## 1norea2019001 - 2.5 percent this year, before growth slows to 2.1 percent in 2020.

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### Outlook and risks
- Short-term forecast headline: "2.5 percent this year, before growth slows to 2.1 percent in 2020."
- Real GDP projections (change in percent):
  - Real GDP: 2018: 1.2, 2019: 2.0, 2020: 1.4, 2021: 2.2, 2022: 1.8.
  - Mainland GDP: 2018: 1.1, 2019: 2.0, 2020: 2.2, 2021: 2.5, 2022: 2.1.
  - Staff note: first half 2019 growth about 2½–2¾ percent; coincident indicators suggest 2019 might be stronger than last year.
- Risks to the outlook:
  - External: Global trade tensions persist; uncertainty about European growth.
  - Domestic: Residential house price growth has abated but remains overvalued; commercial real estate (CRE) valuations growing strongly and stretched in some segments.
  - Upside: Resilient oil prices could lead to stronger-than-expected oil-related investment and exports.
- Output gap and unemployment:
  - Output gap (mainland economy): 2018: -0.9, 2019: -0.6, 2020: -0.2, 2021: 0.5, 2022: 0.7.
  - Unemployment rate (percent of labor force): 2018: 4.7, 2019: 4.2, 2020: 3.9, 2021: 3.7, 2022: 3.7.

### Fiscal policy and public finances
- 2019 budget stance:
  - 2019 budget deficit is likely to be mildly expansionary after better-than-expected outturn last year.
  - Structural non-oil deficit expected to be broadly unchanged over the 2017–19 period.
- Key fiscal projections and indicators (percent of mainland or trend mainland GDP unless stated):
  - Central government non-oil balance: 2018: -7.7, 2019: -8.0, 2020: -7.5, 2021: -7.5, 2022: -7.0.
  - Structural non-oil balance: 2018: -7.4, 2019: -7.6, 2020: -7.2, 2021: -7.7, 2022: -7.7.
  - Fiscal impulse: 2018: 7.4, 2019: 0.2, 2020: -0.4, 2021: 0.5, 2022: 0.0.
  - Fiscal impulse (percent of Government Pension Fund Global): 2018: -2.7, 2019: -2.9, 2020: -2.5, 2021: -2.9, 2022: -2.7.
  - General government overall balance: 2018: 4.6, 2019: 5.8, 2020: 8.8, 2021: 9.0, 2022: 9.9.
  - Net financial assets: 2018: 326.1, 2019: 350.9, 2020: 329.4, 2021: 346.1, 2022: 348.4.
  - Capital of Government Pension Fund Global (GPF-G): 2018: 276.8, 2019: 303.2, 2020: 283.5, 2021: 302.6, 2022: 306.5.
- Directors' policy recommendations:
  - Target a modest consolidation next year; staff recommend ¼–½ percent of GDP structural consolidation in the 2020 budget.
  - Address medium-term pressures from demographics and slower sovereign wealth fund growth by expenditure savings or new revenue sources.
  - Make the tax system more efficient: lower tax incentives on housing and broaden the VAT base.
  - Offset measures with well targeted transfers to protect the most vulnerable where needed.

### Monetary policy and inflation
- Inflation indicators (CPI average and core inflation):
  - CPI (average): 2018: 3.6, 2019: 1.9, 2020: 2.8, 2021: 2.3, 2022: 1.7.
  - Core inflation: 2018: 3.1, 2019: 1.4, 2020: 1.5, 2021: 1.9, 2022: 1.9.
- Central bank actions and outlook:
  - Main policy rate: raised by 50 basis points since August last year and is now at 1 percent.
  - Central bank forward guidance suggests further rate hikes ahead; policy rate at 1 percent is "thus negative in real terms" (per authorities' note with real neutral rate between 0 to 1 percent).
  - Three-month interbank rate (year average): 2018: 1.1, 2019: 0.9, 2020: 1.1, 2021: 1.6, 2022: 2.1.
  - Ten-year government bond yield (year average): 2018: 1.3, 2019: 1.6, 2020: 1.9, 2021: 2.1, 2022: 2.6.
- Directors' assessment:
  - Support for ongoing normalization to balance containing inflation and minimizing self-induced slowdown risks.
  - Caution that faster tightening could appreciate the krone and compound downward inflation pressures; authorities should be ready to adjust pace.

### Financial sector and macroprudential issues
- Banking sector health and buffers:
  - Banks remain liquid, profitable, and well-capitalized.
  - Average common equity tier 1 (CET1): 15.7 percent (2018:Q3); Q4 CET1 "came in at 16.2 percent" per authorities' statement.
  - Average leverage ratios above 8 percent; aggregate LCR at 140 percent and NSFR at 115 percent.
- AML/CFT and supervision:
  - New AML/CFT law approved gives the Financial Supervisory Authority greater sanctioning powers.
  - Increased budgetary resources for AML/CFT supervision welcomed.
- Household and real estate risks:
  - Household debt continues to rise despite recent slowdown in credit growth.
  - Residential house prices: growth softened but remain overvalued (staff estimates: national 0–10 percent overvaluation; Oslo 5–20 percent).
  - CRE: valuations appear stretched in some segments; banks have substantial exposure.
- Macroprudential policy recommendations:
  - Too early to loosen macro-prudential measures given remaining overvaluation and rising household leverage.
  - Increase in the counter-cyclical buffer supported to increase resilience to CRE risks.
  - Monetary normalization should help restrain price growth in the CRE sector.
  - Close existing data gaps on CRE; caution urged against loosening mortgage regulations at end-2019 review barring large unexpected changes.

### Structural policies and labor market
- Labor market developments:
  - Labor Force Survey unemployment rate trending down from mid-2016 peak around 5 percent to 3.8 percent now; employment growing around 2 percent.
  - Employment rate picked up despite negative demographic impulse; pension reform expected to foster labor mobility and support participation among older employees.
  - Wage growth has started to trend up after earlier weakness; negotiated wage growth of 3.2 percent in manufacturing noted.
- Priority reforms and recommendations:
  - Reform of sickness and disability benefits identified as most pressing: tighten eligibility, improve incentives to work, better education and training of beneficiaries, and other measures to boost employment opportunities.
  - Continued wage restraint needed to underpin competitiveness.
  - Consider distributional consequences and offset with targeted transfers if required.
- Longer-term challenges:
  - Population aging and declining oil and gas reserves require enhancing labor supply and overall competitiveness; diversification needed as declining oil and gas production reduces sovereign fund capacity to finance future spending without adjustment.

### External sector and oil
- Key external indicators:
  - Current account balance (percent of mainland GDP): 2018: 4.6, 2019: 6.7, 2020: 9.8, 2021: 8.8, 2022: 8.4.
  - Current account balance (percent of GDP): 2018: 4.0, 2019: 5.6, 2020: 8.1, 2021: 7.4, 2022: 7.1.
  - Exports of goods and services (volume change): 2018: 1.1, 2019: -0.2, 2020: -0.8, 2021: 2.4, 2022: 2.8.
  - Imports of goods and services (volume change): 2018: 3.3, 2019: 1.6, 2020: 0.9, 2021: 2.9, 2022: 2.7.
  - Terms of trade (change): 2018: -9.9, 2019: 4.9, 2020: 1.1, 2021: 0.8, 2022: -0.9.
  - Crude oil price (USD): 2018: 42.8, 2019: 52.8, 2020: 68.3, 2021: 59.2, 2022: 59.0.
- External assessment:
  - Directors noted a challenging external environment and longer-term headwinds from demographic pressures and declining oil contribution.
  - Upside risk: resilient oil prices could boost oil-related investment and exports.

### Selected key statistics (2018–2020 highlights)
- Population (2018): 5.3 million.
- Per capita GDP (2018): US$ 81,848.
- Literacy: 100 percent.
- Gross national saving (percent of GDP): 2018: 32.7, 2019: 33.8, 2020: 35.7.
- Gross domestic investment (percent of GDP): 2018: 28.7, 2019: 28.2, 2020: 27.6.
- International reserves (end of period, in billions of US dollars): 2018: 60.9, 2019: 65.1, 2020: 63.8.
- Exchange rate: Bilateral rate (NOK/USD), end-of-period: 2018: 8.4, 2019: 8.3, 2020: 8.1.
- Real effective rate (2010=100): 2018: 86.6, 2019: 87.4, 2020: 87.4.

### External position and exchange rates (assessment)
- Current account surplus surged to 8.8 percent of mainland GDP last year from under 7 percent in 2017; NEER and REER have not appreciated as in past oil price increases.
- Staff assessment:
  - Current account surplus between 2 and 3 percentage points of GDP weaker than implied by fundamentals and desirable policies (versus 3 to 4 percentage points last year).
  - REER assessed to be between 5 to 10 percent stronger (versus 10 to 15 percent last year).
- NIIP and external buffers:
  - NIIP reached 242 percent of mainland GDP at end-2018 (207 percent in 2014).
  - General government net external assets: 270 percent of mainland GDP.
  - Government Pension Fund Global (GPFG) assets under management: 300 percent of mainland GDP.
  - International reserves: 21 percent of mainland GDP.
- Staff-assessed current account gap and norms:
  - Cyclically-adjusted 2018 CA: 7.5 percent of GDP.
  - EBA regression-estimated norm: 11.9 percent of GDP.
  - Staff-adjusted norm: around 9½ –10½ percent of GDP, implying current account gap of minus 2–3 percent of GDP.
  - EBA-Lite model gap: minus 2.9 percent of GDP (sensitivity range -1 to -5 percent of GDP).

### Housing market and household debt
- House price growth has softened significantly:
  - National house prices rising at around 2.5 percent (y/y), compared to over 10 percent y/y during the boom.
  - Oslo’s house price growth slowed from over 20 percent at the peak to around 5 percent y/y in recent months.
- Staff estimates of overvaluation:
  - House prices remain above fundamentals: 0–10 percent at the national level and 5–20 percent in Oslo.
- Household indebtedness:
  - Households hold debt "more than twice the size of their annual disposable income."
  - Household debt continues to increase from already high levels; high share of variable-rate mortgages makes households sensitive to interest rate rises.
  - Consumer credit accounts for 3 percent of total household debt but has grown rapidly; rising default rate observed.

### Commercial Real Estate (CRE) risks and data gaps
- CRE developments:
  - Real CRE prices have increased by more than 50 percent since 2000; prime offices in Oslo about 2½ times more expensive than early 2000s (real terms).
  - Banks’ lending to commercial property companies represented 56 percent of total corporate loans (15 percent of all bank loans) as of June-2018.
  - Banks’ exposure to CRE loans and bond holdings poses vulnerabilities; CRE loans account for 15 percent of banks’ loan portfolio (23 percent of GDP).
- Policy and monitoring recommendations:
  - Increase in the countercyclical buffer from 2 to 2.5 percent at year-end welcomed.
  - Recommend stepping up efforts to collect and disseminate comprehensive CRE data for better monitoring.
  - Macro-prudential measures on CRE currently bank-targeted and could leak with rising non-bank financing.

### Prudential toolkit and recommendations
- Mortgage and consumer credit regulation:
  - Current mortgage regulations combine capital and borrower-based measures (maximum LTV and DTI); the "speed limit" share allowed to deviate: 8 percent in Oslo vs. 10 percent nationally.
  - Recommendation: extend regulations as is when reviewed at year-end; preserve tighter limits for Oslo; consider making regulations permanent with adjustable parameters.
  - New consumer credit regulation introduced in February and effective in May has slowed consumer credit growth since 2018; licensing of debt information service providers completed in June 2018.
- Macroprudential contingencies:
  - Floating krone is first line of defense; Norges Bank has some room to cut rates and could consider quantitative easing in a sharp downturn.
  - Norway has room to expand the non-oil deficit by about 1 percent of GDP and still be within the 3 percent fiscal rule limit.
  - Regulators could release the counter-cyclical capital buffer if bank credit suffers in a downturn; macro-prudential policies could be loosened if house prices fall enough to change risk balance.

### Risk Assessment Matrix — Selected downside and upside risks
- Downside:
  - Sharp tightening of global financial conditions (Low/Medium likelihood) — expected impact: Medium/High.
  - Weaker than expected global growth (Medium likelihood) — expected impact: Low/Medium.
  - Large reduction in house prices and deleveraging (Medium likelihood) — expected impact: Housing shock to consumption and banks.
  - Sharp increases in CRE risk premia (Medium likelihood) — expected impact: CRE losses for banks.
  - Rising protectionism (High likelihood) — expected impact: Low/Medium.
- Upside:
  - Large swings in energy prices (Low/Medium likelihood) — expected impact: Medium/High; policy response: bring forward fiscal tightening and rate hikes or save additional revenues.

### Public Sector Debt Sustainability Analysis — Baseline scenario (selected figures)
- Nominal gross public debt (percent of GDP): 2017: 34.9; 2018: 33.3; 2019: 33.6; 2020: 35.6; 2021: 35.7; 2022: 36.5; 2023: 37.3; 2024: 37.9; 2024 (alternate): 38.8.
- Real GDP growth (percent): 2017: 1.0; 2018: 2.0; 2019: 1.4; 2020: 2.2; 2021: 1.8; 2022: 1.6; 2023: 1.4; 2024: 1.5; 2024 (final): 1.5.
- Inflation (GDP deflator, percent): 2017: 2.2; 2018: 3.9; 2019: 5.6; 2020: 1.8; 2021: 1.7; 2022: 1.9; 2023: 2.0; 2024: 2.0; 2024 (final): 2.0.
- Effective interest rate (percent): 2017: 3.1; 2018: 2.1; 2019: 1.9; 2020: 2.4; 2021: 2.0; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2024 (final): 2.5.
- Sovereign spreads: EMBIG (bp) 159; 5Y CDS (bp) 11.
- Debt dynamics highlights:
  - Change in gross public sector debt (year sequence): -1.9, 1.6, 0.3, 2.0, 0.2, 0.7, 0.9, 0.6, 0.9; cumulative 5.2.
  - Identified debt-creating flows (cumulative): -8.1, -4.0, -6.4, -5.6, -5.2, -5.3, -5.2, -5.5, -5.6; cumulative -32.3.
  - Primary deficit (year sequence): -8.4, -2.6, -5.0, -5.1, -4.6, -4.7, -4.7, -4.9, -5.2; cumulative -29.2.
- Baseline message: a permanent fiscal adjustment of 4–5 percent of GDP will be needed to secure intertemporal solvency, though it could be spread over many decades.

### Reforming sickness and disability pensions — findings and recommended measures
- Scale:
  - More than 13 percent of working age population receive temporary and permanent disability benefits.
  - 9 percent receive permanent disability benefits.
- Design features driving transitions:
  - Generous sickness and temporary disability benefits; young beneficiaries often receive higher incomes than working peers.
- Predictors:
  - Education: recipiency among individuals without upper secondary school is five times higher than among those with a university degree.
  - Age: recipiency among 62–67 year olds is 30 percent.
- Recommended reform package elements:
  - Reform sick pay: employers and employees share financial cost of prolonged sick leave; increase use of partial absence certificates.
  - Reform work assessment allowance: require beneficiaries to attend full-time training where appropriate; provide greater state support to increase participation.
  - Tighten eligibility and certification: review criteria and role of family doctors.
  - Reduce disability benefit levels, particularly for younger age groups if politically feasible.
  - Increase work incentives: raise thresholds and smooth the loss of benefits from other income.

### Inflation assessment and wage dynamics (key quantitative findings)
- Phillips-curve and wage findings:
  - A one percentage point increase in wage growth raises core inflation by about 0.1 percent (controlling for other factors).
  - A one percentage increase (decline) in the output gap is estimated to raise (lower) core inflation by close to 0.2 percent.
  - A one percentage point increase in the unemployment rate lowers wage growth by about 1.2 percent.
  - A one percentage point increase in the non-employment rate lowers wage growth by about 0.7 percent.
  - Terms of trade explain about half of the wage slowdown during the oil downturn.
  - Lower trend productivity growth and euro area wage dynamics materially influence Norwegian wage and inflation dynamics.

### Commercial Real Estate (CRE) risk assessment (Annex VII) — key facts
- CRE prices increased for 9 consecutive years; real CRE prices up more than 50 percent since 2000.
- Prime Oslo offices: vacancy rates falling and rents on solid upward trajectory; yields are far below those in other large European cities.
- Market transactions more than doubled since the global financial crisis; foreign investor share roughly 20 percent.
- Non-bank financing rising but remains relatively small; macro-prudential measures on CRE are bank-targeted and could leak with rising market funding.
- Data gaps hamper precise CRE risk assessments; stronger data collection and dissemination recommended.

### Prudential policy status and FSAP recommendations (selected)
- Mortgage and macroprudential actions:
  - 1 January 2017: new regulation introduced debt-to-income limit, tighter down-payment requirements, and lower "speed limit" for Oslo.
  - June 2018: Ministry extended these regulations until end-2019.
  - Recommendation: consider making mortgage regulations permanent; preserve tighter Oslo limits.
- Liquidity and funding:
  - LCR regulation introduced in 2015; phase-in completed by end-2017.
  - All Norwegian banks had NSFR ratio of at least 100 percent per Q3:2018.
- AML/CFT:
  - New AML Act passed June 2018; entered into force October 15, 2018; gives FSA powers to sanction non-compliance.
  - FSA budget increased, dedicated AML Section planned operational from April 2019.
- Resolution and deposit insurance:
  - New legal framework corresponding to BRRD entered into force January 1, 2019; FSA designated as resolution authority.
- Data adequacy:
  - Data provision adequate for surveillance; exception: commercial real estate sector where better data would help monitor risks.

### Authorities’ views (summary of key messages)
- Authorities broadly share staff’s views on outlook and risks; expect growth to accelerate in 2019 to around 2.4–2.7 percent depending on institution.
- Fiscal policy: government forecasts spending of petroleum revenues in 2019 corresponds to 2.9 percent of GPFG, in line with fiscal rule limiting spending to 3 percent of the Fund over time.
- Monetary policy: Norges Bank raised key policy rate in September 2018 and March 2019; policy rate now at 1 percent with further gradual increases expected (staff projection: "1.75 percent at the end of 2022").
- Housing and macroprudential: authorities agree mortgage regulations effective; not on political agenda to increase property taxes; stand ready to amend macroprudential measures should risks intensify.
- AML/CFT: authorities emphasize continued vigilance and regional cooperation.

### Staff appraisal — key findings and recommendations
- Economic outlook:
  - Mainland growth projected to accelerate to 2.5 percent in 2019 from 2.2 percent last year, before slowing to 2.1 percent in 2020.
  - Outlook clouded by rising external risks and mounting concerns over CRE valuations in some segments.
- Fiscal policy:
  - Recommend modest consolidation in 2020 given strong cyclical upturn; permanent fiscal adjustment of 4–5 percent of GDP needed for intertemporal solvency.
  - Policy options: VAT base broadening (with targeted transfers), reform of sickness and disability schemes, and lower tax incentives on housing.
- Monetary policy:
  - Further monetary tightening per forward guidance is appropriate given inflation outlook; pace should balance containing inflation and avoiding self-induced slowdown.
- Financial stability:
  - Mortgage regulations should not be loosened at end-2019 review; consider making regulations permanent with adjustable parameters.
  - Remedy data gaps on CRE; reduce tax incentives for home ownership.
- AML/CFT:
  - Full compliance with improved AML/CFT framework is paramount; FSA sanction powers and higher supervisory resources are positive.

*Source: NORWAY STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (May 24, 2019), International Monetary Fund.*

### 2.5 percent this year, before growth slows to 2.1 percent in 2020.

### 1norea2019001 - 2.5 percent this year, before growth slows to 2.1 percent in 2020.

### Outlook and risks
- Real GDP growth:
  - Real GDP projections: 2018: 1.2, 2019: 2.0, 2020: 1.4, 2021: 2.2, 2022: 1.8 (change in percent).
  - Mainland GDP projections: 2018: 1.1, 2019: 2.0, 2020: 2.2, 2021: 2.5, 2022: 2.1 (change in percent).
  - Staff note: Coincident indicators suggest growth in 2019 might be stronger than last year, with first half 2019 growth about 2½–2¾ percent.
- Short-term forecast headline: "2.5 percent this year, before growth slows to 2.1 percent in 2020."
- Risks to the outlook:
  - External: Global trade tensions persist; uncertainty about European growth.
  - Domestic: Residential house price growth has abated but remains overvalued; commercial real estate (CRE) valuations growing strongly and stretched in some segments.
  - Upside: Resilient oil prices could lead to stronger-than-expected oil-related investment and exports.
- Output gap and unemployment:
  - Output gap (mainland economy, -implies output below potential): 2018: -0.9, 2019: -0.6, 2020: -0.2, 2021: 0.5, 2022: 0.7.
  - Unemployment rate (percent of labor force): 2018: 4.7, 2019: 4.2, 2020: 3.9, 2021: 3.7, 2022: 3.7.

### Fiscal policy and public finances
- 2019 budget stance:
  - The 2019 budget deficit is likely to be mildly expansionary, following the better-than-expected outturn (and related small contraction) last year.
  - Structural non-oil deficit expected to be broadly unchanged over the 2017–19 period.
  - Contrast with previous upswing: non-oil deficit previously grew fast in tandem with the sovereign wealth fund and related space under the fiscal rule.
- Fiscal projections and indicators:
  - Central government non-oil balance (percent of mainland GDP): 2018: -7.7, 2019: -8.0, 2020: -7.5, 2021: -7.5, 2022: -7.0.
  - Structural non-oil balance (percent of trend mainland GDP): 2018: -7.4, 2019: -7.6, 2020: -7.2, 2021: -7.7, 2022: -7.7.
  - Fiscal impulse: 2018: 7.4, 2019: 0.2, 2020: -0.4, 2021: 0.5, 2022: 0.0.
  - Fiscal impulse in percent of Government Pension Fund Global: 2018: -2.7, 2019: -2.9, 2020: -2.5, 2021: -2.9, 2022: -2.7.
  - General government overall balance (percent of mainland GDP): 2018: 4.6, 2019: 5.8, 2020: 8.8, 2021: 9.0, 2022: 9.9.
  - Net financial assets (percent of mainland GDP): 2018: 326.1, 2019: 350.9, 2020: 329.4, 2021: 346.1, 2022: 348.4.
  - Capital of Government Pension Fund Global (GPF-G): 2018: 276.8, 2019: 303.2, 2020: 283.5, 2021: 302.6, 2022: 306.5.
- Policy recommendations from Directors:
  - Target a modest consolidation next year (staff note: recommended ¼–½ percent of GDP structural consolidation in the 2020 budget) to minimize overheating risks, be consistent with monetary normalization, and build buffers.
  - Address medium-term pressures from demographics and slower sovereign wealth fund growth by expenditure savings or new revenue sources.
  - Make the tax system more efficient: lower tax incentives on housing and broaden the VAT base.
  - Consider that measures may need to be offset with well targeted transfers to protect the most vulnerable.

### Monetary policy and inflation
- Inflation and central bank actions:
  - CPI (average): 2018: 3.6, 2019: 1.9, 2020: 2.8, 2021: 2.3, 2022: 1.7.
  - Core inflation: 2018: 3.1, 2019: 1.4, 2020: 1.5, 2021: 1.9, 2022: 1.9.
  - Headline and core inflation are now above target, prompting Norges Bank to start normalizing policy.
  - Main policy rate: raised by 50 basis points since August last year and is now at 1 percent.
  - Central bank forward guidance suggests further rate hikes ahead.
- Directors' assessment:
  - Support for ongoing normalization as it balances containing inflation and minimizing self-induced slowdown risks.
  - Caution: Faster tightening could appreciate the krone and compound downward inflation pressures.
  - Authorities should be ready to adjust the pace of normalization if circumstances require.
- Interest rate and yield projections:
  - Three-month interbank rate (year average, in percent): 2018: 1.1, 2019: 0.9, 2020: 1.1, 2021: 1.6, 2022: 2.1.
  - Ten-year government bond yield (year average, in percent): 2018: 1.3, 2019: 1.6, 2020: 1.9, 2021: 2.1, 2022: 2.6.

### Financial sector and macroprudential issues
- Banking sector health:
  - Banks remain liquid, profitable, and well-capitalized.
- AML/CFT and supervision:
  - New anti-money laundering, financing of terrorism law approved in parliament gives the Financial Supervisory Authority greater sanctioning powers against breaches by supervised banks.
  - Directors underscored that full compliance with the new AML/CFT framework is paramount given the regional context.
  - Increased budgetary resources for supervision of AML/CFT compliance welcomed.
- Household and real estate risks:
  - Household debt continues to rise despite recent slowdown in credit growth.
  - Residential house prices: growth has softened significantly but prices remain overvalued.
  - Commercial real estate (CRE): valuations appear stretched in some segments and pose increasing risks.
  - Policy recommendations:
    - Too early to loosen macro-prudential measures given remaining overvaluation and rising household leverage.
    - Increase in the counter-cyclical buffer supported to increase resilience to CRE risks.
    - Monetary normalization should help restrain price growth in the CRE sector.
    - Authorities encouraged to close existing data gaps on CRE.
    - Caution urged against loosening mortgage regulations when reviewed at end 2019, barring unexpected changes.

### Structural policies and labor market
- Labor market developments:
  - Labor Force Survey unemployment rate trending down from mid-2016 peak around 5 percent to 3.8 percent now; employment growing around 2 percent.
  - Employment rate has picked up despite negative demographic impulse; pension reform expected to foster labor mobility and support participation among older employees.
  - Wage growth has started to trend up after earlier weakness.
- Priority reforms:
  - Reform of sickness and disability benefits identified as most pressing labor market reform to boost employment.
  - Directors recommend tightening eligibility, improving incentives to work, better education and training of beneficiaries, and other measures to boost employment opportunities.
  - Need to carefully weigh distributional consequences; offsetting measures may be required.
  - Continued wage restraint needed to underpin competitiveness.
- Longer-term challenges highlighted:
  - Population aging and declining oil and gas reserves require enhancing labor supply and overall competitiveness.
  - Diversification needed as declining oil and gas production will reduce the sovereign fund’s capacity to finance future spending without adjustment.

### External sector and oil
- Balance of payments and oil:
  - Current account balance (percent of mainland GDP): 2018: 4.6, 2019: 6.7, 2020: 9.8, 2021: 8.8, 2022: 8.4.
  - Current account balance (percent of GDP): 2018: 4.0, 2019: 5.6, 2020: 8.1, 2021: 7.4, 2022: 7.1.
  - Exports of goods and services (volume change in percent): 2018: 1.1, 2019: -0.2, 2020: -0.8, 2021: 2.4, 2022: 2.8.
  - Imports of goods and services (volume change in percent): 2018: 3.3, 2019: 1.6, 2020: 0.9, 2021: 2.9, 2022: 2.7.
  - Terms of trade (change in percent): 2018: -9.9, 2019: 4.9, 2020: 1.1, 2021: 0.8, 2022: -0.9.
  - Crude oil price (USD): 2018: 42.8, 2019: 52.8, 2020: 68.3, 2021: 59.2, 2022: 59.0.
- External assessment:
  - Directors noted a challenging external environment and longer-term headwinds from demographic pressures and declining oil contribution.
  - Upside risk: resilient oil prices could boost oil-related investment and exports.

### Selected key statistics (2018–2020 highlights)
- Population (2018): 5.3 million.
- Per capita GDP (2018): US$ 81,848.
- Literacy: 100 percent.
- Gross national saving (percent of GDP): 2018: 32.7, 2019: 33.8, 2020: 35.7.
- Gross domestic investment (percent of GDP): 2018: 28.7, 2019: 28.2, 2020: 27.6.
- International reserves (end of period, in billions of US dollars): 2018: 60.9, 2019: 65.1, 2020: 63.8.
- Exchange rate: Bilateral rate (NOK/USD), end-of-period: 2018: 8.4, 2019: 8.3, 2020: 8.1.
- Real effective rate (2010=100): 2018: 86.6, 2019: 87.4, 2020: 87.4.

*Source: NORWAY STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (May 24, 2019), International Monetary Fund.*

### 5.      Norway’s external position has

### 5.      Norway’s external position has strengthened

### External position and exchange rates
- The current account surplus surged last year to 8.8 percent of mainland GDP, from under 7 percent in 2017, helped by the continued recovery in the terms of trade.
- Despite improvement in relative prices, the NEER and REER have not appreciated as they tended to do in the past whenever oil prices increased.
- The ULC-based REER remains well below its 2014 peak, contributing to a modest revival in non-oil exports.
- Staff assessment:
  - The current account surplus is between 2 and 3 percentage points of GDP weaker than implied by fundamentals and desirable policies (versus 3 to 4 percentage points last year).
  - The REER is assessed to be between 5 to 10 percent stronger (versus 10 to 15 percent last year).
- Two relatively more compelling explanations for the muted exchange rate response are rising risk premium and the Norwegian Krone remaining stronger than equilibrium despite recent depreciation.

### Housing market and household debt
- House price growth has softened significantly:
  - National house prices are rising at around 2.5 percent (y/y), compared to over 10 percent y/y during the boom.
  - Oslo’s house price growth slowed from over 20 percent at the peak to around 5 percent y/y in recent months.
- Factors behind the slowdown: rising supply, tightening of macro-prudential regulations in early 2017, and ongoing monetary policy normalization.
- Staff estimates of overvaluation:
  - House prices remain above fundamentals: 0–10 percent at the national level and 5–20 percent in Oslo.
- Household indebtedness continues to increase from already high levels, leaving households vulnerable to sharp interest rate rises.
- Rapid growth of consumer credit warrants close watch, even if it starts from a small base.

### Near-term outlook and risks
- Near-term outlook:
  - The recent upturn is expected to continue into 2020.
  - Barring large commodity price swings, oil investment should remain strong with positive spillovers to mainland industries.
  - Housing investment is recovering after softness in 2017/18.
  - Negotiated wage growth of 3.2 percent in manufacturing should support household incomes and consumption.
  - Staff projection: mainland GDP growth of 2.5 percent in 2019, easing to 2.1 percent in 2020.
  - The output gap, currently around zero, is projected to turn positive later in the year.
  - Inflation is expected to come down despite the rising output gap as the impulse from electricity and the pass-through from a weaker krone wane.
- Risks:
  - Balanced overall.
  - Downside: global trade tensions, uncertainty over European growth, global market turbulence raising risk premia and debt service costs, and domestic risks from rising commercial real estate (CRE) prices given banks’ exposure to CRE.
  - Upside: oil has been materially above the WEO baseline underpinning staff’s forecasts and could lead to stronger-than-projected investment and oil-related exports.
  - The recent decline in house price growth and related overvaluation lowers risks of an abrupt price reversal.

### Medium-term growth drivers
- Boosting medium-term growth hinges on increasing labor force participation and productivity.
- Working age population growth is trending down due to aging.
- Trend labor productivity has only partially recovered from its post-crisis trough.
- Absent reforms, medium-term mainland growth is estimated at 1.8 percent, slightly lower than in the past.

### Authorities’ views (external, outlook, and reforms)
- Authorities broadly share staff’s views on the outlook and risks; expect growth to accelerate in 2019 to around 2.4–2.7 percent depending on the institution.
- On the external sector assessment, authorities concur that the large post-2014 depreciation was largely driven by permanent changes in fundamentals but do not necessarily share the assessment that the real exchange rate is overvalued.
- Authorities note muted non-oil export response to depreciation partly reflects capacity constraints (e.g., fisheries’ output constrained by number of licenses; recent aluminum investments only now coming on stream).
- Both staff and authorities agree potential output growth will decline gradually absent reforms; enhancing labor supply and productivity is central to the governing coalition’s platform.

### Fiscal policy: stance, recommendations, and challenges
- Recent stance:
  - Fiscal policy has been broadly neutral over the last three years, an improvement versus prior procyclicality.
  - The 2019 deficit target implies an impulse of about ½ percent of GDP, following a negative impulse of 0.4 percent last year.
  - Structural non-oil deficit expected to remain broadly unchanged over 2017–19.
  - Ongoing tax reform shifts burden from direct to less distortionary indirect taxation (lowering personal and corporate income tax rates and broadening the VAT base).
- Staff recommendation:
  - With growth projected above potential in 2019 and 2020 and the output gap turning positive, target a ¼ to ½ percent of GDP structural consolidation in the 2020 budget.
  - Benefits of consolidation:
    - Help contain aggregate demand and minimize overheating risks.
    - Support ongoing monetary policy normalization.
    - Help rebuild fiscal space for the next cyclical downturn.
- Long-run fiscal challenges:
  - Despite a static net worth in excess of 350 percent of GDP, increasing demographic pressures, dwindling oil and gas reserves, and already high non-oil deficits could push intertemporal net worth into negative territory.
  - From a solvency perspective, adjustment estimated at 4–5 percent of GDP in total could be spread over many decades, but space under the fiscal rule will shrink as the oil fund grows more slowly and age-related spending rises.
- Suggested adjustment options:
  - Reform of the sickness and disability benefit scheme to increase employment and yield positive budgetary impact (spending on sickness and disability benefits is higher than in other Nordic countries).
  - Broadening the VAT base: improved VAT efficiency through base broadening could yield an additional 1½ percent of GDP in annual revenue.
  - Improve housing-related taxation: reduce valuation discount on houses for the net wealth tax and reduce or ideally eliminate the mortgage interest deduction to lessen tax incentives for home ownership and household leverage.
- Distributional consequences of measures should be assessed and negative impacts on vulnerable households offset with better-targeted measures.
- Authorities’ fiscal views:
  - Agree with staff on the need for a tight fiscal stance next year but cite political constraints given available room under the fiscal rule.
  - See merit in reforming sickness and disability benefits and further steps to harmonize VAT rates, with limits due to sensitivities (e.g., VAT on food).
  - Emphasize strategic focus on improving use of public resources via spending reviews.

### Monetary policy
- Recent actions:
  - Norges Bank raised the key policy rate by 25 basis points last September and again in March; policy rate is now at 1 percent, thus negative in real terms.
  - With the real neutral rate between 0 to 1 percent, the monetary stance remains accommodative.
- Forward guidance and stance:
  - The central bank now forecasts higher interest rates relative to the forward guidance given last December, at least for the period up to end-2020.
  - Tightening and steepening are appropriate given headline inflation above target, core inflation providing a more acceptable floor on headline, and strong GDP, employment, and wage growth projected into next year.
- Risks of faster tightening:
  - Inflation expectations remain well anchored (forecast shows inflation declining to 2.1 percent in Q4).
  - More than 95 percent of mortgages have variable rates with short lock-in periods, making household consumption very sensitive to interest rate changes.
  - Faster tightening risks precipitating a self-induced slowdown or needing reversal if downside risks materialize.
  - Tightening faster when other central banks pause would widen interest rate differentials and lead to unwanted exchange rate appreciation with rapid pass-through to inflation.
- Payments system and digital currency:
  - Cash usage has fallen to very low international levels; Vipps mobile payment usage has dramatically increased.
  - Staff welcomes Norges Bank’s evaluation of issuing central bank digital currency; the report on phase II should be issued in late spring.
- Central bank governance:
  - New draft central bank act codifies independence into law, providing additional safeguards.
- Authorities’ views:
  - Agree that too-rapid tightening could stifle the upturn and induce exchange rate appreciation, exerting downward pressure on inflation.
  - Inflation targeting framework is flexible, allowing inflation above target for some time.
  - Evaluations of CBDC will continue and there are currently no specific plans to introduce a CBDC.

### Financial sector policies and vulnerabilities
- Key vulnerabilities:
  - House prices remain overvalued (national 0–10 percent; Oslo 5–20 percent), and household debt continues rising.
  - CRE risks are rising:
    - Commercial real estate prices have increased by about 60 percent since 2000 in real terms, and more than twice that in prime Oslo.
    - Oslo’s prime market has the lowest yield compression among major European cities.
    - Banks have substantial exposure to CRE loans which account for 15 percent of banks’ loan portfolio (23 percent of GDP).
  - Banks’ reliance on wholesale funding and cross-holding of covered bonds:
    - About half of banks’ funding still comes from the market, of which more than half is from foreign sources.
    - Covered bonds are typically collateralized with mortgages, linking housing with bank liquidity; banks’ cross-holdings of covered bonds are rising.
- Resilience and buffers:
  - Banks comfortably meet capital requirements with average common equity tier 1 (CET1) of 15.7 percent (2018:Q3).
  - Average leverage ratios have increased to above 8 percent, with all institutions meeting leverage requirements.
  - Aggregate LCR at 140 percent and net stable funding ratio at 115 percent, exceeding requirements by ample margins.
  - FSA stress tests indicate a very large and coordinated shock across residential, CRE, and equity would be required to significantly dent capital positions; no bank comes close to reaching negative capital in those tests.
- Supervisory actions:
  - FSA has proposed reclassifying six large regional banks as systemic, which would lead to higher requirements for them; no decision yet.
- Forthcoming work:
  - The forthcoming FSAP planned to coincide with the 2020 Article IV consultation will delve into these issues.

*Source: Excerpt from IMF staff report chapter on Norway’s external position, outlook, and policy discussions.*

### 24.      The current prudential toolkit to mitigate financial stability risks is quite

### 24. The current prudential toolkit to mitigate financial stability risks is quite comprehensive and should not be loosened at this stage

### Prudential measures and sectoral assessment
- Residential housing
  - Current mortgage regulations (renewed last year) combine capital and borrower-based measures such as maximum LTV and DTI ratios.
  - Measures are well-targeted to areas with higher risks such as Oslo.
  - The share of mortgages allowed to deviate from one or more regulation (the so-called speed limit) is 8 percent in Oslo, vs. 10 percent nationally.
  - Given that prices are still overvalued and household debt continues to rise, the regulations should be extended as is when reviewed at year-end, barring large unexpected developments in the coming months.
  - The tighter limits for Oslo should be preserved.
  - Recommendation: mortgage regulations could be made permanent; parameters could then be adjusted as needed over the financial cycle.
- Consumer credit
  - A new, more stringent regulation on prudent consumer lending practices was introduced in February and took effect in May.
  - Banks with consumer lending as their core business are subject to a higher fee from the deposit guarantee fund and additional capital requirements.
  - Following these measures, consumer credit growth has slowed noticeably since 2018.
  - The licensing process for new debt information service providers (including debt registries) was completed in June 2018. The service providers should become operational this summer.
- Commercial real estate (CRE)
  - Prudential measures on CRE have been bank-based, including higher risk weights (100 percent) and Pillar II capital add-ons for banks with concentrated exposures.
  - The increase in the countercyclical buffer from 2 to 2.5 percent at year-end, partly as a response to rising CRE risks, is welcome.
  - Monetary policy normalization should help dampen rapid price growth in the sector by boosting yields.
  - Recommendation: step up efforts to collect and disseminate comprehensive CRE data for better monitoring of risks.
- AML/CFT
  - Parliament has approved a new AML/CFT law that remedies some previously-identified shortcomings and grants sanction powers to the FSA, broadening its toolkit.
  - The FSA has received higher budgetary resources to step up supervision of AML/CFT compliance.
  - Recommendation: ongoing efforts to close remaining gaps in the AML/CFT framework and to strengthen regional cooperation on AML/CFT issues are welcome.

### Authorities’ views
- Agreement with staff on the need to mitigate further build-up of vulnerabilities in the household sector and contain risks from CRE exposure.
- Authorities concur that regulations have been effective in containing residential real estate risks.
- Some agencies (e.g., FSA) would prefer speed limits be unified at the lower Oslo level to avoid micro-managing the market.
- On CRE: risks are acknowledged and have contributed to the increase in the countercyclical buffer and a strong supervisory focus on banks’ risk management practices.
- Priority: a strongly capitalized banking sector.
- No plans to further reduce tax incentives on housing.
- AML/CFT priority: ensure banks’ full compliance with the new law and enhance international cooperation notably with regional peers.

### Contingent demand policies (policy space if downside risks materialize)
- Exchange rate and monetary policy
  - The floating krone has historically served as the first line of defense.
  - Norges Bank has some room to cut rates.
  - In the event of a sharp downturn, quantitative easing, which has not been used so far, could be considered.
- Fiscal policy
  - Norway has room to expand the non-oil deficit by about 1 percent of GDP and still be within the 3 percent fiscal rule limit, which applies on average over the cycle.
  - This would provide space for automatic stabilizers to operate fully, and for some discretionary stimulus if needed.
  - Note: fiscal space under the rule is smaller than before the previous downturn because the rule was tightened in 2017 and because non-oil deficits have risen in the meantime.
- Other policies
  - Regulators could release the counter-cyclical capital buffer if bank credit suffers in a downturn.
  - Macro-prudential policies could be loosened if house prices fall enough to change the balance of financial stability risks.

### Structural policies and labor market reforms
- Rebalancing away from oil and gas
  - Oil and gas production are projected to start declining in the coming years; continued rebalancing is required.
  - The weak krone is gradually helping competitiveness in non-oil and gas sectors.
  - Wage restraint will be important to sustain recent gains; social partners have demonstrated commitment to moderate wage increases.
  - Expected nominal wage growth in the recent bargaining round: around 3.1–3.2 percent.
- Sickness and disability benefits (priority reform)
  - More than 9 percent of the working age population receives permanent disability pensions, and still more are on temporary disability.
  - Younger beneficiaries are increasing in number and risk being trapped in the system without on-the-job experience.
  - A government-appointed commission has made recommendations to reform these schemes; discussions with the social partners are pending.
  - Recommended reform package elements:
    - (i) tightening eligibility criteria and certification procedures;
    - (ii) enhancing education and retraining programs for beneficiaries, in particular those with more limited employment opportunities;
    - (iii) reducing benefit levels, which are high compared to peer countries, especially for the young.
  - Distributional consequences need careful weighing since less educated people are more likely to be on sickness and disability benefits.
- Integration of vulnerable groups
  - Better alignment of education with private sector demand and improved follow-up to limit dropout rates from vocational training.
  - Continue efforts to increase employment rates among non-OECD immigrants and refugees.
  - Planned standardization and greater flexibility of the Integration Program curriculum are likely to enhance effectiveness.

### Stakeholders’ views
- Authorities
  - Consider reforms to increase employment levels a priority; agree with staff concerns on sickness and disability pensions.
  - Will await outcomes of social partner discussions before major reforms.
  - Support broad social consensus for more moderate wage growth.
- Labor unions
  - Disagree with staff’s assessment on sickness and disability: view eligibility as not too lax and benefits as not too high.
  - Attribute large recipient numbers to disguised unemployment and lack of suitable jobs for lower-skilled people.
  - Prioritize generating employment opportunities via training, wage subsidies, and more public sector jobs.
  - Concerned about differential impact of benefit reductions on blue- vs. white-collar workers and about future of collective bargaining amid rising non-unionized employment.
- Confederation of Norwegian Enterprises
  - Opposes reforms that would result in higher costs for their members.
  - Broadly supports current sickness benefit system where the state covers full costs after around two weeks of absence at no cost to the employer.

### Staff appraisal — key findings and recommendations
- Economic outlook
  - Mainland growth projected to accelerate to 2.5 percent in 2019 from 2.2 percent last year, before slowing to 2.1 percent in 2020.
  - Outlook clouded by rising external risks and mounting concerns over CRE valuations in some segments.
  - Risks from residential real estate have abated relative to last year.
- Fiscal policy
  - Recommend a modest consolidation in 2020 given the strong cyclical upturn.
  - A permanent fiscal adjustment of 4–5 percent of GDP will be needed to secure intertemporal solvency.
  - Policy options to find savings or revenue include VAT base broadening (with targeted transfers), reform of sickness and disability schemes, and lower tax incentives on housing.
- Monetary policy
  - Further monetary tightening as per the latest forward guidance is appropriate given the inflation outlook.
  - The planned pace of normalization balances containing inflation and minimizing risks of a self-induced slowdown.
- Financial stability
  - Despite some cooling in house prices, financial sector risks continue: house prices remain overvalued and household debt is still rising from elevated levels.
  - Recommendation: mortgage regulations should not be loosened when reviewed at end-2019; consider making regulations permanent with adjustable parameters over the cycle.
  - Action needed to reduce tax incentives for home ownership, which remain generous by international standards despite reductions.
  - CRE risks are mounting; the increase in the counter-cyclical buffer at end-2019 is welcome.
  - Remedy existing data gaps on CRE for better risk assessment.
- AML/CFT
  - Full compliance with the recently improved AML/CFT framework is paramount.
  - The new law granting sanction powers to the FSA is a welcome broadening of its toolkit.
  - The FSA’s higher budgetary resources to step up supervision are positive.
  - Ongoing efforts to close remaining gaps and strengthen regional collaboration are welcome.
- Long-term challenges
  - Sustaining prosperity will require greater gains in competitiveness, tackling declining labor supply and weak productivity.
  - Reform of the sickness and disability benefit system is the most pressing labor market reform pending: tighten eligibility, improve incentives to work, and increase training for beneficiaries.
  - Other reforms to better integrate the young and non-OECD immigrants into the labor force are needed.

*Source: 1norea2019001 (IMF).*

### 43.      It is proposed that the next Article IV consultation with Norway be held on the

### It is proposed that the next Article IV consultation with Norway be held on the standard 12-month cycle.

### GDP and Activity Indicators
- Growth remains solid and is "supported by robust domestic demand."
- Regional Network Survey and various PMIs point to strong growth ahead; survey-based near term outlook and PMIs indicate expansion.
- Output gap: "The output gap will turn positive this year."
- Reported data points:
  - 2019Q1, 2.8 (GDP growth, shown in figure)
  - GDP Growth series labeled 2010Q4–2018Q4 with comparisons: Euro Area, Nordics excl. Norway, Norway mainland (percent, yoy).
- Growth decomposition (total economy) contributors include: Private Consumption, Public Consumption, Gross Fixed Capital Formation, Change in Inventory, Net Exports, Total Real GDP (contribution to real GDP growth, y/y in percent).

### Labor Market Developments
- "The unemployment rate continues to fall, driven by strong employment growth."
- Other indicators point to shrinking labor market slack; unemployment gap between male and females has narrowed since the oil shock.
- Concern: labor participation among young males continues to decline steadily.
- Permanent disability recipiency rate is "very high by international standards."
- Reported data and series:
  - Unemployment Rate: series from 12/2010 to 12/2018 (Percent of labor force).
  - Labor Market Slack Indicators: Underemployment and unemployment rate (percent) and New job vacancies (in thousands, RHS) for 2010Q4–2018Q4.
  - Unemployment Rates by Gender (Percent, 4-quarter average) for 2010Q4–2018Q4.
  - Labor Force Participation of Young Age Cohorts (Percent) series for 20-29 years Male and Female, from 2003Q1–2019Q1.
  - Permanent Disability Recipiency Rate, 2016 (Percent of working age population) across countries: Germany, Sweden, Switzerland, Finland, Denmark, Norway (values plotted).

### Price Developments
- "Both headline and core inflation are above target, in part due to a temporary surge in electricity prices."
- "The pick-up of underlying inflation is early in the cycle."
- Weak exchange rate has had lagged effect on import prices; producer prices show early signs of pick-up.
- Wages are growing faster as capacity utilization rises; inflation expectations remain anchored.
- Reported series and indicators:
  - Annual Inflation (Headline inflation, Core CPI, Inflation target) for 2/2015–2/2019.
  - Core Inflation and Trend (Core ex energy and tax changes, Kalman Filter, KF - 1SD, KF +1SD) for 2006–2018.
  - Exchange Rate and Imported Price: Imported consumer goods (Percent change, yoy) and NEER, import-weighted, RHS (+depreciation) for 3/2011–3/2019.
  - Total Producer Price Index: Consumer Goods (Percent change, yoy) for 2/2011–2/2019.
  - Capacity Utilization Rate and Wage Growth (Percent) for 2010Q4–2018Q4.

### External Sector Developments
- "The CA balance strengthened in 2018, benefitting from positive terms of trade."
- Oil exports rebounded sharply; non-oil related exports recovering slowly.
- Improvement reflects broadly stable REERs despite terms of trade gains and the fact that ULCs are no longer inflating the REER.
- "Norway has one of the highest NIIPs in the world."
- Reported series:
  - Current Account Balance (Percent of mainland GDP) for 2011–2018.
  - Manufacturing: Non-oil Related Exports (Percent of mainland GDP) actual and 3 year moving average for 2003–2018.
  - Net International Investment Position (NIIP) (Percent of mainland GDP) for 2004–2018.

### Credit Developments
- "Real interest rates remain low... but will gradually rise as the Norges Bank continues to normalize the monetary policy."
- Household credit broadly stable; credit to NFCs has fallen reflecting lower debt accumulation in the oil industry.
- Housing mortgages account for majority of bank credit outstanding; majority of corporate credit goes to commercial real estate (CRE).
- CRE companies are increasing market funding, albeit from a low level.
- Reported data and series:
  - Real Interest Rates (Percent, adjusted for Norway's one-year ahead inflation) with series for key policy rate, 3-month effective interbank rate, Lending rate to NFCs, Lending rate to households (2/2010–2/2019).
  - Key Policy Rate (Percent) projections shown for 2013Q1–2021Q1.
  - Domestic Credit (in percent, 12-month yoy growth) by borrower categories for 2000Q3–2018Q3.
  - Structure of Credit by Borrowers, June 2018 (Percent): Residential mortgage loans 46%, Other HH loans 5%, Corporate market 27%, Foreign customers 5%, Other loans 17%.
  - Structure of Lending to Corporates, June 2018 (Percent) breakdown by industry including Commercial real estate 45% (and others).
  - Domestic Credit to Non-financial Corporates (Billions of NOK) for 1995–2018.

### Banking Sector Balance Sheet
- "Capital buffers are strong."
- Profitability remains solid thanks to reduced loan losses and higher interest income.
- Liquidity has strengthened further, exceeding both LCR and prospective NSFR requirements by an ample margin.
- Banks continue to rely heavily on wholesale funding; rising issuance and cross-bank exposure to covered bonds increases vulnerability to house price declines.
- Reported metrics:
  - Capital Requirements and Actual Adequacy (Percent) with components: Additional Tier 1 requirement, Tier 2 requirement, Capital conservation buffer, Systemic risk buffer, Buffer for SIBs, Countercyclical buffer, Minimum CET1 requirement, Capital ratio, Norway (time series 2000–2017).
  - Profitability: Return on Equity and Return on Asset (Percent) for 2010Q2–2018Q2.
  - Contributions to Banks' Return on Equity (Percent) components: Net interest income, Loan losses, Other, Pre-tax profit (2015Q4–2018Q2).
  - Liquidity Coverage and Net Stable Funding Ratio (Percent): NSFR and All LCR series keyed to 2014–2018.
  - Market Funding, 2018 by source and maturity and by instrument (percent shares).
  - Banks and other FI's Market Funding Structure (in percent of total) series for 2005–2017 showing Senior bonds, Covered bonds, Short-term market funding + interbank.

### Housing Market Developments
- House prices have stabilized in Oslo and other regions; supply is now exceeding household formation.
- Macroprudential policies are comprehensive and binding.
- House prices continue to rise relative to per capita disposable income, surpassing historical high; they are higher than in other OECD countries.
- Reported indicators:
  - Regional House Prices (SA Index: 2005=100) national and Oslo including Baerum for 2006Q4–2018Q4.
  - Regional House Prices (Index, 2003=100) for multiple cities 2003–2018.
  - Housing Starts and Households in Norway (Thousands) series for 2005–2018.
  - Non-compliant Mortgages by Cause, 2018Q3 (Percent) components: Debt servicing capacity, Debt-to-income ratio, Loan-to-value ratio, Principal repayment for Mortgages in Oslo and Mortgages outside Oslo.
  - House Prices Relative to Disposable Income (Index, 1998 Q4=100): series showing house prices / disposable income and house prices / disposable income per capita (aged 15–74) for 1984Q2–2018Q2.
  - Nordics and OECD: House Prices (Percent of per capita disposable income) comparing Norway, Sweden, Denmark, Finland, OECD for selected years up to 2018.

### Household Vulnerabilities
- Household debt is high by international standards and the proportion of highly-indebted households is rising.
- Low interest rates kept interest burden low, but debt service ratios are high and rising.
- High share of debt at variable rates makes households vulnerable to interest rate hikes, particularly prime age group (25-44).
- Household consumption is "very sensitive to interest rate shocks."
- Reported numbers and series:
  - Household Debt (Percent of net disposable income, in 2017 or latest available) country list with change from 2003 (plot includes NOR and other countries).
  - Households With Debt Higher Than Three Times of After-tax Income (Percent, share of total debt) time series 2004–2016 with categories 3-4 times, 4-5 times, Over 5 times.
  - Household Debt Service Burden: Debt service ratio (LHS), Interest burden (LHS), Debt ratio (RHS) time series 1984–2018.
  - New Mortgage Loans by Interest Lock-in Period (Percent of total during Jan - Sep 2018): Below 1 yr, 1-5 yrs, Above 5 yrs for Norway, Sweden, Denmark.
  - Estimates of Change in Household Consumption, 2007-09 (In percent of 2007 household income) comparisons for Norway, Denmark, UK.
  - Estimated Effect of Interest Rate Hike and Income Loss on Households' Interest Burden, by Age (Percent) scenarios: Before interest rate hike and income loss; After interest rate hike of 4 pp. but before income loss; After interest rate hike of 4 pp. and income loss of 30 per cent. Debt-to-income Ratio (Percent) by age groups: Below 25 years; 25–34; 35–44; 45–54; 55–66; 67–79; 80 years or older.

### Consumer Credit and Prudential Regulations
- Consumer credit accounts for 3 percent of total household debt but has grown rapidly recently; rising default rate observed.
- Prudential measures are binding for a significant share of households and total consumer debt.
- Majority of households constrained by measures are low-income, but most consumer debt constrained by the new measures is owed by high-income households.
- Reported composition and series:
  - Household Debt by Types (Percent): mortgage loans 85%, student loans 5%, consumer credit 3%, other loans 7%.
  - Consumer Credit: Annual change in consumer credit and annual change in households' total debt (Percent) series 2005–2018.
  - Default Rate on Consumer Credit (Percent) series 2008–2018.
  - Households and Household Debt Limited by New Consumer Credit Regulation (Percent) categories: Debt-servicing capacity requirement; Debt-servicing capacity requirement, principal payment requirement and maturity limits; Households; Debt.
  - Breakdown of Households Constrained by New Regulation (Percent) by age and income quintiles (< 253, 253–395, 395–575, 575–817, > 817) and similar breakdown for Breakdown of Consumer Debt Constrained by New Regulation (Percent).

### Corporate Sector Developments
- Corporates’ financial position has strengthened in recent years; debt servicing capacity improved across industries except the oil-service industries.
- Banks remain primary funding source for non-financial corporates, making corporates vulnerable to substantial interest rate rises.
- Market funding is growing in importance (albeit from low levels) across sectors, including CRE.
- Reported indicators:
  - Non-financial Corporations' Financial Position (Percent of mainland GDP): Gross liabilities and Net financial assets (RHS) for 2002–2018.
  - Debt Servicing Capacities (in percent) across industries for 1981–2017; project-related property, property leasing and management, other industries.
  - Debt-serving Capacity in the Oil Service Industry (In percent, 2014Q1-2018Q2) by sub-sectors: Field development and operations, Drilling, Seismic, Supply.
  - Funding Sources of Corporates (in percent): Banks and mortgage companies 80%, Public lending institutions 6%, Finance companies 3%, Bonds and short-term debt 7%, other categories 4%.
  - Funding Sources time series and market funding composition shown for 2001–2017.

*Source: IMF staff figures and calculations as presented in the content unit.*

### 2.5 percentage point increase5 percentage point increase

### 1norea2019001 - 2.5 percentage point increase5 percentage point increase

### External position: background, assessment, and policy implications
- Background:
  - NIIP reached 242 percent of mainland GDP at end-2018, up from 207 percent in 2014.
  - General government net external assets: 270 percent of mainland GDP.
  - Government Pension Fund Global (GPFG) assets under management: 300 percent of mainland GDP.
  - Financial sector: largest net external debtor, with reliance on wholesale funding at over 50 percent of GDP.
  - International reserves: 21 percent of mainland GDP.
- Assessment:
  - NIIP position expected to remain strong and stable due to sound management of GPFG assets.
  - Negative revaluation risks are mitigated by asset diversification.
  - Overall external position in 2018 was weaker than implied by medium-term fundamentals and desirable policies (based on current account and REER assessments), but sizable external buffers exist (NIIP of almost 2½ times mainland GDP).
- Potential policy responses:
  - Use external buffers to buy time to address competitiveness issues.
  - Fiscal and structural policies should aim to foster productivity growth, high labor market participation, and wage moderation.
  - High importance to enhance non-oil sector competitiveness.

### Current account: background, assessment, projections
- Background:
  - Krone depreciation during 2013–15; non-oil exports have only begun to recover recently.
  - Current account rose to 8.1 percent of GDP in 2018 from under 7 percent in 2017, reflecting solid external growth, positive terms of trade, and a broadly flat REER.
  - Recent moderation of ULCs and signs of improvement in non-oil exports suggest further external position improvement.
- Assessment:
  - Cyclically-adjusted 2018 CA: 7.5 percent of GDP.
  - EBA regression-estimated norm: 11.9 percent of GDP.
  - Staff-adjusted norm accounting for Norway-specific effects: around 9½ –10½ percent of GDP, implying a current account gap of minus 2–3 percent of GDP.
  - EBA-Lite consumption model gap: minus 2.9 percent of GDP; sensitive parameter values give a range for the gap of -1 to -5 percent of GDP.
  - Overall staff assessment: current account is 2–3 percent weaker than implied by fundamentals and desirable policies, with considerable uncertainty.

### Real exchange rate (REER): background and assessment
- Background:
  - REER depreciated around 0.1 percent in 2018.
  - Since June 2017, REERs (both ULC and CPI) are about 2 percent stronger as of March 2018, despite a significant increase in export prices.
- Assessment:
  - REER was 10½ percent stronger than the real exchange index norm in 2018.
  - Alternative real exchange level approach points to an undervaluation of 17 percent (approach considered not adequate for commodity exporters like Norway).
  - Using EBA semi-elasticity of 0.36, the minus 2 to 3 percent CA gap implies a REER overvaluation of 6 to 9 percent.
  - Staff assessment: REER is 5–10 percent stronger than implied by fundamentals and desirable policies.

### Capital and financial accounts; banking sector vulnerabilities
- Background:
  - Flows mainly span Nordic and EU countries.
  - Banks’ heavy reliance on wholesale funding: about half of total banks’ funding.
  - 60 percent of wholesale funding from foreign sources.
- Assessment:
  - Financial account vulnerability: low overall.
  - Banking sector reliance on external wholesale funding remains a source of vulnerability.
  - Increase of duration in part of the funding structure is a positive development.

### FX intervention and reserves
- Background:
  - Krone floats freely and independently; Norges Bank has not intervened since 1999 but could if exchange rate deviated substantially from fundamentals.
  - At end-2018: Norges Bank reserves at 21 percent of mainland GDP and GPFG assets at 300 percent of mainland GDP.
- Assessment:
  - Reserves are comfortable even considering banks’ exposure to wholesale funding and risks of regional macro-financial shocks.

### Key numeric indicators and projections (selected)
- NIIP: 242 percent of mainland GDP (end-2018).
- NIIP in 2014: 207 percent of mainland GDP.
- General government net external assets: 270 percent of mainland GDP.
- GPFG assets under management: 300 percent of mainland GDP.
- Financial sector external debtor reliance: over 50 percent of GDP.
- International reserves: 21 percent of mainland GDP.
- Current account: 8.1 percent of GDP in 2018; under 7 percent in 2017.
- Cyclically-adjusted 2018 CA: 7.5 percent of GDP.
- EBA regression norm for CA: 11.9 percent of GDP.
- Staff-adjusted CA norm: around 9½ –10½ percent of GDP.
- Staff-assessed current account gap: minus 2–3 percent of GDP.
- EBA-Lite model gap: minus 2.9 percent of GDP (sensitivity range -1 to -5 percent of GDP).
- REER deviations and implications:
  - REER in 2018: 10½ percent stronger than real exchange index norm.
  - Staff assessment of REER overvaluation: 5–10 percent stronger than implied by fundamentals.
  - EBA-implied REER overvaluation from CA gap: 6 to 9 percent.

### Technical background notes (staff estimates and model caveats)
- Non-oil productivity estimated about 12–15 percentage points lower than the average productivity.
- The EBA norm uses a 5-year backward-looking average of oil exports which fails to capture sharp variations of oil prices.
- About 25 percent of the GPFG return is due to revaluation, signaling the NFA in the regression may be overstated relative to dividend and interest income.

*International Monetary Fund — Norway consultation material (excerpts provided in the source content).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Risk Assessment Matrix — Downside and Upside Risks
- Relative likelihood and expected impacts (staff subjective assessment; “low” <10 percent, “medium” 10–30 percent, “high” ≥30 percent).
- Downside Risks:
  - Sharp tightening of global financial conditions (Low/Medium likelihood).
    - Source: sustained rise in risk premia (concerns about debt levels in some euro area countries, a disorderly Brexit).
    - Expected impact: Medium/High — Increasing costs of borrowing and debt servicing could lower spending by highly-leveraged Norwegian households and hinder corporate investment; credit availability could be constrained if Norwegian banks experience liquidity stress due to high dependence on wholesale funding.
    - Policy response: If needed, relax the countercyclical capital buffer, and bring to bear countercyclical monetary and fiscal policy if needed.
  - Weaker than expected global growth (Medium likelihood).
    - Expected impact: Low/Medium — Norway’s cycle more related to commodity prices than external demand, though weaker growth abroad would have an impact.
    - Policy response: Allow automatic stabilizers to operate fully. Delay monetary policy normalization and relax fiscal policy in the event of a larger slowdown. Make further progress on labor market and productivity-enhancing reforms; and target any temporary expenditure measures to boost long-term growth potential.
  - Large reduction in house prices and deleveraging from high household debt (Medium likelihood).
    - Expected impact: Housing — substantial falls in house prices could dampen private consumption and create negative spillovers to banks’ balance sheets.
    - Policy response: Reduce the countercyclical buffer and ease monetary policy; use automatic fiscal stabilizers and, if needed, discretionary fiscal policy.
  - Sharp increases in CRE risk premia, triggering defaults and bankruptcies (Medium likelihood).
    - Expected impact: CRE — banks could incur substantial losses from CRE loans and bond holdings, affecting the broader economy through tighter funding conditions.
    - Policy response: Reduce countercyclical buffer, ease monetary policy, and call upon automatic and discretionary fiscal stabilizers if needed.
  - Rising protectionism and retreat from multilateralism (High likelihood).
    - Expected impact: Low/Medium — Higher trade barriers could dampen growth in Norway’s trading partners (most notably the UK following Brexit), reducing demand for exports and weakening investment and domestic growth.
    - Policy response: Re-double efforts to reach new economic cooperation and trade agreements; make further progress on labor market and productivity-enhancing reforms; and target any temporary expenditure measures to boost long-term growth potential.
- Upside Risks:
  - Large swings in energy prices (Low/Medium likelihood; risks broadly balanced).
    - Expected impact: Medium/High — Oil prices have been above the WEO baseline underpinning staff’s forecasts for some time; could spur higher than expected petroleum investment in Norway and abroad with broader linkages to oil-related manufacturing and service sectors.
    - Policy response: Bring forward fiscal policy tightening and interest rate hikes if signs of overheating emerge. Save the additional fiscal revenues or lower automatic spending.

### Public Sector Debt Sustainability Analysis (DSA) — Baseline Scenario (As of March 26, 2019)
- Key projected indicators (percent of GDP unless otherwise indicated; calendar years shown as in source):
  - Nominal gross public debt: 2017: 34.9; 2018: 33.3; 2019: 33.6; 2020: 35.6; 2021: 35.7; 2022: 36.5; 2023: 37.3; 2024: 37.9; 2024 (another column) 38.8.
  - Public gross financing needs: -8.6, -3.3, -2.8, -5.4, -3.8, -4.5, -4.9, -5.6, -6.3 (sequence as in table).
  - Real GDP growth (in percent): 2017: 1.0; 2018: 2.0; 2019: 1.4; 2020: 2.2; 2021: 1.8; 2022: 1.6; 2023: 1.4; 2024: 1.5; 2024 (final) 1.5.
  - Inflation (GDP deflator, in percent): 2017: 2.2; 2018: 3.9; 2019: 5.6; 2020: 1.8; 2021: 1.7; 2022: 1.9; 2023: 2.0; 2024: 2.0; 2024 (final) 2.0.
  - Nominal GDP growth (in percent): 2017: 3.3; 2018: 5.9; 2019: 7.0; 2020: 4.1; 2021: 3.6; 2022: 3.6; 2023: 3.4; 2024: 3.5; 2024 (final) 3.6.
  - Effective interest rate (in percent): 2017: 3.1; 2018: 2.1; 2019: 1.9; 2020: 2.4; 2021: 2.0; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2024 (final) 2.5.
  - Sovereign spreads: EMBIG (bp) 159; 5Y CDS (bp) 11.
  - Ratings: Moody's Aaa/Aaa; S&Ps AA/AAAA; Fitch AAA/AAA (format as in table).
- Debt dynamics and flows:
  - Change in gross public sector debt (year sequence): -1.9, 1.6, 0.3, 2.0, 0.2, 0.7, 0.9, 0.6, 0.9; cumulative 5.2.
  - Identified debt-creating flows (cumulative): -8.1, -4.0, -6.4, -5.6, -5.2, -5.3, -5.2, -5.5, -5.6; cumulative -32.3.
  - Primary deficit (year sequence): -8.4, -2.6, -5.0, -5.1, -4.6, -4.7, -4.7, -4.9, -5.2; cumulative -29.2.
  - Primary (noninterest) revenue and grants (percent of GDP): 51.9, 51.1, 52.1, 52.0, 51.5, 51.8, 52.2, 52.7, 53.1; cumulative 313.3.
  - Primary (noninterest) expenditure (percent of GDP): 43.4, 48.5, 47.1, 47.0, 46.8, 47.1, 47.5, 47.7, 48.0; cumulative 284.1.
  - Automatic debt dynamics contribution (cumulative): 0.3, -1.4, -1.4, -0.5, -0.5, -0.5, -0.5, -0.5, -0.4; cumulative -3.1.
  - Interest rate/growth differential (cumulative): -0.1, -1.2, -1.6, -0.5, -0.5, -0.5, -0.5, -0.5, -0.4; cumulative -3.1.
    - Of which: real interest rate (sequence): 0.2, -0.6, -1.2, 0.2, 0.1, 0.0, 0.0, 0.0, 0.1; cumulative 0.4.
    - Of which: real GDP growth (sequence): -0.3, -0.6, -0.4, -0.7, -0.6, -0.6, -0.5, -0.5, -0.6; cumulative -3.5.
  - Exchange rate depreciation contribution (sequence): 0.4, -0.2, 0.2, ... (ellipsis presented as in source).
  - Contingent liabilities and other identified debt-creating flows: 0.0 across indicated years and cumulative 0.0.
  - Residual, including asset changes (sequence): 6.2, 5.5, 6.7, 7.6, 5.3, 6.0, 6.1, 6.1, 6.4; cumulative 37.5.
- Notes and definitions reproduced from the source:
  - Public sector defined as general government.
  - Effective interest rate defined as interest payments divided by debt stock (excluding guarantees) at end of previous year.
  - Automatic debt dynamics derived formula and decomposition into real interest rate, real GDP growth, and exchange rate contribution provided as in source footnotes.
  - Assumption for stress sensitivity: key variables remain at last projection year for a specified alternative.

### Public DSA — Composition of Public Debt and Alternative Scenarios
- Baseline underlying assumptions (selected):
  - Baseline: Real GDP growth (2019–2024): 2.2, 1.8, 1.6, 1.4, 1.5, 1.5; Inflation: 1.8, 1.7, 1.9, 2.0, 2.0, 2.0; Primary Balance: 5.1, 4.6, 4.7, 4.7, 4.9, 5.2; Effective interest rate: 2.4, 2.0, 2.0, 2.0, 2.0, 2.5.
  - Historical Scenario: Real GDP growth (2019–2024): 2.2, 1.2, 1.2, 1.2, 1.2, 1.2; Inflation: 1.8, 1.7, 1.9, 2.0, 2.0, 2.0; Primary Balance: 5.1, 6.8, 6.8, 6.8, 6.8, 6.8; Effective interest rate: 2.4, 2.0, 2.1, 2.2, 2.2, 2.8.
  - Constant Primary Balance Scenario: Real GDP growth and inflation as baseline; Primary Balance constant at 5.1 for 2019–2024; Effective interest rate similar to baseline with slight variation in 2024 at 2.5.
- Composition and maturity/currency structure:
  - Historical composition by maturity: medium and long-term versus short-term (charts included in source).
  - By currency: local currency-denominated versus foreign currency-denominated (charts included in source).

### Expenditure and Revenue Composition in Norway — Key Findings
- Overall expenditure:
  - Total expenditure broadly in line with Nordic peers; much higher than Switzerland despite comparable per capita incomes.
  - When expressed in terms of mainland GDP, expenditure is significantly higher than all comparator countries.
- Government wage bill:
  - Wage bill around 15 percent of GDP — higher than any comparator except Denmark.
  - Both average government salaries and the level of employment contribute equally to the wage bill.
- Social spending:
  - Overall social spending around regional average when measured in terms of overall GDP.
  - Combined sickness and disability spending: 6.7 percent of GDP — more than 2.5 percentage points higher than spending in Sweden (the second-highest peer).
  - Spending on survivor and old-age pensions remains low given Norway’s current dependency ratio, but this will change with the projected increase in old age dependency ratio.
- Tax revenue and structure:
  - Share of tax revenue in total general government revenue roughly 50 percent of GDP — below comparator countries.
  - Share of social security contributions roughly at peers’ average.
  - Share of indirect tax revenue in overall tax revenue (excluding social security contributions) increased from less than 35 percent to about 43 percent since 2012 — above Denmark and Sweden but slightly below Finland.
  - Standard VAT rate among the highest in OECD countries.
  - c-efficiency ratio: Norway’s VAT efficiency in line with regional comparators but far below New Zealand.
    - Potential revenue gain from VAT base broadening: base broadening that reduces Norway’s c-efficiency gap to New Zealand by one quarter could yield additional revenues of around 1½ percent of GDP, holding private consumption, GDP and the standard VAT rate constant.

### Reforming Sickness and Disability Pensions — Findings and Recommended Measures
- Scale and scope of recipiency:
  - More than 13 percent of working age population receive temporary and permanent disability benefits — around twice as high as in Nordic peers.
  - 9 percent of working age population receive permanent disability benefits — about 3 percentage points higher than Nordic peers.
  - Peer countries have seen permanent disability recipients fall over time following reforms; Norway has not.
- Design features driving transitions to long-term benefits:
  - Generous sickness and temporary disability benefits increase likelihood of transition to permanent disability.
  - Most employees are fully compensated during the first year of sickness; other Nordic countries often have lower compensation shares.
  - Young beneficiaries of (mostly temporary) disability pensions receive higher incomes than their working peers, which may disincentivize return to work and promote long-term absence.
- Predictors of long-term disability recipiency:
  - Education: recipiency rate among individuals without upper secondary school is five times higher than among those with a university degree.
  - Age: recipiency rate among 62–67 year olds is 30 percent — six times higher than that of 35–44 year olds; almost half of 62–67 year olds without upper secondary education receive disability benefits.
- Labor market attachment:
  - Almost 80 percent of all beneficiaries are not working.
  - Almost 70 percent of beneficiaries with a university degree pursue some type of work (reflecting differences in disability degree by education).
- Policy recommendations (a suitable reform package would ideally combine measures, many building on the government-appointed commission’s recommendations):
  - Reform sick pay:
    - Employers and employees should participate in the financial cost of prolonged sick leave.
    - Increase use of partial absence certificates to require sick employees to work part time.
  - Reform work assessment allowance:
    - Require beneficiaries to attend full-time training programs where appropriate.
    - Provide greater state-level financial support to increase participation in such programs.
  - Tighten eligibility and certification:
    - Review eligibility criteria and procedures for certification for the full disability pension (current criteria more generous than some peers; share of applicants rejected relatively low).
    - Reassess the role of family doctors as gatekeepers in certification.
  - Reduce disability benefit levels:
    - Minimum and maximum disability benefit levels are high in international comparison.
    - If across-the-board reductions are politically difficult, reduce benefit levels for younger age groups where benefits often exceed wages of working peers.
  - Increase work incentives:
    - Current system creates strong disincentives to earn more than 40,000 kroner due to loss of benefits beyond that level.
    - Consider increasing the threshold and smoothing the loss of benefits from other income to make earnings more gradual up to the new threshold.

*Source: IMF staff (Annex I, Annex II, Annex III, Annex IV, Annex V as provided).*

### 6.      Efforts to reform the system of sickness and disability pensions would need to take

### 6.      Efforts to reform the system of sickness and disability pensions would need to take

### Distributional considerations and labor market context
- Less educated people with fewer opportunities on the labor market are more likely to benefit from sickness and disability pensions.
- Distributional consequences of any reform will have to be carefully weighted and if necessary offset through more efficient and better targeted measures.
- The increasing take-up of sickness and disability by the less educated is a symptom of limited demand for marginal workers at prevailing wages.
- Policy implication: a significant step-up of training and other active labor market policies is needed to boost employment opportunities of marginal workers.

### Productivity-adjusted wages proposal
- The commission proposes to introduce productivity-adjusted wages.
- Rationale: demand for the labor of beneficiaries of disability pensions is likely to be low, given that their productivity is impaired for various reasons.
- Proposal detail: possibility to significantly reduce wages for the disabled in line with the productivity differentials between the latter and other employees to create incentives for employers to hire them.
- Caveat: while appealing theoretically, the challenges to implement such a system would need to be carefully evaluated.

### Lessons from peer-country reforms
- Successful reforms combine tighter eligibility, better incentives, and boosting employment opportunities of potential beneficiaries.
- Switzerland: tightened medical certification by moving from assessments by general practitioners to a more centralized and uniform evaluation.
- Finland: reform emphasized supporting beneficiaries to remain employed or find work, accompanied by a de facto tightening of eligibility criteria—rejection rates are now substantially higher than in Norway.
- Sweden (2008 reforms): combined stronger incentives (for instance, through a reduction in the cash value of sickness benefits for those who did not return to work) with enhanced support to help them return to work.

### Key policy takeaway
- Reforms should balance eligibility tightening and incentive changes with active measures (training, labor market policies, employment support) to avoid adverse distributional impacts, particularly on the less educated.

---

### Annex VI. Assessing Inflation Developments and Underlying Drivers

### High-level assessment
- Inflation had been subdued since the oil downturn until recently, reflecting lagged exchange rate pass-through, remaining slack in the economy and moderate wage growth.
- Weak wage pressure explained primarily by: drag on the terms of trade from the oil shock; spillovers from weak foreign wages; other domestic factors including lower productivity growth and remaining labor slack.
- As terms of trade improve along with stronger labor market conditions, wages are expected to rise faster; stronger economic activity would also imply wider profit margins, contributing to higher underlying inflationary pressure going forward.

### Recent inflation trajectory and indicators
- Following the oil shock, core inflation declined sharply from 4 to below 1 percent, and hovered around low levels before finally picking up in recent months.
- Kalman-filtered trend inflation suggests that the rise in core inflation is still early in the upswing.
- Headline inflation picked up faster as energy prices began to rise in late 2017.
- Unemployment rate based on the labor force survey has fallen below 4 percent, from its peak above 5 percent after the oil shock.
- Broader labor slack indicators, such as underemployment rate and job vacancy, confirm a tight labor market.
- However, core inflation was until recently much lower than historic levels when the labor market was in comparable conditions.

### Phillips curve and wage analysis approach
- Two-step approach:
  1. Estimate a standard price Phillips curve with nominal effective exchange rate, nominal wage growth, output gap, and euro area inflation as key determinants of core inflation.
  2. Analyze wage dynamics using an error correction approach to capture both long run and short run driving factors.

### Phillips curve estimation: main drivers of weak core inflation
- Exchange rates: historically strong correlation between exchange rates and inflation; the oil downturn resulted in a large Krone depreciation that pushed core inflation above 3 percent, but core inflation dropped rapidly after this without meaningful change in the exchange rate.
- Wages/labor market conditions: wages typically lead core inflation by about 1 to 4 quarters. Controlling for other factors, a one percentage point increase in wage growth raises core inflation by about 0.1 percent. Subdued wage growth partly explains weak inflation dynamics.
- Economic slack: using the output gap as proxy, a one percentage increase (decline) in the output gap is estimated to raise (lower) core inflation by close to 0.2 percent. The still negative output gap in 2018 partly contributed to inflation weakness.
- Foreign inflation: given large trade exposure to the Euro Area, subdued inflation there can have negative spillovers on Norway; foreign inflation operates partly through wages and partly through other imported prices (significant coefficients on both IPC indices and euro area producer prices).

### Wage dynamics—model and findings
- Model: an error correction model with a real wage level equation for long-run equilibrium and a nominal wage growth equation for short-run dynamics. Two-year expected inflation used for expected inflation input.
- Long run equation (as given): ln ln ttt RWTP α β ε = + (residual captures error correction).
- Short run equation (as given) includes: expected inflation, labor market slack, productivity growth, and error correction term.

Key quantitative findings (preserve exact reported effects):
- Labor slack:
  - A one percentage point increase in the unemployment rate lowers wage growth by about 1.2 percent.
  - A one percentage point increase in the non-employment rate lowers wage growth by about 0.7 percent.
- Terms of trade:
  - Terms of trade explain about half of the wage slowdown during the oil downturn and continued to weigh on the wage recovery after it.
- Expected inflation: wage growth reacts to expected inflation.
- Lower trend productivity growth: trend productivity growth recovered from the oil crisis but remains much lower than before the global financial crisis; lower trend productivity growth also explains slow wage growth in recent years.
- Foreign wages: euro area wage growth has a significant impact on wage growth in Norway after controlling for other factors.

### Comparative and distinguishing features
- Wage moderation in Norway shares common features with other advanced European countries: wages respond to labor slack, expected inflation, and trend productivity.
- Sensitivities are found to be stronger in Norway than elsewhere.
- Distinguishing factor: terms of trade dynamics play a big role in driving wage developments in Norway—during the oil price boom that ended in 2014, real wages grew much faster than implied by trend productivity; recent moderate wage growth can be seen as a correction toward the long-run relationship.
- Recent apparent pick-up in wage growth in Norway could signal an end to this self-correction.

### Selected reported quantitative points and model statistics (as presented)
- Controlling for other factors, a one percentage point increase in wage growth raises core inflation by about 0.1 percent.
- Using the output gap as a proxy, a one percentage increase (decline) in the output gap is estimated to raise (lower) core inflation by close to 0.2 percent.
- The unemployment rate fell below 4 percent, from its peak above 5 percent after the oil shock.
- Core inflation declined sharply from 4 to below 1 percent following the oil shock.
- Real CRE prices have increased by more than 50 percent since 2000 (from Annex VII context).

---

### Annex VII. Commercial Real Estate in Norway (summary of key risk findings)
- Risks in the commercial real estate (CRE) sector have risen significantly following a prolonged price boom, outpacing international peers.
- Banks are vulnerable to a CRE price correction given their large exposure to CRE loans and the CRE sector’s strong cyclicality.
- Increase in non-bank financing mitigates banks’ direct exposure to the CRE sector, but the sector becomes more susceptible to volatility from financial markets.

Key facts and dynamics:
- Real CRE prices have increased by more than 50 percent since 2000, outpacing most international peers including Sweden and UK.
- Within Norway, prime offices in Oslo are two and half times more expensive now than in the early 2000s (adjusting for inflation), while other regions or types of property experienced slower price increases.
- Market transactions have more than doubled since the global financial crisis.
- In the prime Oslo office segment:
  - Vacancy rates have been falling in recent years and are projected to decline further until 2020.
  - Rents are on a solid upward trajectory.
- Demand drivers: overall strong economic environment and the search for yield in a low interest rate environment.
- The share of foreign investors in transactions is roughly 20 percent, mostly through investment funds (e.g., REITs); the share rose rapidly in 2016-17, and slightly decreased more recently.
- New supply of office space has been falling since 2015 and remains below the long-term average.

*International Monetary Fund, NORWAY country materials (excerpts).*

### 3.      The prolonged price boom implies a significant risk of a sharp and substantial price

### 3. The prolonged price boom implies a significant risk of a sharp and substantial price correction

### Risk of a sharp correction in CRE prices
- CRE prices have increased for 9 consecutive years, with yields falling to historically-low levels.
- Norges Bank estimates that yield spreads in prime office space in Oslo are now far below those in other large European cities.
- A significant increase in the risk premium could trigger an abrupt correction of commercial property prices.
- Evidence from Sweden (Sweden 2019 Article IV) suggests that the combination of low yields and rapidly rising prices have historically been an indicator of future price falls.
- The yields currently observed in Norway are close to the levels observed in Sweden in the early 1990s, just ahead of the property bust.
- Except for a mild and brief correction, no substantial correction has occurred during the 9-year price run-up.

### Historical links between CRE booms and financial crises
- Historical evidence indicates CRE bubbles have often preceded financial crises.
- Using historical U.S. data covering the 1980s and early 1990s, Freund et al. (1997) showed banks which failed had significantly larger CRE loan portfolios compared to banks that survived.
- D’Erasmo (2019) found similar results during the global financial crisis.
- In Norway, CRE prices declined by about 70 percent from their peak in 1987 to 1993, the end of its banking crisis.
- Commercial real estate bubbles played important roles in:
  - the Swedish banking crisis (Sweden Selected Issues Papers, 2019),
  - the savings & loans crisis in the U.S. (Freund et al., 1997),
  - the Asian crisis and Japan’s lost decade (Crowe et al., 2013).

### Banks’ exposure and resilience
- Bank lending to real estate and construction companies in Norway is high both in terms of GDP and [share of the loan portfolio] relative to international peers.
- As of June-2018, banks’ lending to commercial property companies (real estate and construction) represented 56 percent of total corporate loans (15 percent of all bank loans) in Norway.
- On the positive side, Norwegian banks have large loss-absorbing buffers against this exposure.
- Recent stress tests by the FSA show banks could withstand significant price declines without need for recapitalization.

### Rise of non-bank financing and implications
- Non-bank financing has been rising steadily since the global financial crisis, similarly to other European countries, but remains relatively small in level terms.
- The shift away from banks mitigates banks’ direct exposure to the CRE sector but increases the sector’s susceptibility to the volatility of market financing.
- Macro-prudential policies on CRE are currently only targeted at banks and could leak with the rise in non-bank financing.

### Data gaps and monitoring needs
- Precise assessments of CRE risks are hampered by shortcomings in available data.
- Most CRE data comes from private providers and is often incomplete, not representative and not comparable across different data sources.
- Greater efforts from the authorities to collect and disseminate better quality data may be warranted.
- Closely monitoring the risks associated with CRE developments remains essential.

### Related policy and contextual notes (from Annex VIII)
- Fiscal and macroprudential context noted in authorities’ response:
  - The authorities targeted a neutral fiscal stance over 2018 and 2019; staff recommended a modest consolidation.
  - The Ministry of Finance extended mortgage regulations until end-2019, including the differential speed limit; the regulations have not yet been made permanent.
  - Regional differentiation in prices has recently narrowed, which justified not expanding regional differentiation further.
  - Social partners agreed on 3.2 percent nominal wage growth in the wage-leading sector for the year referenced; other sectors are expected to fall close to this value.

*Source: IMF staff analysis as presented in the chapter "The prolonged price boom implies a significant risk of a sharp and substantial price correction" (1norea2019001).*

### Annex IX. Status of FSAP Recommendations

### Annex IX. Status of FSAP Recommendations

### Macroprudential Policies and Framework
- Recommendation: Consider additional measures to contain systemic risks from house price growth and household indebtedness (e.g., stricter loan-to-value (LTV) ratios, and loan-to-income or debt service ratio to supplement the affordability test).
  - Priority: S
  - Time/Status: Mostly done.
  - Actions and dates:
    - June 2015: Ministry of Finance adopted a regulation converting FSA guidelines into explicit requirements, effective from 1 July 2015 to end-2016.
    - 1 January 2017: A new regulation retained previous requirements, introduced a debt-to-income limit, tighter down-payment requirements, and a lower “speed limit” for Oslo.
    - June 2018: Ministry of Finance extended these regulations until end-2019.
- Recommendation: Consider measures to contain risks related to banks’ wholesale funding (e.g. limits on mismatch between maturity of currency swaps and underlying exposures).
  - Priority: S
  - Time/Status: Partly done.
  - Actions and metrics:
    - 2015: LCR regulation introduced in Norway; phase-in completed by end of 2017.
    - Regulation imposes LCR requirements for all currencies in total (of 100 percent).
    - Banks and mortgage companies with EUR or USD as significant currencies must have LCR in NOK of at least 50 percent.
    - NSFR: expected to be introduced after final EU rules are adopted; NSFR implemented as a reporting requirement.
    - All Norwegian banks had a NSFR ratio of at least 100 percent per Q3:2018.
- Recommendation: Improve institutional structure for macroprudential policies (standardized/transparent advice to MOF; “comply or explain”; delegate powers to NB or FSA).
  - Priority: M
  - Time/Status: Under consideration.
  - Actions and proposals:
    - Central Bank Law Commission proposes establishment of a committee for monetary policy and financial stability at Norges Bank, to be chaired by the Governor of Norges Bank.
    - Proposal includes raising the threshold for when government instructions can be issued to Norges Bank.
    - Proposal publicly heard and under consideration in the Ministry of Finance.

### Stress Tests
- Recommendation: Improve liquidity monitoring by performing liquidity stress tests using cash flow structures at various maturities; consider discouraging cross-ownership of covered bonds.
  - Priority: M
  - Time/Status: Done/Under consideration.
  - Actions and metrics:
    - FSA and Norges Bank finalized a framework for liquidity stress testing using cash flow structures at different maturities and funding gaps under three stress scenarios.
    - Stress tests of the seven largest Norwegian banks conducted in fall of 2018; results anonymously published in FSA’s Risk Outlook report in December 2018.
    - Norges Bank published stress test results in its Financial Stability report in October 2018.
    - Framework used in on-site inspections; plans to develop framework further (feedback effects, systemic dimensions, linking solvency and liquidity stress testing).
    - FSA started a project to assess concentration of covered bonds in banks' liquidity buffer (LCR).
- Recommendation: Enhance stress test framework for insurance sector; allocate more FSA resources to assess liability-side risks and validate models.
  - Priority: M
  - Time/Status: Ongoing.
  - Actions and timelines:
    - Solvency II legislation entered into force on January 1, 2016.
    - Norwegian undertakings participated in EIOPA stress-tests in 2016 and 2018.
    - FSA conducted thematic on-site inspections at three largest life undertakings in autumn 2016 and three medium-sized undertakings during March–May 2017; further inspections conducted in 2018 and first half of 2019.
    - 2018: FSA conducted a survey of all life insurance companies to compare best estimate of technical provisions; similar survey planned for 2019.
- Recommendation: Achieve recapitalization of weakly capitalized insurance companies; continue to restrict dividend payouts by companies with weak capital adequacy.
  - Priority: S
  - Time/Status: Ongoing.
  - Actions and outcomes:
    - January 2017: FSA letter to all life insurance undertakings stating they should not pay dividends as long as surplus on insurance policies are used to strengthen reserves per new requirements (new mortality tables).
    - FSA expects boards to review need for capital accumulation where transitional rule for technical provisions used.
    - As of the first quarter of 2019, all Norwegian life insurance companies are satisfactorily capitalized.

### Micro-supervision
- Recommendation: Enhance FSA’s de jure operational independence, powers (especially corrective actions and sanctions), and supervisory resources; strengthen supervision of small banks via more frequent comprehensive assessments.
  - Priority: M
  - Time/Status: Partly done.
  - Actions and developments:
    - FSA granted substantial sanctioning powers under the AML/CFT regulatory framework.
    - FSA budget has seen steady increases, particularly for 2019, with allocations to AML/CFT supervision.
- Recommendation: Upgrade FSA supervisory approach to AML/CFT, increase supervisory activities, and provide guidance.
  - Priority: S
  - Time/Status: Ongoing.
  - Actions and timelines:
    - FSA assesses ML/TF risk in supervised institutions annually; risk assessments update prioritization.
    - Recent AML/CFT on-site inspections across banks, insurance undertakings and intermediaries, investment firms, real estate agents, auditors and external accountants.
    - Number of inspections covering AML/CFT is rising; more resources allocated.
    - Dedicated Section for AML planned to be operational from April 2019.
    - New AML Act passed by Norwegian Parliament in June 2018; entered into force on October 15, 2018, together with a new AML regulation.
      - Act implements EU’s Fourth Anti-Money Laundering Directive (2015/849) and the 2012 FATF Standards.
      - Act gives the FSA powers to sanction non-compliance with administrative fines.
    - FSA published general and sector-specific AML/CFT guidance in 2016 and 2017; new guidance tailored to the new AML Act planned before summer 2019.
    - Government published a new national risk assessment in November 2018.

### Financial Market Infrastructure
- Recommendation: Strengthen operational risk management related to outsourcing in systemically important payment systems.
  - Priority: S
  - Time/Status: Done.
  - Actions and status:
    - Risk management framework for the NICS (clearing) system improved to be fully compliant with CPMI/IOSCO principles for financial market infrastructures.
    - Organizational changes and plans for increased resources for NICS system ownership function implemented.
    - New operational set-up for NICS under preparation.
    - Enhanced contingency solution for the NBO (RTGS) system implemented in November 2015.

### Safety Nets (Resolution and Deposit Insurance)
- Recommendation: MOF should initiate resolution planning for largest banks, assess impediments to resolvability, delegate responsibilities to FSA, and define expectations for recovery and resolution plans of foreign subsidiaries/branches.
  - Priority: S, M
  - Time/Status: Ongoing.
  - Actions and status:
    - January 1, 2019: New legal framework corresponding to EU’s BRRD framework, including rules on resolution planning, entered into force.
    - FSA designated as the resolution authority in Norway and has started resolution planning for the largest banking groups under BRRD.
- Recommendation: Enhance legal framework for resolution to comply with FSB Key Attributes (resolution toolkit, operational independence, legal protection, earlier triggers, cross-border resolution, going-concern vs gone-concern distinction).
  - Priority: S
  - Time/Status: Done.
  - Note: All essential elements of BRRD implemented; Norwegian legal framework will comply with FSB Key Attributes.
- Recommendation: BGF should adopt policies specifying conditions under which board members must recuse themselves, considering conflicts of interest.
  - Priority: S
  - Time/Status: Done.
  - Adopted recusal policy criteria:
    1) When there is a possibility that a company the board member has an interest in would bid on a problem bank or part of its assets.
    2) When there is a possibility that the whole bank in which the board member has an interest, or parts of its assets or its deposit portfolio, may be sold.
  - Additional actions:
    - Board members must consider recusal before meetings where BGF support will be discussed and review how recusal was handled after the problem situation is over.
    - Policies are available on the BGF’s website (in Norwegian only).
    - Effective January 1, 2019: A new Board was appointed to the BGF by the MoF rather than elected by member banks; new Board adopted same recusal and conflict of interest principles as previous Board.

### Fund Relations (as of April/May 2019) — Key Quantitative Items
- Membership Status: Joined: December 27, 1945; Article VIII.
- General Resources Account:
  - Quota: 3,754.70 SDR Million (100.00 percent of Quota)
  - Fund holdings of currency: 3,228.88 SDR Million (86.00 percent of Quota)
  - Reserve tranche position: 525.83 SDR Million (14.00 percent of Quota)
- New Arrangements to Borrow: 149.31 SDR Million (Lending to the Fund)
- SDR Department:
  - Net cumulative allocation: 1,563.07 SDR Million (100.00 percent of Allocation)
  - Holdings: 1,567.16 SDR Million (100.26 percent of Allocation)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming Principal and Charges/Interest:
    - 2019: Charges/Interest 0.03; Total 0.03
    - 2020: Charges/Interest 0.02; Total 0.02
    - 2021: Charges/Interest 0.02; Total 0.02
    - 2022: Charges/Interest 0.02; Total 0.02
    - 2023: Charges/Interest 0.02; Total 0.02
- Exchange Arrangements: De jure and de facto exchange rate arrangements are classified as freely floating. Exchange system free of restrictions on payments and transfers for current international transactions other than those notified to the Fund.

### Statistical Issues and Data Adequacy
- Assessment: Data provision adequate for surveillance; quality, timeliness, and comprehensiveness described as excellent.
  - Specific exception: commercial real estate sector — better data could help monitor growing risks.
- Norway subscriber to SDDS since 1996; uses SDDS flexibility options on timeliness of general government operations and central government debt.
- Monetary and Financial Statistics:
  - Monetary statistics consistent with 2016 MFSMCG methodology.
  - Regular and good quality monetary statistics for IFS publication; room to improve timeliness for other financial corporations.
- Financial Sector Surveillance:
  - Norway reports Financial Soundness Indicators (FSIs) to the Fund; all core FSIs for deposit takers reported quarterly.
  - Some encouraged FSIs for deposit takers and many encouraged FSIs for other sectors provided.
- Financial Access Survey data reported for some basic series and indicators, including mobile money and two UN indicators for SDG Target 8.10.1.
- Article IV Consultation: Norway on 12-month consultation cycle.
- FSAP Participation: FSAP review completed in 2015.

### Table of Common Indicators (as of May 31, 2019) — Selected Publication Frequencies and Latest Observations
- Exchange Rates: 30/05/19 (received 30/05/19) — Frequency: D; Reporting: D; Publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 04/19 (received 05/19) — Frequency: M; Reporting: M; Publication: M.
- Reserve/Base Money: 04/19 (received 05/19) — Frequency: M; Reporting: M; Publication: M.
- Broad Money: 04/19 (received 05/19) — Frequency: M; Reporting: M; Publication: M. Data quality flags: O, O, O, LO (methodological soundness) and O, O, O, O, O (accuracy/reliability).
- Consolidated Balance Sheet of the Banking System: 04/19 (received 05/19) — Frequency: M; Reporting: M; Publication: M.
- Consumer Price Index: 04/19 (received 05/19) — Frequency: M; Reporting: M; Publication: M. Data quality flags: O, O, O, O and O, O, O, O, O.
- General government revenue/expenditure/balance/composition of financing: 2018 (received 2019) — Frequency: A; Reporting: A; Publication: A. Data quality flags provided in table.
- GDP/GNP: Q1 2019 (received 05/19) — Frequency: Q; Reporting: Q; Publication: Q. Data quality flags: O, O, O, O and O, O, O, O, LO.
- Gross External Debt and International Investment Position: Q1 2019 (received 06/19) — Frequency: Q; Reporting: Q; Publication: Q.

### Statement by Norwegian Authorities (June 10, 2019) — Key Messages and Economic Outlook
- Authorities thanked IMF staff for candid discussions and an insightful report.
- Economic performance:
  - Employment growth is high; unemployment has come down across the country; employment rate rising after prior falls.
  - Growth in the mainland economy (excluding petroleum production and shipping) picked up and was above trend last year for first time in three years.
  - Government forecasts mainland economy growth to continue to outpace trend this and next year.
  - Capacity utilization expected to increase further and unemployment to go down.
  - Upswing is broad-based: increases in retail, manufacturing, construction, and suppliers to the petroleum industry.
  - Improved cost competitiveness expected to boost exports and non-oil business investments; higher purchasing power supports consumption growth.
- Petroleum sector:
  - Petroleum investments likely to increase markedly this year after sharp decline following 2014/15 oil price fall.
  - Higher oil prices and substantial cost-reducing measures have made the increase possible.
  - Medium-term challenge: managing smooth transition to a less oil-dependent growth model.
- External risks:
  - Norway relies heavily on trade and international markets; rising protectionism may cause headwinds.
  - Growth could increase if higher oil prices combined with cost reductions boost petroleum investments.
- Fiscal policy:
  - Government has held back public expenditures and kept fiscal policy broadly neutral over 2017–2019.
  - Spending of petroleum revenues in 2019 corresponds to 2.9 percent of the Government Pension Fund Global (GPFG), in line with fiscal rule limiting spending to 3 percent of the Fund over time.
  - Spending of petroleum revenues has been at or below 3 percent of the Fund since 2014.
  - Fiscal impulse in 2019 estimated at ½-percentage point of GDP (latest figures from May 2019); revised impulse for 2019 mainly reflects downward revision of 2018 spending. Taken together 2018 and 2019 still show a neutral impulse.
  - Fiscal framework designed to ensure sustainable management of petroleum revenues while providing flexibility for temporary setbacks and market value fluctuations of GPFG.
  - Authorities note need for fiscal restraint in light of strong growth and low unemployment to avoid overheating and prepare for future shocks and aging-related fiscal challenges.
- Monetary policy:
  - Norges Bank raised key policy rate in September 2018 (first increase in seven years) and further in March 2019; policy rate is now at 1 percent.
  - In March, Norges Bank projected a gradual increase in the policy rate.

*Source: Annex IX. Status of FSAP Recommendations; IMF staff report materials provided.*

### 1.75 percent at the end of 2022, commenting that the uncertainty surrounding global

### 1norea2019001 - 1.75 percent at the end of 2022, commenting that the uncertainty surrounding global

### Monetary policy and macro outlook
- Norges Bank assessed that the outlook and balance of risks imply a gradual increase in the policy rate, and that the next hike will most likely be in June.
- Capacity utilization is "slightly above normal level and continues to increase."
- Underlying inflation is "a little higher than the 2 percent inflation target."
- The uncertainty surrounding global developments persists.
- Staff projection: "1.75 percent at the end of 2022."

### Housing market, household debt, and mortgage regulation
- After several years of rapid growth, house prices fell in 2017 and started increasing again in the first half of 2018 with a moderate pace since last summer.
- Nationally, house prices are now "slightly above their peak in 2017"; house prices in Oslo remain "somewhat lower than their peak."
- Activity remains high in the market for existing homes, with high turnover and a large number of dwellings listed for sale.
- Household debt dynamics:
  - Norwegian households hold debt that is "more than twice the size of their annual disposable income."
  - The steady build-up of household debt increases household vulnerability and poses risks to financial stability and economic growth.
- Government policy and regulation:
  - The Government presented a revision of its housing market strategy emphasizing supply side efficiency, consumer protection, and household debt-sustainability.
  - Current mortgage regulation includes caps on the loan-to-value ratio and debt-to-income ratio.
  - The regulation is temporary and "expires at the end of this year."
  - The Ministry of Finance has asked the Financial Supervisory Authority to evaluate the regulation and advise on whether to adopt a continued regulation.
  - Authorities note IMF staff recommends "not to loosen the requirements, barring large unexpected changes in the coming months."
  - The authorities agree the mortgage regulations have been effective, resulting in tighter lending practices and lower issuance of high-risk mortgages.
  - The Ministry recently enacted a regulation on consumer lending, largely mirroring the mortgage regulation, to curb financial stability risks from over-indebted households and to halt unhealthy credit practices.
  - It is "not on the political agenda to increase tax levels for property in general, and housing specifically."

### Financial stability, banks, and macroprudential measures
- Authorities emphasize containing risks and vulnerabilities in the financial sector.
- Bank soundness:
  - Q4 numbers show the average common equity tier 1 (CET1) "came in at 16.2 percent, up from 15.7 percent in Q3."
  - The banks’ shock absorption capacity is high and has improved significantly over recent years.
- Macroprudential policy:
  - Last December, the Ministry of Finance decided to increase the countercyclical capital buffer rate to "2.5 percent, effective from year-end 2019."
  - There has been a build-up of financial imbalances over the last years, mainly due to high household debt and continued property price growth; more recently, a persistent and sharp rise in commercial property prices contributes to the build-up of imbalances.
  - In May, the Ministry announced it would not change the criteria for identifying systemically important banks, but will conduct a public consultation on possible adjustments of the systemic risk buffer.
  - Authorities stand ready to amend the mortgage regulation and other macroprudential measures should risks intensify or change character.

### Public finances, labor force participation, and pensions
- Fiscal challenge and strategies:
  - Ensuring a sustainable development in public finances will require several measures.
  - Authorities’ two main strategies to secure room for welfare spending without increasing taxation: expand labor force participation and improve value for money in the public sector.
- Labor market and participation:
  - The Norwegian employment rate is rising, but "a lower share of the working age population is working now than ten years ago."
  - An expert commission presented proposals to increase labor force participation, particularly focused on sickness and disability schemes; social partners have joined the commission and the enhanced commission is scheduled to present recommendations early next year.
  - Authorities agree there are large long-term gains from expanding labor market participation and will wait for the enhanced commission's recommendations before considering major reforms.
- Pensions and retirement:
  - Norway has implemented a major pension reform to expand labor participation among elderly workers.
  - Authorities have recently put forward a proposal to Parliament for a corresponding reform of the public sector pension scheme.
  - They will work to reform early retirement schemes that apply to specific public sector professions to align them with the rest of the pension system.
- Public sector efficiency:
  - Several initiatives aim to improve efficiency and service delivery, including introduction of spending reviews.
  - Further efforts will aim to modernize public organizations and identify obsolete spending items.
  - Authorities recognize that securing long-term sustainability in public finances "will require increasingly difficult choices."

### Tax system reform and VAT
- The Norwegian authorities completed implementation of a tax reform with key objectives to increase growth and productivity via significant corporate tax rate reductions and to tackle base erosion and profit shifting.
- Authorities welcome staff’s assessment of the VAT system and note that recommendations to simplify and reduce the number of VAT rates coincide with a Government-appointed expert committee's recommendations.
- The Committee’s report will be subject to a public consultation and the Government will assess the proposals.

### Anti–money laundering and countering terrorist financing (AML/CFT)
- Recent money laundering cases among Norway’s Nordic and Baltic neighbors illustrate the need for continued vigilance.
- Authorities will continue to monitor private sector compliance closely, particularly given the Financial Supervisory Authority's new powers to sanction non-compliance.
- As an FATF-member, Norway is engaged in international AML/CFT policy and standard development.
- Nordic and Baltic supervisory authorities announced in May they will step up regional cooperation, including establishing a permanent working group and formalizing cooperation through a Memorandum of Understanding.
- Continued international coordination and standard setting and regional cooperation are identified as key given cultural, economic, and political ties.

*IMF staff and Norwegian authorities statements as presented in the source content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1norea2019001.pdf_