IMF Executive Board Concludes 2006 Article IV Consultation

with Switzerland

Public Information Notice (PIN) No. 06/63
June 12, 2006

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 2005 Article IV consultation with Switzerland is also available.

On June, 2, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1


After a period of mixed performance, the Swiss economy is showing some spark. Supported by a favorable external environment and accommodative monetary policy, the economy recovered in 2005, with the financial sector accounting for almost half of the rebound. Unemployment, has started to recede. Despite rising oil prices, inflation remains under control and the current account is running a large surplus.

As the recovery gained traction, the Swiss National Bank (SNB) resumed raising its policy interest rate. Nonetheless, monetary conditions remain supportive as short-term interest rates are still slightly negative and the effective exchange rate has weakened somewhat. The general government deficit was halved in 2005 to 0.6 percent of GDP but the structural deficit remained unchanged owing to the deterioration of the underlying position of social security. The federal government is on track to eliminate its small structural deficit by 2007.

The staff projects growth to accelerate in 2006 to over 2 percent, closing the negative output gap, and consumer price inflation to remain just above 1 percent. The risks to the short-term outlook are mostly external and appear balanced, assuming Switzerland is able to make additional progress on structural reform.

Executive Board Assessment

Switzerland's economy continues to gain momentum with low inflation and increasing employment. Directors commended the Swiss authorities for their prudent macroeconomic management, sound monetary and fiscal policy frameworks, and flexible labor markets, and welcomed continued efforts to advance structural reforms. While potentially exposed to a disorderly unwinding of global imbalances, short-term risks facing Switzerland generally appear contained. Directors noted that the main medium-term policy challenges are to strengthen potential economic growth while addressing the fiscal pressures from an aging population.

Directors noted that the current recovery presents an important opportunity for Switzerland to advance with ambitious economic reforms in order to boost potential growth. In this regard, they welcomed the efforts at reforming and further opening up the domestic product markets and network industries. At the same time, Directors underlined the importance of moving forward decisively with further liberalization of sheltered sectors, including by reducing red tape and state regulations, lowering nontariff barriers to trade, and reducing the very high levels of protection and subsidization in the agriculture sector.

Directors supported the authorities' intention to eliminate the structural federal deficit by 2007. Noting the strains likely to be put on the public finances by population aging, Directors strongly supported the authorities' launching of structural fiscal reforms to place social programs on a sound long-term footing. In this context, a number of Directors were disappointed that several cantons preferred to use their share of the proceeds of the gold sale to lower taxes. They welcomed the authorities' commitment to prepare a Long-Run Fiscal Sustainability Report, which should bolster public understanding of the issues involved, and help forge the needed consensus for reform, including at the subnational levels.

Directors noted that the monetary policy framework continues to serve Switzerland well, underpinned by effective communication practices of the Swiss National Bank (SNB). Directors supported the SNB's move to tighten monetary policy gradually to a neutral stance, while closely monitoring the pace of tightening against evolving economic conditions. They noted in particular that the SNB should stand ready to act promptly and decisively if signs of price pressure emerge or in the event of disruptive exchange rate volatility. Directors welcomed the authorities' policy of non-intervention in the foreign exchange markets, in keeping with the Swiss franc's freely floating regime.

Directors noted that the Swiss financial system appears to be healthy and dynamic. They welcomed the strengthening of the regulatory and supervisory framework, and the authorities' appropriate vigilance in monitoring financial sector risks. Nevertheless, Directors noted that there remains room for improving pension industry regulations, and urged the authorities to consider a unified regulatory and supervisory system, to introduce risk-based supervision, and to improve disclosure standards.

Switzerland: Selected Economic Indicators

  2002 2003 2004 2005 2006 1/

Real Economy


Real GDP

0.3 -0.3 2.1 1.9 2.2

Real total domestic demand

-0.5 0.5 1.1 2.0 2.1

CPI (year average)

0.6 0.6 0.8 1.2 1.1

Unemployment rate (in percent of labor force)

2.5 3.7 3.9 3.8 3.7

Gross national saving (percent of GDP)

30.0 34.3 35.0 34.6 34.4

Gross national investment (percent of GDP)

21.7 21.0 20.4 20.8 20.7

Public finances (percent of GDP)


Confederation budget balance 2/

-1.0 -0.9 -0.6 -0.2 -0.2

General government balance 2/3/

-1.2 -1.4 -1.2 -0.6 -1.0

Gross public debt

53.1 53.9 53.7 52.0 50.7

Balance of payments


Trade balance (in percent of GDP)

1.2 1.0 1.5 0.7 0.8

Current account (in percent of GDP)

8.3 13.3 14.6 13.8 13.7

Official reserves (end of year, US$billion) 4/5/

40.2 47.7 55.5 36.3 34.8

Money and interest rates


Domestic credit (annual average) 6/

-0.5 0.6 2.3 4.5 6.3

M3 (annual average) 6/

3.8 8.3 3.2 4.5 3.8

Three-month Libor rate (in percent ) 5/

3.1 2.5 2.6 2.1 2.4

Government bond yield (in percent) 5/

3.1 2.5 2.6 2.1 2.4

Exchange rate


Exchange rate regime     Managed float


Present rate (April 13, 2006)     SwF 1.29 per US$1


Nominal effective exchange rate (1990=100) 7/

108.2 108.6 108.4 108.2 106.9

Real effective exchange rate (1990=100) 8/

106.3 106.4 105.6 104.0 103.3

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 2006 refer to March,.
6/ Figures for 2006 refer to a change from February 2005 to February 2006.
7/ Figures for 2006 refer to February.
8/ Based on consumer prices, figures for 2006 refer to January.

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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