## 1cheea2021001

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---

### Executive Board assessment and policy stance
- Directors commended the authorities for a "strong, timely, and multi-pronged policy response to the COVID-19 pandemic."
- Given "still high uncertainty," Directors stressed the need to "maintain supportive policies until the recovery is on a firm path."
- With "Switzerland’s ample fiscal space," Directors welcomed the extension of targeted fiscal support to 2021 and the authorities’ readiness to deploy additional support, if needed.
- Recommended operational refinements to the fiscal rule, including consideration of "a longer period to offset extraordinary expenditures."
- Urged "expeditious reforms of the withholding tax and stamp duty" to ease tax and administrative burdens and improve capital market functioning.
- Monetary policy: agreed that "monetary policy should remain accommodative, with clear communication to help anchor inflation expectations," and encouraged regular review of the monetary policy framework and tools.
- External sector and FX: concurred that "foreign exchange interventions should be limited to mitigating excessive appreciation and deflationary pressures, provided trend appreciation is allowed."
- Financial sector: welcomed banking sector resilience but highlighted need to monitor asset quality, especially residential and commercial real estate, and recommended reviewing and expanding the macroprudential toolkit.
- Structural: encouraged reforms to promote labor market flexibility and mobility, ambitious pension reforms, and decisive actions to achieve climate change targets.

### Key issues, risks, and near-term outlook
- Context: Switzerland navigated the pandemic relatively well due to early health and economic responses, diversified high value-added exports (increasing role of chemical and pharmaceuticals), strong private and public buffers, well-capitalized banks, and sustained current account surpluses that contributed to CHF appreciation.
- Main near-term risks identified:
  - Lagged COVID-19 impacts and pandemic dynamics.
  - Search-for-yield behavior.
  - Real estate market imbalances (residential and commercial).
  - An uneven global recovery.
- Post-pandemic challenges:
  - Limiting scarring, "especially among vulnerable groups and workers."
  - Sustaining competitiveness and fostering green, digital, and inclusive growth.
  - Tackling pension system gaps.
  - Addressing climate change and implementing an ambitious long-term climate strategy.

### Key recommendations (staff summary)
- Fiscal policy
  - Avoid early withdrawal of fiscal support; maintain accommodative fiscal policy until signs of sustained recovery, and expand support if needed.
  - Operational refinements to the fiscal framework: "longer offset for COVID-19 spending, limiting spending underruns."
  - Enhance fiscal support for green-digital growth, building on existing programs and with attention to low-income earners.
- Monetary and exchange rate policy
  - Keep monetary policy accommodative, given uncertainties and risks of "an extended period of very low or negative inflation."
  - Continually review the monetary framework and tools post-COVID-19 to consider adjustments to targets and instruments.
- Financial sector policies
  - Closely monitor financial sector risks (COVID-19 losses, search for yield, leveraged exposures, residential/commercial real estate) and adopt new measures as needed.
  - Review and expand the macroprudential toolkit to react swiftly to financial stability risks.
- Labor markets and social protection
  - Protective near-term labor policies to limit scarring and inequality, with increased focus on mobility and flexibility amid structural changes.
- Pensions
  - Implement more decisive pension reforms (retirement age, conversion rates, pension fund arrangements) to head off emerging financial gaps.
- Climate
  - Put in place "a clear, monitorable action plan to support the ambitious new long-term climate strategy."

### Recent developments and policy measures implemented
- COVID-19 effects and vaccination
  - Vaccination started in January 2021.
  - As of late-April (2021), "20 percent had received at least one shot, with 10 percent fully vaccinated."
  - Aim: make vaccines available to all adults by end-July (2021).
- Fiscal response
  - A fiscal package "exceeding 10 percent of GDP."
  - Key programs: short-time work program (STWP), expanded coverage for low-wage workers, income-loss compensation for self-employed, and a large federal loan-guarantee program.
  - COVID-19-response spending amounted to "2.4 percent of GDP," mostly at the federal level.
  - Take-up of federal COVID-19 measures was about "half of approved allocations."
  - Fiscal balance deteriorated by "4 percentage points to -2.6 percent of GDP in 2020."
  - Public debt increased to "43 percent of GDP, from 40 percent a year ago."
- Monetary and liquidity support
  - SNB kept the policy rate at "-0.75 percent."
  - SNB raised the exemption threshold for negative interest rate application, established a COVID-19 refinancing facility (CRF), ensured USD liquidity via a swap line, and bought substantial FX during March–May 2020.
  - Support to banks included temporary exclusion of SNB reserves from leverage-ratio calculations and deactivation of a sectoral countercyclical capital buffer (CCyB) targeted at mortgages.
- Adjustments
  - SNB discontinued longer USD repo auctions due to limited demand; almost all macroprudential measures were reversed; fiscal support was fine-tuned and extended in some cases; loan guarantees ended in July 2020, but self-employed support was extended.

### Box 1 — Short-Time Work Program and Guarantees (summary)
- STWP design and usage
  - Lost-earnings compensation normally up to 80 percent.
  - During the first wave, a fifth of all employees were covered.
  - Federal contribution to the unemployment insurance fund to compensate for COVID-19-related payments in 2020 was CHF10.8 billion (~1½ percent of GDP).
  - For 2021, CHF6 billion has been budgeted.
- Loan guarantees: features and take-up
  - From a CHF40 billion overall envelope, loans of CHF17 billion were disbursed.
  - Loans less than CHF 0.5 million were 100 percent guaranteed, at zero interest rate, with no collateral.
  - Loans greater than CHF 0.5 million were 85 percent guaranteed, at 0.5 percent interest rate (guaranteed portion); banks could request collateral.
  - SNB “COVID-19 facility” refinanced the loans at -0.75 percent.
  - Refinancing via the SNB’s COVID-19 facility has amounted to around CHF11 billion; CHF2 billion of loans has been fully repaid.
- Short-term financial effects
  - Initial liquidity strains were relieved by loan guarantees and refinancing.
  - SNB FX purchases in March–May amounted to CHF 90 billion (13 percent of GDP).

### Box 3 — Long-Term Climate Strategy (LTCS) (summary)
- LTCS overview
  - Federal Council adopted a new LTCS through 2050 in January 2021, based on net-zero emissions target for 2050 and revisions to the CO2 Act.
  - Negative emissions technology will be needed to achieve the 2050 targets.
- Targets and sectoral goals
  - A fifty percent emissions reduction target is in place for 2030 overall.
  - Sector-specific 2030 targets:
    - buildings: -65 percent
    - industry: -35 percent
    - transport: -25 percent
    - agricultural: -20 percent
- Policy instruments and financing
  - Emissions reductions via regulation, taxation, financial incentives, investments, and new technologies.
  - A new Climate Fund (CF) will provide CHF 1 billion annually.
  - CF financing sources: levies on heating fuels; a new air-travel levy; payments by vehicle importers; penalties; receipts from auction of emission rights.
  - CF resources will not cover needs; additional public and private actions required.
- Sector-specific challenges
  - Devolution to cantons for buildings regulations could complicate targets despite a ban on CO2 emissions from new buildings from 2023.
  - Agriculture: emissions to be cut by a third through 2050; LTCS does not make specific taxation proposals for livestock/meat/dairy.
  - Financial sector: LTCS highlights insufficient reporting of climate impacts by finance; envisages voluntary approach for now.
  - Transport and fuels: offsets by fuel importers (up to 75 percent abroad) and payments by vehicle importers envisaged.
  - Energy mix: nuclear phase-out timing and electrification raise supply-chain and decarbonization challenges.
- Referendum
  - On June 13, 2021, a national referendum will be held on the revised CO2 Act; if voted down, current 2030 reduction target of 21 percent and tax rates remain.

### Monetary policy framework and tools
- Authorities and staff prefer current "0–2 percent price stability definition."
- Publication of conditional inflation forecasts has supported policy guidance; communications could be further bolstered.
- Doubts about feasibility of a point target for inflation and prospects for expanded domestic quantitative easing or funding-for-lending programs, which could move the SNB towards a fiscal-policy function.
- SNB sees sufficient space under negative interest rate policy and FX interventions.
- Recommendation: SNB should continually review monetary framework and tools — consider adjusting or extending targets and instruments, including wider asset scope for QE if needed.
- Guidance on FX intervention: unsterilized FXI can be used to counter strong appreciation that would worsen deflation risks; should complement, not substitute, other policy adjustments.

### Financial sector policies: monitoring risks and reinforcing stability
Findings
- Most emergency regulatory adjustments for banks have expired; sectoral CCyB remains deactivated.
- Exclusion of central bank reserves from leverage-ratio calculations released resources for lending; extended once in May 2020 to beginning of 2021.
- Banking sector entered crisis with strong buffers; losses limited due to strong policy support and prudential measures.
- Residential property prices have risen during the crisis, increasing affordability and imbalance concerns; commercial real estate faces risks.
- Financial firms reacted to low margins by seeking higher returns and leveraging, increasing risks.
- Recent Credit Suisse experience underscores importance of enhanced supervision and international cooperation.
- Progress on 2019 FSAP recommendations (new ordinance clarifying FINMA powers; eased FINMA resource constraints; stronger data collection; more on-site inspections; new coverage of climate and cyber risks).
Gaps and recommendations
- Enhance asset quality review, especially for banks with lower capital and higher exposure to COVID-19-sensitive sectors.
- Improve resolution mechanisms and preemptive asset-quality reviews.
- Keep CCyB deactivation temporary; reset buffers when conditions allow.
- Consider proactive macroprudential measures (e.g., LTV or DTI restrictions) as voluntary self-regulation may be untimely.
- Strengthen supervision of complex products; increase international cooperation.
- Ensure sufficient resources for data collection and oversight, including fintech activities.
- Be prepared to take early actions if prolonged negative interest rate side effects materialize.
Selected financial indicators preserved from source
- Non-performing loans as percent of total gross loans: "0.7"
- Banks’ Regulatory Tier I capital as percent of risk-weighted assets: "19.3" (for 2020)
- Liquidity coverage ratio example: "179.2" (for 2020)

### Structural policies: labor market, pensions, and climate
Labor market
- Crisis measures (STWP, income compensation for self-employed, unemployment benefits, support for apprenticeships) cushioned impacts but effects were uneven.
- Scarring risks remain, especially for contact-intensive sectors and young, first-time job seekers.
Recommendations
- Continue support to mitigate scarring while promoting flexibility, mobility, and higher participation.
- Focus ALMPs on upskilling and reskilling; expand training and mentorship.
- Address pre-pandemic gaps: encourage women to remain in the labor force (e.g., better childcare) and remove disincentives for hiring/retaining older workers.
Pensions
Findings
- Old-age dependency expected to more than double over next few decades; statutory retirement well below average life expectancy.
- First-pillar (PAYGO) expected to run into large funding gaps by 2030 — "3 percent of GDP."
- Long period of very low interest rates strains second-pillar PFs; mandatory "6.8% conversion rate implies returns of 4.8%" — well above market.
- Some PFs are underfunded; PFs have taken increasing risks or reduced voluntary savings.
Policy proposals under consideration
- First-pillar: proposed harmonization of retirement age for women to "65"; a VAT rate hike to provide funding.
- Second-pillar: one-time conversion rate cut to "6 percent"; transitional compensation proposed.
Staff recommendations
- More ambitious reforms needed — larger increase of retirement age and automatic links to life expectancy.
- Second-pillar reforms should align with market trends; some studies suggest a "5 percent" conversion rate is needed.
- Simplify regulatory environment, optimize PF investment practices, strengthen PF governance, and reduce number of PFs.
Climate
- Findings: Government approved LTCS in January; by 2019 CO2 emissions recorded a "14 percent" decline compared to 1990; pandemic may have helped achieve "20 percent" reduction target for 2020.
- Recommendations: a clear, monitorable emissions action plan to support LTCS; consider further targeted measures and increased/accelerated investments; robust public financial management and governance framework needed for Climate Fund.

### Governance, fiscal policy, and staff appraisal
Governance and AML/CFT
- Federal Audit Office interim assessments found quite limited abuse (e.g., "less than 1 percent" of loan guarantees called to date and "less than 1 percent" involved criminal complaints).
- Parliament adopted legal changes to strengthen AML framework; proposal to subject lawyers and fiduciaries to due diligence was rejected.
- Recommendation: persevere with efforts to ensure accountability of COVID-19-related spending and enhance the AML/CFT framework.
Fiscal policy and staff appraisal
- Recovery has commenced but further waves, new strains, and vaccination uncertainty pose risks.
- Staff recommendations:
  - Fiscal policy should remain accommodative until signs of sustained recovery; expand support if needed.
  - Focus policies on strong rebound, protecting vulnerable groups, mitigating labor-market dislocation and scarring, and ensuring viable firms stay in business.
  - Avoid early withdrawal of fiscal support; lengthen amortization period for extraordinary spending under existing fiscal framework.
  - Extraordinary support scheduled to phase out at the end of 2021; over the medium term, continue and enhance fiscal support for green and digital growth, targeted and with attention to low-income earners.
  - Rebalance policy mix by increasing role of fiscal policy to ease pressures on monetary policy.
  - Next Article IV consultation to take place on the regular "12-month" cycle.

### Current account, REER, capital flows, and FX interventions
- Current Account (2020): "3.8 percent of GDP" (down from "6.7 percent of GDP" in 2019).
- EBA and staff assessments:
  - EBA CA norm: "5.6 percent of GDP."
  - Cyclically-adjusted CA surplus: "3.9 percent of GDP."
  - EBA-estimated CA gap: "-1.6 percent of GDP in 2020."
  - Staff Gap: "-3.1 percent of GDP (± 2 percentage points)."
  - COVID-19 adjustment: "1.9 percent of GDP"; Other adjustments: "-3.4 percent of GDP."
  - Summary figures (percent of GDP) for 2020: CA: 3.8; Cycl. Adj. CA: 3.9; EBA Norm: 5.6; EBA Gap: -1.6; COVID-19 Adj.: 1.9; Other Adj.: -3.4; Staff Gap: -3.1.
- Real Exchange Rate and FX interventions
  - Average NEER appreciated by "6.1 percent" (relative to 2019).
  - CPI-based REER appreciated by "3.9 percent" (relative to 2019).
  - IMF staff CA gap implies a REER overvaluation of "5.9 percent" in 2020 (elasticity 0.52).
  - Staff range assessment: REER overvalued in range "1.9 to 9.9 percent", midpoint "5.9 percent."
  - SNB FX purchases in 2020: net "CHF110 billion" of FX; SNB FX purchases in H1:2020: "CHF 90 billion (13 percent of GDP)."
  - Official reserve assets at end-2020: "US$1,085 billion (135 percent of GDP)."
- Capital and financial accounts
  - 2020 net financial outflows: "1.8 percent of GDP."
  - Private inflows: "14.8 percent of GDP."
  - SNB reserve increases: "16.6 percent of GDP."
  - Historical averages (2009–20): net private inflows averaged "3.6 percent of GDP"; average annual increase in SNB reserves: "10.5 percent of GDP."

### Annex VI — Debt Sustainability Assessment (selected tables and assumptions)
External debt dynamics (percent of GDP)
- Baseline external debt: 2016 "258.3"; 2017 "278.8"; 2018 "250.5"; 2019 "266.9"; 2020 "301.0"; 2021 "248.2"; 2022 "231.2"; 2023 "224.7"; 2024 "213.3"; 2025 "205.6"; 2026 "195.7".
- Debt-stabilizing non-interest current account (long-run): "1.6" (percent of GDP).
- External debt-to-exports ratio (percent): 2016 "398.4"; 2017 "432.6"; 2018 "382.4"; 2019 "408.7"; 2020 "478.3"; 2021 "386.0"; 2022 "353.4"; 2023 "336.8"; 2024 "312.3"; 2025 "294.8"; 2026 "274.1".
- Gross external financing need (US$ billions): 2016 "1057.9"; 2017 "1120.2"; 2018 "1154.0"; 2019 "1093.0"; 2020 "1131.2"; 2021 "1241.5"; 2022 "1125.6"; 2023 "1113.4"; 2024 "1113.3"; 2025 "1109.8"; 2026 "1106.3".
Key macro assumptions underlying baseline
- Real GDP growth (percent): historical average "2.0"; 2016 "1.7"; 2017 "3.0"; 2018 "1.1"; 2019 "-3.0"; 2020 "1.4"; 2021 "1.6"; 2022 "3.5"; 2023 "2.8"; 2024 "1.4"; 2025 "1.8"; 2026 "1.2".
- GDP deflator in US dollars (change in percent): 2016 "-2.9"; 2017 "-0.3"; 2018 "1.4"; 2019 "-1.7"; 2020 "5.2"; 2021 "1.0"; 2022 "6.7"; 2023 "6.6"; 2024 "3.1"; 2025 "2.1"; 2026 "3.1".
- Nominal external interest rate (percent): 2016 "0.6"; 2017 "0.6"; 2018 "0.7"; 2019 "0.7"; 2020 "0.6"; 2021 "0.6"; 2022 "0.1"; 2023 "0.5"; 2024 "0.5"; 2025 "0.5"; 2026 "0.5".
Public sector debt (selected series)
- Nominal gross public debt (percent of GDP): 2019 "41.2"; 2020 "39.8"; 2021 "42.9"; 2022 "45.3"; 2023 "44.5"; 2024 "43.8"; 2025 "42.8"; 2026 "42.1".
- Public gross financing needs (percent of GDP): 2019 "3.7"; 2020 "2.6"; 2021 "6.9"; 2022 "8.3"; 2023 "6.4"; 2024 "5.5"; 2025 "5.4"; 2026 "5.3".
- Effective interest rate (percent): 2019 "1.4"; 2020 "0.7"; 2021 "1.0"; 2022 "1.1"; 2023 "0.9"; 2024 "1.0"; 2025 "1.1"; 2026 "1.3".
- Change in gross public sector debt (cumulative percent of GDP): 2019 "-0.4"; 2020 "0.6"; 2021 "3.1"; 2022 "2.3"; 2023 "-0.7"; 2024 "-0.7"; 2025 "-1.0"; 2026 "-0.7".
Baseline and scenarios (public DSA assumptions)
- Baseline underlying assumptions (percent):
  - Real GDP growth: 2021 "3.5"; 2022 "2.8"; 2023 "1.4"; 2024 "1.8"; 2025 "1.2"; 2026 "1.8".
  - Inflation: 2021 "0.2"; 2022 "0.3"; 2023 "0.5"; 2024 "0.7"; 2025 "0.8"; 2026 "0.8".
  - Primary Balance: 2021 "-3.2"; 2022 "-0.5"; 2023 "0.1"; 2024 "0.1"; 2025 "0.1"; 2026 "0.1".
  - Effective interest rate: 2021 "1.1"; 2022 "0.9"; 2023 "1.0"; 2024 "1.1"; 2025 "1.3"; 2026 "1.5".
Sensitivity analysis
- External debt and public debt subjected to interest rate, growth, current account, combined shocks, and a one-time 30 percent real depreciation in 2021; individual shocks described as permanent one-half standard deviation shocks; historical averages used for ten-year projections.

### Selected key statistics (2019–22 staff projections and indicators)
- Population (2020): "8.55 million"
- Quota (current; millions SDRs / % of total): "5,771.1 / 1.21%"
- Key export markets: "Euro area (44%), US (18%)"
- Real GDP growth (%): 2019 "1.1", 2020 "-3.0", 2021 "3.5", 2022 "2.8"
- Unemployment (%): 2019 "2.3", 2020 "3.1", 2021 "3.5", 2022 "3.4"
- Inflation (period average, %): 2019 "0.4", 2020 "-0.7", 2021 "0.1", 2022 "0.3"
- Revenue (% GDP): 2019 "32.9", 2020 "33.6", 2021 "33.2", 2022 "33.0"
- Expenditure (% GDP): 2019 "31.5", 2020 "36.2", 2021 "36.6", 2022 "33.7"
- Fiscal balance (% GDP): 2019 "1.4", 2020 "-2.6", 2021 "-3.4", 2022 "-0.7"
- Public debt (% GDP): 2019 "39.8", 2020 "42.9", 2021 "45.3", 2022 "44.5"
- Broad money (% change): 2019 "0.8", 2020 "6.5"
- Credit to the private sector (% change): 2019 "4.2", 2020 "2.4"
- 3-month Treasury bill interest rate (%): 2019 "-0.8", 2020 "-0.8"
- Current account (% GDP): 2019 "6.7", 2020 "3.8", 2021 "6.7", 2022 "7.5"
- Net FDI (% GDP): 2019 "4.8", 2020 "8.5", 2021 "3.6", 2022 "5.7"
- Reserves (end-of-period, billions of US dollars): 2019 "854.8", 2020 "1083.6"
- External debt (% GDP): 2019 "264.4", 2020 "284.9"
- REER (% change): 2019 "1.1", 2020 "3.8"

*Italic: International Monetary Fund — selected excerpts from the provided IMF staff report content unit.*

### 2022. Fiscal support has been extended, and monetary policy remains accommodative. Risks

### 2022. Fiscal support has been extended, and monetary policy remains accommodative. Risks

### Executive Board assessment and policy stance
- Directors commended the authorities for a "strong, timely, and multi-pronged policy response to the COVID-19 pandemic."
- Given "still high uncertainty," Directors stressed the need to "maintain supportive policies until the recovery is on a firm path."
- With "Switzerland’s ample fiscal space," Directors welcomed the extension of targeted fiscal support to 2021 and the authorities’ readiness to deploy additional support, if needed.
- Directors recommended operational refinements to the fiscal rule, including consideration of "a longer period to offset extraordinary expenditures."
- Directors urged "expeditious reforms of the withholding tax and stamp duty" to ease tax and administrative burdens and improve capital market functioning.
- Monetary policy: Directors agreed that "monetary policy should remain accommodative, with clear communication to help anchor inflation expectations," and encouraged regular review of the monetary policy framework and tools.
- External sector and FX: Directors concurred that "foreign exchange interventions should be limited to mitigating excessive appreciation and deflationary pressures, provided trend appreciation is allowed."
- Financial sector: Directors welcomed banking sector resilience but highlighted the need to monitor asset quality, especially residential and commercial real estate, and recommended reviewing and expanding the macroprudential toolkit.
- Structural: Directors encouraged reforms to promote labor market flexibility and mobility, ambitious pension reforms, and decisive actions to achieve climate change targets.

### Key issues, risks, and near-term outlook
- Context: Switzerland navigated the pandemic relatively well due to early health and economic responses, diversified high value-added exports (increasing role of chemical and pharmaceuticals), strong private and public buffers, well-capitalized banks, and sustained current account surpluses that contributed to CHF appreciation.
- Main near-term risks identified:
  - Lagged COVID-19 impacts and pandemic dynamics.
  - Search-for-yield behavior.
  - Real estate market imbalances (residential and commercial).
  - An uneven global recovery.
- Post-pandemic challenges:
  - Limiting scarring, "especially among vulnerable groups and workers."
  - Sustaining competitiveness and fostering green, digital, and inclusive growth.
  - Tackling pension system gaps.
  - Addressing climate change and implementing an ambitious long-term climate strategy.

### Key recommendations (staff summary)
- Fiscal policy
  - Avoid early withdrawal of fiscal support; maintain accommodative fiscal policy until signs of sustained recovery, and expand support if needed.
  - Operational refinements to the fiscal framework: "longer offset for COVID-19 spending, limiting spending underruns."
  - Enhance fiscal support for green-digital growth, building on existing programs and with attention to low-income earners.
- Monetary and exchange rate policy
  - Keep monetary policy accommodative, given uncertainties and risks of "an extended period of very low or negative inflation."
  - Continually review the monetary framework and tools post-COVID-19 to consider adjustments to targets and instruments.
- Financial sector policies
  - Closely monitor financial sector risks (COVID-19 losses, search for yield, leveraged exposures, residential/commercial real estate) and adopt new measures as needed.
  - Review and expand the macroprudential toolkit to react swiftly to financial stability risks.
- Labor markets and social protection
  - Protective near-term labor policies to limit scarring and inequality, with increased focus on mobility and flexibility amid structural changes.
- Pensions
  - Implement more decisive pension reforms (retirement age, conversion rates, pension fund arrangements) to head off emerging financial gaps.
- Climate
  - Put in place "a clear, monitorable action plan to support the ambitious new long-term climate strategy."

### Recent developments and policy measures implemented
- COVID-19 effects and vaccination
  - COVID-19 hit early and in waves; vaccination started in January 2021.
  - As of late-April (2021), "20 percent had received at least one shot, with 10 percent fully vaccinated."
  - Aim: make vaccines available to all adults by end-July (2021).
- Fiscal response
  - A fiscal package "exceeding 10 percent of GDP."
  - Key actions included the short-time work program (STWP), expanded coverage and compensation for low-wage workers, income-loss compensation for self-employed, and a large federal loan-guarantee program.
  - COVID-19-response spending amounted to "2.4 percent of GDP," mostly at the federal level.
  - Take-up of federal COVID-19 measures was about "half of approved allocations."
  - Fiscal balance swung to deficit: overall fiscal balance deteriorated by "4 percentage points to -2.6 percent of GDP in 2020."
  - Public debt increased to "43 percent of GDP, from 40 percent a year ago."
- Monetary and liquidity support
  - SNB kept the policy rate at "-0.75 percent."
  - SNB raised the exemption threshold for negative interest rate application on sight deposits, established a COVID-19 refinancing facility (CRF) for guaranteed loans, ensured USD liquidity via a swap line with the U.S. Federal Reserve, and bought substantial FX during March–May 2020.
  - Support to banks included temporary exclusion of SNB reserves from leverage-ratio calculations and deactivation of a sectoral countercyclical capital buffer (CCyB) targeted at mortgages.
- Adjustments
  - SNB discontinued longer USD repo auctions due to limited demand; almost all macroprudential measures were reversed; fiscal support was fine-tuned and, in some cases, extended; loan guarantees ended in July 2020, but self-employed support was extended.

### Key statistics (selected indicators, 2019–22 from staff projections)
- Population (2020): "8.55 million"
- Quota (current; millions SDRs / % of total): "5,771.1 / 1.21%"
- Key export markets: "Euro area (44%), US (18%)"
- Real GDP growth (%): 2019 "1.1", 2020 "-3.0", 2021 "3.5", 2022 "2.8"
- Unemployment (%): 2019 "2.3", 2020 "3.1", 2021 "3.5", 2022 "3.4"
- Inflation (period average, %): 2019 "0.4", 2020 "-0.7", 2021 "0.1", 2022 "0.3"
- Revenue (% GDP): 2019 "32.9", 2020 "33.6", 2021 "33.2", 2022 "33.0"
- Expenditure (% GDP): 2019 "31.5", 2020 "36.2", 2021 "36.6", 2022 "33.7"
- Fiscal balance (% GDP): 2019 "1.4", 2020 "-2.6", 2021 "-3.4", 2022 "-0.7"
- Public debt (% GDP): 2019 "39.8", 2020 "42.9", 2021 "45.3", 2022 "44.5"
- Broad money (% change): 2019 "0.8", 2020 "6.5"
- Credit to the private sector (% change): 2019 "4.2", 2020 "2.4"
- 3-month Treasury bill interest rate (%): 2019 "-0.8", 2020 "-0.8"
- Current account (% GDP): 2019 "6.7", 2020 "3.8", 2021 "6.7", 2022 "7.5"
- Net FDI (% GDP): 2019 "4.8", 2020 "8.5", 2021 "3.6", 2022 "5.7"
- Reserves (end-of-period, billions of US dollars): 2019 "854.8", 2020 "1083.6"
- External debt (% GDP): 2019 "264.4", 2020 "284.9"
- REER (% change): 2019 "1.1", 2020 "3.8"

*IMF Staff Report for the 2021 Article IV Consultation (May 25, 2021).*

### Box 1. Short-Time Work Program and Guarantees

### Box 1. Short-Time Work Program and Guarantees

### Short-Time Work Program (STWP): design and usage
- Companies and employees may apply for lost-earnings compensation, normally up to 80 percent.  
- Disincentives on finding other employment while on STWP were eased.  
- During the first wave, a fifth of all employees were covered.  
- The federal contribution to the unemployment insurance fund to compensate for COVID-19-related payments in 2020 was CHF10.8 billion (~1½ percent of GDP).  
- Registration has picked up again since late 2020, with the second wave of infections.  
- For 2021, CHF6 billion has been budgeted.

### Loan guarantees: features and take-up
- From mid-March through end-July, firms could obtain federally-guaranteed loans from Swiss banks.  
- Loan terms and guarantees:
  - Loans less than CHF 0.5 million were 100 percent guaranteed, at zero interest rate, with no collateral.  
  - Loans greater than CHF 0.5 million were 85 percent guaranteed, at 0.5 percent interest rate (guaranteed portion); banks could request collateral and charge a different rate for their part.  
  - A new SNB “COVID-19 facility” refinanced the loans at -0.75 percent.  
- Demand and usage:
  - From a CHF40 billion overall envelope for the guarantees, loans of CHF17 billion were disbursed.  
  - The envelope was purposefully large, and there were some restrictions on borrowers (e.g., use of funds, dividend payouts).  
  - Applicants were mostly small firms in trade, services, manufacturing, construction, food, and accommodations.  
  - Refinancing of the loans via the SNB’s COVID-19 facility has amounted to around CHF11 billion; CHF2 billion of loans has been fully repaid.

### Short-term financial effects
- Initial liquidity strains were relieved by the loan guarantees and refinancing.  
- A spike of dollar funding costs came down with drawing on the U.S. Fed swap line and injection of dollar liquidity.  
- Policy actions prevented cascading by shoring up confidence; the stock market experienced a V-shaped rebound.  
- SNB FX purchases in March–May amounted to CHF 90 billion (13 percent of GDP), providing additional liquidity and countering safe-haven inflows and deflationary pressures.

*Source: Box 1. Short-Time Work Program and Guarantees (extracted content).*

### Box 3. Long-Term Climate Strategy

### Box 3. Long-Term Climate Strategy

### Climate impacts and LTCS overview
- Climate change is being felt acutely in Switzerland in agricultural and tourism, with more frequent heat waves, droughts, floods, and landslides, and lack of snowfall.
- In January 2021, the Federal Council adopted a new long-term climate strategy (LTCS) through 2050, in line with Paris Agreement commitments.
- The LTCS is based on a net-zero emissions target for 2050 and revisions to the CO2 Act, which provide the legal basis for climate actions through 2030.
- The LTCS lays out principles to guide policy actions for both activities and users through 2030.
- Negative emissions technology will be needed to achieve the 2050 targets.

### Targets and sectoral goals
- A fifty percent emissions reduction target is in place for 2030 overall.
- Sector specific targets for 2030:
  - buildings: -65 percent
  - industry: -35 percent
  - transport: -25 percent
  - agricultural: -20 percent

### Policy instruments and financing
- Emissions reductions through 2030 will take place via regulation (e.g., fuel standards, required offsets by fuel importers), taxation, financial incentives, investments, and new technologies.
- The LTCS lays out sectoral investment needs, noting significant needs in energy, building retrofits, industry, and transport.
- A new Climate Fund (CF) will provide CHF 1 billion annually for reduction, mitigation, adaptation, and new technology.
- CF financing sources:
  - levies on heating fuels
  - a new air-travel levy
  - payments by vehicle importers
  - penalties
  - receipts from auction of emission rights
- Federal and cantonal budgets will provide additional funding.
- CF resources will not cover needs; additional public and private actions and outlays will be required.
- For building renovations, the LTCS notes that existing federal and cantonal tax allowances and the current low-interest rate environment will provide support.

### Sector-specific notes and challenges
- Devolution of responsibility in some areas to cantons—notably buildings regulations—could complicate achievement of reduction targets, although there is a ban on CO2 emissions from new buildings constructed from 2023.
- Agriculture:
  - Agriculture emissions are to be cut by a third through 2050.
  - Livestock production and meat and dairy consumption are key contributors, but the LTCS does not make specific proposals for taxation or regulation; food waste reduction will be targeted.
- Financial sector:
  - The LTCS calls out the financial sector for not supporting sufficiently climate goals (e.g., lack of reporting requirements on the short- and long-term climate impacts of financing decisions).
  - The LTCS envisages a voluntary approach for now, indicating that regulation may eventually be needed, possibly following the lead of other jurisdictions or an emerging global consensus.
- Transport and fuels:
  - Higher motor fuel taxes have not gained public or parliamentary support; the LTCS calls for lower emissions through offsets by fuel importers (up to 75 percent abroad) and payments by vehicle importers.
  - Higher carbon levies are envisaged for fuels used in heating.
- Energy mix and supply-chain issues:
  - Switzerland’s energy mix poses challenges, particularly as nuclear generators are expected to be phased out when they reach the end of operating lives, and projected demand increases due to electrification of transport and heating/AC.
  - The LTCS notes that actions will be needed to decarbonize supply chains for Swiss imports and to ensure no leakage of emissions abroad (two-thirds of Switzerland’s carbon footprint is generated abroad).
  - The authorities are closely monitoring EU and global consideration of carbon border adjustment mechanisms.

### Referendum and legal implications
- On June 13, 2021, a national referendum will be held on the revised CO2 Act.
- Opposition exists from some businesses (fuels, transport), the main conservative party, and some who consider that the revisions do not go far enough.
- If the Act is voted down, the current 2030 reduction target of 21 percent and tax rates will remain in place.
- With passage and in time, new legislation will be needed for subsequent periods.

*Source: Box 3. Long-Term Climate Strategy*

### introduction of new tools and instruments. They explained that they continuously review the SNB’s

### 1cheea2021001 - introduction of new tools and instruments. They explained that they continuously review the SNB’s

### Monetary policy framework and tools
- The authorities and staff expressed a strong preference for the current "0–2 percent price stability definition."
- The "0–2 percent" definition has provided guidance and flexibility and facilitated prompt responses, including quick rollout of the CRF and other measures.
- Publication of conditional inflation forecasts has supported policy guidance; communications could be further bolstered.
- As a small, open economy, doubts were expressed about the feasibility of a point target for inflation and about prospects for expanded domestic quantitative easing or funding-for-lending programs, which could move the SNB towards a fiscal-policy function.
- The SNB sees sufficient space under both the negative interest rate policy and FXIs.
- Interest in reviewing post-GFC "home bias" of Swiss investors was expressed; concern noted about greater FX exposure, especially pension funds.
- Recommendation: The SNB should continually review its monetary framework and tools—consider adjusting or extending targets and instruments, including a wider array of assets for quantitative easing if needed.
- Guidance on FX intervention: Unsterilized FX intervention (FXI) can be used in case of particularly strong appreciation pressures that would worsen deflation risks; FXI should be a complement, not a substitute, for other policy adjustments and should not prevent trend appreciation of the franc during high, safe-haven capital inflows.

### Financial sector policies: monitoring risks and reinforcing stability
Findings
- Most emergency regulatory adjustments for banks have appropriately expired; notable exception: suspension of the sectoral CCyB, which has not been reactivated.
- Direct support at the beginning of the crisis was short (two-week debt standstill; 90-day extension of rental payments).
- Exclusion of central bank reserves from leverage-ratio calculations released resources for lending; extended once in May 2020 to the beginning of 2021.
- Banking sector entered the crisis with strong buffers; losses limited due to strong policy support and prudential measures.
- Deteriorating asset quality is a risk; exposure to contact-heavy firms is limited; new hardship grants will help.
- Residential property prices have risen during the crisis, increasing affordability and imbalance concerns; commercial real estate faces risks from negative COVID-19 effects.
- Financial firms reacted to low margins by reducing costs and seeking higher returns—mortgages, other assets/investments, including leveraged—with higher risks.
- Smaller banks face pressure from digitization; PostFinance (domestic SIFI) faces challenges from low margins and business restrictions.
- Recent negative experience of Credit Suisse underscores importance of enhanced supervision, regulation of complex products, and international cooperation.
- Progress made implementing 2019 FSAP recommendations (new ordinance clarifying FINMA powers; eased FINMA resource constraint; stronger data collection; more on-site inspections; new coverage of climate issues and cyber security risks).
- Gaps remain: making macroprudential policymaking more agile and proactive; reducing regulatory gaps on fintech activities (retail investor protection); far-reaching structural changes to deposit insurance set-up.

Recommendations
- Enhance asset quality review, especially for banks with lower capital and higher exposure to COVID-19-sensitive sectors.
- Continue preemptive review of asset-quality conditions and improve resolution mechanisms.
- Keep sectoral CCyB deactivation temporary; reset buffers for potential real estate developments when conditions allow.
- Consider proactive macroprudential measures (e.g., LTV or DTI restrictions) as voluntary self-regulation may face limits in timeliness and stringency.
- Strengthen supervision, especially of complex products; increase international cooperation.
- Ensure sufficient resources for high-quality data collection and oversight, including fintech activities.
- Be prepared to take early actions if side effects from prolonged negative interest rates materialize.

Key statistics and indicators (preserved where presented)
- Sectoral CCyB: deactivated (no numeric value provided in text).
- Liquidity coverage ratio examples in Table 6: e.g., "179.2" for 2020 (Liquidity coverage ratio series preserved in underlying table).
- Non-performing loans as percent of total gross loans: "0.7" (various years listed in Table 6).
- Banks’ Regulatory Tier I capital as percent of risk-weighted assets: series include "19.3" for 2020 (Table 6).
- Note: Additional detailed financial indicators and time series are presented in figures and tables in the source.

### Structural policies: labor market, pensions, and climate
Labor market
- Crisis measures (STWP, income compensation for self-employed, unemployment benefits, support for apprenticeships and career-mentoring) cushioned impacts but effects were uneven across groups.
- Scarring risks remain, especially for workers in contact-intensive sectors and for first-time job seekers and young workers.
Recommendations
- Continue support to mitigate scarring while promoting flexibility, mobility, and longer/wider participation.
- Focus ALMPs on upskilling and reskilling for jobs with high future demand; expand training and mentorship programs.
- Address pre-pandemic gaps: encourage women to remain in the labor force (e.g., better childcare) and remove disincentives for hiring/retaining older workers.

Pensions
Findings
- Population aging and longer life expectancy: old-age dependency expected to more than double over the next few decades; statutory retirement well below average life expectancy.
- First-pillar (PAYGO) expected to run into large funding gaps by 2030—"3 percent of GDP."
- Long period of very low interest rates strains second-pillar pension funds (PFs); mandatory 6.8% conversion rate implies returns of "4.8%"—well above market.
- Some PFs are underfunded, especially those with government guarantees; PFs have taken increasing risks or reduced voluntary savings to compensate.
- Replacement rates from mandatory schemes expected to decline significantly over the next decades; lower-income earners less able to compensate through savings.
- Gender gaps: lower hours worked by women lead to less lifetime earnings; projected longer lifespan increases risk of old-age poverty for women.
Policy proposals under parliamentary consideration
- First-pillar: gradual male-female retirement age harmonization—proposed increase in retirement age for women by a year to "65"; a VAT rate hike to provide additional funding.
- Second-pillar: one-time conversion rate cut to "6 percent"; proposed transitional compensation for negative pension-level impacts; post-retirement-age incentives to stay in the labor force and greater flexibility for employment while in retirement.
Staff assessment and recommendations
- Proposals stabilize funding gap over the next decade but are temporary and rely heavily on higher VAT funding.
- Recommendation: more ambitious reforms needed—larger increase of retirement age and automatic links to longer life expectancy.
- Second-pillar reforms should align parameters with market trends; some studies suggest a "5 percent" conversion rate is needed.
- Simplify regulatory environment, optimize PF investment practices consistent with risk profiles, strengthen PF governance, and reduce number of PFs to achieve economies of scale.

Climate change
Findings
- Government approved a new long-term climate strategy (LTCS) in January with guidelines and targets through 2050.
- By 2019, CO2 emissions recorded a "14 percent" decline compared to 1990; pandemic restrictions may have helped achieve the "20 percent" reduction target for 2020.
- LTCS includes a new Climate Fund.
Recommendations
- A clear, monitorable emissions action plan is needed to support LTCS and address gaps and risks.
- Consider further targeted measures and whether investments should be increased or accelerated to meet ambitious targets and retain competitiveness.
- A robust public financial management and governance framework will be needed for the Climate Fund.

### Governance, fiscal policy, and staff appraisal
Governance and AML/CFT
- Several measures to strengthen governance implemented or underway.
- Federal Audit Office interim assessments of COVID-19 spending found quite limited abuse (e.g., "less than 1 percent" of loan guarantees have been called to date and "less than 1 percent" have involved criminal complaints).
- Parliament adopted legal changes to strengthen the AML framework; a proposal to subject lawyers and fiduciaries to due diligence was rejected.
- Recommendation: persevere with efforts to ensure accountability of COVID-19-related spending and enhance the AML/CFT framework.
- Note: IMF assessment of Switzerland’s framework for dealing with bribery of foreign officials and AML/CFT is foreseen for 2022.

Fiscal policy and staff appraisal
Findings
- Switzerland navigated COVID-19 well due to early, strong policy response and strong buffers.
- Recovery has commenced but further waves, new strains, and vaccination uncertainty pose risks.
Staff recommendations
- Fiscal policy should remain accommodative until signs of sustained recovery; expand support if needed.
- Policies should focus on ensuring a strong rebound, protecting vulnerable groups, mitigating labor-market dislocation and scarring, and ensuring viable firms stay in business.
- Avoid early withdrawal of fiscal support; lengthen amortization period for extraordinary spending under existing fiscal framework.
- Extraordinary support scheduled to phase out at the end of 2021; this will help ensure prolonged support does not impede post-COVID-19 reallocation.
- Over the medium term, continue and enhance fiscal support for green and digital growth, targeted and with attention to low-income earners.
- Rebalance the policy mix by increasing the role of fiscal policy to ease pressures on monetary policy and maintain external position broadly in line with fundamentals.
- Recommendation: Next Article IV consultation to take place on the regular "12-month" cycle.

Selected quantitative projections and indicators preserved exactly from source tables (examples)
- Real GDP (percent change) series (Table 1): "3.0 1.1 -3.0 3.5 2.8 1.4 1.8 1.2 1.8" (for 2018–2026 as presented in table rows).
- Consumer price index (period average): "0.9 0.4 -0.7 0.1 0.3 0.8 0.9 1.0 1.0" (2018–2026 series).
- Unemployment rate (in percent): "2.5 2.3 3.1 3.5 3.4 3.2 3.0 3.0 3.0" (2018–2026 series).
- First-pillar funding gap projection by 2030: "3 percent of GDP."
- Mandatory conversion rate and implied returns: "6.8% conversion rate implies returns of 4.8%."

*Italic: International Monetary Fund — selected excerpts from the provided IMF staff report content unit.*

### Annex I. Status of Previous Article IV Recommendations

### Annex I. Status of Previous Article IV Recommendations

### Fiscal Policy
- Recommendation: Reduce structural overperformance through operational refinements to the debt-brake rule.
  - Policy actions: The Federal Council (FC) has proposed to simplify the procedures for supplementary budgets to reduce “safety margins.”
  - Policy actions: New accounting changes to introduce accruals were also proposed.
  - Policy actions: Efforts have been made to refine revenue forecasts to limit revenue overperformance (which results in lower planned spending and surplus bias).
  - Policy actions: Adjustments to the asymmetric operation of the debt-brake rule were considered but rejected.
- Recommendation: Redress fiscal-monetary policy imbalances. In case downside risks to activity materialize, fiscal policy should contribute more decisively to supporting growth.
  - Policy actions: The authorities have taken strong, swift, and sustained fiscal measures in response to the COVID-19 pandemic, with coordinated support from monetary policy and regulatory adjustments.

### Monetary Policy
- Recommendation: Foreign exchange intervention (FXI) should be reserved mainly for leaning-against-the-wind of large safe-haven pressures that would otherwise cause excessive volatility in inflation and output, but while preserving the trend appreciation.
  - Observation: The COVID-19 pandemic triggered large safe-haven inflows. In response, the SNB purchased CHF 90 billion foreign exchanges in H1:2020, and another CHF 20 billion in H2:2020.
  - Observation: Notwithstanding these FXIs, the franc appreciated by 6 percent and 4 percent, in nominal and real effective exchange rate terms, respectively.
- Recommendation: Improve transparency of SNB operations with regular and timely publication of FXI data.
  - Policy actions: The SNB started to publish quarterly net FXI information from September 2020. Previously FXI data were only released on an annual basis.

### Financial Sector Policy
- Recommendation: New targeted macroprudential measures are needed to restrain demand for high-risk mortgages on residential investment property.
  - Policy actions: A partial tightening of the self-regulation regime on mortgages for investment properties was recognized by FINMA in August 2019 and became effective in January 2020.
- Recommendation: The toolkit for mandated measures should be expanded, supported by a framework with enhanced expectations to act.
  - Status: No new mandated tools have been introduced, and no formal changes have been made to the decision-making framework on accountability or expectations to act.
- Recommendation: The authority and independence of the financial supervisor should be further strengthened to be commensurate with the very large and complex financial sector and institutions that it supervises.
  - Policy actions: A new Ordinance to the Financial Market Supervision Act came into force in February 2020.
  - Status: But no steps have been taken to lessen the Federal Council’s oversight of FINMA or to strengthen FINMA’s autonomy, governance, and accountability.

### Structural Reforms
- Recommendation: Eliminate remaining gaps in international commitments and in compliance with international standards, and implement the corporate income tax reform expeditiously.
  - Policy actions: The Federal Act on Tax Reform and AHV Financing (TRAF) was approved in May 2019 and became effective in January 2020.
  - Policy actions: Many recommendations in the 2018 OECD Working Group on Bribery (WGB) Phase 4 evaluation have been implemented, but some reforms (e.g., maximum fines for legal persons, whistleblower protection) have fallen short.
  - Policy actions: AMT/CTF procedures have been enhanced in some areas (sanctions, bearer shares, exchange of FIU information and mutual legal assistance).
- Recommendation: Better adapt to demographic trend and technological changes, including by raising the retirement age, amending the pension system, continuing to welcome foreign workers, tailoring education to facilitate life-long learning, and ensuring social safety nets are compatible with new work arrangements.
  - Policy actions: Pension reform effects have continued for both Pillar 1 and Pillar 2.
  - Policy actions: Additional support measures for childcare services have been adopted, with the aim to raise labor force participation.
  - Policy actions: A new package of measures was adopted in 2019 to strengthen the promotion of the domestic labor force potential, with a special focus on older people, including those who have exhausted their unemployment benefits, and job seekers who are difficult to place.

*Source: IMF staff.*

### conclusion of the reporting calendar and improved coverage of domiciliary-company foreign liabilities led to downward re

### conclusion of the reporting calendar and improved coverage of domiciliary-company foreign liabilities led to downward re

### Current Account (CA) — developments and assessment
- 2020 CA surplus: 3.8 percent of GDP (down from 6.7 percent of GDP in 2019).
- Drivers of decline in 2020:
  - Temporary shocks related to COVID-19: weaker trade balances for gold and luxury watches; larger drop in investment income receipts than expenses due to relatively better performance of the Swiss economy in the pandemic.
  - Other potentially persistent factors noted.
- Outlook: CA position likely to return towards 2018–19 levels in 2021 as the global economy recovers and COVID-19-related drags ease.
- EBA and staff assessments:
  - EBA CA norm: 5.6 percent of GDP (slightly lower than last year’s norm).
  - Cyclically-adjusted CA surplus: 3.9 percent of GDP.
  - EBA-estimated CA gap: -1.6 percent of GDP in 2020.
  - Decomposition of EBA gap: domestic policy gaps account for -1.1 percentage points (private sector credit: -0.7; fiscal overspending: - 0.3); policy gaps in the rest of the world contribute 2.4 pp.
  - Adjustments widening the gap to IMF staff Staff Gap: -3.1 percent of GDP (± 2 percentage points):
    - COVID-19 adjustment: 1.9 percent of GDP (increase in underlying CA).
    - Other adjustments (Switzerland-specific income-account factors): -3.4 percent of GDP (including valuation losses on fixed-income securities arising from inflation: - 2.8; retained earnings on portfolio equity investment: -0.6).
  - Summary figure for 2020: CA: 3.8; Cycl. Adj. CA: 3.9; EBA Norm: 5.6; EBA Gap: -1.6; COVID-19 Adj.: 1.9; Other Adj.: -3.4; Staff Gap: -3.1 (all values in percent of GDP).

### Real Exchange Rate (REER) — background and assessment
- 2020 appreciation pressures:
  - Narrower domestic-foreign interest rate differential and heightened risk aversion in H1:2020; pressure eased subsequently.
  - Average NEER appreciated by 6.1 percent (relative to 2019).
  - CPI-based REER appreciated by 3.9 percent (relative to 2019), notwithstanding sizable FX interventions.
  - Long-term changes since end-2010: NEER appreciated by 27 percent; CPI-based REER appreciated by 2.8 percent (reflecting lower domestic inflation).
- Staff assessment of REER valuation:
  - IMF staff CA gap implies a REER overvaluation of 5.9 percent in 2020 (applying an estimated elasticity of 0.52).
  - EBA REER index and level models estimate average REER in 2020 overvalued by 15.2 and 26.4 percent, respectively.
  - Staff range assessment: REER overvalued in the range of 1.9 to 9.9 percent, with a midpoint of 5.9 percent.
  - Caveats: results may not fully capture a secular improvement in productivity, especially in knowledge-based sectors.

### Capital and Financial Accounts — flows and policy measures
- 2020 net financial outflows: 1.8 percent of GDP.
  - Private inflows: 14.8 percent of GDP.
  - SNB reserve increases: 16.6 percent of GDP (offsetting private inflows).
- 2019 comparison: SNB reserve gains 2.2 percent of GDP and private outflows 3.0 percent of GDP led to net financial outflows of 5.2 percent of GDP in 2019.
- Historical averages (2009–20):
  - Net private inflows averaged 3.6 percent of GDP.
  - Average annual increase in SNB reserves: 10.5 percent of GDP.
- Assessment: Financial flows are large and volatile due to Switzerland’s status as a financial center and safe haven; sizable net private financial outflows prior to the global financial crisis have declined and on average turned into net capital inflows, adding to appreciation pressures.

### FX Intervention and Reserves level — background and assessment
- Official reserve assets (including gold) at end-2020: US$1,085 billion (135 percent of GDP), up US$229 billion from end-2019 (including valuation changes).
- SNB FX purchases in 2020: CHF110 billion of FX (net), the highest amount since 2012.
- Assessment:
  - Reserves are large relative to GDP, but more moderate compared with short-term foreign liabilities.
  - High reserve level reflects monetary operations to avoid persistent undershooting of inflation amid FX inflow surges and limited scope for further easing via other monetary policy tools.
  - Constraints noted:
    - Limited supply of domestic assets for purchase.
    - Marginal interest rate on bank deposits at the SNB: -0.75 percent (already the lowest in the world).
  - Transparency step: SNB’s initiation of quarterly publication of (net) FXI information in 2020.

### Data revisions and methodological notes
- December 2020 SNB revisions to BOP/IIP data due to:
  - (i) closing a data gap regarding domiciliary companies (affected IIP data from 2008 to 2019);
  - (ii) newly available data from reporting institutions including a newly-completed 2019 annual survey and corrections for previous reporting periods for complex companies (affected entire BOP and IIP for 2014–2019).
- Consequences of revisions:
  - Net IIP showed an average decrease between 2008 and 2019 of CHF 128 billion (around 17%).
  - Current account surpluses for 2018 and 2019 decreased significantly (mostly due to adjustments in primary income expenses); 2014–17 balances changed less and in both directions.
- Measurement and adjustment notes:
  - NIIP responds to exchange rate and equity price changes asymmetrically per the framework.
  - Underlying CA adjusted for Switzerland-specific income-account factors:
    - Retained earnings on portfolio equity investment not recorded in income balance under BPM6.
    - Recording of nominal interest on fixed income securities that compensates for expected valuation losses (due to inflation and/or nominal exchange rate movements).
  - COVID-19 trade adjustors to CA (total increase of about 1.9 percent of GDP):
    - Tourism: 0.5 ppts (including impact on decline in sales of luxury watches).
    - Oil: -0.3 ppts.
    - Household consumption composition shift: -0.4 ppts.
    - Medical products: 0.7 ppts.
    - Precious metals: 1.4 ppts.

### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses
- Global risks (Relative Likelihood: Medium; Time Horizon: ST, MT):
  - Prolonged pandemic (High expected impact).
    - Expected impact: lower GDP growth, larger sales losses, higher likelihood of bankruptcy.
    - Policy response: maintain/intensify public health measures; allow sustained countercyclical support; targeted measures for most-affected companies; relieve liquidity and sustainability challenges; consider preannounced regular foreign exchange purchases if needed in case of excessive currency volatility.
  - Accelerating de-globalization (Medium expected impact).
    - Expected impact: reduced potential growth; trade and capital flow obstacles would impact growth.
    - Policy response: work with international partners; increase diversification of trade partners; strengthen supervision of bank and nonbank financial sector; consider fiscal loosening if growth downturn occurs.
  - Sharp rise in global risk premia (Medium likelihood; Medium expected impact).
    - Expected impact: stress on leveraged firms and households; losses in non-bank financial institutions; possible sovereign spillovers; potential safe haven inflows and appreciation pressures.
    - Policy response: use substantial fiscal space for countercyclical discretionary stimulus; support viable but insolvent companies; consider targeted FXI if appreciation increases deflation risks.

- Switzerland-specific risks (multiple entries; Relative Likelihood generally Medium; Time Horizon ST, MT):
  - Resumption of safe haven inflows leading to CHF appreciation (High expected impact).
    - Expected impact: sharp appreciation pressures, deflation risk, competitiveness loss, lower growth.
    - Policy response: use targeted FXI to prevent sharp appreciation; allow full operation of structural-balance fiscal rule; allow temporary discretionary fiscal stimulus if downturn is deep/sustained; further enhance anti-corruption and AML/CFT frameworks.
  - Early withdrawal of fiscal policy support (Medium expected impact).
    - Expected impact: depressed GDP growth; deeper corporate balance-sheet scarring and labor-market damage.
    - Policy response: allow gradual withdrawal of support; adjust policies to pandemic and economic developments; delay required amortization of COVID-19-related extraordinary spending.
  - Prolonged low-growth and low-inflation environment (High expected impact).
    - Expected impact: persistent very low interest rates; search-for-yield risk; real estate price adjustment risk; financial stability risks.
    - Policy response: expand monetary and macroprudential toolkits; strengthen bank buffers against real-estate exposure; assess construction-sector risks; consider changes to limits on portfolio allocations for pension funds and insurance companies (indicative).
  - Political developments negatively affecting Swiss-EU relations (High expected impact).
    - Expected impact: progressive undermining of trade, investment, and labor relations with the EU; adverse real-economy impact.
    - Policy response: seek to preserve efficient flows of goods, labor and financial services with the EU; fiscal response may be needed if developments are adverse.

*Source: IMF staff assessment and associated annex as provided in the content unit.*

### Annex VI. Debt Sustainability Assessment

### Annex VI. Debt Sustainability Assessment

### External Debt Sustainability (Table 1: Switzerland, 2016–26)
- Baseline external debt (in percent of GDP): 2016 258.3; 2017 278.8; 2018 250.5; 2019 266.9; 2020 301.0; 2021 248.2; 2022 231.2; 2023 224.7; 2024 213.3; 2025 205.6; 2026 195.7.
- Debt-stabilizing non-interest current account (long-run): 1.6 (percent of GDP).
- Change in external debt (percentage points of GDP): 2016 12.1; 2017 20.6; 2018 -28.4; 2019 16.5; 2020 34.1; 2021 -52.8; 2022 -17.0; 2023 -6.5; 2024 -11.4; 2025 -7.7; 2026 -9.9.
- Identified external debt-creating flows (4+8+9) (percent of GDP): 2016 -8.5; 2017 -17.8; 2018 0.5; 2019 -3.3; 2020 13.8; 2021 -10.5; 2022 -6.1; 2023 -3.8; 2024 -4.4; 2025 -3.1; 2026 -4.4.
- Current account deficit, excluding interest payments (percent of GDP): 2016 -10.4; 2017 -8.7; 2018 -8.4; 2019 -8.4; 2020 -5.3; 2021 -8.1; 2022 -8.8; 2023 -8.4; 2024 -8.7; 2025 -8.3; 2026 -8.6.
- Deficit in balance of goods and services (percent of GDP): 2016 -10.6; 2017 -10.1; 2018 -11.7; 2019 -11.5; 2020 -9.2; 2021 -9.8; 2022 -10.4; 2023 -10.1; 2024 -10.2; 2025 -9.9; 2026 -10.1.
- Exports (percent of GDP): 2016 64.8; 2017 64.5; 2018 65.5; 2019 65.3; 2020 62.9; 2021 64.3; 2022 65.4; 2023 66.7; 2024 68.3; 2025 69.7; 2026 71.4.
- Imports (percent of GDP): 2016 54.2; 2017 54.3; 2018 53.7; 2019 53.8; 2020 53.7; 2021 54.5; 2022 55.0; 2023 56.7; 2024 58.1; 2025 59.9; 2026 61.3.
- Net non-debt creating capital inflows (negative) (percent of GDP): 2016 2.8; 2017 -7.4; 2018 17.7; 2019 5.2; 2020 11.0; 2021 5.8; 2022 7.9; 2023 6.6; 2024 7.0; 2025 6.6; 2026 6.6.
- Automatic debt dynamics (percent of GDP): 2016 -0.9; 2017 -1.7; 2018 -8.8; 2019 -0.1; 2020 8.1; 2021 -8.2; 2022 -5.3; 2023 -2.0; 2024 -2.7; 2025 -1.3; 2026 -2.5.
  - Contribution from nominal interest rate (percent of GDP): 2016 1.4; 2017 1.5; 2018 1.8; 2019 1.7; 2020 1.5; 2021 1.3; 2022 1.3; 2023 1.2; 2024 1.2; 2025 1.1; 2026 1.1.
  - Contribution from real GDP growth (percent of GDP): 2016 -4.9; 2017 -4.2; 2018 -8.1; 2019 -2.8; 2020 7.8; 2021 -9.5; 2022 -6.6; 2023 -3.2; 2024 -3.9; 2025 -2.5; 2026 -3.5.
  - Contribution from price and exchange rate changes (percent of GDP): 2016 2.6; 2017 0.9; 2018 -2.4; 2019 1.0; 2020 -1.2; 2021 [dots in source].
- Residual, incl. change in gross foreign assets (2-3) (percent of GDP): 2016 20.6; 2017 38.4; 2018 -28.9; 2019 19.7; 2020 20.3; 2021 -42.3; 2022 -10.9; 2023 -2.7; 2024 -7.1; 2025 -4.6; 2026 -5.5.
- External debt-to-exports ratio (percent): 2016 398.4; 2017 432.6; 2018 382.4; 2019 408.7; 2020 478.3; 2021 386.0; 2022 353.4; 2023 336.8; 2024 312.3; 2025 294.8; 2026 274.1.
- Gross external financing need (in billions of US dollars): 2016 1057.9; 2017 1120.2; 2018 1154.0; 2019 1093.0; 2020 1131.2; 2021 1241.5; 2022 1125.6; 2023 1113.4; 2024 1113.3; 2025 1109.8; 2026 1106.3.
- Gross external financing need (in percent of GDP): 2016 152.1; 2017 158.9; 2018 156.7; 2019 149.3; 2020 151.3; 2021 10-Year10-Year150.5 (note: source table shows column labels overlapping); 2022 128.8; 2023 123.0; 2024 117.2; 2025 112.3; 2026 106.4.
- Scenario with key variables at their historical averages (percent of GDP): 2016 248.2; 2017 234.5; 2018 226.6; 2019 216.3; 2020 207.7; 2021 199.4; debt-stabilizing non-interest current account 4.3.

### Key Macroeconomic Assumptions Underlying Baseline
- Real GDP growth (percent): historical average 2.0; 2016 1.7; 2017 3.0; 2018 1.1; 2019 -3.0; 2020 1.4; 2021 1.6; 2022 3.5; 2023 2.8; 2024 1.4; 2025 1.8; 2026 1.2; (last column 1.8).
- GDP deflator in US dollars (change in percent): 2016 -2.9; 2017 -0.3; 2018 1.4; 2019 -1.7; 2020 5.2; 2021 1.0; 2022 6.7; 2023 6.6; 2024 3.1; 2025 2.1; 2026 3.1; (last column 2.8; 3.4 appears in source).
- Nominal external interest rate (percent): 2016 0.6; 2017 0.6; 2018 0.7; 2019 0.7; 2020 0.6; 2021 0.6; 2022 0.1; 2023 0.5; 2024 0.5; 2025 0.5; 2026 0.5; (last column 0.5).
- Growth of exports (US dollar terms, percent): 2016 4.4; 2017 0.8; 2018 6.2; 2019 -0.8; 2020 -1.7; 2021 2.3; 2022 8.7; 2023 12.8; 2024 7.8; 2025 5.6; 2026 7.4; (last column 6.2; 7.8 appears).
- Growth of imports (US dollar terms, percent): 2016 5.6; 2017 1.6; 2018 3.4; 2019 -0.5; 2020 1.9; 2021 2.6; 2022 10.5; 2023 12.0; 2024 7.0; 2025 6.6; 2026 6.7; (last column 7.2; 7.9 appears).
- Current account balance, excluding interest payments (percent of GDP): 2016 10.4; 2017 8.7; 2018 8.4; 2019 8.4; 2020 5.3; 2021 9.6; 2022 2.1; 2023 8.1; 2024 8.8; 2025 8.4; 2026 8.7; 203? 8.3; 8.6 appears in source.
- Net non-debt creating capital inflows (percent of GDP): 2016 -2.8; 2017 7.4; 2018 -17.7; 2019 -5.2; 2020 -11.0; 2021 -3.7; 2022 6.8; 2023 -5.8; 2024 -7.9; 2025 -6.6; 2026 -7.0; (last columns -6.6 -6.6).

### External Debt Shock and Sensitivity Analysis (Figure 1)
- Figures report external debt in percent of GDP under baseline and single/combined shocks: interest rate shock, historical scenarios, current account shock, growth shock, combined shock, and a one-time real depreciation of 30 percent in 2021.
- Individual shocks are permanent one-half standard deviation shocks; historical averages used for ten-year projections; permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
- Boxed figures in charts present average projections for respective variables in baseline and scenarios; ten-year historical average also shown.

### Public Sector Debt Sustainability Analysis (Figure 2 and Figure 3)
- As of April 29, 2021.
- Nominal gross public debt (percent of GDP): 2019 41.2; 2020 39.8; 2021 42.9; 2022 45.3; 2023 44.5; 2024 43.8; 2025 42.8; 2026 42.1; 204? 41.2 appears.
- Public gross financing needs (percent of GDP): 2019 3.7; 2020 2.6; 2021 6.9; 2022 8.3; 2023 6.4; 2024 5.5; 2025 5.4; 2026 5.3; 2027 5.2 (source shows sequence through 2026).
- Net public debt equals gross figures shown.
- Real GDP growth (percent): 2019 2.1; 2020 1.1; 2021 -3.0; 2022 3.5; 2023 2.8; 2024 1.4; 2025 1.8; 2026 1.2; 2027 1.8 (table sequence as presented).
- Inflation (GDP deflator, percent): 2019 -0.2; 2020 -0.1; 2021 -0.6; 2022 0.2; 2023 0.3; 2024 0.5; 2025 0.7; 2026 0.8; 2027 0.8.
- Nominal GDP growth (percent): 2019 1.9; 2020 1.0; 2021 -3.4; 2022 3.6; 2023 3.2; 2024 2.0; 2025 2.5; 2026 2.0; 2027 2.6.
- Effective interest rate (percent) (interest payments divided by previous-year debt stock): 2019 1.4; 2020 0.7; 2021 1.0; 2022 1.1; 2023 0.9; 2024 1.0; 2025 1.1; 2026 1.3; 2027 1.5.
- Change in gross public sector debt (cumulative percent of GDP): 2019 -0.4; 2020 0.6; 2021 3.1; 2022 2.3; 2023 -0.7; 2024 -0.7; 2025 -1.0; 2026 -0.7; 2027 -0.9; 2028 -1.7 (table sequence).
- Identified debt-creating flows (percent of GDP): 2019 -0.9; 2020 -1.6; 2021 4.3; 2022 2.1; 2023 -0.5; 2024 -0.5; 2025 -0.7; 2026 -0.5; 2027 -0.6; 2028 -0.6.
  - Primary deficit (percent of GDP): 2019 -0.7; 2020 -1.4; 2021 2.4; 2022 3.2; 2023 0.5; 2024 -0.1; 2025 -0.1; 2026 -0.1; 2027 -0.1; cumulative 3.3.
  - Primary (noninterest) revenue and grants (percent of GDP): 31.8; 32.7; 33.4; 32.9; 32.7; 32.7; 32.7; 32.7; 32.7; cumulative 196.7 (table sequence).
  - Primary (noninterest) expenditure (percent of GDP): 31.1; 31.2; 35.8; 36.1; 33.2; 32.7; 32.6; 32.6; 32.6; cumulative 199.9.
- Automatic debt dynamics (percent of GDP): 2019 -0.2; 2020 -0.1; 2021 1.9; 2022 -1.1; 2023 -1.0; 2024 -0.4; 2025 -0.6; 2026 -0.3; 2027 -0.5; cumulative -3.9.
  - Of which: real interest rate contribution (percent of GDP): 2019 0.6; 2020 0.3; 2021 0.6; 2022 0.4; 2023 0.3; 2024 0.2; 2025 0.2; 2026 0.2; cumulative 0.3; total 1.4.
  - Of which: real GDP growth contribution (percent of GDP): 2019 -0.9; 2020 -0.4; 2021 1.2; 2022 -1.4; 2023 -1.2; 2024 -0.6; 2025 -0.8; 2026 -0.5; cumulative -0.7; total -5.3.
- Exchange rate depreciation contribution: 0.0 across presented years.
- Residual, including asset changes (percent of GDP): 2019 0.5; 2020 2.1; 2021 -1.2; 2022 0.2; 2023 -0.3; 2024 -0.3; 2025 -0.3; 2026 -0.3; cumulative -0.3; final -1.1.
- Sovereign spreads: EMBIG (bp) 0; 5Y CDS (bp) 11 (table lists EMBIG 0 and 5Y CDS 11).

### Public DSA Alternative Scenarios and Composition (Figure 3)
- Baseline underlying assumptions (percent):
  - Real GDP growth: 2021 3.5; 2022 2.8; 2023 1.4; 2024 1.8; 2025 1.2; 2026 1.8.
  - Inflation: 2021 0.2; 2022 0.3; 2023 0.5; 2024 0.7; 2025 0.8; 2026 0.8.
  - Primary Balance: 2021 -3.2; 2022 -0.5; 2023 0.1; 2024 0.1; 2025 0.1; 2026 0.1.
  - Effective interest rate: 2021 1.1; 2022 0.9; 2023 1.0; 2024 1.1; 2025 1.3; 2026 1.5.
- Historical scenario assumptions:
  - Real GDP growth 3.5; 1.4; 1.4; 1.4; 1.4; 1.4 (2021–2026).
  - Inflation 0.2; 0.3; 0.5; 0.7; 0.8; 0.8.
  - Primary Balance -3.2; 0.4; 0.4; 0.4; 0.4; 0.4.
  - Effective interest rate 1.1; 0.9; 1.1; 1.3; 1.6; 1.9.
- Constant Primary Balance scenario:
  - Primary Balance constant at -3.2 (2021–2026).
  - Other assumptions same as baseline for growth and inflation; effective interest rate slightly varied (listed).

### Findings from Staff Report, Statements, and Policy Implications
- External sector:
  - Staff assessment: current account gap estimated at -3.1 percent of GDP; Swiss franc assessed as overvalued by close to 6 percent.
  - Departing from past mechanical linkage between CA gap and external position: a more holistic approach was adopted relying on a broader set of indicators.
- Fiscal policy:
  - Federal deficit in 2020 reached CHF 15.8 billion (USD 17.5 billion); outlays and guarantees totaling 10 percent of GDP were approved in 2020.
  - General government debt (IMF definition) provisionally expected to increase from 40 percent in 2019 to 46 percent in 2021.
  - For 2021, additional outlays of 3.3 percent of GDP have been approved; a deficit of more than CHF 20 billion (USD 22.2 billion) is expected according to recent estimates.
  - Debt-brake framework: authorities consider extending the amortization delay for extraordinary outlays beyond six years envisaged by the rule.
  - Major public investments: 10-year, CHF 13 billion (USD 14.4 billion) railway program (launched 2019); CO2 levy and heavy vehicle fee generate about CHF 2.8 billion (USD 3.1 billion) annually (0.4 percent of GDP); planned Climate Fund to provide approximately CHF 1 billion (USD 1.1 billon) annually.
- Monetary policy:
  - SNB measures: deactivation of countercyclical capital buffer; creation of specific refinancing facility for COVID-19 loans guaranteed by federal government; negative policy rate maintained at -0.75 percent; willingness to intervene in FX market and actual FX interventions occurred.
  - Staff and authorities agree monetary policy should remain accommodative until clear signs of sustained recovery.
- Financial sector:
  - Banks entered the crisis with strong capital buffers and incurred limited losses; loss absorption capacity largely intact.
  - Risks from prolonged negative interest rates to profitability and business models are being monitored.
  - Authorities will monitor mortgage and real estate markets; consider macroprudential measures if needed (including reactivation of countercyclical capital buffer).
  - Financial sector reforms since 2019 FSAP include improvements in recovery and resolution planning and a new ordinance on FINMA powers.
- Structural and labor policies:
  - Crisis-related labor market measures effective in preserving jobs; measures should be maintained until recovery takes hold but prolonged support risks impeding structural transformation.
  - Authorities preparing measures to increase labor force participation and labor market flexibility, including training.
- Pensions:
  - Pension reform progress: latest reform reduced expected yearly financing shortfall by about CHF 2 billion (USD 2.2 billion) for first pillar.
  - Ongoing proposals: align retirement age at 65 for women and men; mobilize additional earmarked revenue; second pillar proposal to reduce conversion rate from 6.8 to 6 percent with transitional and compensatory measures.

*Source: Annex VI. Debt Sustainability Assessment; IMF staff report and accompanying tables and figures contained in the provided PDF content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1cheea2021001.pdf_