IMF Executive Board Concludes 2007 Article IV Consultation with Norway

Public Information Notice (PIN) No. 07/65
June 7, 2007

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 June 4, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway.1


The Norwegian economy is set to grow strongly in 2007 for the fourth consecutive year. This economic performance is underpinned by strong monetary and fiscal policy frameworks. External demand, both for petroleum products and other Norwegian exports, is strong, and rapid credit growth, rising house prices, and tight labor markets are supporting domestic demand. Unit labor cost increases and core inflation have been subdued, although rapidly rising employment, an unemployment rate that has fallen to near record lows, and increasing reports of labor shortages and wage drift indicate intensifying pressures.

Although underlying inflation has been below the inflation target of a 2.5 percent increase in consumer prices, Norges Bank has been increasing interest rates since mid-2005 in response to robust demand conditions. Initially, Norges Bank raised rates gradually, but more recently has picked up the pace. As a result of these increases, monetary conditions have tightened substantially.

Fiscal policy is governed by guidelines, including a rule that the central government non-oil structural deficit should equal 4 percent of the assets in the Government Petroleum Fund-Global (GPF), with temporary deviations for specific reasons. In 2006, for the first time the budget outturn came very close to meeting this rule. For 2007, the relevant deficit is set to fall below 4 percent of the GPF, although since the GPF itself is growing rapidly, the resulting overall fiscal stance will be expansionary.

Parliament recently agreed to a significant package of pension reforms, which promises significant long-term containment of pension costs. Key elements of the package includes benefits based on lifetime earnings, adjustment for rising life expectancy, an actuarially neutral benefit structure to reduce early-retirement incentives, and lower indexation of benefits.

Executive Board Assessment

Executive Directors commended the Norwegian authorities for their strong rules-based monetary and fiscal policy frameworks and prudent management of oil wealth, which have promoted noninflationary growth and mitigated possible adverse effects of oil revenues. Directors welcomed the robust economic expansion of the past three years, which has been underpinned by strong markets for Norwegian exports, notably petroleum products, and supportive monetary conditions. Wage and price pressures have been moderate, in part reflecting favorable supply-side developments, including substantial labor inflows from new EU member countries. Directors noted that the key challenges facing Norway will be to ensure sustained noninflationary growth and medium-term fiscal sustainability.

Directors observed that short-term growth prospects remain promising but noted the increasing indications of demand pressures, including a falling unemployment rate and reports of labor shortages and wage drift. Against this backdrop, they commended the gradual increase in policy interest rates during the past two years, and considered that further increases would be appropriate in the period ahead. Several Directors suggested that the pace of interest rate increases should remain gradual, so that the effects of such increases and other new information on economic developments can be adequately assessed. Directors recognized that further tightening could put upward pressure on the exchange rate, but viewed this as part of the monetary transmission mechanism in an open economy.

Directors were of the view that inflation targeting and a flexible exchange rate have served Norway well. They welcomed innovations that have increased transparency and moved Norway to the forefront among inflation targeting countries. Directors recommended that the authorities continue to explain the policy framework to the public, in order to reinforce understanding and further cement its credibility.

Directors considered that the fiscal guidelines have contributed to prudent fiscal policy, and commended the authorities for bringing the central government non-oil structural deficit to close to 4 percent of the assets of GPF in 2006. They welcomed the objective of reducing the deficit to below 4 percent in 2007, consistent with the fiscal guidelines. Looking ahead, Directors emphasized the need for continued fiscal restraint—in view of the cyclical economic boom, the prospect that deficits will expand significantly under the fiscal guidelines in the years ahead, and the projected large costs of aging. Directors encouraged the adoption of an explicit medium-term fiscal framework—building on the many parts of such a framework that are already in place—to increase the effectiveness of fiscal policy. Directors commended the authorities for the high level of transparency of the GPF, which has enhanced public ownership and support for it while strengthening government accountability.

Directors welcomed the recent parliamentary agreement on pension reform. They judged that the package would contain long-run pension costs and encourage people to stay in work longer through improved incentives. Directors urged that the reforms be implemented as quickly as possible, along with complementary reforms to the early retirement and disability schemes. They noted, however, that on current estimates these reforms will not be sufficient to ensure long-term fiscal sustainability, and therefore welcomed the authorities' consideration of further measures.

Directors considered that the financial sector appears sound and is well supervised, and welcomed the adoption of the bulk of the recommendations of the 2005 Financial Sector Assessment Program. Noting the risks posed by the prolonged credit expansion, the rapid rise in house prices, and aggressive lending practices, Directors urged the Financial Supervisory Authority to continue to ensure that banks remain well capitalized and provisioned, follow prudent lending practices, and maintain high asset quality.

Directors welcomed the impressive performance of the Norwegian labor market but recognized that the rapid growth in enrollment in sickness and disability poses challenges. Directors welcomed the recent reforms, including the merger of welfare agencies to improve case management. They considered, however, that further measures, including a review of the high replacement rates, would be required.

Directors welcomed the improving product market performance. To maximize the benefits of competitive markets, they stressed the need to maintain a level playing field between the private sector and the large state-owned sector through continued effective governance of the latter and suggested that, where appropriate, consideration could be given to further privatization. They also urged strong enforcement of competition and anti-cartel laws.

Norway: Selected Economic Indicators, 2002-07

            Proj. 1/
  2002 2003 2004 2005 2006 2007

Real economy (change in percent)


Private consumption

3.1 2.8 5.6 3.3 4.3 4.0

Public consumption

3.1 1.7 1.5 1.8 2.2 2.8

Gross fixed investment

-1.1 0.2 10.2 11.2 8.9 5.7

Export of goods and services

-0.3 -0.2 1.1 0.7 1.5 2.4

of which: Oil and gas

2.4 -0.6 -0.5 -5.0 -5.4 -1.3

Import of goods and services

1.0 1.4 8.8 8.6 9.1 5.5


1.5 1.0 3.9 2.7 2.9 2.8

Mainland GDP 2/

1.4 1.3 4.4 4.5 4.6 3.8

Consumer prices

1.3 2.5 0.4 1.6 2.3 0.8

Wages (full-time equivalents)

5.7 4.5 3.8 3.3 4.3 ...

Unemployment (percent of labor force)

3.9 4.5 4.5 4.6 3.4 2.8

Nominal effective exchange rate

9.0 -1.8 -2.4 4.2 -0.3 ...

Money and credit (end-period, 12-month percent change)


Broad money, M2

8.6 2.3 7.8 11.3 13.3 ...

Domestic credit

8.9 6.8 8.9 13.1 14.6 ...

Interest rates (year average, in percent)


Three-month interbank rate

6.9 4.1 2.0 2.2 3.0 ...

Ten-year government bond yield

6.4 5.0 4.4 3.7 4.1 ...

Public finance (percent of mainland GDP)


Central government 3/



56.4 54.9 55.1 59.5 63.7 60.9

of which: Non-oil revenues

41.3 39.9 38.7 39.0 39.6 40.8


47.7 46.5 45.9 45.0 43.7 44.5

Overall balance

8.7 8.4 9.2 14.6 19.9 16.3

of which: Non-oil balance

-5.1 -5.2 -5.8 -4.5 -2.8 -2.4

General government financial balance 4/

11.5 9.1 14.3 20.4 25.0 20.9

of which: Non-oil balance

-3.8 -6.7 -4.7 -3.1 -2.0 -1.9

Balance of payments (percent of mainland GDP)


Current account balance

15.7 15.4 16.4 20.8 23.0 18.9

of which: Non-oil balance

-6.5 -6.5 -8.4 -8.5 -8.7 -9.4

Sources: Ministry of Finance; Norges Bank; Statistics Norway; International Financial Statistics; and IMF staff estimates.

1/ IMF staff projections as of March 2007. Fiscal projections are based on the revised 2007 budget, published on May 15, 2007.

2/ Excludes items related to petroleum exploitation and ocean shipping.

3/ Budget definition.

4/ National accounts definition.

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.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100