## 1. Progress on Climate Change and Need for Investments

## Source details

**Canonical URL:** [1. Progress on Climate Change and Need for Investments](https://www.imf.org/-/media/files/publications/cr/2021/english/1sweea2021001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1sweea2021001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1sweea2021001.pdf.json)

---

### Context and recent economic developments
- Sweden entered the crisis with substantial buffers despite subdued growth:
  - 2019 growth: 1.4 percent.
  - Current account (CA) surplus: 4.6 percent of GDP.
  - Unemployment: 6.8 percent.
  - Inflation: slightly below the 2 percent target.
  - Public debt: 35 percent of GDP (Annex I).
- Crisis impact and structural features:
  - Estimated fall in 2020 output of about 3 percent, significantly less than the EU’s average.
  - Moderating structural features: high share of jobs that can be performed from home; small hospitality sector; strong pharmaceutical and machinery exports.
- Labor market impacts and inequities:
  - Sharp decline in temporary employment, concentrated in hospitality.
  - Rising unemployment among the youth and foreign-born.
- External and FX developments:
  - The krona appreciated by almost 5 percent in real effective terms in 2020.
  - The krona remains undervalued by about 5.5 percent against the unit labor cost-based exchange rate estimate.
  - Current account surplus estimated to have widened slightly in 2020.
- Reserve and exchange rate stance:
  - Reserves remain adequate and broadly stable.
  - Exchange rate continues to float freely.
  - The Riksbank will gradually replace reserves borrowed through the National Debt Office with direct purchases, spread over about two years.

### Outlook and risks
- Short-term baseline:
  - Pre-pandemic output level expected to be reached by early 2022.
  - Baseline assumes wide vaccination by the end of the summer of 2021.
  - Industry wage agreement benchmark for annual wage growth over 2020–22: 1.8 percent — contributing to subdued inflation.
- Downside risks:
  - Slower vaccination rollout or difficult-to-control virus mutations could impede recovery.
  - Expansionary policies could contribute to a buildup in real estate and other vulnerabilities.
  - Corporate vulnerabilities may become clearer as support measures are withdrawn.
- Medium-term challenges:
  - Facilitating structural transformation.
  - Addressing dysfunctional housing market and high unemployment among youth and foreign-born.
  - Limited progress on structural reforms to date due to complex political consensus process.

### Authorities’ views
- Broad agreement with staff on risks; some authorities place less weight on downside risks expecting accelerated vaccination.
- Health authorities’ objective: offer vaccine to entire adult population and risk groups by end-June.
- Authorities acknowledge risk of increased bankruptcies as support measures are withdrawn and uncertainty in the CRE outlook.
- Authorities consider extension of support measures helpful to mitigate short-term pressures.

### Policy discussions and recommendations
- General guidance:
  - Withdrawal of assistance should be gradual, coordinated, and well-communicated.
  - Policy mix should focus on fiscal support, with the Riksbank ready to complement fiscal measures as needed.
  - 2021 fiscal stance assessed as adequate; scope exists for additional support if recovery or inflation expectations falter.
  - Recalibration of support measures recommended to facilitate structural transformation and avoid prolonged support of non-viable businesses.
  - Avoid premature return to the surplus target; identify additional growth-enhancing expenditure, and implement structural reforms to boost green and inclusive growth.
- Specific fiscal findings and recommendations:
  - Sweden entered the crisis with a very strong fiscal position and substantial fiscal space.
  - 2020 fiscal change:
    - Overall balance shifted from a small surplus in 2019 to a projected deficit of about 4 percent of GDP in 2020.
    - Abstracting from automatic stabilizers, discretionary and below-the-line measures to support the health system, households, and businesses each amounted to around 4 percent of GDP.
  - Public debt outlook:
    - Public debt is very low compared to other advanced economies.
    - Projected to peak at about 40 percent of GDP in 2021 before converging back to around 35 percent over the medium term (Annex I).
  - Design improvements for crisis measures:
    - Short-term work scheme: largest above-the-line measure; extension welcomed through June 2021, but less flexible than peers because working hours cannot be reduced to zero and labor costs must be cut to qualify—this incentivizes dismissal of temporary employees. Staff recommended recalibration of underlying criteria and consideration of introducing a labor retraining requirement to qualify.
    - Reorientation support covers companies’ fixed costs but does not incentivize adaptation; staff recommended redesigning this measure.
  - Fiscal framework and surplus target:
    - Revamped framework sets average surplus of 0.33 percent over the cycle and anchors debt at 35 percent of GDP, allowing deviations in exceptional times and requiring a review every eight years.
    - Staff recommended considering a return to the surplus target only over the medium term, identifying additional growth-enhancing expenditure (particularly public investment to meet health (municipal level), demographic, and vocational training challenges).
    - Note: The target of 0.33 percent of GDP is ½ a percentage point higher than the debt-stabilizing fiscal balance and implies a continuous reduction in the debt ratio.
- Revenue and tax recommendations:
  - Further reduce the still high labor tax wedge to increase employment, including among the less skilled.
  - Gradually increase property taxes from their extremely low level to help finance additional spending and make the housing market more dynamic.
- Green recovery:
  - Reaching climate goals requires additional investments in biofuel production, hydrogen power plants, and the electric vehicle grid.
  - Short- and medium-term green spending announcements as of 2020 shown relative to 2020 GDP (figure in source).

### Key fiscal and program numbers
- Fiscal balances and debt:
  - Public debt: 35 percent of GDP (Annex I).
  - Projected deficit in 2020: about 4 percent of GDP.
  - Public debt projected to peak at about 40 percent of GDP in 2021, then converge to around 35 percent.
- Wage and inflation:
  - Industry wage agreement benchmark for annual wage growth over 2020–22: 1.8 percent.
- Vaccination timelines referenced:
  - Baseline: wide vaccination by the end of the summer of 2021.
  - Health authorities’ goal: offer vaccine to entire adult population and risk groups by end-June.
- Crisis support measures (Text Table 1: Measures, percent of GDP — Budget / Estimate):
  - Short-term layoffs: 1.9 / 0.9
  - Reduced employers' social security contributions: 0.7 / 0.7
  - General government grants: 0.4 / 0.4
  - Sick pay responsibility: 0.3 / 0.4
  - Reorientation support: 0.8 / 0.3
  - Security and transition support: 0.3 / 0.3
  - Health related: 0.4 / 0.8
  - Other: 0.4 / 0.5
  - Total (above the line): 5.2 / 4.2
  - Below the line:
    - Tax deferrals (max amount): 6.8 / 0.9
    - Guarantees for SME loans: 2.0 / 0.0
    - Export guarantees: 2.5 / 2.3
    - Other guarantees: 0.5 / 0.3
    - Capital reinforcement: 0.2 / 0.2
    - Total (below the line): 12.1 / 3.7
- Budget Bill 2021 amendments and estimates (Original SEK bn; % GDP shown in table header):
  - Tax cuts: 30.0 / 0.6
    - o/w to households: 14.0 / 0.3
  - Aid to local governments: 28.0 / 0.5
    - o/w health related: 14.0 / 0.3
  - Unemployment & labor market: 12.0 / 0.2
  - Green Investments: 9.0 / 0.2
  - Public Investments: 5.0 / 0.1
  - Other: 21.0 / 0.4
  - Amendments (estimates):
    - Short-term layoffs: 18.0 / 0.4
    - Turnover/revenue support: 16.0 / 0.3
    - Additional health care resources: 13.0 / 0.3
    - Other: 1.0 / 0.0
  - Total: 155 / 3.0

### Staff appraisal: crisis response and near-term policy stance
- Crisis performance:
  - Sweden fared the crisis better than many European neighbors due to buffers and strong fundamentals.
  - Authorities’ large support package was timely and adequate, helping avert a financial crisis.
  - 2020 fall in output projected at around 3 percent, less than the EU average.
  - Increase in unemployment, especially of the young and foreign-born, larger than in countries with deeper recessions.
- Fiscal policy guidance:
  - Fiscal policy should continue to support the economy and lead the recovery; avoid premature return to the surplus target.
  - Withdrawal of support measures should be cautiously gradual to minimize scarring.
  - Room exists for increasing public expenditure, including on green outlays, over the medium term to enhance growth and achieve climate and inclusion objectives.
  - Review design of support measures to facilitate structural transformation (e.g., redesign short-term work scheme to be more flexible and supportive for temporary workers).
- Monetary policy guidance:
  - Monetary policy should stand ready to further assist the recovery if needed.
  - Riksbank’s asset purchases contributed to support and market stabilization but can contribute to buildup in vulnerabilities.
  - Policy mix should focus on fiscal support while Riksbank stands ready to complement fiscal measures.
  - Any amendments to the Riksbank law should preserve operational independence and rapid deployment capability.
  - The e-krona pilot project should be designed to maximize benefits while minimizing risks (including financial intermediation and cybercrime).
  - Amendments to the anti-money laundering framework and enforcement are welcome.
- Financial vulnerabilities and data needs:
  - Banks’ exposures to the CRE sector and high household debt call for better data collection to enhance monitoring and guide possible strengthening of prudential regulations, especially for CRE.
  - Close monitoring of corporate vulnerabilities and bond markets necessary to preserve financial stability.
- Structural challenges reiterated:
  - Limited employment prospects for foreign-born and youth, shortages in affordable housing, and demographic shifts need addressing.
  - 2021 Budget Bill measures: higher spending on training and education; lower social security contributions for the youth; initiatives geared towards the foreign-born, especially women.
  - Further reduction of the high labor tax wedge is desirable.

### Key projections (staff)
- Projected real GDP growth: 3.3 (2021), 2.9 (2022), 2.4 (2023), 2.1 (2024), 2.0 (2025), 2.0 (2026).
- HICP inflation (e.o.p): 0.7 (2021), 1.2 (2022), 1.6 (2023), 1.8 (2024), 1.9 (2025), 1.9 (2026).
- Unemployment rate (percent): 8.3 (2020), 8.7 (2021), 8.4 (2022), 7.7 (2023), 7.2 (2024), 7.2 (2025), 7.2 (2026).
- Net lending / borrowing (percent of GDP): -4.0 (2020), -3.9 (2021), -1.8 (2022), -0.2 (2023), 0.1 (2024), 0.3 (2025), 0.3 (2026).
- Gross public debt (percent of GDP): 38.5 (2019), 38.5 (2020), 40.7 (2021), 40.7 (2022), 39.3 (2023), 37.8 (2024), 36.1 (2025), 34.4 (2026).
- Current Account Balance (percent of GDP): 5.0 (2020), 4.5 (2021), 4.3 (2022), 3.9 (2023), 3.4 (2024), 3.2 (2025), 3.0 (2026).

### Labor market integration, housing, and corporate restructuring
- Labor market integration and ALMPs:
  - 2021 Budget Bill included higher spending on employment training schemes.
  - Recommendation: review employment protection arrangements to facilitate fair entry and retention of low-skilled and foreign-born (e.g., revisiting downsizing rules).
  - Restructuring of Public Employment Service: ensure timely provision of well-designed ALMPs; new job matching system contracted out should not leave vulnerable groups behind.
  - Planned initiatives: intensive year training program for new asylum seekers in 2021; “entry agreement” to enhance employment prospects of newly arrived foreign-born.
- Housing market distortions and reforms:
  - Main problem: housing shortages hinder labor mobility and contribute to inequities.
  - Identified impediments: rent controls and extremely low real estate taxes; complex regulations raise construction costs.
  - Staff advice:
    - Phase out impediments to market operation (e.g., rent controls, low property taxes) while expanding housing allowance for social protection.
    - Streamline regulations to increase supply and competition in construction.
    - Introduce a simpler market-based rental system complemented with adequate housing allowances.
    - Gradually increase property taxes from their extremely low level as part of comprehensive reforms.
  - Noted progress: ongoing public inquiries aimed at presenting proposals to improve functioning of the rental market.
- Bankruptcy framework and corporate restructuring:
  - Number of bankruptcies increased in 2020 but moderated recently; insolvencies may be lagging due to support measures.
  - Recommendation: enhance efficiency of bankruptcy framework per OECD recommendations: streamline procedures, reduce barriers to restructuring, lower costs.
  - Progress on transposing the EU Directive on Preventive Restructuring Frameworks planned for completion in the summer.

### Gender equality
- Sweden is a gender equality role model with further progress since 1994.
- Key statistics:
  - Female employment rate: 73.6 percent (2020:Q3).
  - Part-time work: 17.3 percent of women vs. 10.5 percent of men (2019).
  - Sweden scores 100 points on the Women, Business and the Law index 2020.
  - Women in national government: close to 60 percent; 12 of 22 cabinet ministers are women.
  - Nearly half of the 349-member parliament are women.
- Policy link: initiatives aimed at foreign-born, especially women, and preserving gender balance are part of integration measures.

### Box 1 — Climate targets, progress, and investment needs
- Climate targets:
  - Reduce transport emissions by 70 percent from 2010 to 2030.
  - Generate electricity consisting of 100 percent renewables by 2040.
  - Net-zero carbon economy by 2045.
- Carbon pricing and emissions:
  - Carbon tax implemented in 1991; currently about USD 140 per ton.
  - Sweden has one of the lowest CO2 emissions per capita and a low share of fossil fuels in its energy supply.
  - Electricity use per capita is one of the highest in the world; generation is practically decarbonized due to hydro, nuclear, and wind.
- Progress and gaps:
  - Sweden on track to meet EU GHG reduction target of 50 percent by 2030.
  - Tops the Climate Change Performance Index across GHG Emission, Renewable Energy, Energy Use, and Climate Policy, but ranks lower on energy use because energy-intensity remains high.
  - Swedish Climate Policy Council reports annual rate of reductions below what is required to meet Sweden’s own targets; recommends investigating a new road traffic tax, stronger incentives for electrification, reducing agricultural emissions, and incentivizing purchase of zero-emission goods and services.
- Investment needs:
  - Reduction in transport emissions by 2030 will require additional investments in biofuel production, hydrogen power plants, and the electric vehicle grid.
  - IEA: switch to 100 percent renewable electricity requires additional support and recommends analyzing generation adequacy, system resilience, and cost-effectiveness.
  - Infrastructure investments for climate adaptation could be larger than expected; staff analysis suggests adaptation investment needs are large relative to peers (coastal protection and upgrading exposed assets).
  - Government 2021 budget sets aside about 0.2 percent of GDP for investments in energy efficiency, transportation, natural area protection, and climate emission reduction.
- Government co-funding initiatives:
  - The Climate Leap (2015) — extended to 2026; funds electric vehicle infrastructure and biogas for local transport.
  - The Industry Leap (2018) — expected to run till 2040; supports technology and energy-efficient processes in industry and research institutions.
  - Government considers private sector well-positioned to spearhead climate investments and complements public support with co-funding programs.
- Authorities’ fiscal stance on green investment:
  - Determined to balance recovery support with fiscal prudence and stand ready to continue support given available fiscal space.
  - Sweden already has high levels of public investment; room to meet higher ambitions exists but only through well-vetted projects.
  - Authorities highlighted recent green investment grants to support qualifying private investment.

### Annex I — Debt Sustainability Analysis (selected indicators and scenarios)
- Public Sector DSA — baseline key indicators (as of December 02, 2020; percent of GDP unless noted):
  - Nominal gross public debt: 2018: 40.6; 2019: 38.9; 2020: 35.1; 2021: 38.5; 2022: 40.7; 2023: 40.7; 2024: 39.3; 2025: 37.8; 2026: 36.1.
  - Public gross financing needs: 2018: 9.6; 2019: 5.7; 2020: 8.0; 2021: 12.0; 2022: 12.0; 2023: 8.0; 2024: 9.6; 2025: 7.1; 2026: 6.2; 2027: 8.6; 2028: 5.?.
  - Real GDP growth: 2018: 1.9; 2019: 2.0; 2020: 1.4; 2021: -2.8; 2022: 3.3; 2023: 2.9; 2024: 2.4; 2025: 2.1; 2026: 2.0.
  - Inflation (GDP deflator): 2018: 1.5; 2019: 2.4; 2020: 2.7; 2021: 1.4; 2022: 1.0; 2023: 1.4; 2024: 1.6; 2025: 1.8; 2026: 1.9.
  - Effective interest rate: 2018: 2.2; 2019: 1.3; 2020: 1.0; 2021: 0.8; 2022: 1.1; 2023: 1.4; 2024: 1.6; 2025: 1.8; 2026: 2.1.
  - Sovereign spreads: SEK bond (bps): 59; Y CDS (bps): 12.
  - Ratings: Moody's Aaa/Aaa; S&P's AAA/AAA; Fitch AAA/AAA.
- Debt dynamics and flows (selected):
  - Change in gross public sector debt: 2018: 0.4; 2019: -1.9; 2020: -3.7; 2021: 3.4; 2022: 2.1; 2023: 0.0; 2024: -1.4; 2025: -1.5; 2026: -1.7; cumulative: 0.9.
  - Identified debt-creating flows: cumulative: 5.3.
  - Primary deficit (in percent of GDP): 2018: 0.1; 2019: -0.8; 2020: -0.4; 2021: 4.1; 2022: 4.0; 2023: 1.7; 2024: 0.1; 2025: -0.2; 2026: -0.4; cumulative: 9.3.
  - Primary revenue and expenditure (noninterest, percent of GDP): revenue cumulative: 291.2; expenditure cumulative: 300.5.
- Alternative scenarios and shocks:
  - Financial Sector Contingent Liability Shock (assumes fiscal costs equivalent to 10 percent of banking sector assets in a single year):
    - Primary Balance: 2021: -31.3; 2022: -1.7; 2023: -0.1; 2024: 0.2; 2025: 0.4.
    - Effective interest rate spikes: 2021: 1.35; 2022: 5.03; 2023: 3.4; 2024: 3.5; 2025: 3.6.
  - Surplus scenario: Primary Balance improves to 0.3 in 2022–2025.
  - Constant Primary Balance scenario: Primary Balance held at -4.1 for 2020–2025.

### External sector assessment (Annex II) — highlights
- Overall conclusion: External position in 2020 was stronger than level implied by medium-term fundamentals and desirable policies (preliminary).
- Foreign asset and liability position (2020, percent of GDP):
  - NIIP: 23.3; Gross Assets: 295.9; Debt Assets: 95.9; Gross Liabilities: 272.6; Debt Liabilities: 136.7.
  - Swedish net IIP projected to reach 23.3 percent of GDP in 2020, an increase of 4.9 percentage points in 2020.
  - Data caveat: Swedish IIP data includes large errors and omissions, averaging -2.1 percent of GDP in the past five years.
- Current account (2020):
  - CA: 5.0 percent of GDP (2019: 4.6).
  - COVID-19 adjustor: estimated to have improved CA surplus by about 1.1 percentage points.
  - Staff assesses Sweden’s CA gap at 3.1 percent of GDP in 2020, within a range of ± 1.5 percent of GDP.
- Real exchange rate (REER) assessment (2020):
  - Swedish krona appreciated by 5.3 percent in real effective terms (ULC based) in 2020 relative to 2019 average.
  - Staff assesses the krona to be undervalued by 3 to 13 percent, with a midpoint of 8 percent as guided by the ULC based REER index.
- FX reserves and interventions:
  - Foreign currency reserves increased by USD 3 billion to USD 59 billion in December 2020.
  - Reserves equivalent to 22 percent of the short-term external debt of monetary and financial institutions, about 10 percent of GDP and 3.3 months of imports.
  - No foreign exchange interventions in 2020.
  - A USD 60 billion swap facility agreed with the Fed as a backstop (not utilized).

### Risk Assessment Matrix — selected risks and policy responses
- Unexpected shifts in the Covid-19 pandemic:
  - Likelihood: Medium.
  - Impact: Downside — persistent containment costs and behavioral changes; Upside — faster containment boosting confidence.
  - Policy response: Provide health support; fully use fiscal space to support households and businesses while encouraging reallocation.
- Sharp rise in global risk premia:
  - Likelihood: Medium.
  - Impact: Low/Medium — pressure on bank capital adequacy, credit tightening, higher unemployment.
  - Policy response: Stand ready to implement further policy support; maintain flow of credit with targeted financial policies.
- Accelerating de-globalization:
  - Likelihood: Medium.
  - Impact: High — higher barriers to trade dampen exports and investment.
  - Policy response: Monetary and fiscal support, labor market reforms, enhance bankruptcy regime.
- Significant property price decline:
  - Likelihood: Low.
  - Impact: Medium — undermines investment and collateral values; affects loan quality and funding costs.
  - Policy response: Monitor via better data, supervise banks’ CRE lending closely, provide monetary stimulus and funding support if needed.

### Key policy response measures in 2020 (Annex V)
- Fiscal measures:
  - Additional health spending: SEK 38 bn for municipalities and regions, elderly care boost, training, expansion of credit framework for PPE and intensive care equipment.
  - Additional spending and foregone revenue outside health: SEK 169 bn (wage subsidies for short-term leave, sick leave, rent subsidies, more generous unemployment benefits, temporary grants to businesses, infrastructure investment, extra support to public transport, general grants to municipalities and regions, temporary reduction in employers' social security contributions).
  - Tax deferrals: SEK 335 bn (maximum deferral of three-month worth of payments of companies’ social contributions, VAT and payroll taxes for up to 12 months, annual VAT for 2019, and SME taxes).
  - Capital reinforcement: SEK 12 bn (SAS, Swedavia, Lernia, ALMI).
  - Credit guarantees: SEK 250 bn (airlines, Export Credit Agency expansion, central government guarantees for loans).
- Monetary measures:
  - Reduction of the lending rate for overnight loans by 55 basis points to 0.2 percent and subsequently to 0.1 percent (repo rate unchanged at 0 percent).
  - Lending of up to SEK 500 billion to companies via banks (funding for lending).

### New lending facility and prudential measures
- New lending facility:
  - Monetary policy counterparties can borrow unlimited amounts (given adequate collateral) with maturities of 3 and 6 months at an interest rate corresponding to the Riksbank’s repo rate.
  - All credit institutions under the Swedish FSA can apply to become temporary monetary policy counterparties to access the facility.
- Asset purchases:
  - Increase of purchases of securities of up to SEK 700 billion this year and next (securities may include government and municipal bonds, covered bonds and securities issued by non-financial corporations).
- Foreign currency operations and dollar liquidity:
  - Swap facility of USD 60 billion between the Riksbank and the US Federal Reserve.
  - Possibility for banks to borrow in US dollars against collateral of up to USD 60 billion (until March 31, 2021).
- Prudential and liquidity policy measures:
  - Easing of countercyclical capital buffer from 2.5 to 0 percent.
  - Possibility for banks to temporarily breach the liquidity coverage ratio (LCR) for individual currencies and total currencies.
  - Banks may grant all new and existing mortgagors an exemption from the amortization requirement until 31 August 2021.
  - Recommendation for banks and credit market companies to temporarily stop dividend payments.

*Source: 1sweea2021001 - 1. Progress on Climate Change and Need for Investments (PDF).*

### 1. Progress on Climate Change and Need for Investments _______________________________________ 11

### 1. Progress on Climate Change and Need for Investments

### Context and recent economic developments
- Sweden entered the crisis with substantial buffers despite subdued growth and some lingering vulnerabilities:
  - 2019 growth decelerated to 1.4 percent.
  - Current account (CA) surplus increased to 4.6 percent of GDP.
  - Unemployment edged up to 6.8 percent.
  - Inflation was slightly below the 2 percent target.
  - Public debt on a downward trend: 35 percent of GDP (Annex I).
- Structural features that moderated the Covid-19 shock:
  - High share of jobs that can be performed from home, a small hospitality sector, and buoyant pharmaceutical and machinery exports.
  - Estimated fall in 2020 output of about 3 percent, significantly less than the EU’s average.
- Labor market impacts and inequities:
  - Sharp decline in temporary employment, concentrated in hospitality.
  - Rising unemployment among the youth and foreign-born.
- External and FX developments:
  - The krona appreciated by almost 5 percent in real effective terms in 2020.
  - The krona remains undervalued by about 5.5 percent against the unit labor cost-based exchange rate estimate.
  - The current account surplus is estimated to have widened further in 2020, albeit slightly.
- Reserve and exchange rate stance:
  - Reserves remain adequate and broadly stable.
  - The exchange rate continues to float freely.
  - The Riksbank will gradually replace reserves borrowed through the National Debt Office with direct purchases, spread over about two years.

### Outlook and risks
- Short-term outlook and baseline:
  - Projections suggest it will take until early 2022 to reach the pre-pandemic output level.
  - Baseline assumes wide vaccination by the end of the summer of 2021.
  - Inflation will remain subdued, in part because of the industry wage agreement setting the benchmark for annual wage growth over 2020–22 at 1.8 percent.
- Downside risks:
  - Slower vaccination rollout or more difficult-to-control virus mutations could impede recovery.
  - Expansionary policies could contribute to a buildup in real estate and other vulnerabilities.
  - Corporate vulnerabilities may become clearer as support measures are withdrawn.
- Medium-term challenges:
  - Success in facilitating structural transformation.
  - Addressing sector-specific impediments to inclusive growth such as the dysfunctional housing market and high unemployment among the youth and foreign-born.
  - Limited progress on structural reforms to date due to the complex political consensus process.

### Authorities’ views
- Broad agreement with staff on risks to the outlook, with some authorities placing less weight on downside risks expecting accelerated vaccination.
- Health authorities’ objective:
  - To have offered vaccine to the entire adult population and risk groups by end-June.
- Authorities acknowledge risk of increased bankruptcies as support measures are withdrawn and uncertainty in the CRE outlook.
- Authorities consider extension of support measures helpful to mitigate short-term pressures.

### Policy discussions and recommendations
- General guidance:
  - Withdrawal of assistance should be gradual, coordinated, and well-communicated.
  - The policy mix should focus on fiscal support, with the Riksbank ready to complement fiscal measures as needed.
  - The 2021 fiscal stance is assessed as adequate; scope exists for additional support if recovery or inflation expectations falter.
  - Recalibration of support measures recommended to facilitate structural transformation and avoid prolonged support of non-viable businesses.
  - Avoid a premature return to the surplus target; identify additional growth-enhancing expenditure, and implement structural reforms to boost green and inclusive growth.
- Specific fiscal policy findings and recommendations:
  - Sweden entered the crisis with a very strong fiscal position and substantial fiscal space.
  - 2020 fiscal change:
    - Overall balance shifted from a small surplus in 2019 to a projected deficit of about 4 percent of GDP in 2020.
    - Abstracting from automatic stabilizers, discretionary and below-the-line measures to support the health system, households, and businesses each amounted to around 4 percent of GDP.
  - Public debt outlook:
    - Public debt is very low compared to other advanced economies.
    - Projected to peak at about 40 percent of GDP in 2021 before converging back to around 35 percent over the medium term (Annex I).
  - Design improvements for crisis measures:
    - Short-term work scheme: largest above-the-line measure; extension welcomed through June 2021, but noted to be less flexible than peers because working hours cannot be reduced to zero and labor costs must be cut to qualify—this incentivizes dismissal of temporary employees. Staff recommended recalibration of underlying criteria to avoid unintended side-effects and consideration of introducing a labor retraining requirement to qualify.
    - Reorientation support covers companies’ fixed costs but does not incentivize adaptation; staff recommended redesigning this measure.
  - Fiscal framework and surplus target:
    - The revamped fiscal framework sets an average surplus of 0.33 percent over the cycle and anchors debt at 35 percent of GDP, allowing deviations in exceptional times and requiring a review every eight years.
    - Staff recommended:
      - Considering a return to the surplus target only over the medium term to support recovery and minimize scarring.
      - Identifying additional growth-enhancing expenditure, particularly public investment to meet health (municipal level), demographic, and vocational training challenges.
    - Note: The target of 0.33 percent of GDP is ½ a percentage point higher than the debt-stabilizing fiscal balance and implies a continuous reduction in the debt ratio.
- Revenue and tax recommendations:
  - Further reducing the still high labor tax wedge would help increase employment, including among the less skilled.
  - A gradual increase in property taxes from their extremely low level would help finance part of additional spending and make the housing market more dynamic.
- Climate-related investment needs and green recovery:
  - Reaching Sweden’s ambitious climate goals requires additional investments in biofuel production, hydrogen power plants, and the electric vehicle grid, which are part of the authorities’ green recovery.
  - Short- and medium-term green spending announcements as of 2020 shown relative to 2020 GDP (figure reference).

### Key fiscal and program numbers (as presented)
- Fiscal balances and debt:
  - Public debt: 35 percent of GDP (Annex I).
  - Projected deficit in 2020: about 4 percent of GDP.
  - Public debt projected to peak at about 40 percent of GDP in 2021, then converge to around 35 percent.
- Wage and inflation:
  - Industry wage agreement benchmark for annual wage growth over 2020–22: 1.8 percent.
- Vaccination timelines referenced:
  - Baseline assumes wide vaccination by the end of the summer of 2021.
  - Health authorities’ goal: offer vaccine to entire adult population and risk groups by end-June.
- Crisis support measures (Text Table 1: Measures, percent of GDP — Budget / Estimate):
  - Short-term layoffs: 1.9 / 0.9
  - Reduced employers' social security contributions: 0.7 / 0.7
  - General government grants: 0.4 / 0.4
  - Sick pay responsibility: 0.3 / 0.4
  - Reorientation support: 0.8 / 0.3
  - Security and transition support: 0.3 / 0.3
  - Health related: 0.4 / 0.8
  - Other: 0.4 / 0.5
  - Total (above the line): 5.2 / 4.2
  - Below the line:
    - Tax deferrals (max amount): 6.8 / 0.9
    - Guarantees for SME loans: 2.0 / 0.0
    - Export guarantees: 2.5 / 2.3
    - Other guarantees: 0.5 / 0.3
    - Capital reinforcement: 0.2 / 0.2
    - Total (below the line): 12.1 / 3.7
- Budget Bill 2021 amendments and estimates (Original SEK bn; % GDP shown in table header):
  - Tax cuts: 30.0 / 0.6
    - o/w to households: 14.0 / 0.3
  - Aid to local governments: 28.0 / 0.5
    - o/w health related: 14.0 / 0.3
  - Unemployment & labor market: 12.0 / 0.2
  - Green Investments: 9.0 / 0.2
  - Public Investments: 5.0 / 0.1
  - Other: 21.0 / 0.4
  - Amendments (estimates):
    - Short-term layoffs: 18.0 / 0.4
    - Turnover/revenue support: 16.0 / 0.3
    - Additional health care resources: 13.0 / 0.3
    - Other: 1.0 / 0.0
  - Total: 155 / 3.0

*Source: 1sweea2021001 - 1. Progress on Climate Change and Need for Investments (PDF).*

### Box 1. Progress on Climate Change and Need for Investments

### Box 1. Progress on Climate Change and Need for Investments

### Climate targets and current status
- Sweden aims to reduce transport emissions by 70 percent from 2010 to 2030.
- Sweden aims to generate electricity consisting of 100 percent renewables by 2040.
- Sweden aims to become a net-zero carbon economy by 2045.
- Sweden implemented a carbon tax in 1991 and currently imposes it at about USD 140 per ton.
- Sweden has one of the lowest CO2 emissions per capita and a low share of fossil fuels in its energy supply.
- Electricity use per capita is one of the highest in the world and its generation is practically decarbonized due to large access to hydro, nuclear, and wind power.

### Progress toward targets and identified gaps
- Sweden is on track to meet the EU GHG reduction target of 50 percent by 2030.
- Sweden tops the Climate Change Performance Index across the categories GHG Emission, Renewable Energy, Energy Use, and Climate Policy, but ranks lower on energy use because energy-intensity remains high.
- The Swedish Climate Policy Council reports that the annual rate of reductions is below what is required to meet Sweden’s own targets.
- The Council recommends:
  - investigating a new road traffic tax;
  - stronger incentives for electrification;
  - reduction of emissions from agriculture;
  - incentivizing the purchase of zero-emission goods and services.

### Investment needs for mitigation and adaptation
- Reduction in transport sector emissions by 2030 will require additional investments in biofuel production, hydrogen power plants, and the electric vehicle grid.
- The IEA notes that a switch to 100 percent renewable electricity generation requires additional support and recommends analyzing generation adequacy, system resilience, and cost-effectiveness of electricity supply.
- Infrastructure investments for climate change adaptation could be larger than expected.
- Recent staff analysis suggests that investment needs for climate adaptation are large relative to peers, including in coastal protection as well as in upgrading and retrofitting exposed assets.
- Estimates of the annual costs to improve public infrastructure for climate change adaptation are presented in percent of GDP (figure in source).

### Government support and programs
- The 2021 budget sets aside investments in energy efficiency, the transportation sector, natural area protection, and climate emission reduction of about 0.2 percent of GDP.
- The government has implemented two co-funding initiatives for climate investments:
  - The Climate Leap (2015) — extended to 2026; important for the local transport sector and funds investments in electric vehicle infrastructure and biogas.
  - The Industry Leap (2018) — expected to run till 2040; supports development of technology and energy-efficient processes in industry and research institutions.
- The government considers the private sector well-positioned to spearhead climate investments and emission reductions and complements public support with these co-funding programs.

### Authorities’ views and fiscal stance
- Authorities are determined to balance recovery support with fiscal prudence and stand ready to continue support given available fiscal space.
- Sweden has already high levels of public investment; room to meet higher ambitions exists but only through well-vetted projects.
- Authorities highlighted recent green investment grants to support qualifying private investment.
- Regarding crisis support measures:
  - initial design aimed at incentivizing cost-reduction and preserving matches of firm-specific human capital;
  - newly unemployed were supported through social benefits and increased unemployment insurance;
  - economic fallout was less than expected and bank lending held up, reducing take-up of various measures (including the credit guarantee scheme) well below their budgeted envelop.

*Box 1. Progress on Climate Change and Need for Investments*

### 23.      Efforts should continue to improve employment prospects for the youth and foreign-

### 1sweea2021001 - 23.      Efforts should continue to improve employment prospects for the youth and foreign-born.

### Labor market integration and active labor market policies
- 2021 Budget Bill included higher spending on employment training schemes to help address labor shortages in specific occupations.
- Recommendation: When reviewing employment protection arrangements, social partners should seek to facilitate fair labor market entry and retention of the low-skilled and foreign-born (for example by revisiting the requirement that downsizing should start with retrenching those who have a shorter tenure).
- Ongoing restructuring of the Public Employment Service:
  - Important to ensure timely provision of well-designed active labor market programs to prevent short-term unemployment becoming entrenched.
  - The new job matching system is being contracted out to the private sector; it should ensure vulnerable groups are not left behind.
- Planned initiatives:
  - An intensive year training program for new asylum seekers planned to start in 2021.
  - The “entry agreement” is expected to help enhance employment prospects of the newly arrived foreign-born.
- Policy implication: Continue and better target ALMP spending and ensure programs reach marginalized groups (youth, foreign-born, low-skilled).

### Housing market distortions and reforms
- Main problem: Housing shortages hinder labor mobility and contribute to inequities.
- Identified impediments:
  - Rent controls and extremely low real estate taxes reduce the cost to households of retaining prime or large real estate beyond their needs, impeding efficient allocation.
  - Complex regulations contribute to high construction costs and reduce supply of affordable housing.
- Staff advice:
  - Phase out impediments to market operation (e.g., rent controls, low property taxes) while providing social protection more efficiently (including through expanding the housing allowance).
  - Streamline complex regulations to increase supply and competition in the construction sector and drive down costs.
  - Introduce a simpler market-based rental system complemented with adequate housing allowances to meet economic and social objectives.
  - Gradually increase property taxes from their extremely low level as part of comprehensive reforms to make the housing market more dynamic.
- Noted progress: Ongoing public inquiries aimed at presenting proposals to improve functioning of the rental market are welcome.
- Stakeholder view: Some stakeholders expressed that political constraints make comprehensive housing sector reform, including rent regulation, unlikely over the near term.

### Bankruptcy framework and corporate restructuring
- Observation: Number of bankruptcies increased in 2020 but have moderated recently; insolvencies could be lagging due to support measures and the relatively lengthy and costly process.
- Recommendation: Enhance efficiency of the bankruptcy framework by following OECD recommendations:
  - Streamline procedures.
  - Reduce barriers to restructuring.
  - Lower costs.
- Further action: Progress in transposing the EU Directive on Preventive Restructuring Frameworks would be helpful; authorities plan to complete transposition in the summer.

### Gender equality and female labor participation (Box 3)
- Sweden is a gender equality role model with further progress since 1994.
- Key statistics and facts:
  - Female employment rate: 73.6 percent (2020:Q3).
  - Part-time work: 17.3 percent of women work part-time vs. 10.5 percent of men (2019).
  - Registry data: unemployment rate for females is close to males, but more progress is needed to reduce unemployment of foreign-born women.
  - Sweden scores 100 points on the Women, Business and the Law index 2020 (women have equal economic rights as men).
  - Women in national government: close to 60 percent of total; 12 of the 22 cabinet ministers are women.
  - Nearly half of the 349-member parliament are women.
- Policy link: Initiatives aimed at foreign-born, especially women, and preserving gender balance are part of measures to improve integration.

### Staff appraisal: crisis response and near-term policy stance
- Crisis performance:
  - Sweden fared the crisis better than many European neighbors due to buffers and strong fundamentals.
  - Authorities’ large support package was timely and adequate, helping avert a financial crisis.
  - The 2020 fall in output is projected at around 3 percent, which is less than the EU average.
  - Increase in unemployment, especially of the young and foreign-born, was larger than in countries with deeper recessions.
- Fiscal policy guidance:
  - Fiscal policy should continue to support the economy and lead the recovery; it is important to not prematurely return to the surplus target.
  - Withdrawal of support measures should be cautiously gradual to minimize scarring.
  - Room exists for increasing public expenditure, including on green outlays, over the medium term to enhance growth and achieve climate and inclusion objectives.
  - Review design of support measures to facilitate structural transformation; e.g., redesign the short-term work scheme to be more flexible and supportive for temporary workers.
- Monetary policy guidance:
  - Monetary policy should stand ready to further assist the recovery if needed, though its effectiveness may be diminishing.
  - Riksbank’s asset purchases contributed to support and market stabilization but can contribute to buildup in vulnerabilities.
  - Policy mix should focus on fiscal support while Riksbank stands ready to complement fiscal measures.
  - Any amendments to the Riksbank law should preserve operational independence and rapid deployment capability.
  - The e-krona pilot project should be designed to maximize benefits while minimizing risks (including financial intermediation and cybercrime).
  - Amendments to the anti-money laundering framework and enforcement are welcome.
- Financial vulnerabilities and data needs:
  - Banks’ exposures to the CRE sector and high household debt call for better data collection to enhance monitoring and guide possible strengthening of prudential regulations, especially for CRE.
  - A prolonged recession and shifts to e-commerce, teleworking, and less travel could reduce revenue streams for CRE companies highly exposed to affected sectors.
  - Close monitoring of corporate vulnerabilities and bond markets is necessary to preserve financial stability.
- Structural challenges reiterated:
  - Limited employment prospects for the foreign-born and youth, shortages in affordable housing, and demographic shifts are imperative to address.
  - 2021 Budget Bill measures: higher spending on training and education; lower social security contributions for the youth; initiatives geared towards the foreign-born, especially women.
  - A further reduction of the high labor tax wedge is desirable.

### Key quantitative remarks from staff projections and tables (selected)
- Projected real GDP growth: 3.3 (2021), 2.9 (2022), 2.4 (2023), 2.1 (2024), 2.0 (2025), 2.0 (2026).
- HICP inflation (e.o.p): 0.7 (2021), 1.2 (2022), 1.6 (2023), 1.8 (2024), 1.9 (2025), 1.9 (2026).
- Unemployment rate (percent): 8.3 (2020), 8.7 (2021), 8.4 (2022), 7.7 (2023), 7.2 (2024), 7.2 (2025), 7.2 (2026).
- Net lending / borrowing (percent of GDP): -4.0 (2020), -3.9 (2021), -1.8 (2022), -0.2 (2023), 0.1 (2024), 0.3 (2025), 0.3 (2026).
- Gross public debt (percent of GDP): 38.5 (2019), 38.5 (2020), 40.7 (2021), 40.7 (2022), 39.3 (2023), 37.8 (2024), 36.1 (2025), 34.4 (2026).
- Current Account Balance (percent of GDP): 5.0 (2020), 4.5 (2021), 4.3 (2022), 3.9 (2023), 3.4 (2024), 3.2 (2025), 3.0 (2026).

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Public Sector DSA — Baseline Scenario (key indicators and projections)
- As of December 02, 2020.
- Nominal gross public debt (in percent of GDP): 2018: 40.6; 2019: 38.9; 2020: 35.1; 2021: 38.5; 2022: 40.7; 2023: 40.7; 2024: 39.3; 2025: 37.8; 2026: 36.1.
- Public gross financing needs (in percent of GDP): 2018: 9.6; 2019: 5.7; 2020: 8.0; 2021: 12.0; 2022: 12.0; 2023: 8.0; 2024: 9.6; 2025: 7.1; 2026: 6.2; 2027: 8.6; 2028: 5.?
- Real GDP growth (in percent): 2018: 1.9; 2019: 2.0; 2020: 1.4; 2021: -2.8; 2022: 3.3; 2023: 2.9; 2024: 2.4; 2025: 2.1; 2026: 2.0.
- Inflation (GDP deflator, in percent): 2018: 1.5; 2019: 2.4; 2020: 2.7; 2021: 1.4; 2022: 1.0; 2023: 1.4; 2024: 1.6; 2025: 1.8; 2026: 1.9.
- Nominal GDP growth (in percent): 2018: 3.5; 2019: 4.4; 2020: 4.1; 2021: -1.5; 2022: 4.4; 2023: 4.3; 2024: 4.1; 2025: 3.9; 2026: 4.0.
- Effective interest rate (in percent): 2018: 2.2; 2019: 1.3; 2020: 1.0; 2021: 0.8; 2022: 1.1; 2023: 1.4; 2024: 1.6; 2025: 1.8; 2026: 2.1.
- Sovereign spreads: SEK bond (bps): 59 (long-term bond spread over German bonds). Y CDS (bps): 12.
- Ratings: Moody's Aaa/Aaa; S&P's AAA/AAA; Fitch AAA/AAA.

### Debt dynamics and flows (2018–2025 and cumulative)
- Change in gross public sector debt (in percent of GDP): 2018: 0.4; 2019: -1.9; 2020: -3.7; 2021: 3.4; 2022: 2.1; 2023: 0.0; 2024: -1.4; 2025: -1.5; 2026: -1.7; cumulative: 0.9.
- Identified debt-creating flows (in percent of GDP): 2018: -0.2; 2019: -1.2; 2020: -1.0; 2021: 4.9; 2022: 2.8; 2023: 0.5; 2024: -0.9; 2025: -1.0; 2026: -1.1; cumulative: 5.3.
- Primary deficit (in percent of GDP): 2018: 0.1; 2019: -0.8; 2020: -0.4; 2021: 4.1; 2022: 4.0; 2023: 1.7; 2024: 0.1; 2025: -0.2; 2026: -0.4; cumulative: 9.3.
- Primary (noninterest) revenue and grant (in percent of GDP): 2018: 48.4; 2019: 49.1; 2020: 48.3; 2021: 48.6; 2022: 47.9; 2023: 48.4; 2024: 48.7; 2025: 48.8; 2026: 48.9; cumulative: 291.2.
- Primary (noninterest) expenditure (in percent of GDP): 2018: 48.5; 2019: 48.3; 2020: 47.9; 2021: 52.7; 2022: 51.9; 2023: 50.0; 2024: 48.8; 2025: 48.6; 2026: 48.4; cumulative: 300.5.
- Automatic debt dynamics (in percent of GDP): 2018: -0.3; 2019: -0.4; 2020: -0.6; 2021: 0.8; 2022: -1.2; 2023: -1.1; 2024: -1.0; 2025: -0.8; 2026: -0.7; cumulative: -3.9.
- Interest rate/growth differential (in percent of GDP): 2018: -0.5; 2019: -1.2; 2020: -1.1; 2021: 0.8; 2022: -1.2; 2023: -1.1; 2024: -1.0; 2025: -0.8; 2026: -0.7; cumulative: -3.9.
  - Of which: real interest rate: 2018: 0.2; 2019: -0.4; 2020: -0.6; 2021: -0.2; 2022: 0.0; 2023: 0.0; 2024: 0.0; 2025: 0.0; 2026: 0.0; cumulative: -0.1.
  - Of which: real GDP growth: 2018: -0.8; 2019: -0.8; 2020: -0.5; 2021: 1.0; 2022: -1.2; 2023: -1.1; 2024: -1.0; 2025: -0.8; 2026: -0.7; cumulative: -3.8.
- Exchange rate depreciation contribution (in percent of GDP): 2018: 0.2; 2019: 0.8; 2020: 0.5.
- Other identified debt-creating flows: 0.0 across years.
- Residual, including asset changes (in percent of GDP): 2018: 0.6; 2019: -0.6; 2020: -2.7; 2021: -1.5; 2022: -0.7; 2023: -0.6; 2024: -0.6; 2025: -0.5; 2026: -0.5; cumulative: -4.5.

### Composition of Public Debt and Alternative Scenarios (assumptions)
- Baseline scenario assumptions (selected):
  - Real GDP growth: 2020: -2.8; 2021: 3.3; 2022: 2.9; 2023: 2.4; 2024: 2.1; 2025: 2.0.
  - Inflation: 2020: 1.4; 2021: 1.0; 2022: 1.4; 2023: 1.6; 2024: 1.8; 2025: 1.9.
  - Primary Balance (in percent of GDP): 2020: -4.1; 2021: -4.0; 2022: -1.7; 2023: -0.1; 2024: 0.2; 2025: 0.4.
  - Effective interest rate: 2020: 0.8; 2021: 1.1; 2022: 1.4; 2023: 1.6; 2024: 1.8; 2025: 2.1.
- Historical scenario (selected differences): Primary Balance in 2021–2025: 0.1 each year; Effective interest rate slightly higher in later years (2022: 1.6; 2023: 1.9; 2024: 2.1; 2025: 2.4).
- Constant Primary Balance Scenario: Primary Balance held at -4.1 for 2020–2025; Effective interest rate close to baseline.
- Financial Sector Contingent Liability Shock (assumes fiscal costs equivalent to 10 percent of banking sector assets in a single year):
  - Primary Balance: 2021: -31.3; 2022: -1.7; 2023: -0.1; 2024: 0.2; 2025: 0.4.
  - Effective interest rate exhibits large spikes: 2021: 1.35; 2022: 5.03; 2023: 3.4; 2024: 3.5; 2025: 3.6.
- Surplus scenario: Primary Balance improves to 0.3 in 2022–2025.
- Spending scenario: Primary Balance path shows 2022: -0.8; 2023: 0.1; 2024: 0.3; 2025: 0.6.

### Debt composition charts (descriptive)
- Gross Nominal Public Debt, Public Gross Financing Needs, By Maturity (short-term vs. medium and long-term), By Currency (local vs. foreign) are charted for 2018–2025 under baseline and alternative scenarios (projections shown).

*Source: IMF staff.*

### External Sector Assessment (Annex II) — Overall conclusions
- Overall assessment: On a preliminary basis, and adjusting for transitory factors, recent developments suggest that the external position in 2020 was stronger than the level implied by medium-term fundamentals and desirable policies. Assessment is preliminary pending full-year data for 2020; complete analysis will be provided in the 2021 External Sector Report.
- Potential policy responses:
  - Given the large fiscal buffers, Sweden is in a good position to provide further support to companies and households, if the crisis is protracted.
  - Over the medium term, scope exists for greener and growth-enhancing expenditure to facilitate structural transformation and support domestic demand.
  - The Riksbank has ensured ample liquidity, but further ability to increase aggregate demand may be limited.
  - As recovery resumes, address past imbalances and policy distortions through reforms that raise potential output and productive investment, decrease unemployment, and reduce household debt levels.

### Foreign asset and liability position and trajectory (2020 data)
- 2020 (percent of GDP): NIIP: 23.3; Gross Assets: 295.9; Debt Assets: 95.9; Gross Liabilities: 272.6; Debt Liabilities: 136.7.
- Background: Swedish net IIP projected to reach 23.3 percent of GDP in 2020, an increase of 4.9 percentage points in 2020 in line with positive current account balance.
- Data caveat: Swedish IIP data includes large errors and omissions, which have averaged -2.1 percent of GDP in the past five year.
- Assessment highlights:
  - Gross liabilities projected to increase to 273 percent of GDP in 2020, with about half being gross external debt (137 percent of GDP).
  - Other financial institutions (87 percent of GDP) hold the bulk of net foreign assets; Social Security Funds (26 percent); households (20 percent); Riksbank (12 percent).
  - Net external debtors include non-financial corporations (60 percent of GDP), monetary financial institutions (51 percent of GDP) and the central government (11 percent of GDP).
  - Rollovers of external debt (including banks’ covered bonds) pose vulnerability, but moderated by banks’ ample liquidity and large capital buffers.

### Current account (2020)
- Background and figures:
  - Current account (CA) increased to 5.0 percent of GDP in 2020 compared to 4.6 percent of GDP in 2019.
  - Improvements supported by exports of goods (machinery and chemicals) in Q1 and doubling of primary income from investments in Q2.
  - Sweden is a net oil importer; lower oil prices and reduced imports (tourism and goods) contributed to CA improvement.
  - Impact from lower-than-usual imports of oil and tourism services estimated to have improved the CA surplus by about 1.1 percentage points (COVID-19 adjustor).
  - Over the medium-term, CA projected to return to long-run average of 3 percent of GDP.
- Assessment (2020, percent of GDP): Est. CA: 5.0; Cycl. Adj. CA: 5.6; EBA Norm: 1.4; EBA Gap: 4.2; COVID-19 Adj.: -1.1; Other Adj.: —; Staff Gap: 3.1.
  - Staff notes EBA norm has been below actual CA for past two decades; other factors (mandatory contributions to fully-funded pension schemes, demographic dynamics, older labor force) may drive savings-investment balances.
  - Staff assesses Sweden’s CA gap at 3.1 percent of GDP in 2020, within a range of ± 1.5 percent of GDP.

### Real exchange rate (REER) assessment (2020)
- Background: Swedish krona appreciated by 5.3 percent in real effective terms (ULC based) in 2020 relative to 2019 average.
- Assessment:
  - Staff CA gap implies REER gap of -8.8 percent in 2020 (applying elasticity of 0.35), range between -5.1 to -13.7 percent.
  - REER index and level models suggest gaps of -18.2 percent and -16.9 percent respectively.
  - ULC based REER index was 5.5 percent below its 28-year average in 2020.
  - Overall, staff assesses the krona to be undervalued by 3 to 13 percent, with a midpoint of 8 percent as guided by the ULC based REER index.
  - REER gap may decline once situation and monetary policy normalize.

### Capital and financial accounts; FX intervention and reserves
- Financial account composition (2020): Other investments ~2.5 percent of GDP (half of financial account); portfolio investment outflows 2.0 percent; direct investments 1.4 percent; derivatives -1 percent.
- Assessment: Sweden’s large banks vulnerable to liquidity risks from global wholesale markets; banks improved structural liquidity and authorities strengthened regulation (LCR requirements in foreign and domestic currency).
- FX reserves and interventions:
  - Foreign currency reserves increased by USD 3 billion to USD 59 billion in December 2020.
  - Reserves equivalent to 22 percent of the short-term external debt of monetary and financial institutions, about 10 percent of GDP and 3.3 months of imports.
  - No foreign exchange interventions in 2020.
  - A USD 60 billion swap facility was agreed with the Fed as a backstop (not utilized).

*Source: IMF staff.*

### Risk Assessment Matrix (Annex III) — Selected risks, likelihood, impact, and policy responses
- Unexpected shifts in the Covid-19 pandemic.
  - Likelihood: Medium.
  - Impact: Downside — disease proves harder to eradicate requiring costly containment and persistent behavioral changes; Upside — pandemic contained faster than expected boosting confidence.
  - Staff summary of impacts: Medium: Demand in contact intensive services remains low for longer. Financial markets reassess real economy risks leading to repricing of risk assets. CRE and corporate vulnerabilities worsen, affecting banks. High: Strong confidence impact in near term; activity recovers faster over medium term and limits scarring.
  - Policy response: Keep provide adequate support to the health system. Fully use available fiscal space to support households and businesses overcome liquidity needs while encouraging necessary reallocation of resources.
- Sharp rise in global risk premia exposes financial vulnerabilities.
  - Likelihood: Medium.
  - Impact: Low/Medium — further pressure on bank capital adequacy triggering credit tightening; adverse spillovers to other sectors; higher unemployment.
  - Policy response: Stand ready to implement further policy support. Maintain flow of credit by making sure financial policies are adequately targeted and effectively deployed.
- Accelerating de-globalization.
  - Likelihood: Medium.
  - Impact: High — higher barriers to trade would dampen exports and investment and weaken growth; negative shock from Brexit would hit exports.
  - Policy response: Provide monetary and fiscal support, implement labor market reforms and enhance bankruptcy regime to facilitate sectoral reallocation of labor and capital.
- Significant property price decline in Sweden due structural changes.
  - Likelihood: Low.
  - Impact: Medium — investment and collateral values undermined, loan quality impacted mainly for firms serving domestic market, potential funding cost pressures if covered bond quality doubted.
  - Policy response: Monitor through better data collections and supervise banks’ commercial real estate lending closely. In the event, provide monetary stimulus and funding support to banks.

*Source: IMF staff.*

### Authorities’ Response to Past IMF Policy Recommendations (Annex IV)
- Fiscal Policy:
  - IMF recommendation: Maintain full operation of automatic fiscal stabilizers; consider temporary cut in surplus target to address higher public investment needs.
  - Authorities’ response: Sweden has fully allowed automatic stabilizers operate during the crisis. The medium-term surplus objective has been reduced, and Sweden has expanded spending to some extent.
- Structural Reforms:
  - Labor: Recommendation for further reforms of employment protection and public employment services to support low-skilled and migrant employment, aided by education and training.
    - Response: Reforms are ongoing.
  - Wage setting: Recommendation for social partners to consider updating wage formation to reflect structural changes and increase scope for wage variation across sectors.
    - Response: Limited traction.
  - Housing: Recommendations on rental market, property taxation, affordable housing, and protecting households in transition.
    - Response: Reforms have been piecemeal due to political contention and the Covid-19 crisis.
- Macro-Financial Issues:
  - Data collection: Enhance household level data collection to evaluate supervisory effectiveness; review banks’ risk management and commercial property borrowers’ financial health.
    - Response: Efforts ongoing, but many shortcomings persist.
  - AML/CFT: Need for strong frameworks and close regional cooperation.
    - Response: The Nordic-Baltic constituency has requested regional TA from the Fund.
  - e-krona: Explore regulatory options to ensure reliable and efficient private payments, standards for business continuity and fee regulation.
    - Response: The e-krona pilot is being launched for testing purposes; efforts ongoing.

*Source: IMF staff.*

### Key Policy Response Measures in 2020 (Annex V)

- Fiscal measures:
  - Additional spending in the health sector (SEK 38 bn): funding of extraordinary cost for municipalities and regions, elderly care boost, training of health and social care workers, expansion of the National Board of Health and Welfare's credit framework for purchases of personal protective equipment and intensive care equipment.
  - Additional spending and foregone revenue in areas other than health (SEK 169 bn): wage subsidies for short-term leave, sick leave, rent subsidies, more generous unemployment benefits, temporary grants to businesses based on their loss of turnover to cover fixed costs, infrastructure investment, extra support to public transport, general grants to municipalities and regions, temporary reduction in employers' social security contributions.
  - Tax deferrals (SEK 335 bn): deferral of a maximum of three-month worth of payments of companies’ social contributions, VAT and payroll taxes for a period of up to 12 months, annual VAT for 2019, and SME taxes.
  - Capital reinforcement (SEK 12 bn): capital injection to the Scandinavian carrier SAS, the state-owned airport operator Swedavia, Lernia (state-owned education and matching firm) and ALMI (the Swedish SME and Entrepreneur Agency).
  - Credit guarantees (SEK 250 bn): guarantees for Swedish airlines, expansion of the Swedish Export Credit Agency’s credit guarantee framework and the programs under the Export Credit Corporation, central government guarantees for loans to companies.
- Monetary measures:
  - Reduction of the lending rate for overnight loans by 55 basis points to 0.2 percent and subsequently to 0.1 percent (while leaving the repo rate unchanged at 0 percent).
  - Lending of up to SEK 500 billion to companies via banks (funding for lending).

*Source: IMF staff.*

### Introduction of a new lending facility whereby monetary policy counterparties can borrow

### Introduction of a new lending facility whereby monetary policy counterparties can borrow

### New lending facility and terms
- Introduction of a new lending facility whereby monetary policy counterparties can borrow unlimited amounts (given adequate collateral) with a maturity of 3 and 6 months at an interest rate corresponding to the Riksbank’s repo rate.
- All credit institutions under the supervision of the Swedish FSA can apply to become temporary monetary policy counterparties so that they can access the new funding for lending facility.

### Asset purchases and eligible securities
- Increase of purchases of securities of up to SEK 700 billion this year and next (where securities may include government and municipal bonds, covered bonds and securities issued by non-financial corporations).

### Foreign currency operations and dollar liquidity
- The establishment of a swap facility of USD 60 billion between the Riksbank and the US Federal Reserve (mutual currency arrangement).
- The possibility for banks to borrow in US dollars against collateral of up to USD 60 billion (until March 31, 2021).

### Prudential and liquidity policy measures
- Easing of countercyclical capital buffer from 2.5 to 0 percent.
- The possibility for banks to temporarily breach the liquidity coverage ratio (LCR) for individual currencies and for their total currencies.
- Banks may grant all new and existing mortgagors an exemption from the amortization requirement until 31 August 2021.
- Recommendation for banks and credit market companies to temporarily stop dividend payments.

*Sources: Ministry of Finance, Riksbank, and Finansinspektionen.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1sweea2021001.pdf_