that although Switzerland, with its greater reliance on the fully-funded second pillar of its pension system, was better prepared than most other industrial countries to face aging-related challenges, it needed to act at an early stage to ameliorate the burden on future generations.

Directors commended the authorities for acting promptly to ease the strains on second pillar pension funds but underscored the need for further action in strengthening prudential supervision and eliminating regulatory arbitrage. Directors considered the reduction of the minimum guaranteed interest rate on pensioners' assets as a necessary first step and encouraged the authorities to put in place a predictable, rule-based mechanism in setting the minimum interest rate.

Directors noted the resilience of the Swiss financial system in the face of recent shocks. They commended the authorities' sound supervisory framework and their continued efforts to strengthen it further, particularly in the area of insurance. In this context, Directors welcomed steps to create an integrated financial market supervisory authority, revamp the insurance regulatory framework, strengthen external auditing, and improve corporate governance. Directors endorsed the efforts to strengthen further the framework for anti-money laundering and combating terrorist financing (AML/CFT) and commended the authorities' commitment to ensure that the AML/CFT framework meets high international standards.

Directors supported the renewed emphasis on long-overdue structural reforms, noting that slow progress so far in addressing structural rigidities in the highly protected domestic product markets has contributed to more than a decade of poor growth performance. In this regard, Directors welcomed the strengthening of the Competition Authority and underscored the need for decisive steps to reduce barriers in the internal market, cut red-tape, and create a leaner and uniform regulatory environment for products, services, and network industries across Switzerland, overcoming the excess regulation at lower levels of government.

Directors welcomed the conclusion of negotiations with the EU for a package of bilateral treaties that has also allowed agreement on the taxation of income from savings. Directors commended the authorities' initiative to eliminate all trade barriers to imports from poor countries. They encouraged them to accelerate the dismantling of the high level of trade protection and subsidization of agriculture. They commended the authorities for the effectiveness of Swiss official development assistance (ODA) and welcomed the intention to raise ODA to 0.4 percent of GNP by 2010. Some Directors encouraged the authorities to move closer to the United Nations target.

Directors noted that Switzerland's economic statistics are generally adequate for surveillance purposes and welcomed continuing improvements, including the introduction of the European System of Accounts. Directors noted, however, that, in certain areas, data deficiencies hampered the quality of economic analysis and policy advice and urged the authorities to take corrective action.


Switzerland: Selected Economic Indicators


 

1999

2000

2001

2002

2003

2004 1/


             

Real economy

           

Real GDP

1.3

3.7

1.0

0.2

-0.5

1.7

Real total domestic demand

0.3

2.2

1.9

-0.9

0.1

2.2

CPI (year average)

0.8

1.6

1.0

0.6

0.6

0.3

Unemployment rate (n percent of labor force)

2.7

1.8

1.7

2.5

3.7

3.4

Gross national saving (percent of GDP)

30.5

32.5

27.6

27.3

28.3

28.8

Gross national investment (percent of GDP)

19.0

20.0

19.1

18.8

18.0

19.2

             

Public finances (percent of GDP)

           

Confederation budget balance 2/

-0.8

0.9

-0.4

-0.1

-0.9

-1.3

General government balance 2/ 3/

-0.6

2.2

0.0

-1.2

-1.9

-2.5

Gross public debt

50.2

49.9

50.5

54.9

55.6

56.2

             

Balance of payments

           

Trade balance (in percent of GDP)

-0.1

-1.0

-1.1

1.2

1.1

0.7

Current account (in percent of GDP)

11.5

12.5

8.5

8.5

10.2

9.6

Official reserves (end of year, US$ billion) 4/ 7/

36.3

32.3

32.0

40.2

47.6

49.8

             

Money and interest rates

           

Domestic credit (end of year) 5/

3.8

0.3

2.1

-0.9

1.1

1.9

M3 (end of year) 7/

0.9

-1.2

5.5

4.2

8.3

7.9

Three-month Libor rate (in percent) 6/

1.4

3.1

2.9

1.2

0.3

0.3

Government bond yield (in percent) 6/

2.9

3.8

3.3

3.1

2.5

2.5

             

Exchange rate

           

Exchange rate regime

 

Managed float

 

Present rate (April 13, 2004)

 

SwF 1.30 per US$1

 

Nominal effective exchange rate (1990=100) 7/

106.0

105.1

109.2

113.6

113.2

110.7

Real effective exchange rate (1990=100) 7/ 8/

100.2

97.8

100.7

104.4

104.0

102.0

             

Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

1/ Staff estimates and projections

2/ Including privatization revenue.

3/ Including Confederation, cantons, communes, and social security.

4/ Excluding gold.

5/ Figures for 2004 refer to a change from January 2003 to January 2004.

6/ Figures for 2004 refer to March.

7/ Figures for 2004 refer to February.

8/ Based on consumer prices.

           

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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