## 1canea2023001 - 3.7 percent in May.

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### Conjuncture and Recent Developments
- Growth and output gap:
  - Growth is gradually slowing; the output gap is estimated at +0.4 percent.
- Inflation:
  - Headline inflation has come down substantially; headline inflation fell from a peak of 8.1 percent y/y in June 2022 to 3.4 percent in May.
  - Core inflation remains stickier: core inflation declined from around 6 percent y/y last year to 3.7 percent in May; BoC preferred three-month annualized core measures averaged 3.7 percent in May, up from around 3.6 percent in the first three months of the year.
- Labor market:
  - Unemployment rate remains very low at 5.4 percent in June; vacancies have dropped; wage growth has outpaced inflation.
- Housing market:
  - After a sharp correction in 2022, housing is rebounding; house prices have risen since the start of the year and rents have climbed throughout.
  - Current levels of housing prices and rents appear broadly in line with fundamentals, though affordability concerns persist.
- Financial sector:
  - Broadly resilient to domestic and global financial stress so far despite ongoing mortgage resets at higher interest rates and global banking stresses.
  - Banking system concentration: the six largest banks account for 92 percent of total assets.
  - Capitalization and liquidity: banks are well capitalized and liquid; securities unrealized losses represent about 0.3 percent of total assets.
  - Credit quality: average NPL ratios are below 0.4 percent.
  - Small and medium-sized banks (SMSBs): remain profitable and well above regulatory capital minima; only about 25 percent of their deposits are uninsured.
  - FSB narrow measure of NBFIs: represented 20.1 percent of NBFI sector assets and 12.7 percent of total financial assets at end-2021.
- Contextual risks:
  - As a highly open economy, Canada faces substantial external risks that compound domestic vulnerabilities related to inflation expectations, the housing market, and household leverage.

### Outlook and Risks
- Inflation path:
  - With continued tight policies and slowing growth, inflation is expected to approach the 2-percent target by end-2024.
  - Headline inflation should ease to around 3 percent by the end of the third quarter.
  - Core inflation may take another 6 months to reach 2 percent given elevated inflation expectations, robust wage growth, and rising shelter costs.
- Growth and labor market:
  - Real GDP growth is likely to bottom out in 2023Q3 and should moderate to around 1.7 percent on average in 2023.
  - Unemployment should gradually rise to slightly above its long-term level of 6 percent next year.
  - A negative output gap is expected to arise in the coming four quarters before closing by end-2025.
- Monetary stance and real policy rate:
  - BoC raised the key policy rate in June and again in July to 5 percent; quantitative tightening continues.
  - As inflation declines the ex post real policy rate will continue to rise, peaking at 2 percent by end-year.
- Downside and external risks:
  - Outlook is uncertain and shocks could push the economy into a mild recession.
  - Geoeconomic fragmentation may slow global growth and cross-border trade and investment, but could open opportunities for Canada as a supplier of energy and critical minerals.
  - External position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.

### Macro Policy Advice
- Monetary policy recommendations:
  - Monetary policy should remain restrictive and data dependent to bring inflation back toward target by end-2024.
  - Quantitative tightening should continue.
  - Enhance monetary policy communication: present alternative scenarios in the quarterly Monetary Policy Report (MPR); publish summaries of Governing Council deliberations; provide quarterly paths for key variables in the MPR; consider reducing the five-year lag in release of internal staff forecasts; conduct regular ex post evaluations of inflation forecast errors; contemplate publishing a policy rate path consistent with economic projections.
- Fiscal policy recommendations:
  - Fiscal policy should remain tight given the rise in debt since the pandemic and the need to cool the economy and tame inflation.
  - Fiscal consolidation is proceeding, though slower than previously envisaged, partly reflecting new spending initiatives in the 2023 budget.
  - Recommendation: adopt a quantitative fiscal framework, including a specific debt anchor and a supporting operational rule, to enhance credibility, communication, and to help assess tradeoffs between spending needs and the pace of consolidation.
- Housing policy:
  - Given the recent rebound in housing prices, measures to promote housing affordability—particularly through increased supply—remain necessary (expedite permitting; incentives to promote densification; consider a permanent federal-provincial-municipal discussion forum).

### Financial Sector Recommendations and Risks
- Strengthen resilience:
  - Expand stress testing of nonbank financial institutions (NBFIs).
  - Strengthen capital and liquidity requirements on smaller banks (small and medium-sized banks).
  - Enhance federal-provincial supervisory cooperation.
  - Address persistent data gaps and fragmentation; progress on 2019 FSAP recommendations continues but gaps remain.
- AML/CFT and transparency:
  - Canada’s AML/CFT framework is generally appropriate; focus further on cross-border money laundering risks in banking and real-estate sectors.
  - Proposed establishment of a Canada Financial Crimes Agency is welcome.
  - Steps toward establishing beneficial-ownership registries are welcome; only 10–15 percent of legal entities are federally incorporated—provincial registries or harmonization recommended.
- Sector vulnerabilities and scenarios:
  - Mortgage repricing: staff analysis suggests 40 percent of mortgages are likely to reprice by 2023, and nearly 70 percent by 2025.
  - High-LTV and high-DSR shares: only 8 percent of loans have an LTV above 80 percent; only 14 percent have a DSR above 25 percent; 77 percent of loans are uninsured.
  - Mortgage scenario outcomes (Box 2):
    - Baseline: 40 percent of loans (38 percent of loan amounts) face a payment increase by 2023; 71 percent (67 percent of loan amounts) by 2025.
    - Under the baseline, 13 percent of loans face a payment increase of more than 50 percent in 2023; this rises to 26 percent under the adverse scenario.
    - Banking impact: under the adverse scenario mortgage DSR increases from 7.6 percent in 2022 to 8.7 percent in 2024; aggregate mortgage PD increases from 0.12 in 2022 to 0.63 percent in 2024.
    - Credit losses: adverse scenario credit losses amount to less than 2 percent of CET1 Capital (drop in CET1 ratio by 25 bps); baseline credit losses amount to less than 0.25 percent of CET1 capital.
  - CRE exposures represent less than 10 percent of total loans; just ½ percent of CRE assets are currently impaired; 80 percent of CRE loans have LTVs between 40 and 80 percent.
  - Tail responses: if inflation proves stickier, additional monetary tightening would weigh on growth; an abrupt global slowdown or sustained banking turmoil could tighten credit conditions—policy responses could include an easier monetary stance, liquidity provision, targeted fiscal support, temporary increases in deposit insurance, and possible recapitalization needs among smaller banks.

### Fiscal Outlook, 2023 Budget Measures, and Recommendations
- Fiscal trajectory and 2023 budget:
  - Federal debt ratio increases in the first year before resuming its decline; ends five-year horizon 3 percent of GDP higher than envisaged in the 2022 Fall Economic Statement (40 percent of GDP versus 37 percent).
  - The spending package objectives: affordability (including GST credit), health and dental care upgrades, and boosting clean-economy investment via green fiscal incentives.
  - Provincial spending packages also introduced; general government fiscal trajectory worsened.
  - New spending measures are backloaded (only about ¼ percent of GDP in the first year); about two-thirds of the new spending was accommodated by slowing the pace of fiscal consolidation.
- Cumulative fiscal impact of 2023 Budget (FY2022/23 to FY2027/28) — key figures:
  - Spending measures: 67.3 $C billion = 2.2 percent of GDP.
    - Affordability: 5.2 $C billion = 0.2 percent of GDP (Grocery rebate 2.5 = 0.1; Indigenous housing 1.9 = 0.1; Better affordability for students and others 0.9 = 0.0).
    - Health care: 31.3 $C billion = 1.0 percent of GDP (Additional health care transfers 24.0 = 0.8; Dental care 13.3 = 0.4; less previous provisions -6.0 = -0.2).
    - Clean economy: 20.9 $C billion = 0.7 percent of GDP (Investment tax credit for clean electricity 6.3 = 0.2; for clean technology manufacturing 4.5 = 0.1; for clean hydrogen 5.6 = 0.2; Others 4.6 = 0.2).
    - Reconciliation and inclusion: 9.1 = 0.3.
    - Global leadership and defense: 0.7 = 0.0.
  - Offsetting measures: -21.5 $C billion = -0.7 percent of GDP (Effective government incl. spending cut -9.9 = -0.3; Taxation -11.6 = -0.4: Raising minimum tax on the wealthiest -3.0 = -0.1; Global minimum tax -5.1 = -0.2; Tax on share buyback and dividends to financial -6.2 = -0.2; less previous provisions 2.7 = 0.1).
  - Total net fiscal impact: 45.8 $C billion = 1.5 percent of GDP.
- Fiscal recommendations:
  - Keep fiscal policy tight to support disinflation and rebuild fiscal buffers to respond to future downturns and finance green transition.
  - Consider a quantitative fiscal framework with a debt anchor and operational rule (with escape clauses) to guide expectations and assess tradeoffs.

### Key Statistics and Projections (selected)
- Nominal GDP (2022): Can$ 2,785 billion (US$ 2,139 billion)
- Population (2022): 39.6 million
- GDP per capita (2022): US$ 54,015
- Main exports: Oil and gas, autos and auto parts, gold, lumber, copper.
- Real GDP growth (projections): 2023: 1.7; 2024: 1.4; 2025: 2.2; 2026: 1.9; 2027: 1.7; 2028: 1.7
- CPI inflation (average): 2023: 3.6; 2024: 2.5; 2025: 2.0; 2026: 1.9; 2027: 1.9; 2028: 2.0
- Unemployment rate (average): 2023: 5.5; 2024: 6.2; 2025: 6.1; 2026: 6.0; 2027: 6.0; 2028: 6.0
- Total domestic demand growth: 2023: -0.5; 2024: 1.5; 2025: 2.6
- Household Credit Growth (annual average): 2023: 5.0; 2024: 3.6; 2025: 3.5
- Current account balance (percent of GDP): 2023: -1.5; 2024: -1.5; 2025: -1.7; 2026: -1.9; 2027: -2.1; 2028: -2.4
- General government overall balance (percent of GDP): 2023: -0.7; 2024: -0.7; 2025: -0.6; 2026: -0.4; 2027: -0.2; 2028: -0.2
- Gross Debt (percent of GDP): 2023: 106.7; 2024: 105.8; 2025: 103.5; 2026: 101.0; 2027: 98.8; 2028: 96.7; 2029: 94.7
- Gross national saving (percent of GDP): 2023: 21.5; 2024: 21.4; 2025: 21.2; 2026: 21.0; 2027: 20.8; 2028: 20.5

### Structural Challenges, Climate Policy, and Industrial Opportunities
- Productivity and population:
  - Long-term priorities: boost productivity growth and strengthen the investment climate (competition, FDI barriers, governance).
  - Attract and deploy immigrants productively while ensuring housing supply keeps pace.
- Climate mitigation and green transition:
  - Canada is among the world’s top-ten emitters and committed to reducing emissions by 42.5 percent in 2030 relative to 2005.
  - Staff analysis: carbon pricing and other policies could produce a 30 percent reduction in emissions by 2030 relative to 2005; full implementation of the Emissions Reduction Plan (ERP), including a separate cap on oil and gas emissions and clean electricity regulations, could deliver the 40-45 percent commitment in the NDC.
  - IMF-ENV model finds Canada’s carbon pricing would reduce GHG emissions by around 29 percent relative to BaU; output cost of mitigation estimated between 0.2 and 1.2 percent of GDP depending on revenue recycling.
  - Policy recommendation: recycling carbon tax revenues to reduce distortionary taxes or finance productive green investment can materially lower output costs and mitigate competitiveness effects; prefer standard, time-bound incentive regimes rather than company-specific packages and ensure WTO-consistency.
- Industrial opportunities:
  - Canada is rich in “transition minerals” and energy, including LNG, and can gain market share amid geoeconomic fragmentation; green industrial policies can help but design poses risks—eschew trade-distorting approaches.

### Sovereign Risk, Debt Sustainability, and External Sector (Annex summaries)
- Sovereign risk and debt sustainability (Annex I):
  - Staff assess overall risk of sovereign stress to be low; medium-term assessment indicates moderate debt stress and liquidity risk.
  - Government financial assets: about 92¾ percent of GDP at end-2022; general government consolidated gross debt: 106¾ percent of GDP at end-2022 (about 16½ percentage points above pre-pandemic level).
  - Excluding accounts payable gross debt: about 89¼ percent of GDP in 2022.
  - Net debt-to-GDP ratio: fell to 14 percent in 2022 from a peak of 15¾ percent in 2020.
  - Gross financing needs: nearly 19 percent of GDP in 2022; projected to remain in the 19–22 percent range through projection horizon.
  - Selected baseline public debt series (percent of GDP): 2022 = 106.7; 2023 = 105.8; 2024 = 103.5; 2025 = 101.0; 2026 = 98.8; 2027 = 96.7; 2028 = 94.7.
  - Effective interest rate (percent) memo: 2022 = 2.6; 2023 = 3.2; 2024 = 3.4; 2025 = 3.4; 2026 = 3.4; 2027 = 3.4; 2028 = 3.4.
  - Final medium-term assessment: low overall risk of sovereign stress despite mechanical moderate signals, mitigated by large financial asset holdings and low foreign-currency debt share.
- External Sector Assessment (Annex II):
  - Overall assessment: external position in 2022 was moderately weaker than implied by medium-term fundamentals and desirable policies.
  - Current account: CA remained marginally in deficit in 2022; estimated CA balance -0.3 percent of GDP in 2022; staff gap assessed between -2.3 and -1.3 percent of GDP with midpoint -1.8 percent of GDP.
  - NIIP and external stocks (2022 % GDP): NIIP: 30.2; Gross Assets: 265.1; Debt Assets: 87.3; Gross Liab.: 234.9; Debt Liab.: 128.5.
  - Real exchange rate: staff assess the REER to be overvalued by between 5.1 and 8.5 percent, midpoint 6.8 percent; semi-elasticity of CA with respect to REER set to 0.27.
  - Policy responses to external imbalances: improve labor productivity; remove nontariff barriers; invest in R&D and physical capital; invest in green transformation; promote FDI; medium-term fiscal consolidation plan to stabilize debt and support external rebalancing.

### Risk Assessment Matrix (selected items)
- Selected global and domestic risks:
  - Intensification of regional conflict(s): Likelihood: High; Expected Impact: Medium.
  - Deepening geo-economic fragmentation and geopolitical tensions: Likelihood: High; Expected Impact: Medium.
  - Abrupt global slowdown or recession: Likelihood: Medium; Expected Impact: High.
  - Systemic financial instability: Likelihood: Medium; Expected Impact: Medium.
  - Commodity price volatility: Likelihood: Medium; Expected Impact: Medium.
  - Cyberthreats: Likelihood: Medium; Expected Impact: High.
  - Entrenched inflation expectations: Likelihood: Medium; Expected Impact: High — policy response: central bank should continue communicating strong commitment to the inflation target and willingness to increase the policy rate if needed.

*Source: IMF staff report for the 2023 Article IV consultation on Canada (data and text as of July 13, 2023).*

### 3.7 percent in May.

### 1canea2023001 - 3.7 percent in May.

### Conjuncture and Recent Developments
- Growth is gradually slowing; the output gap is estimated at +0.4 percent.
- Headline inflation has come down substantially, but core inflation remains stickier due to a still-tight labor market and elevated near-term expectations.
- Labor market: unemployment rate remains very low at 5.4 percent in June; vacancies have dropped; wage growth has outpaced inflation.
- Housing market: after a sharp correction in 2022, the housing market is rebounding; house prices have risen again since the start of the year and rents have climbed throughout. Current levels of housing prices and rents appear broadly in line with fundamentals, though affordability concerns persist.
- Financial sector: broadly resilient to domestic and global financial stress so far, despite ongoing mortgage resets at higher interest rates and global banking stresses.
- Contextual risks: Canada, as a highly open economy, faces substantial external risks that compound domestic vulnerabilities related to inflation expectations, the housing market, and household leverage.

### Outlook and Risks
- Inflation path: With continued tight policies and slowing growth, inflation is expected to approach the 2-percent target by end-2024.
- Downside risk: The outlook is uncertain and shocks could push the economy into a mild recession.
- External position: The external position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Geoeconomic dynamics: Geoeconomic fragmentation may slow global growth and cross-border trade and investment, but could open opportunities for Canada as a supplier of energy and critical minerals.

### Macro Policy Advice
- Monetary policy:
  - Should remain restrictive and data dependent to bring inflation back toward target by end-2024.
  - Quantitative tightening should continue.
  - Some further enhancements to monetary policy communication could be pursued.
- Fiscal policy:
  - Should remain tight given the rise in debt since the pandemic and the need to cool the economy and tame inflation.
  - Fiscal consolidation is proceeding, though slower than previously envisaged, partly reflecting new spending initiatives in the 2023 budget.
  - Recommendation: adopt a quantitative fiscal framework, including a specific debt anchor and a supporting operational rule, to enhance credibility, communication, and to help assess tradeoffs between spending needs and the pace of consolidation.
- Housing policy:
  - Given the recent rebound in housing prices, measures to promote housing affordability—particularly through increased supply—remain necessary.

### Financial Sector Recommendations
- Strengthen resilience by:
  - Expanding stress testing of nonbank financial institutions (NBFIs).
  - Strengthening capital and liquidity requirements on smaller banks (small and medium-sized banks).
  - Enhancing federal-provincial supervisory cooperation.
  - Addressing persistent data gaps and fragmentation (progress on 2019 FSAP recommendations continues, but gaps remain).
- AML/CFT:
  - Canada’s AML/CFT framework is generally appropriate.
  - Further focus recommended on assessment and mitigation of cross-border money laundering risks, particularly in the banking and real-estate sectors.
  - The proposed establishment of a Canada Financial Crimes Agency is welcome.
  - Steps toward establishing beneficial-ownership registries are welcome.

### Structural Challenges and Climate Policy
- Long-term priorities:
  - Boost productivity growth and strengthen the investment climate (including in competition, FDI barriers, and governance).
  - Attract and deploy immigrants productively while ensuring housing supply keeps pace.
- Climate and green investment:
  - Canada is among the world’s top-ten emitters of greenhouse gases and has committed to reducing emissions by 42.5 percent in 2030 relative to 2005.
  - The pricing-centered mitigation strategy should largely deliver on Nationally Determined Contributions (NDCs).
  - Exchange rate flexibility and well-designed recycling of carbon tax revenues can mitigate adverse competitiveness implications.
  - International cooperation—e.g., to avoid a race to the bottom on green subsidies and to agree on a carbon price floor—would be important to preserve competitiveness and avoid harmful policy spillovers.
  - Green industrial policies can aid transition but their design poses risks; Canada should eschew trade-distorting approaches.

### Key Statistics and Projections (selected)
- Nominal GDP (2022): Can$ 2,785 billion (US$ 2,139 billion)
- Population (2022): 39.6 million
- GDP per capita (2022): US$ 54,015
- Main exports: Oil and gas, autos and auto parts, gold, lumber, copper.
- Real GDP growth (projections): 2023: 1.7; 2024: 1.4; 2025: 2.2; 2026: 1.9; 2027: 1.7; 2028: 1.7
- CPI inflation (average): 2023: 3.6; 2024: 2.5; 2025: 2.0; 2026: 1.9; 2027: 1.9; 2028: 2.0
- Unemployment rate (average): 2023: 5.5; 2024: 6.2; 2025: 6.1; 2026: 6.0; 2027: 6.0; 2028: 6.0
- Total domestic demand growth: 2023: -0.5; 2024: 1.5; 2025: 2.6
- Household Credit Growth (annual average): 2023: 5.0; 2024: 3.6; 2025: 3.5
- Current account balance (percent of GDP): 2023: -1.5; 2024: -1.5; 2025: -1.7; 2026: -1.9; 2027: -2.1; 2028: -2.4
- General government overall balance (percent of GDP): 2023: -0.7; 2024: -0.7; 2025: -0.6; 2026: -0.4; 2027: -0.2; 2028: -0.2
- Gross Debt (percent of GDP): 2023: 106.7; 2024: 105.8; 2025: 103.5; 2026: 101.0; 2027: 98.8; 2028: 96.7; 2029: 94.7
- Gross national saving (percent of GDP): 2023: 21.5; 2024: 21.4; 2025: 21.2; 2026: 21.0; 2027: 20.8; 2028: 20.5

*Source: IMF staff report for the 2023 Article IV consultation on Canada (data and text as of July 13, 2023).*

### 9.      Headline inflation has declined sharply from its mid-2022 peak, but core has been

### 9.      Headline inflation has declined sharply from its mid-2022 peak, but core has been stickier.

### Inflation dynamics
- Headline inflation fell from a peak of 8.1 percent y/y in June 2022 to 3.4 percent in May, aided by substantial base effects related to energy prices.
- Core inflation declined more moderately—from a peak of around 6 percent y/y last year to 3.7 percent in May—reflecting high services inflation, robust wage growth, and stubbornly high near-term inflation expectations.
- On a three-month annualized basis, the Bank of Canada’s (BoC’s) preferred measures of core inflation rose to 3.7 percent on average in May, up from around 3.6 percent in the first three months of the year.

### Financial sector resilience and vulnerabilities
- Banking system concentration: the six largest banks account for 92 percent of total assets, implying most of the system is subject to the most stringent regulation and supervision.
- Capitalization and liquidity: banks are well capitalized and liquid and have stayed profitable, supported by increases in net interest income during the tightening cycle.
- Securities unrealized losses represent about 0.3 percent of total assets and have been partially mitigated by proactive hedging.
- Funding and deposits: funding sources are well diversified, and deposit growth has stayed robust (in contrast to outflows observed at U.S. banks).
- Credit quality: average NPL ratios are below 0.4 percent, despite some minor deterioration.
- Small and medium-sized banks (SMSBs):
  - Less diversified balance sheets with heavier exposures to residential mortgages and commercial real estate and a high share of broker-sourced deposits.
  - Remained profitable and well above regulatory capital minima.
  - Only about 25 percent of their deposits are uninsured.
- Nonbanks (NBFIs and pension funds): appear healthy though data gaps limit full analysis; pension funds and institutional investors use sophisticated strategies that likely involve increased leverage and liquidity risk but generally have ample liquidity and access to a Bank of Canada backstop.
- FSB narrow measure of NBFIs: represented 20.1 percent of NBFI sector assets and 12.7 percent of total financial assets at end-2021.

### Monetary and fiscal policy stance
- Monetary policy:
  - After a “conditional pause,” the BoC raised the key policy rate in June and again in July, taking it to 5 percent.
  - Quantitative tightening continues with the BoC allowing securities to roll off its balance sheet as they mature.
- Fiscal stance:
  - The general government’s cyclically adjusted primary deficit narrowed by 4½ percent of GDP in 2021 and a further 2¾ percent of GDP in 2022.
  - During 2023, fiscal policy is expected to remain slightly contractionary, though less so than in previous years and less than previously envisaged, reflecting new spending measures in the 2023 federal and provincial budgets.
  - Canada has some fiscal space due to a low overall risk of sovereign stress and a relatively moderate level of gross debt compared to other G7 economies.

### Outlook and key projections
- Growth and labor market:
  - Real GDP growth is likely to bottom out in 2023Q3.
  - Growth should moderate to around 1.7 percent on average in 2023.
  - Unemployment should gradually rise to slightly above its long-term level of 6 percent next year.
  - Quarterly growth is expected to bottom out by Q3:2023, with housing construction and sales activity reaching a trough then.
  - A negative output gap is expected to arise in the coming four quarters before closing by end-2025.
- Policy rates and real policy rate:
  - As inflation declines the ex post real policy rate will continue to rise, peaking at 2 percent by end-year.
- Inflation path:
  - Headline inflation should ease to around 3 percent by the end of the third quarter.
  - Inflation is expected to approach the 2 percent target by end-2024.
  - Core inflation may take another 6 months to reach 2 percent given elevated inflation expectations, robust wage growth, and rising shelter costs.
- Residential mortgage repricing and risks:
  - Staff analysis suggests 40 percent of mortgages are likely to reprice by 2023, and nearly 70 percent by 2025.
  - Only 8 percent of loans have an LTV above 80 percent.
  - Only 14 percent have a DSR above 25 percent.
  - Households have large cumulative savings much higher than pre-pandemic (data on joint distribution of savings and mortgages unavailable).
  - Mortgage loans remain full-recourse in most provinces.
- Commercial real estate (CRE):
  - CRE exposures represent less than 10 percent of total loans.
  - Just ½ percent of CRE assets are currently impaired.
  - Eighty percent of CRE loans have LTVs between 40 and 80 percent.

### Financial sector scenarios and risks
- Overall resilience: Canadian banks projected to remain well capitalized and able to continue providing credit, though credit growth will slow as monetary transmission works through.
- Bank margins and funding:
  - Net interest margins should continue to benefit from higher interest rates if banks can reprice loans faster than deposits.
  - Funding costs may come under pressure, though deposit outflows have not materialized to date.
- Vulnerabilities:
  - Medium-sized banks (less than 7 percent of banking-system assets) are more vulnerable due to less diversified balance sheets; problems in one or a few could undermine stability via interconnections or loss of confidence.
  - Mortgage repricing and high interest rates could weigh on households’ debt-servicing capacity.
  - CRE pressures could mount given high interest rates and slowing activity; medium-sized banks and credit unions are more susceptible to CRE-related risk.
  - NBFI sector vulnerabilities (leverage, liquidity, interconnectedness) could amplify distress and highlight the need to close data gaps and strengthen monitoring.
- Tail scenarios and policy responses:
  - If inflation proves stickier, additional monetary tightening would further weigh on growth.
  - A more abrupt slowdown in the U.S. or global economy or sustained banking turmoil abroad could tighten credit conditions, weaken confidence, and interact with high household debt to dampen growth and inflation; appropriate responses would include an easier monetary stance, provision of liquidity, and targeted fiscal support to the vulnerable.
  - Heightened financial stress could justify temporary increases in deposit insurance coverage and possible recapitalization needs among smaller banks.

### Policy discussions and recommendations
- Monetary and fiscal policy cooperation:
  - Monetary and fiscal policy must continue working together to bring inflation down to target.
  - Tight policies are necessary to slow demand, bring down core inflation, and contain wages growing much faster than productivity.
  - The BoC should take the lead in achieving price stability, supported by a tight fiscal stance to reduce public debt and rebuild buffers.
- Bank of Canada guidance:
  - The BoC should maintain its restrictive monetary stance but remain data dependent.
  - The real policy rate has not been positive for long; the economy needs more time under a restrictive stance to burn off excess demand and cool the labor market.
  - Further rate hikes by the Fed could justify a BoC response to avoid exchange-rate driven inflationary pressures.
  - The BoC should continue to allow its balance sheet to shrink as government bonds mature.
  - Existing lender-of-last-resort tools (standing liquidity facility and overnight standing repo facility) are available; substantial tightening of financial conditions would need to be factored into the monetary stance.
- Communication and transparency enhancements for the BoC:
  - Continue and expand strong monetary policy communication, including:
    - Presenting alternative scenarios in the quarterly Monetary Policy Report (MPR).
    - Publishing summaries of Governing Council deliberations (already underway).
    - Providing quarterly, not just annual, paths for key variables in the MPR and including downloadable data appendices.
    - Considering reducing the five-year lag in public release of internal staff forecasts.
    - Conducting regular ex post evaluations of inflation forecast errors.
    - Contemplating publication of a policy rate path consistent with the BoC’s economic projections, to be revised regularly as data arrive.

*Source: IMF staff analysis in the Canada country report (excerpt provided).*

### 24.      While the overall fiscal stance remains contractionary, the recently introduced 2023

### 1canea2023001 - 24.      While the overall fiscal stance remains contractionary, the recently introduced 2023

### Fiscal outlook and 2023 federal budget measures
- The federal debt ratio now increases in the first year before resuming its decline, and it ends the five-year horizon 3 percent of GDP higher than envisaged in the 2022 Fall Economic Statement (40 percent of GDP versus 37 percent).
- The spending package aims to: (i) help citizens better afford the cost of living (including through a GST credit); (ii) upgrade health and dental care; and (iii) boost investment for a clean economy, via a sizable ramp-up in green fiscal incentives introduced partly in response to the far-reaching subsidies in the U.S. Inflation Reduction Act.
- Provincial governments also have introduced spending packages to improve affordability and support the green transition, and the general government fiscal trajectory has also worsened.
- The new spending measures are backloaded (with only about ¼ percent of GDP to be spent in the first year) and thus unlikely to substantially worsen inflationary pressures.
- About two-thirds of the new spending was accommodated by slowing the pace of fiscal consolidation.
- Canada still has some fiscal space, and debt is moderate in international comparison, but it spiked after the pandemic.

### Cumulative fiscal impact of new measures in 2023 Budget (FY2022/23 to FY2027/28)
- $C billion% GDP
- Spending measures67.32.2
  - 1. Affordability
    - 5.20.2
    - Grocery rebate2.50.1
    - Indigenous housing1.90.1
    - Better affordability for students and others0.90.0
  - 2. Health care
    - 31.31.0
    - Additional health care transfers24.00.8
    - Dental care13.30.4
    - less previous provisions-6.0-0.2
  - 3. Clean economy
    - 20.90.7
    - Investment tax credit for clean electricity6.30.2
    - Investment tax credit for clean technology manufacturing4.50.1
    - Investment tax credit for clean hydrogen5.60.2
    - Others4.60.2
  - 4. Reconciliation and inclusion9.10.3
  - 5. Global leadership and defense policy update0.70.0
- Offsetting measures
  - -21.5-0.7
  - 1. Effective government incl. spending cut
    - -9.9-0.3
  - 2. Taxation
    - -11.6-0.4
    - Raising minimum tax on the wealthiest
      - -3.0-0.1
    - Global minimum tax
      - -5.1-0.2
    - Tax on share buyback and dividends to financial
      - -6.2-0.2
  - less previous provisions2.70.1
- Total net fiscal impact45.81.5
- Source: 2023 Federal Budget and IMF staff calculations.

### Fiscal policy recommendations and framework
- Fiscal policy should be kept tight, including to support disinflation goals.
- Rebuilding fiscal buffers is recommended to provide space to respond to future downturns and to finance the fiscal costs of the green transition and other longer-term challenges.
- Consideration of a quantitative fiscal framework is advised to guide market expectations, enhance credibility and accountability, and allow assessment of tradeoffs between spending initiatives and the speed of consolidation.
  - Such a framework could include a debt anchor, supported by escape clauses for large shocks, and an operational rule to determine how to return to the anchor following shocks.
  - A quantitative framework would impose tighter constraints on fiscal choices while providing policymakers latitude to make choices within those constraints.
- More credible communication about fiscal plans through the introduction of a specific debt anchor would reduce the output costs of consolidation.

### Housing affordability and supply-side measures
- Rising interest rates have aggravated short-term affordability concerns, and the increase in immigration may further bolster house prices.
- Despite a recent rebound, Canadian house prices and rents appear to be in line with fundamentals, including because of strong post-pandemic immigrant inflows.
- The 2023 budget introduced a tax-advantaged vehicle to help first-time homebuyers save up for their down-payments.
- The 2022 budget introduced a Housing Accelerator Fund to provide incentives for municipalities to expand housing supply (see Annex IV).
- Further action is needed, especially on the supply side, including:
  - Expediting permitting.
  - Incentives to promote densification.
- Consider creating a permanent discussion forum for relevant stakeholders: federal, provincial, and municipal officials responsible for housing and immigration, construction industry representatives, and advocacy groups.

### Authorities’ views (fiscal and monetary)
- Authorities agreed on the need for tight macro policies to bring inflation back to target and on the need for the BoC to remain data dependent.
- The planned introduction of a “Digital Monetary Policy Report” would facilitate communication enhancements, such as interactive data charts and tables.
- Both IMF and BoC agree on the importance of explaining the BoC’s reaction function; the BoC has begun publishing a Summary of Deliberations of its Governing Council and provides alternative scenarios in its Monetary Policy Report when appropriate.
- On fiscal policy, authorities emphasized strong consolidation since the pandemic, firm commitment to debt reduction over the medium term, and strong fiscal track record compared to peer countries.
- Authorities were doubtful that a more specific fiscal rule would improve fiscal performance while still allowing adequate flexibility to respond to shocks and substantial investment needs, including for the green transition.
- Authorities agreed that increasing supply should be the focus of housing policy and noted the idea of a discussion forum oriented toward practical, actionable solutions.

### Safeguarding financial stability
- Areas to strengthen:
  - Banks: deposit insurance appears adequate, with more than 90 percent of depositors covered, but there may be scope to further protect depositors at small banks.
  - Consider extending the Domestic Stability Buffer, recently increased for larger banks, to SMSBs given unsettled times in the global banking sector.
  - NBFIs: introduce more routine and compulsory top-down stress tests by federal and provincial regulators to complement institution-run exercises.
  - Supervisors may need additional powers to compel information from pension funds and asset managers; voluntary approaches to assessing market liquidity risks may have limits.
  - Improve coordination between federal and provincial supervisors and address data privacy legal provisions that constrain sharing of supervisory information.
- OSFI is reviewing Guideline B-20 on residential mortgage underwriting and is considering tools to mitigate household indebtedness risk, including LTI and DTI restrictions.
- Persistent data gaps constrain identification and estimation of vulnerabilities, particularly for some NBFIs and SMEs; resolving data gaps and fragmentation remains important.
- Priority: strengthen oversight of large public pension funds and increase transparency of their financial disclosures.

### AML/CFT, beneficial ownership, and transparency
- AML/CFT frameworks should keep pace with evolving risks, including inflows of foreign proceeds of corruption and other financial crimes.
- Canada was assessed as substantially effective in risk-based supervision of intermediaries in its 2016 FATF assessment.
- The Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada 2023 identifies high inherent money-laundering vulnerabilities in sectors including banking, legal, and real estate.
- Key shortcoming: lack of coverage of legal professionals in the AML/CFT preventive framework; remedying this is recommended.
- Need to deepen understanding of cross-border money-laundering risks and tailor supervisory tools accordingly.
- Ongoing amendments to the Canada Business Corporations Act include provisions for a publicly accessible federal beneficial ownership registry.
  - Only 10–15 percent of Canadian legal entities are incorporated federally; provinces should set up their own registries or harmonize approaches to ensure a pan-Canadian approach.
  - British Columbia’s real property beneficial ownership registry is a welcome development; the federal government should incentivize similar registries elsewhere, focusing on regions with high-risk markets.

### Structural challenges and climate transition
- Boosting productivity growth is critical for long-run prospects; Canada has relied on factor accumulation (notably skills-based immigration) which does not suffice for per capita income growth.
- Policies that raise female labor force participation (e.g., subsidized childcare) are important and may already be bearing fruit.
- Lagging productivity stems from barriers to domestic trade, suboptimal infrastructure investment, regulatory burdens, tax inefficiencies, product market distortions, and pandemic-related learning and productivity losses.
- Addressing housing supply constraints can improve affordability and boost productivity and potential growth.
- Priority should be given to harnessing new industrial opportunities: Canada is rich in “transition minerals” and energy, including LNG, and can gain market share as a reliable global supplier amid possible geoeconomic fragmentation.
- Opportunities exist to integrate into green-sector supply chains (e.g., electric-vehicle production), but much more investment and improvements in the investment climate (competition policy, FDI barriers, governance) are required.
- The government’s green subsidies are welcome, though design could be strengthened to avoid a “race to the bottom,” distortions, and global fragmentation; prefer standard, time-bound incentive regimes rather than company-specific packages and ensure WTO-consistency.
- Canada’s multipronged climate mitigation strategy centered around carbon pricing is credited; maintaining domestic consensus and policy certainty is key to promote investment.
- Staff analysis suggests carbon pricing and other policies could produce a 30 percent reduction in emissions by 2030 relative to 2005; full implementation of the Emissions Reduction Plan (ERP), including a separate cap on emissions in the oil and gas industry and clean electricity regulations, could deliver the 40-45 percent commitment in the NDC.
- Consideration should be given to a differentiated international carbon price floor, an effort Canada could help lead.
- Authorities reiterated commitment to carbon pricing and agreed that full implementation of the ERP would put the NDCs within reach; they noted the U.S. Inflation Reduction Act raises competitiveness issues and that fiscal considerations informed the response of focused but broadly accessible investment tax credits and production subsidies.

### Staff appraisal and near-term outlook
- The economy is slowing, but disinflation still has a way to go.
- Policy tightening is feeding through to the economy; growth is gradually slowing, although the housing market is rebounding again.
- The financial sector has so far been largely resilient to the domestic cycle as well as to global financial stress.
- Headline inflation has come down substantially, but core inflation has been slower to move, as the labor market is still tight and near-term expectations remain elevated.
- The external position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- The outlook is subject to important downside risks, and shocks could tip the economy into a mild recession.

*Source: IMF staff summary of the 2023 federal budget and related assessment as presented in the provided content unit.*

### 41.      Tight macro policies thus remain necessary. Assuming the economy evolves in line with

### Tight macro policies thus remain necessary. Assuming the economy evolves in line with baseline projections

### Monetary and fiscal policy
- Monetary policy: "monetary policy should remain restrictive, but it will be important for decisions to remain data dependent."
- Quantitative tightening: "Quantitative tightening should continue."
- Communication: "some further enhancements to monetary policy communication could be pursued."
- Fiscal policy: "Fiscal consolidation is proceeding, although at a slower pace than previously envisaged, partly reflecting welcome new spending initiatives introduced in the 2023 budget."
- Fiscal space and caution: "While Canada has fiscal space to accommodate these initiatives, care will need to be taken that fiscal policy supports inflation reduction goals."
- Recommendation: "A quantitative fiscal framework, including a specific debt anchor and a supporting operational rule, would enhance policy credibility and communication, while helping to assess the tradeoffs between spending needs and the pace of consolidation."
- Housing policy: "Given the recent rebound in housing prices, measures to promote housing affordability, particularly through increased supply, remain necessary."

### Financial sector risks and policy priorities
- Risks identified: "high household leverage and housing-market developments, from rising interest rates, and from global banking stresses."
- Resilience and gaps: "While the sector has remained resilient to date, there is scope to strengthen capital and liquidity requirements on smaller banks and to expand the stress testing of NBFIs."
- Data and fragmentation: "recent global market volatility has underscored the importance of addressing persistent issues of data gaps and fragmentation."
- AML/CFT: "Canada’s AML/CFT framework is generally appropriate but further focus could be placed on the assessment and mitigation of cross-border money laundering risks, particularly in the banking and real-estate sectors."
- Institutional steps: "The proposed establishment of a Canada Financial Crimes Agency is welcome, as are steps to move toward establishing beneficial-ownership registries."
- Progress: "Progress continues to be made on the 2019 FSAP recommendations."

### Structural challenges and climate policy
- Productivity and investment: "Productivity growth must be enhanced and the investment climate made more attractive."
- Emissions and mitigation: "Canada is currently among the world’s top-ten emitters of greenhouse gases, but announced climate mitigation policies should go a long way toward delivering its NDCs."
- Competitiveness: "Adverse competitiveness implications of these policies may be significantly mitigated by exchange rate flexibility and by well-designed recycling of carbon tax revenues, and any remaining effects could be addressed through international cooperation, such as on a carbon price floor."
- Industrial policy: "Green industrial policies can help the economy to transition and may be a needed response to policies of major trading partners, but their design poses some risks."
- Trade stance: "Canada should continue to eschew approaches that distort trade."

### Consultation timing
- Recommendation: "Staff recommend that the next Article IV consultation be held on the standard 12-month cycle."

### Box 1 — Immigration as a Source of Labor Supply in Canada (key findings)
- Share of population: "As of 2021, non-native-born Canadian residents accounted for close to one-quarter of the population, the highest rate in the G7."
- Skill composition: "the shares of high-skilled and highly educated immigrants are both above the G7 average."
- Matching: "matching is particularly weak in health, manufacturing, and sciences-related occupations, with healthcare facing consistent demand/supply imbalances in all provinces."
- Pandemic impact: "monthly immigrant arrivals during 2020–21 averaged about 15,000 lower than before the pandemic, resulting in a cumulative shortfall of nearly half a million immigrants to Canada."
- Rebound: "Since early 2022, migrant inflows have rebounded sharply, recouping most of the cumulative losses during the pandemic."
- Labor market tightness: "migrant shortfalls in 2020 raised the V/U ratio by about ¼ percentage points in the following year."
- Effect of rebound: "the recent immigration rebound has likely played a role in reducing vacancies and increasing employment."
- Table 1 model statistics: "Number of Observations 587", "Adj. R-squared 0.845 0.853 0.860", significance: "*** p<0.01, ** p<0.05, * p<0.1"

### Box 2 — Mortgage Analysis (key findings and scenarios)
- Context: "The rise in interest rates combined with the higher cost of living has made borrowers more vulnerable to financial distress."
- Scenarios: "The scenarios have a 3-year horizon and comprise: a baseline scenario following April WEO projections, and an adverse scenario simulated using the Global Macro Financial Model (GFM) (Vitek, 2018)."
- Baseline loan payment increases:
  - "Under the baseline, 40 percent of loans (i.e., 38 percent of loan amounts) would, by 2023, face a payment increase relative to February 2022."
  - "This share would increase to 71 percent (67 percent of loan amounts) by 2025."
- Adverse scenario: "Under the adverse scenario, these shares are only marginally higher, but ... the size of the monthly payment increase" is substantially larger.
  - "Under the baseline, 13 percent of loans face a payment increase of more than 50 percent in 2023. This rises to 26 percent under the adverse scenario."
- Mitigants to defaults:
  - "low share of high-LTV and high-DSR loans"
  - "loans that reprice are not concentrated in those more vulnerable segments"
  - "presence of mandatory insurance for loans with LTV above 80 percent"
  - "more than 50 percent of loans are concentrated in borrowers in the top two income quintiles"
  - "86 percent correspond to owner-occupied real estate"
- Vulnerabilities noted:
  - "77 percent of loans are uninsured"
  - "48.5 percent of loans that repriced in 2022, the new interest rate is higher than the qualifying rate used as part of the stress test, and this share is expected to increase in the coming years."
- Lending rates regressions: Observations "39", R-squared values: "0.886 0.782 0.895 0.898 0.879"; coefficients and significance preserved in models table.
- Banking system impact:
  - Mortgage DSR path: "The mortgage DSR increases from 7.6 percent in 2022 to 8.7 percent in 2024 under the adverse scenario."
  - PDs: "Under the adverse scenario the aggregate mortgage PD increase from 0.12 in 2022 to 0.63 percent in 2024."
  - Credit losses: "estimated mortgage credit losses over the scenario horizon amount to less than 2 percent of CET1 Capital under the adverse scenario, which results in a drop on CET1 ratio by 25 bps."
  - Baseline credit losses: "Under the baseline scenario credit losses amount to less than 0.25 percent of CET1 capital."
- PD model statistics: "Observations 552 552", "R-squared 0.896 0.896", coefficients and significance preserved ("Mortgage DSR 0.0698*** 0.0699***", "Unemployment 0.0846*** 0.0847***", "Inflation 0.0427*** 0.0427***", "Constant -1.989*** -1.995***").

### Box 3 — Monetary Policy Transmission in Canada (key points)
- Nature of tightening: "Canada’s monetary policy response to post-pandemic inflation has been resolute and forceful, but the nature, speed, and scale of this tightening cycle are unprecedented, prompting large uncertainties around monetary policy transmission."
- Factors weakening transmission:
  - "(i) the government’s extraordinary COVID-19 support could have strengthened household balance sheets and eased liquidity constraints, dampening transmission through the credit channel;"
  - "(ii) wealth gains from surging house prices (which are not expected to be fully reversed) may have weakened the functioning of the asset price channel;"
  - "(iii) synchronous monetary tightening across advanced economies may have, ceteris paribus, limited appreciation of the Canadian dollar, undermining the exchange rate channel."
- Factors strengthening transmission:
  - "rising household leverage and the shift toward variable-rate and shorter-tenor fixed-rate mortgages ... could have made consumption and investment more responsive to monetary policy shocks."
  - "prevalence of short to medium tenor fixed-rate mortgages (one to five years) in Canada also makes the mortgage channel more effective than in the United States."
- Empirical evidence: "Impulse responses from a simple interacted VAR model ... 1990–2022 confirm that consumption, investment, and real house prices are more responsive to monetary policy shocks when household debt is higher."

### Box 4 — Housing Booms and Productivity Growth (key findings)
- Longstanding patterns: "Canada has had a longstanding housing boom, the recent correction notwithstanding. And it has also had a longstanding problem with productivity growth."
- Correlation: "A negative correlation between house-price and productivity growth is evident in many advanced economies, and the relationship seems to be particularly strong in Canada, at both aggregate and provincial levels."
- Channels identified:
  - Collateral channel: "increase in real-estate values disproportionately benefits firms holding such assets and leads to an inefficient reallocation of resources."
  - Bank-lending channel: "increase in mortgage demand during a housing boom crowds out commercial lending and leads to lower investment and productivity growth."
  - Home-ownership channel: "restricts labor mobility during housing boom-bust cycles and in turn impacts productivity growth."
- Empirical steps and findings:
  - Step 1: "firms holding larger tangible assets on a net basis ... tend to be less productive."
  - Step 2: "increases in real house prices lead to lower investment for firms holding a smaller share of tangible assets, but increase investment for those with larger tangible assets."
  - Step 3: "changes in house prices are in general positively correlated with average industry productivity, but the relationship turns negative for industries with larger average holdings of tangible assets, thereby confirming resource misallocation associated with the collateral channel at least in some Canadian industries."
- References to robustness: "Results are robust to alternative firm-level productivity measures."

### Box 5 — Canada’s Investment Climate (key findings)
- Labor productivity growth: "During 2012–21, labor productivity growth registered 0.54 percent, slightly above the G7 average of 0.45 percent, but still notably below the growth rates observed in leading economies including the U.S. and Australia."
- Multifactor productivity: "multifactor productivity (MFP) growth lagged, particularly during the early 2000s, but has done better more recently."
- Investment performance: "Gross fixed capital formation is now in the lowest quartile of OECD countries and far below the level in the U.S."
- Comparative charts: period averages presented for labor productivity and multifactor productivity across comparator countries and periods (1982-1991, 1992-2001, 2002-2011, 2012-2021).

*Source: Excerpt from IMF staff report on Canada (content unit: 1canea2023001).*

### Box 5. Canada’s Investment Climate

### Box 5. Canada’s Investment Climate

### Competition and product-market barriers
- Regulatory barriers appear to be above the OECD average, with weaknesses related to public procurement and SOE governance, as well as the licensing of new entrant businesses.
- Staff’s sentiment analysis based on the application of natural-language processing techniques to Twitter data confirms that competition may be an issue.
- There has been a growing focus on competition over the years, and the ratio of negative comments has been on the rise, with the exception of the pandemic year 2021.
- The authorities have taken recent steps including:
  - strengthening the powers of the competition bureau;
  - increasing its budget; and
  - launching a review of its governing legislation.

### Barriers to foreign direct investment
- Barriers to FDI continue to be high relative to comparator countries.
- Restrictions are highest in the sectors media, communications, and fisheries but are above the G7 average in most sectors.
- The OECD 2023 economic survey for Canada highlights foreign-ownership limits in network sectors like telecommunications, airlines, and banking as a major challenge.

### Governance indicators and public sentiment
- Governance indicators are strong, but there are signs of slippage in recent years.
- Scores on the Worldwide Governance Indicators compiled by the World Bank have declined in all but one category (especially “government stability and corruption”) during the last five years.
- Similar trends are reported by the Corruption Perception Index and the political risk rating of the International Country Risk Guide.
- Twitter content analysis suggests that prior to the pandemic, there was an upward trend in negative perceptions of governance, which subsequently declined following the pandemic.
- Overall, the negativity ratio, defined as the ratio of negative comments over the total number of comments, was not increasing.

### Mining sector: attractiveness and policy uncertainty
- Canada’s mining sector continues to be an attractive investment destination, but policy uncertainty is an issue.
- The Fraser annual survey of mining companies assesses attractiveness based on government policies, geologic mineral potential, and overall attractiveness.
- Some provinces (e.g., Newfoundland and Labrador, Alberta, and New Brunswick) performed strongly according to the PPI.
- Respondents continue to cite policy uncertainty—particularly around disputed land claims, protected areas, and environmental regulations—as a major deterrent to mining investment in Canada.
- Compared to 2021, respondents were less concerned about potential labor shortages, and government stability.
- On indigenous policies, there has been no significant change in negative sentiment, based on results from Twitter analysis.

*Box 5. Canada’s Investment Climate*

### Box 7. Domestic and Cross-Border Effects of Climate Policies in North America

### Box 7. Domestic and Cross-Border Effects of Climate Policies in North America

### Mechanisms and analytical insights
- Production subsidies for the green sector in the foreign economy could be equivalent to “beggar-thyself” and “beggar-thy-neighbor” policies, respectively.
- Competitive disadvantage from divergent climate policies is manifested through weaker terms of trade.
- Under flexible exchange regimes, the nominal exchange rate is expected to work as a buffer, partially reversing aggregate competitiveness effects induced by climate policies.
- Budget-balancing assumptions materially affect competitiveness channels by offsetting:
  - the increased cost of production faced by domestic brown firms subject to carbon taxation; and
  - the decreased cost of production faced by foreign green firms eligible for production subsidies.
- Financing green subsidies via an increase in corporate income tax (as designed in the IRA) could partially reduce efficiency in the U.S. and thus partially offset adverse implications for Canada’s competitiveness.
- The analytical model shows alternative policy and structural designs can dampen competitiveness losses from divergent climate policies; the design of Canada’s output-based performance standard (OBPS) and the United States’ subsidies partly mitigate concerns.

### IMF-ENV model quantitative findings for Canada
- Canada’s carbon pricing policy would reduce GHG emissions by around 29 percent relative to BaU.
- The output cost of mitigation is estimated to be between 0.2 and 1.2 percent of GDP.
  - The lower-end cost estimate (0.2 percent of GDP) obtains if carbon tax revenues are used to finance productive (possibly green) investment.
  - The higher-end cost estimate (1.2 percent of GDP) obtains if these revenues are returned to households via transfers.
  - Decreasing distortionary taxation in the form of decreasing personal income tax (PIT) or value-added tax (VAT) lead to moderate cost.
- These results reinforce that the choice of recycling scheme has a first-order impact on the output costs of mitigation.

### Policy implications and recommendations
- Policy design choices on revenue recycling can substantially modify competitiveness and efficiency outcomes from carbon taxation differences.
  - Using carbon tax revenues to reduce distortionary payroll taxes could yield efficiency benefits and address competitiveness implications.
  - Financing green subsidies through corporate income tax increases (as in the IRA) can reduce efficiency in the subsidizing country and thus partially offset competitiveness impacts for trading partners.
- Equity objectives matter: policymakers may not focus entirely on efficiency and may need to use revenues for equity. However:
  - Transfers should be better targeted to the most vulnerable households to minimize efficiency costs associated with lump-sum transfers.
- Careful choices on how carbon tax revenues are recycled (investment, reducing distortionary taxes, or transfers) are central to balancing emissions reductions, efficiency costs, and competitiveness effects.

*Source: Box 7. Domestic and Cross-Border Effects of Climate Policies in North America (excerpt).*

### Annex I. Sovereign Risk and Debt Sustainability Assessment

### Annex I. Sovereign Risk and Debt Sustainability Assessment

### Summary assessment
- Staff assess the overall risk of sovereign stress to be low.
- Medium-term risk assessment indicates moderate debt stress and liquidity risk.
- The government’s holdings of large financial assets (about 92¾ percent of GDP at end-2022) would provide a comfortable buffer.
- Staff assess the long-term risk of sovereign stress is low, given no significant increase in fiscal costs stemming from pensions or health is envisioned, and climate-related risks are contained.
- Debt stabilization in the baseline: Yes.

### Background & key debt metrics
- General government consolidated gross debt: 106¾ percent of GDP at end-2022 (about 16½ percentage points above the pre-pandemic level).
- Excluding accounts payable (in line with common international practice), gross debt: about 89¼ percent of GDP in 2022.
- Government financial assets (market value): about 92¾ percent of GDP at end-2022.
  - Around one-quarter of these assets are highly liquid (currency, deposits, and bonds).
  - About 30 percent are invested in equity and investment shares, of which more than half relate to pension fund investments.
- Net debt-to-GDP ratio: fell to 14 percent in 2022 from a peak of 15¾ percent in 2020.
- Gross financing needs: nearly 19 percent of GDP in 2022.

### Market perceptions
- Confidence in Canada’s sovereign debt remains high.
- Canada had AAA ratings from all 3 major ratings agencies from 2002 to June 2020, when Fitch downgraded it to AA+.
- As of late June 2023, Canada’s benchmark ten-year bond yields were around 3½ percent, about 35 basis points below U.S. ten-year Treasury yields.

### Baseline projections (projection horizon and medium term)
- Gross debt dynamics:
  - Peak gross debt-to-GDP ratio: 119 percent in 2020.
  - Projected gross debt-to-GDP ratio: broadly unchanged in 2023 then resuming decline to about 94¾ percent by 2028.
- Net debt dynamics:
  - Net debt ratio expected to decline to 13½ percent by 2028 from a peak of 15¾ percent in 2020.
- Primary balance (consolidated general government):
  - Primary deficit: 1¼ percent of GDP in 2022, projected to decline to 0.2 percent of GDP by 2028.
- Gross financing needs (GFN) projection:
  - Expected to remain within the range of 19–22 percent of GDP through the projection horizon.
- From Annex I. Figure 4 (selected series, percent of GDP unless indicated otherwise):
  - Public debt: 2022 = 106.7; 2023 = 105.8; 2024 = 103.5; 2025 = 101.0; 2026 = 98.8; 2027 = 96.7; 2028 = 94.7.
  - Change in public debt: 2022 = -8.4; 2023 = -0.8; 2024 = -2.3; 2025 = -2.5; 2026 = -2.2; 2027 = -2.1; 2028 = -2.0.
  - Primary deficit: 2022 = 1.3; 2023 = 0.6; 2024 = 0.5; 2025 = 0.4; 2026 = 0.3; 2027 = 0.2; 2028 = 0.2.
  - Noninterest revenues: 2022 = 37.4 (and 37.4 for 2023–2032 in the table).
  - Noninterest expenditures: 2022 = 38.7; 2023 = 38.1; 2024 = 37.9; 2025 = 37.8; 2026 = 37.8; 2027 = 37.9; 2028 = 38.0.
  - Automatic debt dynamics (contribution): 2022 = -7.8; 2023 = 1.0; 2024 = -0.4; 2025 = -0.8; 2026 = -0.5; 2027 = -0.4; 2028 = -0.4.
  - Real GDP growth (percent) memo: 2022 = 3.4; 2023 = 1.7; 2024 = 1.4; 2025 = 2.2; 2026 = 1.9; 2027 = 1.7; 2028 = 1.7.
  - Inflation (GDP deflator; percent) memo: 2022 = 7.2; 2023 = 0.3; 2024 = 2.3; 2025 = 1.9; 2026 = 2.0; 2027 = 2.1; 2028 = 2.1.
  - Nominal GDP growth (percent) memo: 2022 = 10.9; 2023 = 2.1; 2024 = 3.8; 2025 = 4.2; 2026 = 3.9; 2027 = 3.8; 2028 = 3.8.
  - Effective interest rate (percent) memo: 2022 = 2.6; 2023 = 3.2; 2024 = 3.4; 2025 = 3.4; 2026 = 3.4; 2027 = 3.4; 2028 = 3.4.
- Commentary: The decline in debt-to-GDP ratio is largely driven by real GDP growth and interest revenue.

### Realism of baseline assumptions and forecast performance
- Projection errors in recent years for real GDP growth, the primary balance, and inflation were moderate and broadly in line with those in other economies.
- No evidence of a systematic projection bias in the baseline assumptions that could undermine the SRDSA.
- Projected deficit reduction in the near term is realistic and close to the median range of adjustment in historical and cross-country experience.
- Slightly ambitious debt reduction driven largely by the withdrawal of unprecedented fiscal support during the pandemic.
- Noted large forecast errors: primary balance in 2020 and inflation in 2021 due to high uncertainty.

### Accounting issues and international comparisons
- Canada’s general government gross debt includes sizable accounts payable (about 17 percent of GDP at end-2022), which many advanced economies do not report.
- Canada reports general government net debt as total liabilities less total financial assets, which includes sizable equity and investment fund shares; most other advanced economies remove accounts payable and receivable as well as equity holdings.
- Unfunded pension liabilities are included in Statistics Canada’s reporting of general government gross debt, but are excluded in this SRDSA to maintain comparability with other countries.
- Statistics Canada methodological change: assets are valued at market value instead of book value (introduced last December), substantially revising up values of equity and investment shares from 1990 to 2022.

### Debt structure and financing characteristics
- Gross public debt includes sizable accounts payable (about 17 percent of GDP at end-2022) and is dominated by local-currency instruments.
- Residual maturity: 6.6 years (average debt maturity).
- Public debt by instrument and holder: marketable and nonmarketable debt composition indicated in charts (general government perimeter).
- Gross financing needs path from Annex I. Figure 4:
  - 2022 = 18.9; 2023 = 19.6; 2024 = 20.8; 2025 = 22.1; 2026 = 21.3; 2027 = 20.8; 2028 = 19.8.

### Medium-term risk analysis and stress-test signals
- Debt fanchart module:
  - Fanchart width: 43.7 (percent of GDP).
  - Probability of debt non-stabilization: 50.1 (percent).
  - Terminal debt-to-GDP x institutions index: 16.0.
  - Debt fanchart index (DFI): 1.4 → Risk signal: Moderate.
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 20.7 (percent of GDP).
  - Banks' claims on the general government: 6.1 (pct bank assets).
  - Change in banks' claims in stress: 0.5 (pct banks' assets).
  - GFN financeability index (GFI): 9.2 → Risk signal: Moderate.
- Medium-term index:
  - Both the debt fanchart and the GFN modules point to moderate level of risk.
  - Final medium-term assessment: overall risk mitigated by the government's large financial asset holdings and small share of foreign-currency denominated debt limiting exchange rate shock impacts.
  - Final assessment: Low overall risk of sovereign stress despite mechanical moderate signals.
- Probabilities (2023–2028):
  - Prob. of missed crisis, if stress not predicted: 9.1 percent.
  - Prob. of false alarms, if stress predicted: 43.2 percent.

### Commentary on sources of past debt dynamics and residuals
- Large contribution of the residual to debt accumulation in the past five years driven mostly by unprecedented liquidity support measures implemented in 2020 (funding for emergency loans, tax deferral, purchase of assets, notably mortgages).
- These loans and deferrals are expected to be paid off in the next five years, resulting in large negative contribution of the residual to debt accumulation.

*Source: IMF staff (Annex I. Sovereign Risk and Debt Sustainability Assessment).*

### Annex I. Figure 7. Canada: Long-Term Risk Analysis

### Annex I. Figure 7. Canada: Long-Term Risk Analysis

### Large Amortization Trigger
- Overall Risk Indication: The large amortization module is not triggered, as the analysis shows no significant large amortizations are expected over the forecast horizon.
- ProjectionVariable Risk Indication (values as presented):
  - 0.00
  - 0.00
  - Medium-term extrapolation
  - Medium-term extrapolation with debt stabilizing primary balance
  - Historical average assumptions
  - 0
  - 1.00
  - 1.00
  - 1.00
  - 1.00
  - 0.00
  - 0.00
  - 1.00

### Key statistics shown (from figure/context)
- GFN-to-GDP ratio (listed as headings in figure)
- Amortization-to-GDP ratio (listed as headings in figure)
- Amortization (listed as headings in figure)

*Source: 1canea2023001 - Annex I. Figure 7. Canada: Long-Term Risk Analysis (IMF).*

### Annex II. External Sector Assessment

### Overall assessment and outlook
- Overall Assessment: The external position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Current account (CA) balance: remained marginally in deficit in 2022.
- Outlook: With commodity prices expected to be softer on average in 2023, the CA deficit is expected to widen to 1.5 percent of GDP in 2023 and remain in deficit over the medium term as export prices decline further and domestic demand continues to recover.

### Potential policy responses (listed)
- (i) introducing measures to improve labor productivity;
- (ii) removing nontariff trade barriers;
- (iii) investing in R&D and physical capital;
- (iv) investing in the green transformation;
- (v) promoting FDI.
- Additional: A medium-term fiscal consolidation plan would also help in stabilizing debt and supporting external rebalancing.

### Foreign Asset and Liability Position and Trajectory
- Background: After swelling to 52.1 percent of GDP in 2021 with the boom in global equities during the pandemic, Canada’s NIIP dropped sharply in 2022 as stock markets fell, registering 30.2 percent of GDP, broadly in line with the 2017-19 average. At the same time, gross external debt decreased to 128.6 percent of GDP, of which around 51.1 percent of GDP is short-term debt.
- Assessment: Canada’s foreign assets have a higher foreign-currency component than do its liabilities, which provides a hedge against currency depreciation. The NIIP level and trajectory are sustainable.
- 2022 (% GDP) (as presented):
  - NIIP: 30.2
  - Gross Assets: 265.1
  - Debt Assets: 87.3
  - Gross Liab.: 234.9
  - Debt Liab.: 128.5

### Current Account (CA)
- Background: The estimated CA balance remained at -0.3 percent of GDP in 2022, reflecting the decline in investment income and services which offset the effect of a stronger trade balance.
- Assessment: The cyclically adjusted CA was -1.3 percent of GDP in 2022, as against the EBA’s CA norm for Canada of 2.2 percent of GDP, implying a gap of -3.4 percent of GDP for 2022. Part of this gap, however, is explained by biases in measuring inflation and retained earnings, while COVID-19 adjustors for travel (including tourism) and transportation were assessed to be immaterial. Taking these factors into account, IMF staff assess the CA gap to be in the range between -2.3 and -1.3 percent of GDP, with a midpoint of -1.8 percent of GDP.
- 2022 (% GDP) (as presented):
  - CA: -0.3
  - Cycl. Adj. CA: –1.3
  - EBA Norm: 2.2
  - EBA Gap: –3.4
  - Other Adj.: 1.6
  - COVID-19 Adj.: 0.0
  - Staff Gap: -1.8

### Real Exchange Rate (REER)
- Background: The average REER for 2022 was broadly unchanged from the 2021 average (just 0.1 percent stronger). As of June 2023, the REER was 4.6 percent below the 2022 average.
- Assessment: The EBA REER index model points to an overvaluation of 1.9 percent in 2022, while the REER level model suggests an undervaluation of 10.5 percent. Consistent with the staff CA gap, staff assess the REER to be overvalued by between 5.1 and 8.5 percent, with a midpoint of 6.8 percent.
- Note: The semi-elasticity of the CA with respect to the REER is set to 0.27.

### Capital and Financial Accounts: Flows and Policy Measures
- Background: FDI saw net outflows of 1.3 percent of GDP in 2022 (comparable with levels in 2021 and 2020). Net portfolio inflows rose to 5.4 percent of GDP in 2022, up from 2.1 percent in 2021, while other investments moved from net inflows in 2021 of around 0.6 percent of GDP to net outflows of 3.34 percent of GDP in 2022. Errors and omissions were small at 0.1 percent of GDP.
- Assessment: Canada has an open capital account. Vulnerabilities are limited by a credible commitment to a floating exchange rate.

### FX Intervention and Reserves Level
- Background: Canada has a free-floating exchange rate regime and has not intervened in the FX market since March 2011 (joint or otherwise). Canada has limited reserves, but its central bank has standing swap arrangements with the U.S. Federal Reserve and four other major central banks. (The Bank of Canada has not drawn on these swap lines.)
- Assessment: Policies in this area are appropriate to the circumstances of Canada. The authorities are strongly committed to a floating regime which, together with the swap arrangements, reduces the need for reserve holdings.

### Notes (as presented)
- 1/ The statistical treatment of retained earnings on portfolio equity and of net interest outflows (which are recorded in nominal terms and thus artificially boosted by currently high inflation) is estimated to generate a downward bias in the income balance of 0.6 and 1 percent of GDP, respectively, totaling 1.6 percent of GDP.
- 2/ The semi-elasticity of the CA with respect to the REER is set to 0.27.

### Annex III. Risk Assessment Matrix

- RAM overview: The RAM shows events that could materially alter the baseline path. The relative likelihood is staff’s subjective assessment (“low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent). The RAM reflects staff views as of the time of discussions with the authorities.

### Selected Global Risks (items 1–6)
1. Intensification of regional conflict(s).
- Likelihood: High
- Expected Impact: Medium. As a major commodity exporter, Canada has been hit less hard than others by the war and the ensuing rise in commodity prices, but these, along with supply chain disruptions, still drive inflation higher.
- Policy Response: Policies should focus on further increasing the resilience of supply chains and of the financial sector.

2. Deepening geo-economic fragmentation and geopolitical tensions.
- Likelihood: High
- Expected Impact: Medium. With the US as its major trading partner and neighbor, Canada may benefit from supply chain nearshoring and diversion of US investment and trade. On the other hand, like all countries, Canada will be negatively impacted by the weaker global demand induced by fragmentation.
- Policy Response: Authorities should work actively to strengthen the rules-based multilateral trading system, and deepen international and regional economic cooperation, including on climate policies.

3. Abrupt global slowdown or recession.
- Likelihood: Medium
- Expected Impact: High. Global and idiosyncratic risk factors could combine to trigger a “hard landing” in the U.S. and a synchronized global downturn, which would quickly spillover into Canada given the strong trade and financial cross-country interlinkages.
- Policy Response: Both monetary and fiscal policy would need to respond to a global recession. The strength of the reaction would depend on developments in inflation and commodity prices.

4. Systemic financial instability.
- Likelihood: Medium
- Expected Impact: Medium. Although the Canadian financial sector has proved to be resilient in the first half of 2023, a deepening banking turmoil in the U.S. and Europe could eventually spill over to Canada via financial interlinkages or a generalized loss of confidence.
- Policy Response: Addressing data fragmentation and data gaps is crucial, especially for regional banks and NBFIs. The macroprudential toolkit may need to be expanded to cover NBFIs, and federal-provincial cooperation should be enhanced.

5. Commodity price volatility.
- Likelihood: Medium
- Expected Impact: Medium. While increased commodity prices would undermine the disinflation effort, the resulting windfall revenues to Canada’s exporting sector would boost growth. On the other hand, a negative terms of trade shock would worsen external sector imbalances.
- Policy Response: Monetary policy would need to remain data-driven supported by effective communication to ensure that headline inflation increases and pass-through to core inflation do not de-anchor inflation expectations. Policies should be targeted to boost competitiveness and productivity of Canada’s exporting sectors (see annex II).

6. Cyberthreats.
- Likelihood: Medium
- Expected Impact: High. Given the strong reliance of its public sector, financial sector, businesses, and critical infrastructure on cybernetworks, Canada could be highly impacted by cyberattacks.
- Policy Response: Strengthen defenses (in the financial sector and elsewhere in the economy) to prevent cyberattacks and take steps to build resilience to ensure continuity of operations when attacks occur.

### Selected Domestic Risk (item 8)
8. Entrenched inflation expectations
- Likelihood: Medium
- Expected Impact: High. Although headline inflation has been dropping fast, core inflation has moved by less, wage growth remains high, and there is a chance that the past year of high inflation may have de-anchored expectations more than realized.
- Policy Response: To ensure a regularization of inflation expectations, the central bank should continue communicating a strong commitment to the inflation target and its willingness to increase the policy rate further if needed.

### Annex IV. Progress on Past Article IV Policy Recommendations

### 2022 Article IV Policy Recommendations and Action Taken

- Monetary policy: maintain the policy rate at or above 4 percent for most of 2023 and keep reducing the Bank of Canada’s (BoC) balance sheet.
  - Action Taken: The BoC raised its key policy rate to 4.25 percent at end-2022 and to 4.75 percent in June 2023. Its balance sheet continued to shrink, complementing rate hikes.

- Fiscal policy: save further revenue windfalls and accelerate deficit reduction from the 2023 budget onwards.
  - Action Taken: Deficit reductions envisaged in the 2023 budget are lower than the projections in fall 2022, largely reflecting deteriorated economic outlook and smaller tax base, but also new spending measures adopted in the 2023 budgets.

- Housing: adopt further policy measures, particularly on the supply side, to improve housing affordability.
  - Action Taken: The 2023 budget launched the new Tax-Free First Home Savings Account; and also announced the government’s intention to support the reallocation of funding from the National Housing Co-Investment Fund’s repair stream to its new construction stream.

- Fiscal framework: adopt a specific debt anchor, supported by an operational rule; and consider introducing rules-based automatic stimulus.
  - Action Taken: The authorities were unconvinced of the need for a quantitative debt anchor in Canada. They view Canada’s strong fiscal track record as giving them credibility to operate a more flexible framework that focuses on debt reduction but can respond to changing circumstances.

- BoC communication: add more quantitative discussion of changes in the policy stance associated with alternative scenarios; and publish the rate path underpinning the quarterly economic forecast.
  - Action Taken: The BoC started publishing summaries of Governing Council deliberations in January 2023. When appropriate, the BoC also presents alternative scenarios in the quarterly Monetary Policy Report (MPR). It is preparing for the introduction of a “Digital Monetary Policy Report.” All of these initiatives are intended to further enhance communication and help markets and the public to better understand its reaction function.

- Financial regulation: establish a comprehensive regulatory regime for cryptoassets; and address shortcomings in the AML/CFT framework.
  - Action Taken: Following the publication of an interim crypto exposure advisory last year, OSFI launched consultations in April on international recommendations related to fiat-referenced cryptoasset arrangements and activities. New legislation was tabled in March to create a federal beneficial-ownership registry; and the Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada was published in 2023.

- Climate Policy Priorities: Develop a comprehensive strategy to help the economy and workers transition away from carbon-intensive products and processes.
  - Action Taken: The government presented the Canadian Sustainable Jobs Act to parliament on June 15, to support the creation of sustainable jobs for workers in a net-zero economy.

*Source: 1canea2023001 - Annex I. Figure 7. Canada: Long-Term Risk Analysis (IMF).*

### Annex V . State of Progress in the Implementation of 2019 FSAP

### Annex V . State of Progress in the Implementation of 2019 FSAP

### Capital requirements and mortgage risk
- Recommendation: Raise required capital for mortgage exposures at both banks and mortgage insurers to fully account for through-the-cycle risks; increase risk-based differentiation in mortgage pricing. (OSFI, AMF; DOF) — Timeframe: NT; MT *
- Progress:
  - OSFI:
    - OSFI’s CAR Guideline updated and became effective on February 2023.
    - Updated Guideline: more risk sensitive approach for risk weighting mortgages under the Standardized Approach (SA) with more granularity with respect to LTV ratios.
    - Higher risk mortgages (e.g. those that rely on rental income) will be subject to higher capital requirements.
    - New requirement: all IRB bank PD models must be based on data samples that include a minimum of 10 percent of data from stress periods.
    - OSFI is monitoring RESL lending activities, assessing risks posed by variable rate fixed payment mortgages and fixed rate mortgages that will renew with higher payments to determine whether current capital treatment is fit-for-purpose or revisions (such as a Pillar II add on) are warranted.
    - Project to review capital requirements for multi-unit properties within MICAT is ongoing; capital requirements for multi-unit business anticipated to rise effective Jan. 2025.
  - AMF:
    - AMF revised SA and IRB approaches in its Capital Adequacy Requirements Guideline; changes in effect since February 2023.
    - SA: new LTV bucket introduced for uninsured mortgage loans and more conservative risk-weights must be applied.
    - IRB: new “Loss Given Default (LGD) downturn” introduced to account for through-the-cycle risks, including possible real estate bubbles.

### Housing market downturn preparedness and underwriting
- Recommendation: Develop the policy framework for managing a housing market downturn. (BOC, AMF, BCSC, OSC) — Timeframe: NT *
- Progress:
  - OSFI:
    - Introduced a crisis preparedness framework to improve internal preparedness for idiosyncratic events at a DTI; training provided in spring 2022; work continues to incorporate systemic concerns and governance.
    - In January 2023, OSFI launched a public consultation of Guideline B-20 on Residential Mortgage Underwriting Practices and Procedures; sought feedback on proposed complementary debt service ability measures to better control prudential risks from high consumer indebtedness. (link referenced in source)
  - AMF:
    - Updated its Residential Hypothecary Lending Guideline twice in the last three years; intends to review it in the coming year to ensure robustness against housing market downturns.
    - June 2021: rate used in debt service calculation for uninsured mortgages changed to the greater of the contractual mortgage rate plus 2 percent and a fixed floor rate initially established at 5.25 percent; annual review introduced.
    - June 2022: reference to fixed rates in the formula for calculating the qualifying rate for uninsured mortgages was removed to adapt quickly to market volatility; reserve and floor rate to be determined by the AMF and updated as needed.
    - AMF expects updates to residential property values for LTV calculations and monitors combined loan plans (CLPs), reverse mortgages, and residential equity mortgages.
  - Credit-risk and forbearance:
    - OSFI issued supplementary Advisory to Guideline B-20 on June 28, 2022 clarifying treatment of innovative RESL products; reinforced LTV limits for CLPs and reverse mortgages.
    - OSFI launched initial consultation on Guideline B-20 on January 12, 2023 focused on debt serviceability measures; B-20 review will continue over 2023-24.
    - AMF: working on a Non-Performing Loans and Forbearance Guideline expected to come into force in December 2023.

### Systemic risk oversight, data, and surveillance
- Recommendation: Modernize the systemic risk oversight framework underpinned by a federal-provincial platform to discuss systemic issues and formulate policy responses, supported by enhanced transparency (HOA, BOC) — Timeframe: NT *
- Recommendation: Develop a comprehensive systemic risk surveillance framework, supported by a more unified approach to data collection; address data gaps, particularly related to cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities (BOC, competent authorities, governments) — Timeframe: NT/MT *
- Progress:
  - BOC:
    - Systemic Risk Surveillance Committee (SRSC) continues to meet regularly; SRSC formed subgroups on liquidity mismatch in open-ended investment funds and on investor demand for housing.
    - Bank of Canada continues to include a box in its FSR on the activities of the HoA during the prior year.
    - SRSC cooperative approach delivers value but faces limitations: some vulnerabilities lack data access within SRSC members (e.g., high frequency holdings data for some NBFI); distributed data across agencies limits cross-market analysis; not all agencies have the same analytical expertise.
    - Since 2021, BoC has participated in Data Collection Modernization (DCM) initiative with OSFI and CDIC to modernize data collection technology and provide access to more timely, granular, and trustworthy data.
  - OSFI:
    - Worked with industry to develop and expand data sets for key portfolios (granular reporting on RESL exposures and leveraged lending exposures).
    - Participating in DCM initiative aimed at improved data usability, efficiencies, reduced regulatory burden, standardized data definitions, and real-time advanced analytics.
  - AMF:
    - Ensures D-SIFI cooperative participates in BoC’s macro stress-test (MST) exercises; feedback from MST informs AMF supervision.
    - Participating in BoC-led climate-related crisis simulation exercise.
    - AMF participates at semi-annual SRSC meetings and is a member of CUPSA working on risk data sharing mechanisms.

### Inter-agency cooperation, governance, and MoUs
- Recommendation: Enhance inter-agency cooperation, particularly between federal and provincial authorities, with additional MoUs (OSFI, AMF, other relevant provincial authorities) — Timeframe: NT *
- Recommendation: Strengthen autonomy and governance of financial sector authorities, including BOC and OSFI (powers), and FICOM (overall); clarify roles/responsibilities for oversight of systemically important FMIs (DOF, provincial governments; BOC; AMF, BCSC, OSC) — Timeframe: MT
- Progress:
  - OSFI:
    - Heads of Agencies Committee (HoA) meets regularly; supported by sub HoA and SRSC. Terms of Reference available (referenced in source).
  - AMF:
    - MoUs with BoC and CDIC signed in 2018 are fully operational; holds technical and quarterly meetings with both organizations.
    - Regular meetings with Québec Minister of Finance on resolution plan for Desjardins Group and related governance and funding matters; joint work plan being implemented.
    - Discussions with OSFI on a potential MoU resumed; legal departments assessing confidentiality protections for information sharing.
  - CSA:
    - Actively participates in HoA SRSC and signed an MoU for protection of confidential information among HoA members in spring 2022; agreement in principle for non-HoA SRSC members to adhere.
    - CSA and BoC entered MoU Respecting the Resolution of Certain Clearing and Settlement Systems effective January 13, 2022.
  - DOF:
    - DOF: OSFI has required autonomy and governance to carry out mandate; guidelines enforceable in practice.
    - BOC and provincial authorities continue to cooperate effectively in oversight of systemically important FMIs; overlapping responsibilities reflect federal-provincial division of powers and no changes were made in response to FSAP recommendation.

### Market infrastructure, derivatives, client duties, and market stress preparedness
- Recommendation: Complete reforms in OTC derivatives and duties towards clients; increase oversight focus on high-impact firms; ensure capacity to handle market-wide stress (CSA, relevant provincial governments) — Timeframe: NT
- Progress:
  - Derivatives:
    - CSA developed a Business Conduct Rule (published for a third comment period in January 2022) and published a Registration Rule for consultation in April 2018; Business Conduct rule scheduled for summer 2023; Registration rule next priority.
    - Amendments to Trade Reporting Rules proposed to update trade repository governance and better align with PFMI; CSA aims to finalize rule by end of 2023.
    - Mandatory Clearing Rules have been in effect since September 1, 2022.
  - Client Focused Reform (CFR):
    - CFR conflicts of interest requirements came into force on June 30, 2021; remaining requirements came into force on December 31, 2021.
  - Oversight of high-impact firms:
    - CSA considers oversight sufficient but will continue to improve processes; some jurisdictions (Ontario) have formal processes to identify high-impact firms.
  - Market Disruption Coordination:
    - CSA Market Disruption Plan tested September 18, 2019 and October 26, 2021; tests successful. Planning started for 2023 test to take place first week of December 2023.
    - Canadian participation in global cybersecurity exercises noted (Quantum Dawn V / SIFMA).

### Crisis preparedness, recovery, resolution, and ELA
- Recommendation: Task the SAC with responsibility for Canada-wide crisis preparedness and strengthen CDIC’s operational independence; expand recovery and resolution planning; operationalize ELA with provinces; develop market-wide liquidity contingency plans. (Multiple authorities) — Timeframes: NT; MT; I
- Progress:
  - Crisis preparedness and coordination:
    - DOF: agencies continue to develop inter-agency contingency planning and crisis management frameworks; conduct tabletop exercises to test coordinated crisis preparedness measures.
    - Agencies developing and maintaining crisis management frameworks and conducting tests.
  - Recovery and resolution planning:
    - OSFI: All D-SIBs must have recovery plans; OSFI uses criteria to determine which other banks must prepare recovery plans.
    - AMF: Recovery and resolution plans for Desjardins Group continually updated; external firm assisting on valuation framework. Two of five deliverables planned over summer 2021/23 finalized: “Methodologies and Approaches” and “Valuation Process”. Third deliverable on “Identification of required financial data, or any other information needed to perform the valuations” expected to be approved by June 2023.
    - Introduction of depositor preference is federal purview; AMF raised topic with CDIC at November 24, 2022 quarterly meeting and will pursue technical discussions.
    - Strengthening resolution powers: legislative inventory shared with Québec Ministry of Finance in summer 2022; AMF seeks formal power to require changes to improve resolvability. Legislative amendment passed in December 2021 harmonized AMF powers with federal level but removed power to write down shares and liabilities. Resolution Board governance and playbooks under development; discussions ongoing on backstop funding arrangements.
  - Emergency Lending Assistance (ELA):
    - BOC undertook first ELA test draw with a provincially regulated financial institution in 2022 focusing on legal and operational preparedness to provide collateral and receive/repay funds.
    - BoC maintained engagement with provincial regulators via information-sharing MoUs (QC: 2018; BC and ON: 2020); engaged with ON and BC to finalize indemnity agreements required for PRFIs to be eligible for ELA.
    - AMF: submitted third iteration of Desjardins Group resolution plan and 2022/26 work plan to BoC in June 2022; BoC and Desjardins conducted an ELA simulation exercise in October 2022. AMF intends to harmonize preparatory measures for recovery and resolution plans.
    - Engagement also continues with other provinces having information-sharing MoUs (AB, SK, MB, NS, NB).
  - Market-wide liquidity provision:
    - BOC routinely tests Swapline facilities for foreign vs domestic currency liquidity; drafted program terms and conditions for a US dollar repo facility should it need implementation.

### Macroprudential toolkit and nonbank lending
- Recommendation: Expand scope of macroprudential toolkit to address risks from lending by nonbank financial institutions and to limit policy leakages; develop prudential instruments for risks from HELOCs and other risky mortgage products; expand cyclical capital requirements to all deposit-taking institutions. (DOF; OSFI; AMF) — Timeframes: I; note macro-critical *
- Progress:
  - DOF: No update available on expanding macroprudential toolkit; majority of lending is federally and provincially regulated; Statistics Canada tracks size of non-prudentially regulated sector.
  - OSFI:
    - June 28, 2022 advisory to Guideline B-20 clarified treatment of innovative RESL products and reinforced LTV limits for CLPs and reverse mortgages.
    - January 12, 2023: initial consultation on Guideline B-20 focused on debt serviceability measures; B-20 review to continue over 2023-24.
  - AMF:
    - July 2022: publicly expressed intention to review its Residential Hypothecary Lending Guideline in the coming year to include expectations for sound management of HELOCs and other risky mortgage products.
  - Expand cyclical capital requirements:
    - AMF: No change.

Note: Institutions in the parenthesis are the agencies with leading responsibilities. The * denotes macro-critical. In terms of the timeframe, I, NT and MT stand for immediate (within one year), near-term (within one year) and medium-term (within 2–3 years).

*Prepared by staff based on information reported by the authorities.*

### 8.10 of the Sustainable Development Goals (SDGs).

### 8.10 of the Sustainable Development Goals (SDGs).

### Financial Soundness Indicators (FSIs)
- Canada reports all core financial soundness indicators (FSIs) and some additional FSIs for all sectors.

### External Sector
- Statistics Canada provides timely information on a quarterly frequency on:
  - the balance of payments,
  - external debt, and
  - the international investment position.
- Canada provides data for:
  - the Coordinated Portfolio Investment Survey,
  - the Coordinated Direct Investment Survey,
  - Data Template on International Reserves and Foreign Currency Liquidity, and
  - Currency Composition of Official Foreign Exchange Reserves.

### Data Standards and Quality
- Canada is an adherent to the Special Data Dissemination Standard Plus (SDDS Plus) since April 11, 2017, and publishes the data on its National Summary Data Page.
- Canada’s latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board.
- Canada completed the transition plan under the SDDS Plus for the residential real estate price index and debt securities data categories in 2022 and uses timeliness flexibility options for central government operations and debt.
- A data module Report on the Observance of Standards and Codes (ROSC) for Canada was published in May 2002.

### Table of Common Indicators Required for Surveillance (as of June 22, 2023) — Key statistics and metadata
- Notes and footnotes included in the table:
  - 1 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.
  - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - 5 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
  - 6 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

- Indicators, latest observation dates, dates received, and frequency (as reported):
  - Exchange Rates — Date of latest observation: Same day; Date received: Same day; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1 — Date of latest observation: June 15, 2023; Date received: June 22, 2023; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W
  - Reserve/Base Money — Date of latest observation: September, 2022; Date received: June 2, 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Broad Money — Date of latest observation: September, 2022; Date received: June 2, 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Central Bank Balance Sheet — Date of latest observation: June 14, 2023; Date received: June 16, 2023; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W
  - Consolidated Balance Sheet of the Banking System — Date of latest observation: April 30, 2023; Date received: June 22, 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Interest Rates2 — Date of latest observation: Same day; Date received: Same day; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D
  - Consumer Price Index — Date of latest observation: April 2023; Date received: June 16, 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Revenue, Expenditure, Balance and Composition of Financing3 – General Government4 — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Revenue, Expenditure, Balance and Composition of Financing3 – Central Government — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Stock of Central Government and Central Government-Guaranteed Debt — Date of latest observation: 2023 Q1; Date received: June 14, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - External Current Account Balance — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Exports and Imports of Goods and Services — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - GDP/GNP — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Gross External Debt — Date of latest observation: 2023 Q1; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - International Investment Position5 — Date of latest observation: 2022 Q4; Date received: June 2, 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q

*Source: 1canea2023001 - 8.10 of the Sustainable Development Goals (SDGs).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1canea2023001.pdf_