## 1norea2021001 ## Source details **Canonical URL:** [1norea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1norea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1norea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1norea2021001.pdf.json) --- ### Context - Norway entered the Covid-19 crisis with ample policy buffers and steady growth: - 2019 mainland real GDP growth: 2.3 percent. - Sovereign wealth fund (GPFG) balance: USD1.2 trillion (3.3 times mainland GDP). - Norges Bank policy rate hiked to 1.5 percent during 2019. - Structural resilience: - Share of jobs that could be done from home: 40 percent. - High digitalization, relative ease of remote working, and high public compliance. ### Covid-19 cases and vaccines — key findings - Norway achieved one of the lowest infection and mortality rates in Europe due to swift action and sequencing of mobility restrictions. - Vaccination rollout slowed by supply availability; pace comparable to most other European countries. - Authorities expected most of the adult population vaccinated by end-July 2021. - Government plan to lift national Covid-related restrictions into four broad steps, determined by: - Evolution of the pandemic. - Capacity of the health care system. - Vaccination rollout. ### Recent developments (2020 — impacts) - Output and demand: - Mainland real GDP fell by 2.5 percent in 2020. - Private consumption fell by -7.6 percent. - Investment dropped by 4 percent. - Mainland net exports contributed +2.8 percent to growth. - Labor market and distributional impacts: - Registered unemployment peaked at more than 10 percent in March 2020. - Average unemployment rate (ILO definition) in 2020: 4.6 percent (about 0.9 percentage points above end-2019). - Sectors most affected: hotels and restaurants, other high-contact services. - Frisch Center estimate: fall in hours worked between February and August 2020 for sample employed in February — 11 percent for lowest income decile, 3 percent for highest income decile. - Real wages grew at an average rate close to 1 percent in 2020. - Inflation and external sector: - Core inflation (CPI-ATE) peaked at 3.7 percent (y-o-y) in August 2020. - Headline CPI averaged 1.3 percent in 2020. - Terms of trade down by 12 percent for the year. - Trade balance declined to -0.9 percent of total GDP (from +1.6 percent in 2019). - Current account surplus in 2020: 1.9 percent of total GDP. - Staff assessment: current account gap in 2020 around -0.9 percentage points of total GDP. - REER index in 2020 assessed as overvalued by 2.8 percent relative to the REER index norm. ### Outlook and risks - Near- and medium-term projections: - Mainland real GDP rebound projected by 3.2 percent in 2021. - Real mainland GDP forecast growth for 2022: 3 percent. - By end of medium-term, mainland GDP expected to be about 1 ¼ percent below its pre-Covid forecast. - Key assumptions: - Recovery depends on vaccination rollout efficiency and reaching herd immunity by end-2021 (as assumed). - Net exports expected to contribute negatively to GDP growth as imports recover. - Risks: - Near-term risks mainly balanced; medium-term risks tilted to the upside. - Downside risks: uncertainty in vaccine rollout, higher household precautionary saving, delayed investment, spike in bankruptcies and unemployment once fiscal support is withdrawn. - Upside factors: higher household savings and ongoing recovery in oil prices; large fiscal buffers available if needed. - Uncertainty about longer-term future of oil production beyond expected 2024 peak. ### Authorities’ views - Authorities expect a slightly stronger rebound in mainland GDP than staff, with minimal medium-term scarring. - Norges Bank expects a positive output gap as early as 2022 and low risk of inflationary pressures. - Authorities acknowledge persistent risk of increased unemployment and bankruptcies as Covid support measures are withdrawn. - Authorities expect higher ongoing contributions to growth from the offshore sector and limited medium-term scarring in that sector. ### Fiscal policy — measures and calibration - Pre-crisis fiscal rule: - Structural non-oil deficit during 2017–19 consistent with fiscal rule: average no more than 3 percent of the GPFG over the cycle. - Fiscal rule tightened from 4 percent to 3 percent of the GPFG effective 2017. - 2020 fiscal response: - Initial discretionary above-the-line (ATL) measures committed up to 5 ¼ percent of mainland GDP (NOK 162 billion); later adjusted to 4 ¼ percent of mainland GDP (NOK 131 billion). - Automatic stabilizers estimated at 1 ¾ percent of mainland GDP (NOK 50 billion). - Below-the-line (BTL) measures committed: 4 ½ percent of GDP (mainly loans and guarantees); take-up modest. - Committed 2020 figures (Text Table 1): - Discretionary ATL total: 131.3 NOK billion, 4.3 percent of mainland GDP. - Main BTL guarantee and loan schemes total: 129.1 NOK billion, 4.2 percent of mainland GDP. - Grand total: 137.5 NOK billion, 4.5 percent of mainland GDP. - ATL measures included temporary layoff scheme, income support for corporates and individuals, compensation schemes, and support for municipalities, the health sector and public transport. - 2021 fiscal approach: - Fiscal support expected to be adjusted and become more targeted. - 2021 budget ATL measures: somewhat over half the size of 2020 ATL measures (2020 ATL was 4 ¼ percent of mainland GDP; 2021 budget outlined 2.1 percent of mainland GDP before supplementary budget). - Supplementary budget (published May 12) may raise 2021 ATL stimulus above the 2.1 percent of mainland GDP outlined. - Key 2021 budget measures (before any supplement): - Supporting businesses that suffered large falls in income: nearly 1 percent of mainland GDP. - Getting people back to work, building skills and human capital: nearly 0.5 percent of mainland GDP. - Support for sectors of ‘critical importance’ to society: nearly 1 percent of mainland GDP. - Staff expects the structural non-oil deficit to decline to 3.7 percent of the GPFG in 2021 (from 3.9 percent in 2020) and then fall under 3 percent by 2023. ### 2021 budget — composition and near-term stance - Permanent tax changes to encourage labor participation and private investment (examples listed in source). - Increased focus and funding for R&D, investment, and green technologies. - Temporary ship guarantee scheme valued at 0.3 percent of mainland GDP, NOK 10 billion. - Budgetary allocations (presented): - Measures targeting businesses: 29.7 NOK billion, 0.9 Percent GDP1 - Measures targeting households: 13.00 NOK billion, 0.4 Percent GDP1 - Measures for sectors with duties of critical importance to society: 26.2 NOK billion, 0.8 Percent GDP1 - Total: 68.9 NOK billion, 2.1 Percent GDP1 - 1 Mainland GDP. - Repayment of company tax deferrals postponed from end-July 2021 to end-October 2021, with equal repayments over 12 months (instead of 6 months). - Staff supports authorities’ intention to draw more from GPFG’s savings if needed to protect health and livelihoods and mitigate scarring. ### Medium-term fiscal challenges and recommended reforms - Long-term adjustment need: - A long-term fiscal adjustment of around 5 percent of GDP will be needed to secure intertemporal solvency given negative demographics and other factors. - Revenue-side recommendations: - Simplify and broaden the VAT system; Norway’s standard VAT rate is 25 percent. - Unwind temporary VAT cuts introduced during the pandemic on schedule. - Support authorities’ intent to more than triple Norway’s carbon tax by 2030 to around EUR 200 per ton (with offsetting tax cuts to make the plan revenue neutral). - Spending-side recommendations: - Expenditure share reached around 65 percent of mainland GDP in 2020, up from 60 percent in 2019. - Consider measures to boost labor supply (e.g., further changes to sickness and disability benefits). - Consider an expenditure review to improve cost-effectiveness of government spending. - Consider merits of a fully independent external fiscal council; currently Norway has a ‘Model and Method Commission’ internal advisory body. ### Monetary policy response and guidance - Norges Bank actions during 2020: - Cut policy rate by 150 basis points to zero in three steps. - Provided liquidity to the banking sector through market operations. - Intervened in the foreign exchange market and offered USD loans and a Fed swap agreement as a backstop. - Interventions totaled NOK 3.5 billion over March 19th and 23rd. - Effects of monetary easing: - Interest burden-to-income ratios fell by almost 1.5 percentage points in 2020:Q1–Q3, boosting disposable household income. - Bank lending held up; lending to households increased though some decrease in mid-2020. - Ongoing considerations: - Some factors pushing core inflation higher are temporary and may subside in 2021. - Tripartite wage commission estimates core inflation could be 2.8 percent in 2021. - Early April wage agreement settled on wage hikes of 2.7 percent. - Norges Bank brought forward the projected initial increase of the policy rate to late 2021. - Norges Bank should remain ready to ease further, including the option of negative interest rates, should the recovery falter. ### Financial sector resilience and macroprudential policy - Macroprudential actions: - Countercyclical capital buffer (CCyB) partially released from 2.5 percent to 1 percent. - Temporary relaxation of mortgage lending regulation allowed temporary deviations for up to 20 percent of new loans. - Authorities urged banks and insurers to restrict dividend payouts and share buy-backs. - Effective end-2020, the systemic risk buffer increased from 3 to 4.5 percent for IRB banks. - Bank asset quality and outcomes: - Central scenario: mainland GDP contracts by almost 5½ percent in 2020. - Downside scenario: GDP declines by about 7 percent in 2020. - Actual decline in 2020: 2.5 percent. - Overall NPLs remain low but increasing in some loan segments. - Bankruptcies declined by 18 percent y-y in 2020; bankruptcy claims by the tax administration declined from 4.9k in 2019 to 2.5k in 2020. - Key vulnerabilities: - Households highly leveraged; Total Household Debt (memorandum) 2020: 134.7 (in percent of GDP). - Banks obtain nearly half their overall funding from wholesale markets; international wholesale funding accounts for 48 percent of all wholesale funding. - Commercial real estate (CRE) exposure significant; pandemic-driven shifts could undermine CRE revenue streams. - Recommendations: - Consider tightening mortgage regulations if house price growth does not slow. - Upgrade CRE data collection and consider broadening mitigation tools (including sectoral capital tools). - Improve AML/CFT supervision: increase scope, intensity, and frequency of inspections and active enforcement. ### Structural policy recommendations - Corporate-side: - Identify business solvency risks and facilitate debt restructuring. - Explore equity-type support mechanisms for stressed but viable SMEs and mid-cap companies. - Labor-side: - Deepen efforts to include vulnerable and diverse workers; promote mobility and training; further sickness and disability reforms to boost participation. - Regulatory / housing supply: - Relax land-use restrictions to facilitate housing supply. - Digitalization and R&D: - Address shortage of big data analysts and ICT specialists; 3.7 percent of all university graduates are ICT graduates (DESI index) compared with EU average 3.6 percent. - Strengthen links between public research, innovation, and businesses. - Climate policy: - Continue carbon taxation increases, R&D on carbon capture, and recalibration of EV adoption policies to improve cost effectiveness. ### Current account, REER, and external position - 2020 current account (CA): 1.9 percent of total GDP (2.2 percent of mainland GDP). - Cyclically adjusted 2020 CA per EBA calculations: 4.2 percent of GDP. - EBA regression-estimated norm: 10.8 percent of GDP; EBA gap: -6.6 percent of GDP. - Covid-19 adjustment: 1.7 percent; staff gap (final assessment): -0.9 percent of GDP. - REER developments: - REER depreciated by around 11 percent in 2020. - REER assessed as overvalued by 2.8 percent in 2020 relative to REER index norm. - Reserves and FX: - Norges Bank reserves at end-2020: 21.5 percent of mainland GDP. - Reserves assessed as ample; Norges Bank expanded swap agreements with the Fed and Nordic central banks. ### Annex IV — Oil supply curve and petroleum wealth - Supply-curve developments: - Weighted-average break-even price (weighted by size of field resources): $59/Bbl in 2015; $52/Bbl in 2019; $46/Bbl by 2020. - Government authorities’ estimate of the breakeven price is around $38/Bbl. - 2020 shock and outlook: - In 2020 oil prices fell by more than 30 percent. - Production grew by 6 percent in 2020. - Under current projections, Norwegian energy production expected to peak in 2024–25 at a level 12 percent higher than 2020, then begin a gradual fall. - Long-term implications: - Comparing expected production per day by 2040 between the 2019 and 2020 vintages suggests a drop of more than 50 percent. - Present value of intertemporal net worth drops by almost 125 percent of 2021 mainland GDP when only 60 percent of proven petroleum resources are viable. - To offset such a downward revision, government would need to lower its non-oil deficit by more than 1 percent of mainland GDP over the full simulation horizon, or reform key expenditure items (e.g., lower growth in sickness, disability and old age pensions by around 0.35 percentage points). - Policy implication: strengthen case for longer-term fiscal adjustment and balance sector support with green transition. ### Annex VIII — Climate mitigation - Emissions and sectors: - Norway has cut its CO2 emissions by about 5 percent since 1990. - Sectoral shares of CO2 emissions: Oil and gas extraction: 28%; Manufacturing industries and mining: 23%; Energy supply: 3%; Heating in other industries and households: 2%; Road traffic: 17%; Aviation, navigation, motor equipment etc.: 14%; Agriculture: 9%; Other: 4%. - Nearly 100 percent of electricity is generated by renewables (mostly hydropower). - Targets: - Paris Commitment: lower GHGs by 50–55 percent in 2030 relative to 1990 baseline. - Government objective: become a ‘low-carbon’ society by 2050; when land uptake is included, Norway expects net negative emissions by 2050. - 2021 budget green measures: - Carbon tax hike and broaden CO2 tax coverage by abolishing exemptions and lower rates. - Increase road transport biofuel sales requirement from 12 to 20 percent in 2020. - Private sector R&D and innovation support for climate mitigation. - EVs: - Share of battery electric vehicles (EVs) in total sales of new cars now exceeds 50 percent. - Fiscal costs of EV subsidies are relatively high; effectiveness could be improved by incentivizing scrapping of conventional cars. - Assessment: - Business as usual (BAU) scenario projects stable positive emissions after 2020. - Multiple trackers and assessments indicate additional domestic mitigation required to meet 2030 and 2050 objectives. ### Risk Assessment Matrix — selected risks and policy responses - Unexpected shifts in the Covid-19 pandemic: - Likelihood: M (medium) - Policy response: Maintain adequate support; rely primarily on fiscal policy. - Higher precautionary household saving rate: - Likelihood: M (medium) - Policy response: Accelerate structural reforms; focus on labor market measures. - Slow reallocation of labor and capital (zombification): - Likelihood: H (high) - Policy response: Speed up default and restructuring procedures; retarget fiscal support; invest in retraining. - Decline in labor supply and rise of long-term unemployment: - Likelihood: H (high) - Policy response: Calibrate unemployment benefits; phase-out recession-related social benefit changes timely. - Significant property price decline: - Likelihood: M (medium) - Policy response: Monitor via better data; supervise CRE lending closely; consider broadening toolkit. ### Key selected statistics and indicators (as reported) - Population (2020): 5.4 million - Per capita GDP (2020): US$ 67,176.4 - Real GDP (annual changes): 2019: 0.9; 2020: -0.8; 2021: 3.0; 2022: 3.6; 2023: 2.9; 2024: 1.8; 2025: 1.3; 2026: 1.3 - Real mainland GDP (annual changes): 2019: 2.3; 2020: -2.5; 2021: 3.2; 2022: 3.0; 2023: 2.2; 2024: 1.8; 2025: 1.8; 2026: 1.8 - Unemployment rate (percent of labor force): 2019: 3.7; 2020: 4.6; 2021: 4.3; 2022: 4.0; 2023: 3.9; 2024: 3.8; 2025: 3.8; 2026: 3.8 - CPI (average): 2019: 2.2; 2020: 1.3; 2021: 2.6; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0; 2026: 2.0 - Central government non-oil balance (percent of mainland GDP): 2019: -7.4; 2020: -14.2; 2021: -12.5; 2022: -10.5; 2023: -8.7; 2024: -7.4; 2025: -6.4; 2026: -5.8 - General government overall balance (percent of mainland GDP): 2019: 7.4; 2020: -6.9; 2021: -5.6; 2022: 0.9; 2023: 3.6; 2024: 5.0; 2025: 5.4; 2026: 5.4 - Net financial assets (percent of mainland GDP): 2019: 391.1; 2020: 421.6; 2021: 405.6; 2022: 402.8; 2023: 403.2; 2024: 405.2; 2025: 407.4; 2026: 409.7 - Capital of Government Pension Fund Global (GPF-G) (bil. NOK): 2019: 328.8; 2020: 358.7; 2021: 346.3; 2022: 346.3; 2023: 348.9; 2024: 352.9; 2025: 357.0; 2026: 361.2 - Current account balance (percent of total GDP): 2019: 2.8; 2020: 1.9; 2021: 5.6; 2022: 5.0; 2023: 4.7; 2024: 4.1; 2025: 3.4; 2026: 3.0 - Crude Oil Price (USD per barrel): 2019: 61.4; 2020: 41.3; 2021: 58.5; 2022: 54.8; 2023: 52.5; 2024: 51.3; 2025: 50.7; 2026: 50.5 - Financial Soundness Indicators (selected) — Regulatory Capital to Risk-Weighted Assets: 2014: 16.5; 2015: 18.9; 2016: 22.1; 2017: 22.1; 2018: 22.3; 2019: 24.2; 2020: 24.8 - Memorandum: Total Household Debt (in percent of GDP): 2014: 122.3; 2015: 119.3; 2016: 121.4; 2017: 129.8; 2018: 127.1; 2019: 127.9; 2020: 134.7 - Annex I external position (2020, percent of mainland GDP): NIIP: 320; Gross Assets: 600; Res. Assets: 21.5; Gross Liab.: 275; Gross External Debt: 203 - NIIP reached 320 percent of mainland GDP at end-2020 (up from 284 percent in 2019). GPFG assets under management reached 3.6 times mainland GDP by end-2020. International reserves: 21.5 percent of mainland GDP. _International Monetary Fund — NORWAY (selected excerpts)._ ### 1. Covid-19 Cases and Vaccines __________________________________________________________________________ 4 ### 1. Covid-19 Cases and Vaccines ### Context - Norway entered the Covid-19 crisis with ample policy buffers and steady growth: - 2019 mainland real GDP growth: 2.3 percent. - Sovereign wealth fund (GPFG) balance: USD1.2 trillion (3.3 times mainland GDP). - Norges Bank policy rate hiked to 1.5 percent during 2019. - Structural features supporting resilience: - Share of jobs that could be done from home: 40 percent. - High level of digitalization, relative ease of remote working, and high public compliance. ### Box: Covid-19 Cases and Vaccines — key findings - Norway achieved one of the lowest infection and mortality rates in Europe due to swift action and sequencing of mobility restrictions. - Vaccination rollout slowed by supply availability; pace comparable to most other European countries. - Authorities expected most of the adult population vaccinated by end-July 2021. - Government plan to lift national Covid-related restrictions into four broad steps, determined by: - Evolution of the pandemic. - Capacity of the health care system. - Vaccination rollout. - Each step eases mobility, social distancing and public gathering restrictions; regional measures may still be applied if needed. ### Recent developments (2020 – impacts) - Output and demand: - Mainland real GDP fell by 2.5 percent in 2020. - Private consumption fell by -7.6 percent. - Investment dropped by 4 percent. - Mainland net exports contributed +2.8 percent to growth. - Labor market and distributional impacts: - Registered unemployment peaked at more than 10 percent in March 2020. - Average unemployment rate (ILO definition) in 2020: 4.6 percent (about 0.9 percentage points above end-2019). - Sectors most affected: hotels and restaurants, other high-contact services. - Frisch Center estimate: fall in hours worked between February and August 2020 for sample employed in February — 11 percent for lowest income decile, 3 percent for highest income decile. - Real wages grew at an average rate close to 1 percent in 2020. - Inflation and external sector: - Core inflation (CPI-ATE) peaked at 3.7 percent (y-o-y) in August 2020. - Headline CPI averaged 1.3 percent in 2020. - Terms of trade down by 12 percent for the year. - Trade balance declined to -0.9 percent of total GDP (from +1.6 percent in 2019). - Current account surplus in 2020: 1.9 percent of total GDP. - Staff assessment: current account gap in 2020 around -0.9 percentage points of total GDP. - REER index in 2020 assessed as overvalued by 2.8 percent relative to the REER index norm. ### Outlook and risks - Near- and medium-term projections: - Mainland real GDP rebound projected by 3.2 percent in 2021. - Real mainland GDP forecast growth for 2022: 3 percent. - By end of medium-term, mainland GDP expected to be about 1 ¼ percent below its pre-Covid forecast. - Key assumptions and dependencies: - Recovery depends on vaccination rollout efficiency and reaching herd immunity by end-2021 (as assumed). - Net exports expected to contribute negatively to GDP growth as imports recover. - Risks: - Near-term risks mainly balanced; medium-term risks tilted to the upside. - Downside risks: uncertainty in vaccine rollout, higher household precautionary saving reducing consumption, delayed investment, spike in bankruptcies and unemployment once fiscal support is withdrawn. - Upside factors: higher household savings and ongoing recovery in oil prices; large fiscal buffers available if needed. - Uncertainty about longer-term future of oil production beyond expected 2024 peak. ### Authorities’ views - Authorities expect a slightly stronger rebound in mainland GDP than staff, with minimal medium-term scarring. - Norges Bank expects a positive output gap as early as 2022 and low risk of inflationary pressures. - Authorities acknowledge persistent risk of increased unemployment and bankruptcies as Covid support measures are withdrawn. - Authorities expect higher ongoing contributions to growth from the offshore sector and limited medium-term scarring in that sector. ### Policy discussions — near-term and medium-term priorities - Near-term policy goals: - Mitigate the pandemic. - Limit scarring. - Support recovery and adjustment. - Fiscal policy: - Fiscal policy should continue to play the lead role given substantial space, adjusting to circumstances. - Monetary policy: - Stance regarded as appropriate for near-term support while recognizing financial stability and inflation risks. - Financial policies: - Focus on balancing recovery support with containing vulnerabilities, addressing 2020 FSAP recommendations, and monitoring emerging NPLs. - Structural policies: - Aim to mitigate scarring and facilitate reallocation; emphasize green and digital spending. - As recovery firms, policies should gradually withdraw support and focus on medium-term challenges to boost inclusive and green growth and ensure intergenerational fairness. ### A. Fiscal policy — measures and calibration - Pre-crisis stance: - Structural non-oil deficit during 2017–19 consistent with fiscal rule: average no more than 3 percent of the GPFG over the cycle. - Fiscal rule tightened from 4 percent to 3 percent of the GPFG effective 2017. - 2020 fiscal response: - Initial discretionary above-the-line (ATL) measures committed up to 5 ¼ percent of mainland GDP (NOK 162 billion); later adjusted to 4 ¼ percent of mainland GDP (NOK 131 billion). - Automatic stabilizers estimated at 1 ¾ percent of mainland GDP (NOK 50 billion). - Below-the-line (BTL) measures committed: 4 ½ percent of GDP (mainly loans and guarantees); take-up modest. - Text Table 1 summary (committed 2020): - Discretionary ATL total: 131.3 NOK billion, 4.3 percent of mainland GDP. - Main BTL guarantee and loan schemes total: 129.1 NOK billion, 4.2 percent of mainland GDP. - Grand total: 137.5 NOK billion, 4.5 percent of mainland GDP. - ATL measures included temporary layoff scheme, income support for corporates and individuals, compensation schemes, and support for municipalities, the health sector and public transport. - 2021 fiscal approach: - Fiscal support expected to be adjusted in line with pandemic developments and become more targeted. - 2021 budget ATL measures: somewhat over half the size of 2020 ATL measures (2020 ATL was 4 ¼ percent of mainland GDP; 2021 budget outlined 2.1 percent of mainland GDP before supplementary budget). - Supplementary budget (published May 12) may raise 2021 ATL stimulus above the 2.1 percent of mainland GDP outlined in the 2021 budget. - Key 2021 budget measures (before any supplement): - Supporting businesses that suffered large falls in income: nearly 1 percent of mainland GDP (continuation of 2020 measures, at less than half the size). - Getting people back to work, building skills and human capital: nearly 0.5 percent of mainland GDP (including tertiary/secondary capacity increases, integrating vulnerable groups, combining unemployment benefits with training). - Support for sectors of ‘critical importance’ to society: nearly 1 percent of mainland GDP (transfers to municipalities, health sector, transport). *Source: IMF staff report excerpt — "1. Covid-19 Cases and Vaccines" (Norway).* ### 14. The 2021 budget also includes: ### 1norea2021001 - 14. The 2021 budget also includes: ### Fiscal measures, composition, and near-term stance - Permanent tax changes to encourage labor participation and private investment: - Reduced tax on operating assets by increasing the valuation discount for shares and fixed assets. - Reduced wealth tax for working capital. - Increased tax-exempted benefit on employee purchases of company shares. - A 5 percent CO2 tax hike as the first step in a multi-year planned broadening and increase in carbon taxation (with reductions in other taxes in a revenue-neutral manner). - Increased focus and funding for R&D, investment, and green technologies: - Participation in various EU programs (e.g., Digital Europe). - Increased R&D funds and funding for a "green platform" where companies will compete for grant and investment funding for new climate technologies. - Temporary ship guarantee scheme valued at 0.3 percent of mainland GDP, NOK 10 billion. - Increased funding for innovation and continued multi-year effort to incentivize climate-friendly transport solutions and CO2 capture and storage facilities. - Budgetary allocations (as presented): - Measures targeting businesses: 29.7 NOK billion, 0.9 Percent GDP1 - Measures targeting households: 13.00 NOK billion, 0.4 Percent GDP1 - Measures for sectors with duties of critical importance to society: 26.2 NOK billion, 0.8 Percent GDP1 - Total: 68.9 NOK billion, 2.1 Percent GDP1 - Sources: Ministry of Finance, and IMF staff calculations. - 1 Mainland GDP. - Near-term fiscal stance and COVID-related measures: - Remaining Covid-related measures envisaged to gradually taper by end-2021 as the economy recovers. - Repayment of company tax deferrals postponed from end-July 2021 to end-October 2021, with equal repayments over 12 months (instead of 6 months). - Staff expects the structural non-oil deficit to decline to 3.7 percent of the GPFG in 2021 (from 3.9 percent in 2020) and then fall under 3 percent by 2023, thus remaining within the limits set by the fiscal rule. - If the recovery falters, staff supports the authorities’ intention to draw more from GPFG’s savings if needed to protect health and livelihoods and mitigate scarring. ### Medium-term fiscal challenges and recommended reforms - Long-term adjustment need: - A long-term fiscal adjustment of around 5 percent of GDP will be needed to secure intertemporal solvency given negative demographics and other factors. Norway can afford to spread this adjustment over decades. - Revenue-side recommendations: - Simplify and broaden the VAT system, consistent with the Government-appointed VAT Commission and past IMF advice; Norway’s standard VAT rate is 25 percent and multiple reduced rates and exemptions add complexity. - Unwind temporary VAT cuts introduced during the pandemic on schedule. - Impact of any VAT rate increases on the most vulnerable could be offset by more targeted measures. - Support authorities’ intent to more than triple Norway’s carbon tax by 2030 to around EUR 200 per ton (with offsetting tax cuts to make the plan revenue neutral and mitigate social impact). - Spending-side recommendations: - Expenditure share reached around 65 percent of mainland GDP in 2020, up from 60 percent in 2019. - Given negative demographics and expected decline in oil revenues after the mid-2020s, consider measures to boost labor supply (e.g., further changes to sickness and disability benefits) in line with expert commission recommendations. - Consider an expenditure review to improve cost-effectiveness of government spending. - Authorities could consider merits of a fully independent external fiscal council; currently Norway has a ‘Model and Method Commission’ internal advisory body. ### Long-term management of oil revenues and fiscal rule - Norway needs continued adjustment away from dependency on oil revenues as oil revenues are set to decline sharply in coming decades. - Responsible management and investment of oil revenues into financial assets has enabled significant diversification, but the task is to consolidate and preserve accumulated wealth and ensure intergenerational fairness given deteriorating demographics. - Staff believes the fiscal rule remains compatible with the long-term objective of building substantial buffers through prudent medium-to-long-term fiscal policy. ### Authorities’ views on fiscal policy - Authorities affirmed the fiscal stance will remain accommodative in 2021 and responsive to economic conditions; structural deficit will be slightly larger than previously assumed in the 2021 budget. - Compensatory fiscal measures for companies and households will become progressively less utilized as automatic stabilizers become less active. - Authorities concur that fiscal policy should revert towards neutrality as the output gap closes, with the structural deficit edging back towards 3 percent of the oil fund balance (GPFG). - Supplementary budget presented to Parliament on May 12 proposes a looser fiscal stance than previously envisaged for 2021 due to a more prolonged lockdown and vaccination rollout uncertainties. - Authorities support focus on vulnerable populations and a more inclusive labor force; concur with staff on long-term pressures on public finances and the role of the fiscal rule. - Authorities are open to an expenditure review but consider expenditure rules incompatible with the fiscal rule framework. ### Monetary policy response and guidance - Norges Bank actions during 2020: - Cut policy rate by 150 basis points to zero in three steps. - Provided liquidity to the banking sector through market operations with varying maturities at or slightly above the policy rate. - Intervened in the foreign exchange market for financial stability-related considerations and offered USD loans and a Fed swap agreement as a backstop. - Interventions totaled NOK 3.5 billion over March 19th and 23rd, as discussed in Norges Bank (2021). - Effects of monetary easing: - Interest burden-to-income ratios fell by almost 1.5 percentage points in 2020:Q1–Q3, boosting disposable household income. - Bank lending held up during the crisis, with lending to households increasing though some decrease in mid-2020. - Spreads in corporate funding fell after early-crisis spikes; government bond buying program likely helped. - Ongoing monetary considerations and tradeoffs: - Some factors pushing core inflation higher are temporary and may subside in 2021, possibly resulting in below-target inflation. - Strong wage growth and increasing capacity utilization could increase inflationary pressures; tripartite wage commission estimates core inflation could be 2.8 percent in 2021. - Early April wage agreement settled on wage hikes of 2.7 percent, though some sectors not included expressed dissatisfaction. - Continued loose monetary policy could worsen financial vulnerabilities; tightening could slow the recovery. - Current stance and forward guidance: - Norges Bank brought forward the projected initial increase of the policy rate to late 2021. - Bank’s stance aims to support the economy while preventing sustained above-target inflation and build-up of stability risks. - Norges Bank’s reluctance to pursue asset purchases is appropriate given low government debt and potential financial stability side effects; the Government Bond Fund is purchasing corporate bonds with a large resource envelope. - Norges Bank should remain ready to ease further, including the option of negative interest rates, should the recovery falter, though any reversal of recent tightening could bring credibility risks. ### Comparative tools and programs - Text Table 3 — Government Bond Fund vs Riksbank corporate bond purchases (January 2021 snapshot): - Authority: Riksbank (Sweden) vs Government Bond Fund (reports to MoF) (Norway) - Market: Secondary (Sweden) vs Primary and secondary markets (Norway) - Holdings (January 2021): SEK 4 billion (Sweden) vs NOK 6.1 billion (Norway) - Total envelope: SEK 10 billion (0.2 percent of GDP) (Sweden) vs NOK 50 billion (1.6 percent of GDP) (Norway) - Rating of bonds: Baa3/BBB– or higher (Sweden) vs Ba, B/BB, B or higher (Norway) - Investment risk: Investment/med risk (Sweden) vs junk/high risk (Norway) ### Other monetary policy issues - Norges Bank’s CBDC exploration: - Continued exploration of Central Bank Digital Currency is welcome given falling cash usage and rising electronic payments (including ‘Vipps’). - Norges Bank does not see immediate need to issue CBDC but continues the CBDC project. - Authorities’ views on monetary policy: - Authorities broadly concurred with staff’s assessment; emphasized exchange rate intervention aimed at improving market conditions, reducing volatility and augmenting liquidity, not targeting a specific exchange rate level. - Authorities noted Norway had more space to cut rates than other central banks and benefits from strong monetary transmission due to high household indebtedness and flexible rate loans. - Norges Bank projected core inflation to remain close but below target under its flexible inflation target framework. ### Financial sector resilience and macroprudential policy - 2020 FSAP conclusions: - Banks entered the Covid crisis well prepared with strong profitability, low operating expenses, and low credit losses. - Stress tests with shocks larger than experienced in 2020 found banks would generally continue meeting capital requirements due to very high capital buffers at crisis onset. - Banks’ liquidity positions are generally robust in the short term, with significant risks over longer horizons. - Macroprudential framework is comprehensive but has room for further improvement; authorities should guard against weakening capital requirements from implementation of European regulations. *International Monetary Fund staff summary based on the chapter "The 2021 budget also includes:"* ### 27. These factors, along with timely macroprudential policy measures, have helped ### 1norea2021001 - 27. These factors, along with timely macroprudential policy measures, have helped ### Financial-sector response to the Covid shock - Countercyclical capital buffer (CCyB) partially released from 2.5 percent to 1 percent to ease bank lending constraints. - Temporary relaxation of mortgage lending regulation allowed temporary deviations from LTV, DTI, and other requirements for up to 20 percent of new loans (previous “speed limit” was 10 percent nationally and 8 percent in Oslo), facilitating debt restructuring and temporary home-equity withdrawals. - Authorities urged banks and insurers to restrict dividend payouts and share buy-backs until economic uncertainty subsides. - Effective end-2020, the systemic risk buffer increased from 3 to 4.5 percent for IRB banks to maintain current requirements in real terms when European rules change banks’ capital adequacy calculations. ### Macroeconomic scenarios and outcomes - Central scenario: mainland GDP contracts by almost 5½ percent in 2020. - Downside scenario: GDP declines by about 7 percent in 2020. - Actual decline in 2020: 2.5 percent. ### Bank asset quality, profitability, and non-performing loans (NPLs) - Overall NPLs remain low but are increasing in some loan segments; full pandemic effects remain uncertain. - Banks’ profitability fell in the first half of 2020 due in part to higher credit losses and a lag in funding-cost reductions following policy rate cuts. - NPLs have been increasing among NFCs; non-performing consumer loans stood at 11 percent at end-2019. - Loan provisioning has not shown a clear upward trend, possibly reflecting limited exposure to the most affected sectors. - Bankruptcies declined by 18 percent y-y in 2020, helped by support measures; bankruptcy claims by the tax administration declined from 4.9k in 2019 to 2.5k in 2020 (only half of the tax administration’s filed claims lead to declaration of bankruptcy). - Recent months: total bankruptcies have reverted toward their historical average with risk of acceleration once macro policy support is withdrawn and tax-deferral repayments resume. ### Key financial-sector vulnerabilities - Households are highly leveraged: debt ratios and household debt service ratios exceed most peers; share of households with debt exceeding five times gross income has been rising. - Prevalence of flexible-rate mortgages means interest burden fell with rates; policy rate hikes or higher lending premia could quickly raise burdens and NPLs. - The expiration of crisis-related relaxation of borrower-based requirements, eventual policy rate hikes, and planned CCyB increases could help curb house price growth. - Authorities should consider tightening mortgage regulations in line with FSA recommendations if house price growth does not slow, and consider targeted measures (easing supply constraints, gradual phasing out of mortgage interest deductibility). - Commercial real estate (CRE) accounts for a large share of bank lending to corporates; vulnerabilities contained so far partly due to public-sector tenants. - Stock price performance of three major listed CRE firms has been mixed, with higher retail exposures performing relatively worse. - Pandemic-driven shifts (e-commerce, teleworking, reduced travel) could undermine CRE revenue streams. - Authorities’ initiatives to upgrade CRE data collection and consideration of broadening mitigation tools (including sectoral capital tools) are welcome. - Bank funding structure risks: - Norwegian banks obtain nearly half their overall funding from wholesale markets. - International wholesale funding accounts for 48 percent of all wholesale funding, posing risks if liquidity in these markets is compromised. - Maturity of market funding has lengthened in recent years; covered bonds have partially substituted for riskier wholesale funding but substantial cross-ownership of covered bonds between banks increases real estate exposure. ### Other structural risks - Climate change, cybersecurity threats, and financial integrity (AML/CFT) remain material sources of financial-sector risk. - Norway has made progress addressing AML/CFT deficiencies, but more efforts needed on AML/CFT supervision: improve scope, intensity, tools, methodologies; increase frequency of inspections (including branches of foreign banks); pay greater attention to cross-border payments. - FSA should pursue active enforcement using new sanctioning powers, including continuing application of penalties as needed. ### Structural policy recommendations - Corporate-side: - Identify business solvency risks / risk-of-default and facilitate debt restructuring to avoid unnecessary bankruptcies. - Explore mechanisms to identify and facilitate equity-type support for stressed but viable SMEs and mid-cap companies (e.g., banks’ viability assessments, subordinated loans backed by government guarantees, rapid/inexpensive debt restructuring and equity-like investment mechanisms). - Labor-side: - Deepen 2020–21 efforts to include more vulnerable and diverse workers; promote mobility and training for permanently laid-off workers. - Further sickness and disability reforms to boost labor force participation. - Regulatory / housing supply: - Relax restrictions on land-use to facilitate productive use and address housing supply constraints. - Digitalization: - Address shortage of big data analysts and ICT specialists; 3.7 percent of all university graduates are ICT graduates (DESI index) compared with EU average 3.6 percent. - Continue expanding broadband, mobile coverage, public digital services, and digital competence; develop open government data ecosystem. - R&D and higher education: - Strengthen links between public research, innovation, and businesses to facilitate adoption of new technologies. - Climate policy: - Continue implementation and adjustment of measures to meet climate mitigation objectives through 2030 (carbon taxation, R&D on carbon capture). - Norway’s commitment to become a low emission country by 2050 with net negative emissions when land uptake is accounted for is noted. - Recalibration of EV adoption policies could increase cost effectiveness in a revenue-neutral way and complement target that all new cars are electric by 2025. ### Authorities’ views - Authorities broadly concurred with staff assessments of financial vulnerabilities. - On housing prices: agreed supply-side measures would help but take time; Ministry of Finance and Norges Bank expect reversal of policy rate cuts to be sufficient near term, while FSA recommends tightening mortgage regulation. - On CRE risks: data gaps acknowledged; current indicators suggest resilience but could worsen with sectoral scarring; sectoral capital tools not ruled out. - On structural issues: authorities prioritize support for vulnerable groups (youth, foreign-born, low-income) via education, training, and liquidity-support schemes focused on workers; favor targeting viable firms while avoiding disincentives to activity; implementation of climate measures is now key. ### Staff appraisal (summary) - Challenge is to balance support for recovery and adjustment. - Authorities appropriately continue exceptional policy support into 2021 to help affected sectors and prevent scarring, at levels consistent with the pace of the rebound and internal/external balances. - Support is increasingly targeted to facilitate reallocation of capital and labor and to include green and digital spending. - Outlook subject to substantial risks, including slower-than-expected vaccine rollout, prolonged pandemic, and adverse external conditions. - Authorities should remain flexible and closely adjust policies to reflect changing circumstances, given ample policy space. *Source: NORWAY — International Monetary Fund (excerpt).* ### 36. The gradual phasing out of fiscal support, and the reversion to a neutral fiscal ### 36. The gradual phasing out of fiscal support, and the reversion to a neutral fiscal stance ### Fiscal stance and near-term fiscal policy - The gradual phasing out of fiscal support and reversion to a neutral fiscal stance is appropriate, provided downside risks do not materialize. - The 2021 budget’s mix of support for private sector activity, employment and green and inclusive growth is welcomed. - The stimulus should become smaller and more targeted as the recovery gathers traction, while continuing to protect those worst hit. - The government’s objective to integrate vulnerable groups into the workforce and improve the provision of education and skill-enhancing programs is noteworthy and should remain a priority. - As the pandemic recedes, the authorities should examine the composition of spending (possibly via an expenditure review by an external committee) to: - create space for medium-term reductions in individual and corporate taxation to facilitate labor participation and private investment; - pursue further changes to the sickness and disability benefit system with social partners; - advance VAT reform through broadening and simplification. ### Monetary policy and macrofinancial stance - Monetary policy is adequately accommodative while countering financial stability risks. - If the economy continues to recover in line with Norges Bank’s forecasts, the projected gradual tightening of monetary policy is appropriate. - Should the recovery and inflation expectations falter, Norges Bank should stand ready to loosen policies. - Norges Bank’s continued work on a Central Bank Digital Currency (CBDC) is welcome. ### Housing market and demand management - Authorities currently rely primarily on: - gradual monetary policy tightening; - expiration of crisis-related relaxation of borrower-based requirements; - the countercyclical capital buffer to curb housing demand. - The authorities should consider tightening mortgage regulations if house price growth does not slow as expected and if other targeted measures are not implemented in a timely manner, including: - easing restrictions that constrain the supply of new housing (e.g., related to land use); - a gradual phasing out of mortgage interest deductibility to curb demand. ### Banking sector, CRE risks, and supervision - Banks have weathered the crisis well so far, but the outlook remains uncertain. - Financial sector risks include: - high household debt; - banks’ exposure to commercial real estate (CRE), as demand for office, retail and hotel space could recede. - Initiatives to upgrade data collection for enhanced monitoring of CRE-related risks are welcome. - Authorities could broaden the toolkit for mitigating CRE vulnerabilities. - Authorities should closely monitor bank balance sheets, which could suffer if bankruptcies increase following the phasing out of support and depending on banks’ exposure to crisis-affected sectors. - Progress in addressing AML/CFT deficiencies is welcome, but financial supervision tools and methodologies need to be expanded, including improving the frequency and coverage of inspections. ### Longer-term fiscal and structural challenges - Key medium- and long-term drivers: expected decline in oil production after the mid-2020s, projected increase in age-related expenditures, and the high level of government expenditure reached in 2020. - Structural reform priorities: - boost labor force participation, including among vulnerable groups; - raise non-oil productivity; - support green growth amid the decline in the offshore sector. - Authorities’ plans to strengthen investment in R&D, physical infrastructure and green technologies, and efforts to promote digitalization, technology adoption and upskilling of vulnerable population segments are welcome. ### Climate change mitigation - Norway’s proactive approach to climate mitigation through 2030 is centered on carbon taxation and initiatives such as R&D of carbon capture. - Norway’s commitment to become a low emission country by 2050, with net negative emissions when accounting for uptake by Norwegian forests and other land, is welcome; the focus is now on implementation. - Norwegian policies on electric vehicle (EV) adoption provide an important example, but they could be recalibrated to strengthen cost effectiveness, including steps aimed at accelerating replacement of the most polluting cars by EVs. ### Administrative/consultation note - It is proposed that the next Article IV consultation with Norway be held on the standard 12-month cycle. ### Key selected statistics and indicators (as reported) - Population (2020): 5.4 million - Per capita GDP (2020): US$ 67,176.4 - Real GDP (annual changes): 2019: 0.9; 2020: -0.8; 2021: 3.0; 2022: 3.6; 2023: 2.9; 2024: 1.8; 2025: 1.3; 2026: 1.3 - Real mainland GDP (annual changes): 2019: 2.3; 2020: -2.5; 2021: 3.2; 2022: 3.0; 2023: 2.2; 2024: 1.8; 2025: 1.8; 2026: 1.8 - Unemployment rate (percent of labor force): 2019: 3.7; 2020: 4.6; 2021: 4.3; 2022: 4.0; 2023: 3.9; 2024: 3.8; 2025: 3.8; 2026: 3.8 - CPI (average): 2019: 2.2; 2020: 1.3; 2021: 2.6; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0; 2026: 2.0 - Central government non-oil balance (percent of mainland GDP): 2019: -7.4; 2020: -14.2; 2021: -12.5; 2022: -10.5; 2023: -8.7; 2024: -7.4; 2025: -6.4; 2026: -5.8 - General government (national accounts, percent of mainland GDP) overall balance: 2019: 7.4; 2020: -6.9; 2021: -5.6; 2022: 0.9; 2023: 3.6; 2024: 5.0; 2025: 5.4; 2026: 5.4 - Net financial assets (percent of mainland GDP): 2019: 391.1; 2020: 421.6; 2021: 405.6; 2022: 402.8; 2023: 403.2; 2024: 405.2; 2025: 407.4; 2026: 409.7 - Capital of Government Pension Fund Global (GPF-G) (bil. NOK): 2019: 328.8; 2020: 358.7; 2021: 346.3; 2022: 346.3; 2023: 348.9; 2024: 352.9; 2025: 357.0; 2026: 361.2 - Current account balance (percent of total GDP): 2019: 2.8; 2020: 1.9; 2021: 5.6; 2022: 5.0; 2023: 4.7; 2024: 4.1; 2025: 3.4; 2026: 3.0 - Crude Oil Price (USD per barrel): 2019: 61.4; 2020: 41.3; 2021: 58.5; 2022: 54.8; 2023: 52.5; 2024: 51.3; 2025: 50.7; 2026: 50.5 - Financial Soundness Indicators (selected): Regulatory Capital to Risk-Weighted Assets: 2014: 16.5; 2015: 18.9; 2016: 22.1; 2017: 22.1; 2018: 22.3; 2019: 24.2; 2020: 24.8 - Memorandum: Total Household Debt (in percent of GDP): 2014: 122.3; 2015: 119.3; 2016: 121.4; 2017: 129.8; 2018: 127.1; 2019: 127.9; 2020: 134.7 - Annex I external position (2020, percent of mainland GDP): NIIP: 320; Gross Assets: 600; Res. Assets: 21.5; Gross Liab.: 275; Gross External Debt: 203 - Annex I (2020) additional notes: NIIP reached 320 percent of mainland GDP at end-2020 (up from 284 percent in 2019). GPFG assets under management reached 3.6 times mainland GDP by end-2020. International reserves: 21.5 percent of mainland GDP. *Source: IMF staff report excerpt (Norway), chapter titled "The gradual phasing out of fiscal support, and the reversion to a neutral fiscal stance."* ### 1.9 percent in 2019, in response to a historic decline in oil prices. Overall, the current account remained stab ### 1norea2021001 - 1.9 percent in 2019, in response to a historic decline in oil prices. Overall, the current account remained stab ### Current Account: developments, assessment, and adjustments - 2020 current account (CA): 1.9 percent of total GDP (2.2 percent of mainland GDP). - Cyclically adjusted 2020 CA per EBA calculations: 4.2 percent of GDP. - EBA regression-estimated norm: 10.8 percent of GDP. - EBA gap: -6.6 percent of GDP. - Covid-19 adjustment: 1.7 percent (after correcting for short-term Covid effects, the estimated gap comes down to -4.9 percent). - Other adjustment (Norway-specific bias): 4 (percent of GDP). - Staff gap (final assessment): -0.9 percent of GDP. - Drivers of 2020 primary income increase: lower flows abroad due to postponed dividend and interest payments; positive effect of a depreciated krone on the value of foreign income relative to GDP. - Staff assessment: the larger share of Covid-related dynamics is considered temporary; a rebound in oil prices and travel activities is likely to bring the trade balance closer to its historical pattern. - Staff assessment summary: The current account is assessed to be broadly in line with what is implied by fundamentals and desirable policies, though EBA-norm estimation for Norway is prone to significant bias. ### Real Exchange Rate (REER) - Background: Norway’s REER depreciated by around 11 percent in 2020, reflecting a weaker trade balance driven primarily by significantly negative terms of trade growth of -12 percent. - Assessment: REER is assessed to be broadly in line with fundamentals and desirable policies, with considerable uncertainties. - Real exchange rate index valuation: overvalued by 2.8 percent in 2020 (relative to the real exchange rate index norm). - Alternative REER approach outcome: points to an undervaluation of 23.9 percent; staff note this approach is not adequate for commodity exporters like Norway. ### Capital and Financial Accounts: flows and vulnerabilities - Background: Flows mainly span Nordic and EU countries. - Banks’ funding structure: heavy reliance on wholesale funding—accounting for about half of total banks’ funding—with about half of wholesale funding from foreign sources. - Vulnerability assessment: Financial account vulnerability is low, but the banking sector’s reliance on external wholesale funding remains a source of vulnerability. - Positive development: increase of duration in part of the funding structure. ### FX intervention and reserves level - Background: The krone floats freely; Norges Bank had not intervened in FX markets since 1999 except for a brief exception in March 2020 due to extraordinary market turbulence spurred by Covid. - Norges Bank policy stance: remains ready to intervene if the exchange rate deviates substantially from fundamentals. - Norges Bank reserves at end-2020: 21.5 percent of mainland GDP. - Assessment: Reserves are ample even considering banks’ exposure to wholesale funding and risks of regional macro-financial shocks (imports are less than 35 percent of total GDP and there is no GG short-term financing risk thanks to the large pension fund). - Additional measures: Norges Bank has expanded swap agreements with the Fed and Nordic central banks to bolster market confidence. ### Technical background notes (key quantifications and identified biases) - Covid-19 related norm adjustments: oil balance adjustment estimated at 3.1 percent; tourism balance adjustment estimated at -1.5 percent. - Norway-specific sources of bias in EBA norm estimation: - Large size and composition of Norway’s foreign assets (tilted towards portfolio equity) causes portfolio equity retained earnings bias, estimated around 4.0 percent of GDP for Norway. - Estimated IIP valuation changes averaged around 8.8 percent of GDP over the 2015–19 period, inflating dividend-yield estimates used in CA norm and overstating the CA norm. - Productivity of the non-oil sector is lower than implied by average productivity. - Oil affects the norm considerably; adequacy of the econometric specification is doubtful. - Note on reserves adequacy metrics: Standard reserves adequacy metrics are not adequate for Norway given its large pension fund which is mostly invested in foreign markets and is fully diversified away from oil markets. ### Annex II — Scarring in Context: outlook and comparative strengths/weaknesses - Main conclusion: Norway is expected to be one of the earliest economies to rebound to its pre-Covid medium-term GDP trend, with relatively small scarring expected. - Reasons for relatively limited scarring (selected): - Recession in Norway was relatively shallow, leading to modest drop in investment and less significant increase in long-term unemployment. - Larger share of jobs can be done from home. - Economy is less dependent on hospitality and tourism activities. - Ample fiscal space has shielded Norway from productivity losses associated with higher GG debt. - Economic activity is relatively less dependent on exports, foreign investment, and immigration. - Stronger educational attainment suggests a more mobile and adaptable labor force. - Main vulnerability: relatively higher growth in corporate and household (HH) debt during the pandemic exposes the economy to potential scarring effects due to debt overhang affecting investment and consumption. ### Risk Assessment Matrix (RAM): key risks, likelihoods, impacts, and policy responses - Format note: staff subjective likelihood categories—“low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent. - Unexpected shifts in the Covid-19 pandemic - Likelihood: M (medium) - Impact (downside): Demand in contact-intensive services remains low for longer; financial markets reassess real economy risks; CRE and corporate vulnerabilities worsen, affecting banks and insurers. - Impact (upside): Faster containment could boost confidence and activity; rapid rebound could limit scarring. - Policy response: Maintain adequate support to the broader economy and health system; rely primarily on fiscal policy given ample fiscal space; monetary policy limited due to policy rates already at zero and inflation relatively high. - Higher precautionary household saving rate - Likelihood: M (medium) - Impact: If uncertainty remains high, muted consumption rebound leads to lower growth and higher business distress; if vaccines proceed swiftly, high savings could fuel strong demand-driven rebound. - Policy response: Accelerate structural reforms, focus on labor market measures to boost labor participation, especially vulnerable segments. - Slow reallocation of labor and capital (zombification) - Likelihood: H (high) - Impact: Decline in aggregate productivity; increased financial sector vulnerability; higher fiscal burden; increased household saving uncertainty. - Policy response: Speed up default and restructuring procedures; retarget fiscal support; invest in retraining and requalification programs; target support to firms with long-term potential. - Decline in labor supply and rise of long-term unemployment - Likelihood: H (high) - Impact: Lower aggregate productivity, decline in potential output, increased fiscal burden. - Policy response: See slow reallocation responses; calibrate unemployment benefits to maintain incentives; timely phase-out of recession-related social benefit changes once recovery is underway. - Sharp rise in global risk premia - Likelihood: M (medium) - Impact: Pressure on bank capital adequacy, credit tightening, adverse spillovers, higher unemployment. - Policy response: Stand ready to implement further policy support; deploy government fund to purchase fixed income assets; maintain flow of credit through targeted financial policies; guarantee schemes could be prolonged as needed. - Oversupply and volatility in the oil market - Likelihood: M (medium) - Impact: See Annex IIV on Norway’s oil supply curve. - Policy response: Deploy liquidity measures to manage sectoral transition; fund transition/investment to green projects; if sharper rebound, interest rates may need to be steeper and fiscal support unwound more promptly. - Cyber-attacks on critical infrastructure and financial systems - Likelihood: M (medium) - Impact: Disruption in economic activity; weaken confidence. - Policy response: Provide monetary and fiscal support; improve spending on cyber-security. - Accelerating de-globalization - Likelihood: M (medium) - Impact: Higher barriers to trade dampen exports and investment, weaken growth. - Policy response: Provide monetary and fiscal support; implement labor market reforms; enhance bankruptcy regime to facilitate sectoral reallocation. - Higher frequency/severity of natural disasters related to climate change - Likelihood: M/L (medium/low) - Impact: Severe disruptions in economic activity; weaker consumer and market confidence. - Policy response: Continue drive towards green technologies and climate mitigation policies; deploy fiscal space if needed. - Significant property price decline - Likelihood: M (medium) - Impact: Investment and collateral values undermined; loan quality impacted; lending curtailed; potential rise in NPLs. - Policy response: Monitor developments via better data; supervise banks’ CRE lending closely; consider broadening toolkit for mitigating CRE vulnerabilities; provide funding support to banks if needed. _International Monetary Fund — NORWAY (selected excerpts)._ ### Annex IV. Oil Supply Curve Developments and Petroleum ### Annex IV. Oil Supply Curve Developments and Petroleum Wealth in Norway ### Oil supply curve developments and recent performance - In the years leading up to 2020 the Norwegian long-run oil supply curve shifted upward, implying higher expected lifetime well production at most price points and higher potential oil revenue flows. - Drivers of the upward shift: - Lower break-even prices of new discoveries, such as the Johan Sverdrup field (close to $20 per barrel; or ‘Bbl’). - Improvements in operating cost that by 2020 averaged just $5/Bbl. - Field-level data indicate most improvements occurred at the higher end of the cost distribution: - Changes were marginal in the amount of resources viable for extraction at an oil price up to $40/Bbl, while viable extraction at prices above $40/Bbl rose significantly. - In 2019, with oil at $50/Bbl Norway expected around 9.7 bn Bbls viable for production, up by 50 percent compared to the 6.5 bn Bbls expected based on a 2015 vintage. - Weighted-average break-even price (weighted by size of field resources): - $59/Bbl in 2015 - $52/Bbl in 2019 - $46/Bbl by 2020 - Government authorities’ estimate of the breakeven price is around $38/Bbl. ### Impact of the 2020 shock and medium-term outlook - In 2020: - Oil prices fell by more than 30 percent. - Projected medium-term price was revised down by near 10 percent. - Despite this, the medium-term implications were muted: - Projected petroleum production in the five years ahead declined only modestly. - During 2020, production grew by 6 percent (against initial expectations of a more than 10 percent increase). - Production actually increased despite government-mandated supply curbs in response to OPEC recommendations. - Under current projections: - Norwegian energy production is expected to continue on an upward growth trend, peaking in 2024–25 at a level 12 percent higher than 2020, and then begin a gradual fall. ### Long-term outlook, investment, and supply-curve reversal in 2020 - The sector’s long-term outlook suffered significantly from the 2020 shock: - Norway’s investment in the sector, including exploration activities, was significantly scaled back. - Comparing expected production per day by 2040 between the 2019 and 2020 vintages suggests a drop of more than 50 percent. - The long-run oil supply curve shifted strongly downward in 2020: - The size of viable extractable resources at an oil price of $50/Bbl shrank by 33 percent, almost back to 2015 levels. - Impact was even stronger on higher-cost resources (viable at $80/Bbl or more). - Authorities’ note: they expect further exploration activities and technology developments could result in a high activity level on the shelf for the next 50 years, potentially at levels higher than indicated above. - Similar patterns observed in peer oil exporters (UK, Mexico, Brazil), with Brazil an exception reflecting new discoveries. ### Fiscal implications and sensitivity of petroleum wealth - Tax and policy response in 2020: - Government introduced a temporary targeted amendment to the petroleum tax system allowing immediate expensing of offshore petroleum investments in 2020 and 2021 against the sector’s special tax obligation of 56 percent of profits (frontloading the usual 6 year expensing period). - The Ministry of Finance estimated the measure would improve companies’ liquidity by more than NOK 100 billion over 2020 and 2021. - Footnote detail: amendments include a temporary tax allowance with a 24 percent uplift in the special tax base and a cash payout of tax losses; Ministry estimated additional liquidity in 2020 and 2021 to be about NOK 115 billion in total; estimated tax relief (unrecoverable tax revenue loss) of about NOK 8 billion (in present value terms) based on investment forecasts. - The full impact on investment remains to be assessed; there has been frontloading of development and exploration plans into 2021. - Key fiscal risks and quantitative findings: - Resource and viability: - Norwegian Petroleum Directorate estimates 52 bn of oil equivalent barrels left to produce, of which 27 bn barrels are proven resources as of 2019. - Field-level breakeven analysis indicates only 64 percent of the total proven resources in reporting fields were commercially viable for extraction at an oil price of around $50/Bbl. - Intertemporal net worth: - The present value of the intertemporal net worth of the Norwegian government, accounting for future revenues and expenditures over an 80 years horizon, drops by almost 125 percent of 2021 mainland GDP when only 60 percent of proven petroleum resources are viable for extraction. - The effect of lower oil revenues into the oil fund is amplified by less investment income. - Required fiscal adjustments to offset downward revision in petroleum wealth: - To make up for such a downward revision, the government would need to lower its non-oil deficit by more than 1 percent of mainland GDP over the full horizon of the simulation. - Alternatively, reforming key expenditure items such as sickness, disability and old age pensions (projected to grow at an average of 4.1 percent a year) could achieve the same net worth position by lowering growth on this expenditure item by around 0.35 percentage points. - Sensitivity: - The magnitude of viable petroleum wealth is sensitive to global energy sector outlook and domestic investment; significant uncertainty remains, including global climate mitigation efforts. - A mitigating factor for Norway’s long-run fiscal position is the shrinking role of oil revenues relative to the size of financial wealth in the GPFG, limiting oil revenues’ impact on the overall fiscal position. ### Policy implications and recommendations - Strengthen the case for longer-term fiscal adjustment: - The risk of a faster decline in petroleum revenues raises risks to Norway’s longer-term ambitions for intergenerational equity in the use of the GPFG. - Compensating for higher than expected oil revenue losses would require offsetting fiscal adjustment over the long-term. - Balance sector support with green transition: - Government fiscal support in 2020 mitigated rapid disruptive movements; support was untargeted but quick to deploy and improved sector liquidity. - Going forward, future support should be balanced against the need to facilitate a gradual shift towards green (and other) sectors with higher long-term growth potential and to meet climate change mitigation goals. *Source: IMF staff calculations and Rystad Energy; Annex IV. Oil Supply Curve Developments and Petroleum Wealth in Norway.* ### Annex VI. ### Annex VI. Status of 2020 FSAP Recommendations ### Systemic Risk Oversight and Macroprudential Policy - Recommendation: Develop and publish a macroprudential policy strategy. (MoF, Norges Bank, FSA) — Time: ST — Status: Partly addressed. The authorities expanded on key aspects of macroprudential policy in the 2020 edition of the Ministry’s annual Financial Markets Report. - Recommendation: Use existing triparty meetings more effectively to discuss risks and policy actions needed to address them. (MoF, Norges Bank, FSA) — Time: I — Status: Partly addressed. Adjustments implemented to facilitate candid and targeted exchanges on risks and better align meeting schedule with planned policy decisions. - Recommendation: Give Norges Bank recommendation powers over macroprudential policy tools that can be relaxed under stress, with a comply-or-explain mechanism. (MoF) — Time: I — Status: Under consideration. - Recommendation: Make key household sector measures permanent features of the framework. (MoF) — Time: ST — Status: Partly addressed. Mortgage regulation still requires renewal, but has now been implemented for 4 years, up from 1.5 years previously. - Recommendation: Consider broadening the toolkit for mitigating CRE vulnerabilities, including sectoral capital tools. (MoF) — Time: MT — Status: Evaluation ongoing. ### Banking and Insurance Supervision - Recommendation: Strengthen the FSA’s prudential powers, operational independence, and budgetary autonomy. (MoF) — Time: ST — Status: Under consideration. - Recommendation: Expand review of banks’ risks in supervisory activities to strengthen oversight over systemic foreign bank branches and domestic medium and small sized banks. (FSA) — Time: ST — Status: Addressed. - Finanstilsynet strengthened internal guidelines for monitoring and supervising foreign branches and subsidiaries, provided additional resources to supervisory teams for foreign branches. - Finanstilsynet developed a new automatic tool providing a risk dashboard for each institution on a quarterly basis, facilitating risk-based supervision of medium and small sized banks. - Recommendation: Further enhance oversight of banks’ IRB models, in view of the implementation of CRD IV. (FSA) — Time: I — Status: Partially addressed. Finanstilsynet intends to publish a circular clarifying supervisory practice and expectations regarding IRB models in 2021H1. - Recommendation: Intensify oversight of banks’ risk management of real estate loans and funding/liquidity conditions. (FSA) — Time: ST — Status: Under consideration. - Recommendation: Strengthen risk-monitoring of individual insurers. (FSA) — Time: ST — Status: Partially addressed. A project established to further develop the Early Warning Risk Dashboard. - Recommendation: Complement EIOPA efforts with Norway-specific in-house stress tests of the whole insurance sector. (FSA) — Time: MT — Status: Ongoing. An EIOPA stress test will be conducted in 2021; Finanstilsynet will consider modifying and applying it to a larger share of the Norwegian market. ### Cybersecurity Supervision - Recommendation: Make processes for cybersecurity risk supervision and oversight more structured and comprehensive. (FSA, Norges Bank) — Time: I — Status: Ongoing. - Finanstilsynet will consider strengthening the approach for cybersecurity risk supervision and further guidance on IT/cybersecurity risk. - Norges Bank is establishing a more structured process for oversight and supervision, including annual risk-based planning, more active use of third party reports and self-assessments from FMIs. - Introduction of the TIBER framework in Norway expected to contribute to oversight of cyber risk in the payment system. - Recommendation: Establish incident reporting and crisis management frameworks for systemic cyber incidents. (FSA, Norges Bank) — Time: ST — Status: Partly done. - Norges Bank and Finanstilsynet updated routines for reporting of incidents from FMIs to The Financial Infrastructure Crisis Preparedness Committee (BFI) in 2020. - Finanstilsynet works closely with Nordic Financial CERT (NFCERT) with "open line" and monthly status meetings. - Finanstilsynet and BFI are exploring enhancements leveraging the EBA Guidelines, the European Commission’s Digital Operational Resilience Act and the ESRB’s work on systemic cyber risk. ### Anti-Money Laundering / Countering Financing of Terrorism (AML/CFT) Supervision - Recommendation: Enhance AML/CFT supervision by increasing the frequency of targeted and thematic inspections and improving the risk-based approach and tools for AML/CFT risk assessments. (FSA) — Time: I — Status: Partly addressed. Full scope on-site inspections dedicated to AML/CFT and off-site inspections are increasing; risk-based approach adjusted and risk classification model further developed. - Recommendation: Ensure appropriate use of sanctions, including monetary penalties, for AML/CFT violations. (FSA) — Time: I — Status: Addressed. - The sanctioning power has been used as appropriate in cases of serious breaches. - Several banks have been sanctioned: Three banks were sanctioned in 2019, one bank in 2020, and three cases are ongoing. ### Financial Crisis Management and Safety Nets - Recommendation: Make the new resolution tools operational and strengthen the crisis preparedness framework. (FSA, MoF) — Time: ST — Status: Ongoing. Finanstilsynet continuously enhancing crisis preparedness; a 2021 project will develop a bail-in playbook. - Recommendation: Ensure BGF’s integration into the broader resolution framework. (BGF, FSA) — Time: ST — Status: Ongoing. - MoUs between Norges Bank and BGF and Finanstilsynet and BGF have been drafted and are being discussed with aim to sign them spring 2021. - BGF invited to take part in a crisis simulation exercise with Norges Bank, MoF and Finanstilsynet in April 2021. ### Systemic Liquidity - Recommendation: Monitor banks’ collateral eligible for central bank liquidity. (Norges Bank) — Time: ST — Status: Addressed. - Norges Bank and Finanstilsynet have access to databases containing information on banks' assets. - Collateral management system provides detailed information on pledged securities; other securities in Finanstilsynet's Liquidity Reporting (ILAP). - Norges Bank follows up potential mortgages via semi-annual survey and issue and price data from commercial databases updated daily; foreign mortgage information via general market insight and foreign exchange reserves management. - Norges Bank establishing a model for analysis of cash flows in the banks. - Recommendation: Develop, test, and implement a mechanism for acceptance of mortgage loan collateral for emergency liquidity support to solvent banks. (Norges Bank) — Time: ST — Status: Ongoing. Project initiated with larger Norwegian Banks and Finance Norway to implement such a mechanism. ### Financial Stability Analysis - Recommendation: Upgrade data collection for risk monitoring to include more granular data on bank lending (including for commercial real estate), group mappings, and liquidity positions of foreign branches. (FSA, Norges Bank) — Time: ST — Status: Addressed. - More data on banks’ CRE exposures included in Finanstilsynet’s ENGA database. - Norges Bank will from 2021 subscribe to a novel private sector database combining several sources via algorithms to produce a more comprehensive CRE dataset by region. - Norges Bank started exploiting payment remarks data for quantitative analysis of credit risk on loans to non-financial companies. - Finanstilsynet developed new sector specific bankruptcy models (10 sectors), expanding non-financial company coverage. - Work on group mappings will commence during Q2 2021; Finanstilsynet is setting up a common reporting framework for foreign branches, including liquidity information. - Recommendation: Improve collection and analysis of derivatives exposure data and analyze banks’ margin arrangements. (FSA, Norges Bank) — Time: ST — Status: Ongoing. - Norges Bank and Finanstilsynet working to make more data on agents’ derivatives contracts accessible and usable (EMIR data). - Norges Bank is analyzing effects of margining agreements (see Norges Bank Staff Memo 2/2021 for part of the analysis). - Finanstilsynet has analysed bank derivatives exposures using EMIR-data. *Source: Annex VI. Status of 2020 FSAP Recommendations (Norway), IMF staff compilation.* ### Annex VIII. Climate Mitigation ### Annex VIII. Climate Mitigation ### Emissions trends and sectoral composition - Norway has cut its CO2 emissions by about 5 percent since 1990. - Per capita domestic total greenhouse emissions: - Norway compares favorably among OECD countries but is on the high-side relative to Sweden and Denmark. - Accounting for exported carbon emissions of the offshore sector would substantially increase Norway’s impact (to approximately 90 tons per capita). - Nearly 100 percent of electricity is generated by renewables (mostly hydropower). - Sectoral shares of CO2 emissions (as presented): - Oil and gas extraction: 28% - Manufacturing industries and mining: 23% - Energy supply: 3% - Heating in other industries and households: 2% - Road traffic: 17% - Aviation, navigation, motor equipment etc.: 14% - Agriculture: 9% - Other: 4% - Historical and projected trends: - A business as usual (BAU) scenario (current mitigation policies frozen) projects stable positive emissions after 2020 because trend reductions in the energy intensity of GDP are not enough to offset expanding GDP. ### Policy framework, commitments, and targets - International and domestic frameworks: - Norway participates in the EU’s Emissions Trading System (ETS), the EU effort sharing regulation for non-ETS emissions, and the EU’s LULUCF regulations. - Targets and commitments: - Norway’s Paris Commitment: lower GHGs by 50–55 percent in 2030 relative to a 1990 baseline. - The government’s national objective: become a ‘low-carbon’ society by 2050 (nominally lags some Nordic peers). - Authorities note the national objective does not include uptake of carbon by Norwegian forests and other land; when these are included, Norway expects to achieve net negative emissions by 2050. - Recently the government announced it would likely exceed its 40 percent non-ETS target (aiming for up to 45 percent cut) by 2030. ### 2021 budget and policy measures - The 2021 budget includes multiple green measures: - A carbon tax hike (see fiscal discussion in source). - Measures to broaden CO2 tax coverage by abolishing exemptions and lower rates. - Regulatory measures such as increasing the road transport biofuel sales requirement from 12 to 20 percent in 2020. - Setting zero or low emission objectives for some passenger vessels. - The government expects the private sector to play a key role in climate mitigation and supports R&D and innovation spending (see fiscal section in source). - Fiscal statement (supplementary budget context): - Proposed supplementary budget would, if approved without modification, result in 2021 above-the-line (ATL) exceptional fiscal measures totaling NOK 93.9 bn, approximately 2.9 percent of mainland GDP (versus NOK 68.9 bn, or 2.1 percent of mainland GDP, currently projected by staff). ### Oil and gas sector mitigation progress - The oil and gas extraction industry remains the most polluting sector in Norway, amounting to more than a quarter of total domestic emissions. - Drivers of sector emissions: combustion of natural gas and diesel in turbines, engines, and boilers, and flaring of natural gas. - Industry progress: - Norskpetroleum estimates emissions from activities related to oil and gas production declined by more than 7 percent from 2015 to 2019. - Norskpetroleum projects a further 3 percent decline by 2024 (versus 2019). - Reductions attributed to investment in energy efficiency measures, carbon capture technologies, and proximity of new fields (e.g., Johan Sverdrup) to onshore clean electricity supply. ### Electric vehicles and transport policy - Norway is among the countries leading in EV ownership: - The share of battery electric vehicles (EVs) in total sales of new cars now exceeds 50 percent. - Policy design and effectiveness: - Generous tax and other incentives for purchase and operation of EVs have driven uptake. - Fiscal costs of tax subsidies for EV purchases relative to emissions saved are relatively high. - Effectiveness could be improved by incentivizing both purchase of new EVs and scrapping of conventional cars, especially the most polluting ones. ### External assessments and adaptation needs - International recognition and critiques: - Norway ranked highly in the Climate Change Performance Index across GHG Emissions, Renewable Energy, Energy Use, and Climate Policy, but has a relatively weaker score in energy use due to high energy intensity. - The Climate Action Tracker points to a substantial shortfall against Norway’s target under current policies (assessments prepared before January 2021 announcements of further measures). - The IEA assesses Norway will need to increase domestic mitigation efforts to achieve its GHG reduction targets, with major potential in transportation, oil and gas production, and manufacturing. - Climate adaptation investment needs: - Recent staff analysis (Fiscal Monitor, Oct 2020) suggests Norway’s investment needs for climate adaptation are large relative to peers, including coastal protection and upgrading and retrofitting assets. - Estimates of the annual costs to improve public infrastructure for climate change adaptation show Norway among Nordic peers with significant percent-of-GDP requirements (chart-based context in source). ### Key scenarios and projections - Business as usual (BAU) scenario: - Defined as current mitigation policies frozen; baseline fuel mixes broadly unchanged and energy efficiency increases at historical rates. - Under BAU IMF staff projects stable positive emissions after 2020. - Policy ambition vs. projected outcomes: - Despite policy measures and sectoral improvements, multiple international trackers and assessments indicate additional domestic mitigation is required to meet stated 2030 and 2050 objectives. *Source: Annex VIII. Climate Mitigation, 1norea2021001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1norea2021001.pdf_