IMF Executive Board Concludes 2011 Article IV Consultation with Sweden

Public Information Notice (PIN) No. 11/88
July 13, 2011

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 2011 Article IV Consultation with Sweden is also available.

On July 8, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sweden.1

Background

Sweden’s recovery from the global recession has been very strong relative to other advanced countries. In 2010, output rose by 5½ percent, with exports, investment, and consumption all rising rapidly. Unemployment has come down to 7¾ percent, from its mid-crisis peak of over 9 percent, and core inflation has remained close to target throughout. Financial sector strains have been contained, bank capital and liquidity have strengthened, and most emergency stabilization measures have been withdrawn.

The fiscal deficit narrowed to 0.3 percent of GDP in 2010 and while public debt remains at about 40 percent of GDP, it is expected to fall. Alongside, a cautious monetary tightening cycle has been underway since July 2010, with the Riksbank raising the policy rate by 1¾ percentage points, together with prudential mortgage regulations to cool housing. Since its trough in mid-2009, the krona has appreciated by 20 percent against the euro, but remains competitive. Growth momentum has been maintained into 2011 with first quarter GDP rising by 6½ percent year-on-year. This success reflects the strength of domestic and global stabilization policies.

However, long-term and youth unemployment have lagged in the recovery, and fixed investment, although rising again, is still below 2006–08 levels relative to output. Furthermore, there is risk of a decline in house prices in coming years which could have an adverse impact on growth.

Executive Board Assessment

Executive Directors commended Sweden’s impressive recovery from the global recession, noting that its economic growth in 2010 was uniquely strong among advanced countries. This performance reflects decisive domestic policies, underpinned by sound policy frameworks.

Directors welcomed the measured exit from policy stimulus. The increases in the Riksbank policy rate confirm the commitment to low inflation. The withdrawal of many financial sector support measures alongside enhanced capital ratios has strengthened the resilience of the sector. The return to fiscal surpluses has reinforced strong sovereign credentials.

Directors noted that notwithstanding the positive outlook, challenges remain. Youth and long-term unemployment has lagged the recovery, fixed investment has remained below its pre-crisis level relative to GDP, and despite the recent dip in house prices, they still appear richly valued in the context of elevated household indebtedness. While the global economic outlook has improved, risks remain, especially from ongoing stresses in the euro area.

Directors commended the balance that the authorities had secured in their 2011 budget between supporting activity by maintaining a neutral stance given the remaining output gap, and continuing to build fiscal buffers against external uncertainties. In this regard, they welcomed the increased margins relative to spending ceilings and the postponement of planned tax reductions. Directors agreed that if scope remains for reductions in 2012, the focus should be on the earned income tax credit to strengthen labor market performance. Directors welcomed the role that the Fiscal Policy Council is playing as an effective watchdog. Going forward, it will be important to ensure that the Council remains adequately resourced.

Directors noted that continued moderation in wage settlements would provide a platform to secure a sustained reduction in unemployment. Along with further structural efforts, they encouraged adoption of permanent concessionary arrangements for labor market entrants.

Directors considered the anticipated further increases in the Riksbank policy rate to be appropriate. The authorities should stand ready to respond flexibly to circumstances, raising rates more rapidly if wage settlements accelerate and delaying somewhat if strong krona appreciation continues.

Directors welcomed the findings of the recent Financial Sector Assessment Program (FSAP) update, indicating the initial reassurance on credit risks. In light of the potential vulnerabilities stemming from house prices, they called for continued supervisory vigilance. The authorities should be prepared to take further macro prudential measures if significant new financial stability or consumer risks develop.

Directors welcomed recent measures to strengthen the monitoring of liquidity, as well as plans for early introduction of strong liquidity regulations taking specific account of risks in foreign currencies. Given the unique characteristics and risks of the Swedish financial system, Directors supported the authorities’ intention to go faster and further than Basel III capital regulations.

Directors also endorsed the FSAP recommendations on institutional issues. These include merging the stability and deposit insurance funds, establishing a special bank resolution regime, increasing further the Financial Supervisory Agency’s capacity, and improving coordination among institutions responsible for macro prudential policies.


Sweden: Selected Economic and Social Indicators, 2005–12
 
              Projections
  2005 2006 2007 2008 2009 2010 2011 2012
 

Real economy (in percent change)

               

Real GDP

3.2 4.3 3.3 -0.6 -5.3 5.5 4.4 3.8

Domestic Demand

3.0 3.9 4.7 0.0 -4.9 6.1 2.9 3.3

CPI inflation

0.8 1.5 1.7 3.3 2.0 1.9 3.0 2.5

Unemployment rate (in percent)

7.6 7.0 6.1 6.2 8.3 8.4 7.4 6.6

Gross national saving (percent of GDP)

24.5 27.2 29.6 28.9 23.4 25.0 26.0 27.0

Gross domestic investment (percent of GDP)

17.7 18.7 20.3 20.2 16.3 18.5 20.0 21.4

Output Gap (as a percent of potential)

4.2 5.6 5.4 1.5 -5.9 -3.1 -1.6 -0.9

Public finance (in percent of GDP)

               

Total Revenues

53.8 53.0 52.5 51.9 52.1 50.7 49.3 48.6

Total Expenditures

51.8 50.8 46.1 46.6 49.7 47.8 45.2 44.2

Overall balance

1.9 2.2 3.6 2.2 -0.9 -0.3 0.8 1.3

Structural balance (as a percent of potential GDP) 1/

3.0 1.9 1.0 0.9 1.3 1.4 1.3 1.2

General government gross debt, official statistics

50.4 45.3 40.2 38.8 42.8 39.8 36.1 32.7

Gross public debt, Maastricht criterion

50.2 45.0 40.0 38.3 42.1

Money and credit (12-month, percent change)

               

M1

9.4 11.1 9.9 4.9 8.0 7.1 ... ...

M3

7.5 10.6 12.5 10.4 8.2 4.5 ... ...

Credit to non-bank public

10.8 11.2 14.3 7.7 ... ... ... ...

Interest rates (year average)

               

Repo rate

1.5 3.0 4.0 2.0 0.3 1.3 ... ...

Three-month treasury bill rate

1.7 2.3 3.5 3.8 0.4 0.5 ... ...

Ten-year government bond yield

3.4 3.7 4.2 3.9 3.3 2.9 ... ...

Balance of payments (in percent of GDP)

               

Current account

6.8 8.4 9.2 8.7 7.0 6.3 6.0 5.7

Trade balance

7.2 7.8 7.2 6.6 6.6 6.0 5.8 5.4

Foreign Direct Investment, net

-4.5 0.7 -2.3 1.2 -5.2 -2.1 -2.1 -2.1

International reserves (in billions of US dollars)

26.4 26.0 29.7 35.4 44.2 46.6 53.9 55.8

Reserve cover (months of imports of goods and services)

2.1 2.0 1.8 1.7 3.0 3.3 2.9 2.9

Exchange rate (period average, unless otherwise stated)

               

Exchange rate regime

Free Floating Exchange Rate

Skr per U.S. dollar (June 1, 2011)

6.15

Nominal effective rate (2000=100)

99.2 99.5 101.3 99.5 90.7 97.8 ... ...

Real effective rate (2000=100) 2/

84.4 80.2 84.2 84.4 80.0 81.8 ... ...

Fund Position (April 30, 2011)

               

Holdings of currency (in percent of quota)

74.51

Holdings of SDRs (in percent of allocation)

100.74

Quota (in millions of SDRs)

2395.50

Social Indicators (reference year)

GDP per capita (in current PPP US dollars, 2009): 35,805; Income Distribution (ratio of income received by top

and bottom quintiles, 2005): 3.3; Life expectancy at birth (2009): 79.3 (males) and 83.3 (female); Automobile ownership

(2004): 456 per thousand; CO2 Emissions (tonnes per capita, 2007): 5.4; Population Density (inhabitants per sq. km.,

2008): 22; Poverty Rate (share of the population below the established risk-of-poverty line, 2005): 9%.

 

Sources: Statistics Sweden; Riksbank; Ministry of Finance; Datastream; INS; and IMF staff estimates.

1/ IMF Staff Estimates

2/ Based on relative unit labor costs in manufacturing.


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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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