IMF Executive Board Concludes 2010 Article IV Consultation with Finland

Public Information Notice (PIN) No. 10/122
September 2, 2010

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 2010 Article IV Consultation with Finland is also available.

On August, 25, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Finland.1


Finland’s economy has been dealt a severe blow by the global crisis and the recovery is slow. Owing to the high dependence of its exports on countries and commodities severely impacted by the downturn, Finland experienced the worst recession in the euro area in 2009, with gross domestic product (GDP) collapsing by 8 percent in 2009. Growth was mildly negative in both the final quarter of 2009 and the first quarter of 2010, technically putting Finland in a double-dip recession. A moderate resumption of growth is projected, with output expanding by 1¼ percent in 2010 and around 2 percent in 2011, although the outlook is unusually uncertain.

The impact of the crisis on employment and inflation was contained. The unemployment rate rose relatively little from 6½ to 8¼ percent during 2008–09 reflecting the absence of evident domestic bubbles, voluntary job hoarding given early population aging, and the government-subsidized temporary employment-support program. The labor market is anticipated to lag the pick-up in activity, with unemployment hitting 8 percent in 2010. Inflation turned down markedly in 2009. However, it has outpaced the EU average since late 2008, in part as the result of generous multi-year collective wage agreements in 2007 that were generally in excess of productivity gains. As a result, external competitiveness has deteriorated but remains adequate.

With fiscal policy turning to support growth, the budget position worsened sharply in 2009, reversing years of impressive performance. The general government headline balance went abruptly from a surplus of 4 percent of GDP in 2008 to a deficit of 2½ percent of GDP in 2009. In 2010 the headline fiscal balance is expected to drop to a deficit of 3½ percent of GDP, breaching the Stability and Growth Pact limits. This deterioration primarily reflects further structural relaxation of around 1 percent of GDP implying only a small structural primary fiscal surplus in 2010.

The banking system has weathered the global turmoil well thanks to healthy capital buffers and prudent management. Finnish banks have limited exposure to opaque structured products or vulnerable countries, including those within Europe. The country’s stern regulatory and supervisory environment has helped shield the financial sector from the worst of the crisis. Profitability and asset quality have deteriorated in the turmoil, while capital coverage has dropped, but remained well above regulatory minima. The financial condition of insurance companies and pension funds recovered in 2009 after sharply weakening in 2008.

Executive Board Assessment

Executive Directors commended the authorities for their continued strong policies, which helped mitigate the impact of the global crisis. Because of their geographic distribution and product composition, Finland’s exports have been particularly hard hit by the global downturn in 2009, and the economy experienced a severe recession. Looking ahead, while a gradual recovery is anticipated for 2010–11, the outlook remains highly uncertain. Directors underscored that a possible permanent loss of output, along with rapid population aging, would heighten challenges to growth and fiscal sustainability.

Directors agreed that the financial system had weathered the global turbulence well, thanks to healthy capital buffers, prudent management, and vigilant supervision. They noted staff’s assessment that direct exposure to opaque structured products or highly vulnerable countries is limited and spillover risks are manageable. Nevertheless, they encouraged the authorities to remain vigilant and focus their efforts on improving bank cost efficiency, preventing excessive risk taking, and limiting liquidity and funding risks. In light of the high degree of foreign ownership of banks, Directors agreed that it is crucial to further strengthen the effectiveness of cross-border supervision and crisis management arrangements, and welcomed the recent establishment of the Nordic-Baltic Stability Group.

Directors supported the ongoing stimulatory fiscal stance to confront the economic downturn, but noted that strong and credible consolidation would be called for starting in 2011. In this context, many Directors concurred with the authorities’ plans for a relatively large fiscal adjustment already in 2011. Considering the large uncertainties still surrounding the extent of the economic recovery, many other Directors, however, supported a more moderate pace of fiscal consolidation in 2011 which, in their view, would better achieve the balance between the twin objectives of restoring fiscal sustainability and allowing the recovery to continue.

Over the medium term, Directors endorsed a gradual closing of the sustainability gap by 2020. They concurred that fiscal adjustment efforts should focus on expenditure restraint, while efforts could also be made to broaden the tax base, including through higher property and indirect taxes and by reducing the number of items on reduced VAT rates and other special treatments. Directors stressed that, with growing pressures from an aging population, it is important that the authorities take the necessary measures to increase the effective retirement age, enhance efficiency in the provision of public services, and contain demand for these services to secure fiscal sustainability.

Directors concurred that Finland maintains an adequate margin of external competitiveness. They noted, however, that competitiveness has been eroded recently by large wage increases, which would have to be commensurate with productivity growth going forward.

Directors welcomed the authorities’ continued commitment to structural reforms, particularly in the labor market, in view of Finland’s aging population. They underscored the importance of increasing labor utilization and productivity growth to enhance potential output and improve the long-tem fiscal position. Directors encouraged the authorities to consider measures to further limit the transition to early retirement via unemployment and disability, and boost employment among the young. They also supported actions to increase competition and foster research and entrepreneurship.

Finland: Selected Economic Indicators

  2008 2009 2010 1/ 2011 1/

Real economy


GDP (change in percent)

0.9 -8.0 1.2 2.0

Harmonized CPI (change in percent) 2/

3.9 1.6 1.4 1.8

Unemployment rate (in percent) 2/

6.4 8.3 8.8 8.7

Gross national saving (in percent of GDP)

24.9 18.9 19.3 19.1

Gross domestic investment (in percent of GDP)

21.8 17.5 17.8 17.6

Public finances (general government, in percent of GDP)


Overall balance

4.1 -2.4 -3.4 -1.8

Primary balance

5.6 -1.0 -2.1 -0.4

Gross debt (Maastricht definition)

34.2 44.0 50.0 52.2

Money and credit (end of year, percentage change)


M3 (Finnish contribution to euro area 3/

5.0 -1.7 -0.8

Finnish MFI euro area loans 3/

11.6 1.7 4.5

Interest rates (year average)


Three-month money market 4/

4.6 1.2 0.8

Ten-year government bonds 4/

4.3 3.7 2.9

Balance of payments (in percent of GDP)


Trade balance

3.7 2.3 1.9 1.8

Current account

3.1 1.3 1.5 1.4

Fund position (as of end-June 2010)


Fund holding of currency (in percent of quota)


Holdings of SDR (in percent of allocation)


Quota (in millions of SDRs)


Exchange rate


Exchange rate regime


Present rate (August 5, 2010)

US$1.32 per euro

Nominal effective exchange rate (increase in percent) 5/

2.6 1.3

Real effective exchange rate (increase in percent) 5/ 6/

4.1 5.5

Sources: Finnish authorities; International Financial Statistics; and IMF staff estimates.

1/ IMF staff estimates and projections, unless otherwise indicated.

2/ Consistent with Eurostat methodology.

3/ For 2010, annual change through April.

4/ For 2010, data are for April.

5/ For 2009, data are for first 10 months.

6/ Based on unit labor costs.

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. An explanation of any qualifiers used in summings up can be found here:


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