## 1norea2023001

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### Recent developments
- Mainland real GDP (excluding the offshore oil and gas sector) grew by 3.8 percent in 2022.
- Consumption slowed in 2023Q1; overall growth remained positive and slightly above projections supported by strong business investment and exports.
- General government budget surplus was close to 26.1 percent of overall GDP in 2022.
- Structural fiscal deficit (non-oil balance) declined to 9.5 percent in 2022, from 10.6 percent of mainland GDP in 2021.
- Structural deficit was somewhat below the long-term guideline: 2.7 percent versus 3 percent of the Government Pension Fund Global (GPFG) value.
- Core inflation was 5.8 percent, Y oY, by end-2022; headline inflation was 5.9 percent.
- Norges Bank raised the policy rate six times in 2022 to 2.75 percent, and 3 times in 2023 to 3.75 percent by June.
- Annual wage growth around 4.3 percent; average unemployment declined to 3.3 percent in 2022.
- Seasonally adjusted registered unemployment was 1.8 percent in May 2023; registered jobless rate was 2.1 percent.
- House prices in June 2023 remained about 17 percent above pre-pandemic levels (February 2020).
- Current account surplus increased to 30.3 percent of total GDP in 2022 from 13.6 percent in 2021.
- Staff assesses the current account gap in 2022 to have been 5.5 percent of total GDP.
- The real effective exchange rate (REER) in 2022 was undervalued by 26 percent relative to the REER norm.

### Fiscal and monetary context
- Initial 2023 budget targeted a contractionary fiscal impulse of 0.6 percent of mainland trend-GDP; revised budget: expansionary stance of 0.4 percent of mainland trend-GDP.
- Revised budget projected structural non-oil deficit at 10 percent of mainland GDP and 3 percent of the GPFG.
- Text Table 1 budget figures (NOK Billion, 2023):
  - Non-oil Revenues: 1462
  - Non-oil Expenditures: 1762
  - Non-oil Deficit: 300
  - Structural Non-Oil Deficit: 373
  - Structural Non-Oil Deficit (percent of Mainland GDP): 10.0
  - Fiscal Impulse: 0.4
  - Structural Non-Oil Deficit (percent of GPFG): 3.0

### Impact of high energy prices and household support (Box 1)
- Staff estimate of total burden on household annual consumption, all things equal, was around 3 percent in 2022, with slightly higher incidence for low-income households.
- The burden is lower than the European average (6 percent).
- Fiscal support of about 0.7 percent of GDP was allocated in 2022.
- Actual outlays estimated at about 0.5 percent of GDP for the electricity subsidy.
- Targeting support to fully compensate for higher electricity price for the bottom two quintiles would have cost roughly around 0.25 percent of GDP.
- Norway: Temporary Energy Support Measures (Billions NOK, 2022):
  - Subsidies and Direct Assistance: 37.0
  - Electricity subsidy scheme for households: 33.2
  - Increased housing assistance: 1.7
  - Electricity subsidy scheme for agriculture and greenhouses: 1.0
  - Electricity subsidy scheme for the voluntary sector: 0.6
  - Additional support for students and sports teams: 0.6
  - Grants and Guarantees: 2.1
  - Support for energy efficiency measures for households: 0.1
  - Grant scheme for businesses (expired): 1.6
  - Increased grants to municipalities for welfare payments: 0.3
  - Grant for energy efficiency measures in rental housing, care homes and nursing homes: 0.2
  - Other Grants: 0.1
  - Total: 39.1
  - Total (percent of GDP): 0.7

### Fiscal policy recommendations and analysis
- Recommended stance:
  - Fiscal policy should be more supportive of the disinflationary effort.
  - A tighter fiscal stance over the near term would help contain inflation and have added benefits to financial stability.
  - The revised budget’s expansionary stance reduced near-term support for monetary policy’s disinflation objective.
- Targeting and efficiency:
  - Redesigning the electricity support package to better target lower-income households would have been more equitable and less costly overall.
  - Spending on electricity subsidies projected to decline this year; potential savings by narrowing coverage and calibrating support to vulnerable households.
- Medium/longer-term fiscal pressures:
  - Additional revenue or expenditure measures are needed to make room for multi-year spending commitments and population ageing; limited scope exists within the fiscal rule unless measures are accompanied by revenue-raising or cost-saving actions.
- Pensions and labor supply:
  - Pension reform proposals to link retirement age limits to life expectancy would benefit sustainability and labor force participation, but other elements of the reform could increase costs and jeopardize work incentives unless disability benefits reform is comprehensive.
  - Reducing incentives for early retirement should remain an important policy objective.

### Proposals for tax reform (Box 2)
- Staff broadly supports the “Torvik Committee” (Expert Committee on Tax Reform) proposals; quantified to be revenue-neutral in the short term.
- Short-term financing of labor income tax reductions via VAT, increased taxation on housing and high pensions, rent taxes, and taxes on environmentally harmful activities.
- Long-term: projected increased revenue to be used to reduce tax pressure.
- Main proposals include:
  - Introducing a new deduction on income earned and lowering contributions on salary, social security, and business income to strengthen work incentives.
  - Expanding the resource rent tax to onshore wind power, hydropower, and fisheries.
  - Introducing a single Value-Added Tax (VAT) rate at 25 percent and a compensatory scheme for lower-income households.
  - Introducing an imputed-rent tax and extending capital gains tax to include primary residences.

### Outlook and risks
- Growth and labor:
  - Mainland GDP expected to grow by 1.4 percent in 2023.
  - Employment growth is softening but labor demand should remain strong; capacity utilization approaching more normal levels with large differences among sectors.
- Demand and inflation:
  - Compensatory electricity subsidies and excess savings accumulated during the pandemic should continue to support real incomes and spending.
  - Headline inflation likely to recede somewhat because of the slowdown in domestic demand and expected lower global inflation.
  - Overall risks are balanced (Annex V), but short-term inflation risks are skewed significantly to the upside.
- External and financial:
  - Current account projected to remain in a high surplus, with net exports contributing strongly to growth.
  - Financial stability: systemic risks have not materially increased; no signs of liquidity problems for Norwegian banks so far.
- Downside and emerging risks:
  - Downside risks: abrupt global slowdown or recession; property price decline (expected to fall moderately and stabilize in 2023).
  - Emerging risks: cyber risks becoming a more prominent threat to financial stability.

### Authorities’ views
- Broad agreement with staff on outlook and risks; highlighted economy’s resilience despite higher policy rates and consumption resilience given tight labor market and savings buffers.
- Authorities noted constraints on finding workers starting to ease, moderating new vacancies, but stock of vacancies at historical highs and registered unemployment close to historical lows.
- In this context, authorities saw risks to growth as broadly balanced and on the upside for inflation.

### Monetary policy — current assessment, risks, and CBDC
- Upside inflation risks identified by staff:
  - A weak krone (Annex III).
  - Tight labor market and elevated inflation expectations that could lead to higher-than-expected wage increases.
  - Robust consumption backed by savings (Annex IV).
  - Strong corporate credit demand; a resilient housing market; a fiscal stance that is looser than warranted.
- Norges Bank actions:
  - With core inflation at 6.7 percent in May, raised the policy rate by 50 basis points to 3.75 percent in June and revised the rate path upwards toward slightly above 4 percent later this year.
  - Inflation in June was 6.4 percent, easing from May but still slightly above market expectations; core inflation accelerated to a record-high 7 percent.
- Policy implication:
  - Further tightening this year may be needed to bring inflation towards the medium-term target of 2 percent; continued clear communication is important.
- CBDC work:
  - CBDC project initiated in 2016; currently in its fourth phase covering required legislative amendments for a generally accessible retail CBDC.
  - Legislative amendments being considered only for introduction of digital cash as a well-functioning means of payment for general public use.
  - Introduction of CBDC would have a major impact on bank deposit funding and Norges Bank’s liquidity policy and will require regulatory adjustments beyond Norges Bank’s purview.
  - Decision on CBDC introduction rests with parliament; Norges Bank will advise on technical solutions and considerations.

### Financial sector policies — resilience and risks
- Banks:
  - Norwegian banks remain robust with no substantial increase in systemic vulnerabilities over the last year.
  - Banks remain highly capitalized, with high earnings and low credit losses.
  - Stress test in the Financial Stability Report (2022) indicates banks are resilient and capital buffers would help absorb losses and maintain lending even in a severe downturn.
- Capital and buffers:
  - Countercyclical capital buffer requirement of 2.5 percent and systemic risk buffer of 4.5 percent help banks maintain ample loss-absorbing capacity.
- Credit and property:
  - Credit growth has declined gradually over the past 1½ years, mostly among households.
  - High corporate credit growth attributed to increased bank lending, particularly to manufacturing and services.
  - Banks’ exposure to CRE is about 50 percent of corporate portfolios.
  - An economic downturn with a sharp fall in selling prices and rental income could result in considerable bank losses.
- Household resilience and regulation:
  - Most households should be able to service their debt.
  - Financial Stability Report 2022 estimated households holding a relatively small share (2–3 percent) of overall household debt may be affected by higher interest rates and may experience severe pressures.
  - Ministry of Finance changed the Lending Regulation (effective January 1, 2023–December 31, 2024) to lower the maximum rise in interest rates borrowers must be able to tolerate; stressed interest rate level is adjusted as interest rates rise.
  - Overall mortgage rules likely effective in reducing excessive borrowing by households most vulnerable to further tightening.
- Macroprudential and regulatory progress:
  - Progress on some 2020 FSAP recommendations; merit in eventually introducing a sectoral systemic risk buffer (SSRB).
  - Average risk weight floors of 20 percent for retail exposures and of 35 percent for corporate exposures collateralized by real estate were extended until end-2024.
- Cybersecurity and AML/CFT:
  - Cyber risks increasing; Norges Bank established structured oversight processes and introduced the TIBER framework for cyber resilience tests.
  - Supervisory sanctioning power used; since 2019 FSA imposed monetary penalties on nine banks, five investment firms, nineteen real estate agents, and thirty-five audit or accounting firms.
  - Statute of limitations for pecuniary sanctions in the AML Act increased to five years from when a reporting entity is no longer in breach of an AML provision.
  - Ongoing IMF regional technical assistance to address cross-border money laundering threats and vulnerabilities.

### Financial stability — authorities’ assessment and macroprudential posture
- Authorities saw systemic vulnerabilities in the banking sector as "broadly unchanged."
- Downside risks from further global market turmoil and higher funding costs remain.
- Borrower-based measures have helped to contain vulnerabilities.
- Norges Bank assessment: the Systemic Risk Buffer (SRB) rather than a sectoral SRB (SSRB) should serve as a main rule applying to all exposures.
- Preparedness and contingency planning for cyber risks remain priorities.

### Structural policies, labor market, housing, and inclusion
- Structural reform progress described as "uneven"; some upskilling with increased vocational training.
- Disability benefits:
  - High participation in the disability benefit system: "11 percent of working age population."
  - Characterized as a drain on public finances and deprives the labor market of needed workforce.
  - Recommendation to evaluate retraining expenditure quality and prioritize broader disability reform.
- Youth and education:
  - New Youth Guarantee program to take effect in "July 2023".
  - Amendments to the Education Act expected to come into force in "2024".
- Housing affordability:
  - Authorities acknowledge structural supply shortfall.
  - Short-term instruments: increasing portable allowances and reducing the income tax for the most vulnerable described as "the most powerful immediate tools."
  - Medium-term: ease restrictions on supply of new housing and alter regulations to boost construction efficiency.

### Climate policy and carbon pricing (Box 4)
- Main instruments: taxes on greenhouse gas (GHG) emissions and participation in the EU Emissions Trading System (ETS).
- Norway's share of GHG emissions subject to taxation is among the highest in OECD.
- Planned carbon-tax path (Climate Action Plan 2021–30 proposal):
  - Raise the carbon tax rate on non-ETS emissions from "$87 per ton of CO2-equivalent in 2023" to "about $200/T by 2030."
  - EU ETS price described as "currently around €100/T."
- Projected impacts:
  - Statistics Norway analysis: emissions decrease by "34 percent from 2022 to 2035" due to already adopted policies; proposed tax increase would decrease emissions to "36 percent."
  - IMF CPAT estimates for most carbon intensive sectors (accounting for "95 percent of emissions and 30 percent of Gross Value Added"), assuming full pass-through, output prices could increase up to "2–3 percent (e.g., aviation)."
  - Estimated revenue increase: "0.5 percent of GDP by 2030."
  - Fully recycling revenues by reducing the allowance for the Personal Income Tax and increasing targeted transfers could compensate the negative impact on consumption for "more than half of the income distribution."
- Other measures: higher use of biofuels, tax on waste incineration, increased funding to ENOVA, establishment of BIONOVA, and large-scale publicly supported carbon-capture and storage projects.

### Staff appraisal: summary recommendations
- Growth and external position:
  - Norway experienced one of the highest growth rates among advanced economies last year; risks remain "balanced."
  - External position in 2022 was "moderately stronger" than level implied by medium-term fundamentals and desirable policies.
- Fiscal policy:
  - Fiscal position described as "strong" but should address short- and long-term pressures.
  - Near term: fiscal stance should be more supportive of disinflation efforts; avoid mildly expansionary fiscal stance that adds to aggregate demand amid persistent inflation.
  - Over the medium term: address aging-related spending pressures and provide room for investment and climate initiatives.
  - Tax and pension reform: Expert Committee proposals could simplify and increase efficiency; link retirement age limits to life expectancy could help sustainability if disability benefits are reformed first.
- Monetary policy:
  - Recommendation: "Further monetary policy tightening is needed as inflation risks are to the upside."
  - Aim: contain demand and durably bring down inflation to the "2 percent" target.
- Financial sector:
  - Banking system strong; tightening global conditions pose risks—continued vigilance recommended.
  - Macroprudential: broaden toolkit, consider sectoral systemic risk or countercyclical buffer for CRE; make mortgage loan size limits relative to value permanent merits consideration.
  - Cyber risk: strengthen resilience; TIBER framework rolled out.
  - AML/CFT: implement recommendations from IMF assessment of regional cross-border threats and vulnerabilities.
- Structural reform:
  - Progress "piecemeal"; continue upskilling, evaluate retraining effectiveness, address high disability benefit participation.
- Climate:
  - Norway making important mitigation/adaptation efforts; additional efforts needed to fulfil 2030 Paris Agreement ambition.
- Consultation cycle:
  - Proposal for next Article IV consultation on the standard "12-month cycle."

### Public Debt Sustainability Assessment (Annex I) — baseline and projections
- Overall risk of sovereign stress: low.
- Near-term assessment: Low.
- Medium-term assessment: Low (mechanical moderate in the fan chart only).
- Long-term risks: Moderate, driven by aging-related expenditures.
- DSA baseline: Public Debt (Percent of GDP), actual and projections:
  - 2022: 37.2
  - 2023: 38.8
  - 2024: 38.7
  - 2025: 38.4
  - 2026: 38.3
  - 2027: 37.8
  - 2028: 37.3
  - 2029: 36.4
  - 2030: 35.5
  - 2031: 34.6
  - 2032: 33.7
- Change in Public Debt (percent of GDP):
  - 2023: 1.7; 2024: -0.1; 2025: -0.3; 2026: -0.1; 2027: -0.5; 2028: -0.5; 2029: -0.9; 2030: -0.9; 2031: -0.9; 2032: -0.9
  - (2022 change shown as -5.6)
- Primary deficit (percent of GDP):
  - 2022: 7.1; 2023: 8.3; 2024: 8.1; 2025: 8.3; 2026: 8.6; 2027: 8.5; 2028: 8.5; 2029: 8.4; 2030: 8.3; 2031: 8.1; 2032: 8.0
- Noninterest revenues (percent of GDP): 2022: 31.0; 2023: 32.9; 2024: 33.7; 2025: 34.2; 2026: 34.8; 2027: 35.7; 2028: 36.6; 2029: 36.1; 2030: 35.5; 2031: 35.0; 2032: 34.4
- Noninterest expenditures (percent of GDP): 2022: 38.2; 2023: 41.2; 2024: 41.8; 2025: 42.5; 2026: 43.4; 2027: 44.4; 2028: 45.1; 2029: 44.5; 2030: 43.8; 2031: 43.1; 2032: 42.5
- Gross Financing Needs (GFN) (percent of GDP):
  - 2022: 0.0; 2023: 8.3; 2024: 8.5; 2025: 8.8; 2026: 9.1; 2027: 9.1; 2028: 9.3; 2029: 9.1; 2030: 8.9; 2031: 8.7; 2032: 8.6
- Memo items:
  - Real GDP growth (percent): 2022: 3.3; 2023: 2.1; 2024: 2.5; 2025: 1.8; 2026: 1.5; 2027: 1.4; 2028: 1.4; 2029: 1.2; 2030: 1.2; 2031: 1.2; 2032: 1.2
  - Inflation (GDP deflator; percent): 2022: 8.1; 2023: -3.3; 2024: 0.0; 2025: 0.7; 2026: 0.1; 2027: 0.5; 2028: 0.3; 2029: 1.8; 2030: 2.0; 2031: 2.0; 2032: 2.0
  - Nominal GDP growth (percent): 2022: 32.3; 2023: -1.2; 2024: 2.5; 2025: 2.5; 2026: 1.6; 2027: 1.9; 2028: 1.7; 2029: 3.0; 2030: 3.2; 2031: 3.2; 2032: 3.2
  - Effective interest rate (percent): 2022: 1.1; 2023: 1.0; 2024: 1.2; 2025: 1.2; 2026: 1.3; 2027: 1.3; 2028: 1.3; 2029: 1.3; 2030: 1.4; 2031: 1.4; 2032: 1.4
- Staff commentary: "Public debt will stablize and decline over time, reflecting GDP growth, and low borrowing needs."

### Krone developments and implications for monetary policy (Annex III)
- Exchange rate dynamics:
  - Equilibrium model based on interest rate differentials and (real) oil price has generally explained exchange rate movements.
  - Since pandemic start, nominal exchange rate more depreciated than implied by longer-term trend.
  - Norges Bank (2023) notes undervaluation could be explained by narrowing interest rate differentials and increased global economic uncertainty.
- Contributing factors to krone weakness:
  - Narrowing interest rate differentials; increased global uncertainty; reduced relative liquidity of Norwegian currency and bond markets.
  - Large net sale of krone to manage oil revenue inflows within the Petroleum Fund Mechanism may have influenced currency.
- Exchange rate pass-through:
  - Studies indicate a 1 percent depreciation results in a 0.65 percent increase in imported prices and a 0.1 percent increase in core inflation after a year (Bergset et al., 2016).
  - Passthrough may be asymmetric and higher during large depreciations and periods of high inflation/uncertainty.
- Policy implication:
  - Prolonged currency weakness points to upside inflation risks; from a risk management perspective, further policy tightening by Norges Bank appears warranted to ensure durable disinflation towards the 2 percent target.

### Macroeconomic impact of pension reform proposals (Annex VI)
- Commission mandate and options:
  - Pension Commission (established 2020) proposed: increase in age limits in line with life expectancy; indexation of minimum-wage earner pension in line with old age pensions; compensating old-age pensions of previously disabled people in line with longer life expectancy.
- Retirement age reform:
  - Current notional retirement age 67; can be brought forward to 62 or deferred to 75.
  - Proposal: adjust retirement age automatically by 2/3 of marginal life expectancy change in an actuarially neutral manner.
- Disability pensions:
  - Norway’s permanent disability pensioner population is among the highest in the world; preferential treatment of disability pensioners creates disincentives.
  - Recommendation: broader disability reform to curtail inflows and encourage outflows; sequence disability reform before retirement-age increases.
- Model and simulation results:
  - Model: four-region IMF GIMF adapted to analyse ageing.
  - Baseline “Current Policy” scenario: real GDP per capita projected to decline by 12 percent by 2100; working age population decline by 10 percent by 2100.
  - Scenario: increase age limits as envisaged by the Commission—decline in real GDP per capita reduced by half relative to baseline; labor supply declines by less than 5 percent compared to baseline.
  - Scenario with no disability reform (share on disability benefits increases by 2.5 percent): decline in real GDP per capita about -10 percent by end of simulation, nearly reversing benefits of age-limit increases.
  - Fiscal projection summary: “Pensions expenditures are projected to increase by 20 percent under the reform proposals compared to the current policies.”
- Policy sequencing:
  - Initiate broader disability reform first; then implement retirement-age increases and minimum-pension indexation.

### Status of 2020 FSAP Recommendations (Annex VII) — implementation highlights
- Macroprudential policy:
  - Expanded reporting and frameworks; lending regulation extended until year-end 2024 and amended from January 2023.
  - Consideration of broadening toolkit for CRE vulnerabilities; temporary floor for average risk weights for CRE exposures at 35 percent renewed in 2022.
- Supervision and resolution:
  - Government tasked a Commission (September 2021) to propose new Financial Supervision Act; report submitted 2 March 2023 proposing increased FSA independence (public consultation until 2 June 2023).
  - FSA strengthened supervision of foreign branches and medium/small banks; improved IRB oversight guidance.
  - Work underway to make resolution tools operational and strengthen crisis preparedness; bail-in playbook project initiated.
- Cybersecurity:
  - Norges Bank established structured oversight processes; TIBER framework implemented; incident reporting and crisis management routines updated.
- AML/CFT:
  - Sanctioning power used; full scope on-site and off-site AML/CFT inspections increasing; risk-based approach adjusted.
- Data and monitoring:
  - Improved data collection for CRE exposures and payment remarks; legislative process to expand mandatory credit registries to include collateralized debt underway.
- Status coding in report: ST (short term), MT (medium term), I (in progress) noted throughout.

### Progress in strengthening the AML/CFT framework (Annex VIII)
- Key findings:
  - Norway’s AML/CFT regime needs further reinforcement to address ML/TF risks from cross-border and non-resident financial activity.
  - FATF re-rated Norway as compliant with Recommendation 16 on wire transfers in January 2023 following adoption of the EU regulation on information accompanying transfers of funds (TFR).
  - Launch of Norwegian register of beneficial owners delayed; authorities examining implications of European Court of Justice judgement regarding public access.
  - Effectiveness issues remain in ML investigation, prosecution, and confiscation.
- Policy recommendations:
  - Reinforce AML/CFT regime to better address cross-border and non-resident financial activity risks.
  - Strengthen risk-based supervision of banks and supervisory ML/TF risk assessment.
  - Address effectiveness shortcomings in ML investigation/prosecution and confiscation frameworks.
  - Expedite and operationalize beneficial ownership register, resolving public-access considerations.
  - Align legal framework for beneficial ownership transparency with revised FATF standards (Recommendations 24 and 25).

### Statistical issues and data adequacy for surveillance (Section 2(a), 3)
- General assessment: Data provision is adequate for surveillance; data generally high quality, timely, and comprehensive.
- Monetary and financial statistics:
  - Monetary statistics consistent with 2016 Monetary and Financial Statistics Manual and Compilation Guide.
  - Regular and good-quality monetary statistics for publication in IFS, with room to improve timeliness for other financial corporations.
  - Norway reports several series and indicators in the Financial Access Survey (FAS), including two UN SDG indicators.
- Financial sector surveillance:
  - Norway reports Financial Soundness Indicators (FSIs) to the Fund; all core FSIs for deposit takers reported quarterly.
- SDDS:
  - Subscriber to SDDS since 1996; uses SDDS flexibility option on timeliness of general government operations-financing; metadata posted on DSBB.
- Norway: Table of Common Indicators Required for Surveillance (As of June 30, 2023) — selected exact observation dates and frequencies preserved:
  - Exchange Rates: Date of latest observation: 22/06/23; Frequency: D
  - International Reserve Assets and Reserve Liabilities: Date of latest observation: 05/23; Frequency: M
  - Reserve/Base Money: Date of latest observation: 05/23; Frequency: M
  - Broad Money: Date of latest observation: 05/23; Frequency: M; Data Quality – Methodological soundness: O, O, O, LO
  - Central Bank Balance Sheet: Date of latest observation: 0/23; Frequency: M
  - Consolidated Banking System Balance Sheet: Date of latest observation: 04/23; Frequency: M
  - Interest Rates: Date of latest observation: 05/23; Frequency: M
  - Consumer Price Index: Date of latest observation: 05/23; Frequency: M; Data Quality – Methodological soundness: O, O, O, O
  - Revenue/Expenditure/Balance – General Government: Date of latest observation: 2022; Frequency: A; Data Quality – Methodological soundness: LO, O, O, O, LO
  - Stocks of Central Government Debt: Date of latest observation: Q1 2023; Frequency: Q
  - External Current Account Balance: Date of latest observation: Q1 2023; Frequency: Q
  - GDP/GNP: Date of latest observation: M4 2023; Frequency: M
  - Gross External Debt: Date of latest observation: Q1 2023; Frequency: Q
  - International Investment Position: Date of latest observation: Q1 2023; Frequency: Q

*Source: IMF staff report excerpt: 1. The Impact of High Energy Prices and Compensating Measures for Households (content unit 1norea2023001).*

### 1. The Impact of High Energy Prices and Compensating Measures for Households _______________9

### 1. The Impact of High Energy Prices and Compensating Measures for Households

### Recent developments
- Mainland real GDP (excluding the offshore oil and gas sector) grew by 3.8 percent in 2022.
- Consumption slowed in 2023Q1; overall growth remained positive and slightly above projections supported by strong business investment and exports.
- General government budget surplus was close to 26.1 percent of overall GDP in 2022.
- Structural fiscal deficit (non-oil balance) declined to 9.5 percent in 2022, from 10.6 percent of mainland GDP in 2021.
- Structural deficit was somewhat below the long-term guideline: 2.7 percent versus 3 percent of the Government Pension Fund Global (GPFG) value.
- Core inflation was 5.8 percent, Y oY, by end-2022; headline inflation was 5.9 percent.
- Norges Bank raised the policy rate six times in 2022 to 2.75 percent, and 3 times in 2023 to 3.75 percent by June.
- Annual wage growth around 4.3 percent; average unemployment declined to 3.3 percent in 2022.
- Seasonally adjusted registered unemployment was 1.8 percent in May 2023; registered jobless rate was 2.1 percent.
- House prices in June 2023 remained about 17 percent above pre-pandemic levels (February 2020).
- Current account surplus increased to 30.3 percent of total GDP in 2022 from 13.6 percent in 2021.
- Staff assesses the current account gap in 2022 to have been 5.5 percent of total GDP.
- The real effective exchange rate (REER) in 2022 was undervalued by 26 percent relative to the REER norm.

### Fiscal and monetary context
- The initial 2023 budget targeted a contractionary fiscal impulse of 0.6 percent of mainland trend-GDP.
- In the revised budget, spending increased; non-oil structural deficit projected at 10 percent of mainland GDP and 3 percent of the GPFG.
- Resulting fiscal stance is expansionary: 0.4 percent of mainland trend-GDP (revised budget) versus tightening in the initial budget.
- Text Table 1 budget figures (NOK Billion, 2023):
  - Non-oil Revenues: 1462
  - Non-oil Expenditures: 1762
  - Non-oil Deficit: 300
  - Structural Non-Oil Deficit: 373
  - Structural Non-Oil Deficit (percent of Mainland GDP): 10.0
  - Fiscal Impulse: 0.4
  - Structural Non-Oil Deficit (percent of GPFG): 3.0

### Impact of high energy prices and household support (Box 1)
- Staff estimate of total burden on household annual consumption, all things equal, was around 3 percent in 2022, with slightly higher incidence for low-income households.
- The burden is lower than the European average (6 percent).
- Fiscal support of about 0.7 percent of GDP was allocated in 2022.
- Actual outlays estimated at about 0.5 percent of GDP for the electricity subsidy.
- Targeting support to fully compensate for higher electricity price for the bottom two quintiles would have cost roughly around 0.25 percent of GDP.
- Norway: Temporary Energy Support Measures (Billions NOK, 2022):
  - Subsidies and Direct Assistance: 37.0
  - Electricity subsidy scheme for households: 33.2
  - Increased housing assistance: 1.7
  - Electricity subsidy scheme for agriculture and greenhouses: 1.0
  - Electricity subsidy scheme for the voluntary sector: 0.6
  - Additional support for students and sports teams: 0.6
  - Grants and Guarantees: 2.1
  - Support for energy efficiency measures for households: 0.1
  - Grant scheme for businesses (expired): 1.6
  - Increased grants to municipalities for welfare payments: 0.3
  - Grant for energy efficiency measures in rental housing, care homes and nursing homes: 0.2
  - Other Grants: 0.1
  - Total: 39.1
  - Total (percent of GDP): 0.7

### Fiscal policy recommendations and analysis
- Fiscal policy should be more supportive of the disinflationary effort.
- A tighter fiscal stance over the near term would help contain inflation and have added benefits to financial stability.
- The revised budget’s expansionary stance reduced near-term support for monetary policy’s disinflation objective.
- Redesigning the electricity support package to better target lower-income households would have been more equitable and less costly overall.
- Additional revenue or expenditure measures are needed to make room for multi-year spending commitments and population ageing; limited scope exists within the fiscal rule unless measures are accompanied by revenue-raising or cost-saving actions.
- Pension reform proposals to link retirement age limits to life expectancy would benefit sustainability and labor force participation, but other elements of the reform could increase costs and jeopardize work incentives unless disability benefits reform is comprehensive.
- Reducing incentives for early retirement should remain an important policy objective.

### Proposals for tax reform (Box 2)
- Staff broadly supports the “Torvik Committee” (Expert Committee on Tax Reform) proposals; quantified to be revenue-neutral in the short term.
- Short-term financing of labor income tax reductions via VAT, increased taxation on housing and high pensions, rent taxes, and taxes on environmentally harmful activities.
- In the longer term, projected increased revenue to be used to reduce tax pressure.
- Main proposals include:
  - Introducing a new deduction on income earned and lowering contributions on salary, social security, and business income to strengthen work incentives.
  - Expanding the resource rent tax to onshore wind power, hydropower, and fisheries.
  - Introducing a single Value-Added Tax (VAT) rate at 25 percent and a compensatory scheme for lower-income households.
  - Introducing an imputed-rent tax and extending capital gains tax to include primary residences.

### Outlook and risks
- Mainland GDP is expected to grow by 1.4 percent in 2023.
- Employment growth is softening but labor demand should remain strong; capacity utilization approaching more normal levels with large differences among sectors.
- Compensatory electricity subsidies and excess savings accumulated during the pandemic should continue to support real incomes and spending.
- The current account is projected to remain in a high surplus, with net exports contributing strongly to growth.
- Public spending is expected to add to demand pressures.
- Headline inflation likely to recede somewhat because of the slowdown in domestic demand and expected lower global inflation.
- Overall risks are balanced (Annex V), but short-term inflation risks are skewed significantly to the upside.
- Downside risks: abrupt global slowdown or recession; property price decline (expected to fall moderately and stabilize in 2023).
- Financial stability: systemic risks have not materially increased; no signs of liquidity problems for Norwegian banks so far.
- Emerging risks: cyber risks becoming a more prominent threat to financial stability.

### Authorities’ views
- Authorities broadly share the assessment of the outlook and risks.
- They highlighted the economy’s resilience despite higher policy rates and noted consumption resilience given tight labor market and savings buffers.
- They observed constraints on finding workers starting to ease, moderating new vacancies, but stock of vacancies at historical highs and registered unemployment close to historical lows.
- In this context, they saw risks to growth as broadly balanced and on the upside for inflation.

*Source: IMF staff report excerpt: 1. The Impact of High Energy Prices and Compensating Measures for Households.*

### 11.      The authorities agreed that in a context of elevated inflation and tight labor markets

### 11.      The authorities agreed that in a context of elevated inflation and tight labor markets

### Fiscal Policy
- Authorities agreed fiscal policy should not add to aggregate demand in the context of elevated inflation and tight labor markets.
- Measures to preserve the real level of spending in the budget were considered necessary.
- Part of the increase of the deficit in the revised budget was attributed to lower energy prices, which had a larger impact on revenues than on expenditures.
- Additional spending increases were identified as:
  - Foreign aid—mainly to Ukraine.
  - Humanitarian assistance to other countries severely hit by higher food and energy prices.
  - These spending items were judged to be priorities and to affect domestic demand "to a little degree."
- Energy measures were described as well designed and "easy to discontinue once electricity prices durably fall."
- Proposals from the tax commission:
  - Have been discussed in public hearings.
  - Will be considered in subsequent budgets.
- Structural reforms:
  - Strengthening work incentives and reforming disability benefits remain important for long-term sustainability but are politically difficult.

### Monetary Policy — Current Assessment and Risks
- Staff sees upside risks to inflation from:
  - A weak krone (Annex III).
  - Tight labor market and elevated inflation expectations that could lead to higher-than-expected wage increases.
  - Robust consumption backed by savings (Annex IV).
  - Strong corporate credit demand.
  - A fairly resilient housing market.
  - A fiscal stance that is looser than warranted.
- Electricity price futures indicate receding price pressures ahead; headline CPI inflation should abate due to base effects.
- With core inflation above expectations in May at 6.7 percent, Norges Bank:
  - Raised the policy rate by 50 basis points to 3.75 percent in June.
  - Revised the rate path upwards, indicating a rise in the policy rate slightly above 4 percent later this year.
- Inflation developments:
  - Inflation in June was 6.4 percent, easing from May but still slightly above market expectations.
  - Core inflation accelerated to a record-high 7 percent, well-above expectations.
- Output and transmission considerations:
  - Positive growth and an output gap around 0.5 percent were noted.
  - Staff analysis suggests the elasticity of consumption to interest rates is relatively low (Annex IV), thus only moderately affecting output.
  - Important uncertainties exist in the transmission of monetary policy and its impact on the real economy.
  - Compression of profit margins to help restrain inflation is considered more likely in the energy sector than in services.
- Policy implication:
  - To bring inflation towards the medium-term target and given upside risks, further tightening this year may be needed.
  - Further policy rate increases are needed, accompanied by continued clear communication on how economic developments affect the current and future policy stance.
- Norges Bank CBDC work:
  - CBDC project initiated in 2016; currently in its fourth phase covering required legislative amendments for a generally accessible retail CBDC.
  - Legislative amendments being considered are only for introduction of digital cash as a well-functioning means of payment for general public use.
  - Introduction of CBDC would have a major impact on bank deposit funding and Norges Bank’s liquidity policy and will require regulatory adjustments beyond Norges Bank’s purview.
  - Legislative amendments to make CBDC payments anonymous or to give CBDC automatic payment functionality would have to be considered separately.
  - Decision on CBDC introduction rests with parliament; Norges Bank will advise on technical solutions and considerations.

### Authorities’ Views on Monetary Policy
- Authorities agreed policy rates should be flexibly adjusted to respond to economic developments.
- They recognized a higher policy rate may be required if inflation pressures persist.
- Authorities noted currency depreciation is an upward risk to inflation and might require more tightening.
- They highlighted uncertainty over:
  - How much savings could cushion the impact of higher inflation.
  - Cash flow effects from higher interest rates on consumption.
- Authorities pointed out private consumption has been resilient and has surprised on the upside.

### Financial Sector Policies — Resilience and Risks
- Overall assessment:
  - Norwegian banks remain robust with no substantial increase in systemic vulnerabilities over the last year.
  - Banks remain highly capitalized, with high earnings and low credit losses.
  - The stress test in the Financial Stability Report (2022) indicates banks are resilient and capital buffers would help absorb losses and maintain lending even in a severe downturn.
- Capital and buffers:
  - Countercyclical capital buffer requirement of 2.5 percent and systemic risk buffer of 4.5 percent help banks maintain ample loss-absorbing capacity.
  - Banks satisfy capital and liquidity requirements by an ample margin and have diversified funding with a large share of guaranteed deposits.
- Profitability and credit:
  - Bank profitability is expected to remain solid despite expected increases in credit losses, as deposit and interest rates have risen with policy rates.
  - Risks are broadly manageable but warrant continued vigilance given uncertainty about household and firm responses to higher interest rates and funding costs.
- Credit developments:
  - Credit growth has declined gradually over the past 1½ years, mostly among households.
  - Drivers include tightening financial conditions, large share of variable mortgages (Annex IV), moderation of house prices, and lower market turnover.
  - High corporate credit growth attributed to increased bank lending, particularly to manufacturing and services, reflecting higher investment and generally high profitability and debt servicing capacity of firms.
  - Some banks have reported stricter equity and debt-servicing requirements for new CRE loans and increased margins on new CRE loans.
  - Risk premiums on new corporate bond issues have risen markedly over the past year, particularly for CRE firms, reducing bond issuance.
  - Banks’ exposure to CRE is about 50 percent of corporate portfolios; limited exposure to financially weak CRE firms with substantial upcoming bond debt amortization (Norges Bank, 2023).
  - Fast rise in rents and CPI-indexing of office leases make many CRE firms robust against higher interest rates and credit premiums (Norges Bank, 2022 and 2023).
  - An economic downturn with a sharp fall in selling prices and rental income could result in considerable bank losses.
- Household resilience and regulation:
  - Most households should be able to service their debt.
  - Financial Stability Report 2022 estimated households holding a relatively small share (2–3 percent) of overall household debt may be affected by higher interest rates and may experience severe pressures.
  - At end-2022, the Ministry of Finance changed the Lending Regulation (effective January 1, 2023–December 31, 2024) to lower the maximum rise in interest rates borrowers must be able to tolerate; stressed interest rate level is adjusted as interest rates rise to avoid being overly aggressive.
  - Overall mortgage rules remain likely effective in reducing excessive borrowing by households most vulnerable to further tightening.
- Regulatory and structural progress:
  - Progress on some 2020 FSAP recommendations:
    - A special commission proposed strengthening the FSA’s prudential powers and more independence (now under public review).
    - FSA has been monitoring banks’ collateral eligible for central bank liquidity operations.
    - Norges Bank initiated a project with larger banks and Finance Norway to implement a mechanism for acceptance of mortgage loan collateral for emergency liquidity support to solvent banks.
    - Government started legislative process to expand mandatory credit registries to include collateralized debt (including housing loans).
    - CRE data started to be monitored through a private sector database on renters and owners.
    - Average risk weight floors of 20 percent for retail exposures and of 35 percent for corporate exposures collateralized by real estate were extended until end-2024.
  - Given CRE vulnerabilities, there is merit in eventually introducing a sectoral systemic risk buffer (SSRB).
  - Other recommendations are in progress or only partially implemented, e.g., making key household sector measures permanent features of the framework (Annex VII).
- Cybersecurity:
  - Cyber risks are becoming a more prominent threat; number of cyber-attacks has risen.
  - Norges Bank established a more structured process for oversight and supervision in cyber security: annual risk-based planning, more active use of third-party reports, and self-assessments from participants.
  - In collaboration with the FSA, Norges Bank introduced the TIBER framework for tests of cyber resilience in the financial system.
- AML/CFT and anti-corruption:
  - Supervisory sanctioning power has been used; since 2019 the FSA has imposed monetary penalties on nine banks, five investment firms, nineteen real estate agents, and thirty-five audit or accounting firms.
  - The statute of limitations for pecuniary sanctions in the AML Act has been increased to five years from when a reporting entity is no longer in breach of an AML provision.
  - Progress has been made in addressing risks from cross-border financial flows (Annex VIII); ongoing IMF regional technical assistance will provide recommendations on guarding against cross-border money laundering threats and vulnerabilities.
  - Authorities are encouraged to further strengthen the framework to combat foreign bribery and to address deficiencies that may undermine enforcement.

### Box: Actions to Combat Foreign Bribery (Summary of Key Points)
- Norway has a strong overall legal framework to combat foreign bribery and is an active enforcer of the OECD Anti-Bribery Convention, but further improvements are needed.
- Authorities amended Norway’s Penal Code to ensure prosecution of foreign bribery offences committed by Norwegian nationals in foreign jurisdictions, regardless of whether that act was unlawful or punishable in those jurisdictions.
- Progress included increasing resources to ØKOKRIM and development of comprehensive guidelines to assist implementation of new public procurement legislation.
- October 2022 report detailed the state’s expectations for state-owned enterprises to prevent financial crimes such as corruption and money laundering in their activities and supply chains.
- Key remaining gaps:
  - Norway has not yet amended the Penal Code to remove the provision limiting possible sanctions for foreign bribery offences committed in a foreign jurisdiction to those available in the jurisdiction where the bribery occurred.
  - Limited progress in clarifying whether supervisory authorities should inform state-owned enterprises when they are subject to foreign bribery allegations.
  - Limited progress in raising awareness of embassy staff roles in detecting and reporting foreign bribery allegations to Norwegian authorities.

*Source: IMF staff report excerpt provided in content unit 1norea2023001.*

### 22.      The authorities saw systemic vulnerabilities in the banking sector as broadly

### 22.      The authorities saw systemic vulnerabilities in the banking sector as broadly unchanged

### Financial stability and banking-sector vulnerabilities
- Authorities' assessment:
  - Systemic vulnerabilities in the banking sector seen as "broadly unchanged."
  - Downside risks remain from further turmoil in global markets that could lead to higher funding costs.
  - Uncertainty about firms' and households' responses to further rate hikes could possibly increase losses.
- Macroprudential measures and assessments:
  - Borrower-based measures have helped to contain vulnerabilities.
  - Authorities reiterated assessment of CRE risks as "broadly manageable."
  - Norges Bank assessment: the Systemic Risk Buffer (SRB) rather than a sectoral SRB (SSRB) should serve as a main rule that applies to all exposures in Norway, especially given uncertainty about the effect of structural vulnerabilities on banks in a downturn.
  - Risks attenuated by a strong rental market and adjustment of leases to inflation.
  - Preparedness and contingency planning for cyber risks remain priorities.
  - Authorities expressed appreciation for the regional TA and recommendations.

### Structural policies and labor market
- Progress:
  - Progress on vital structural reforms described as "uneven."
  - Some upskilling of the workforce, with increased vocational training contributing most.
- Disability benefits and labor force participation:
  - High participation in the disability benefit system: "11 percent of working age population" (especially young people).
  - This is characterized as a drain on public finances and deprives the labor market of needed workforce.
  - Spending on retraining has increased without a meaningful decline in benefit recipients; recommendation to evaluate the quality of such expenditures.
  - The Norwegian Inclusive Workplace Agreement (January 2019–December 2022) focused mainly on preventing transitions from employment to disability benefits, with little relevance for young disability pensioners who are early school leavers and have weak labor market attachment.
  - A pilot project to prevent early dropouts from upper secondary education was recently launched by the Labor and Welfare Service in collaboration with other institutions.
  - Integration Act (in effect since January 2021): two evaluation reports expected in 2023, and a system to measure implementation, efforts, and results of the Act is expected.

### Housing affordability
- Context:
  - Housing affordability has become more prominent under high inflation and rising interest rates.
  - Authorities acknowledge structural supply shortfall.
- Policy implications:
  - Policy proposals in the Housing Strategy considered insufficient to alleviate pressures in the short to medium term.
  - Short-term instruments: increasing portable allowances and reducing the income tax for the most vulnerable described as "the most powerful immediate tools."
  - Medium-term actions: easing restrictions on supply of new housing and altering regulations to boost construction efficiency to increase supply of rental and for-sale housing.

### Climate policy and carbon pricing (Box 4)
- Existing framework:
  - Main instruments: taxes on greenhouse gas (GHG) emissions and participation in the EU Emissions Trading System (ETS).
  - Norway's share of GHG emissions subject to taxation is among the highest in OECD.
- Planned carbon-tax path:
  - Climate Action Plan 2021–30 proposal: raise the carbon tax rate on non-ETS emissions from "$87 per ton of CO2-equivalent in 2023" to "about $200/T by 2030."
  - EU ETS price described as "currently around €100/T."
- Projected impacts:
  - Statistics Norway analysis: a marginal decrease in GDP compared to a baseline; emissions decrease by "34 percent from 2022 to 2035" due to already adopted policies, and the proposed tax increase would decrease emissions slightly further ("by 36 percent").
  - IMF CPAT estimates for the most carbon intensive sectors (accounting for "95 percent of emissions and 30 percent of Gross Value Added"), assuming full pass-through, output prices could increase up to "2–3 percent (e.g., aviation)."
  - Estimated revenue increase: "0.5 percent of GDP by 2030."
  - Fully recycling revenues by reducing the allowance for the Personal Income Tax and increasing targeted transfers could compensate the negative impact on consumption for "more than half of the income distribution."
- Other climate initiatives:
  - 2023 plan includes scheduled carbon-tax increase, higher use of biofuels, a tax on waste incineration, increased funding to ENOVA, establishment of BIONOVA, and large-scale publicly supported projects for carbon-capture and storage.
  - Additional measures suggested: more efficient use and re-use of CO2-intensive building materials (steel, concrete) and removal of regulatory impediments to increase use of second-hand building materials.

### Authorities' views
- Agreement with recommendations:
  - Authorities agreed there are too many people outside the labor force.
  - New Youth Guarantee program to take effect in "July 2023" aimed at shortening passive periods outside education and work.
  - Amendments to the Education Act expected to come into force in "2024" with anticipated positive outcomes.
  - Training under the Integration Act will take time; requires minimum language achievement and formal education for career paths.
  - Authorities view housing allowance schemes as important policy instruments used since the pandemic and energy crisis.
  - Authorities concur that further efforts are needed to fulfil the 2030 Paris Agreement goals.

### Staff appraisal: growth, fiscal, monetary, financial, and structural recommendations
- Growth and external position:
  - Norway experienced one of the highest growth rates among advanced economies last year; risks remain "balanced."
  - Growth continuing at a more modest pace; windfall gains from high petroleum and natural gas prices have countered global headwinds.
  - External position in 2022 was "moderately stronger" than level implied by medium-term fundamentals and desirable policies.
- Fiscal policy:
  - Fiscal position described as "strong" but should address short- and long-term pressures.
  - Near term: fiscal stance should be more supportive of disinflation efforts.
  - Structural non-oil deficit in the revised budget results in a "mildly expansionary fiscal stance," contributing to higher aggregate demand which should be avoided amid persistent inflation.
  - Spending on electricity subsidies projected to decline this year; potential savings by narrowing coverage and calibrating support to vulnerable households.
  - Over the medium term: aging-related spending pressures require additional measures to make room for new investment and climate initiatives.
  - Tax and pension reform suggestions: proposals by the Expert Committee on Tax Reform could simplify and increase efficiency; Pension Commission suggestion to link retirement age limits to life expectancy could help sustainability and labor force participation; but changes should be preceded by comprehensive reform of Norway’s disability benefits.
- Monetary policy:
  - Recommendation: "Further monetary policy tightening is needed as inflation risks are to the upside."
  - Rationale: GDP growth and the output gap projected positive this year, labor market still tight, consumption backed by pandemic savings, elevated inflation expectations, currency weakness, and broad-based inflation.
  - Aim: contain demand and durably bring down inflation to the "2 percent" target.
  - Importance of continued clear communication given uncertainties about transmission of monetary policy.
- Financial sector:
  - Banking system described as "strong" but tightening global conditions pose risks.
  - Risks broadly manageable but continued vigilance recommended.
  - Suggested macroprudential actions: further broadening of toolkit, such as gradually introducing a sectoral systemic risk or countercyclical buffer for CRE.
  - Mortgage policy: merit in making limits on mortgage loan size relative to value permanent given high household debt and elevated house prices.
  - Cyber risk: need to strengthen resilience; Norges Bank and FSA rolled out the TIBER framework.
  - AML/CFT: ongoing improvements; implement recommendations from IMF assessment of regional cross-border threats and vulnerabilities to enhance supervision.
- Structural reform progress:
  - Progress described as "piecemeal."
  - Upskilling measures and planned youth guarantee are positive, but retraining has not reduced benefit recipiency; continued assessment of effectiveness recommended.
  - High participation in disability benefits remains a policy priority.
  - Housing affordability has become more prominent under current macro conditions.
- Climate:
  - Norway making important efforts in mitigation and adaptation, including scheduled carbon-price increases and publicly supported carbon-capture and storage projects.
  - Additional efforts needed to fulfil 2030 Paris Agreement ambition.
- Consultation cycle:
  - Proposal that the next Article IV consultation be held on the standard "12-month cycle."

### Key statistics and indicators (selected exact figures preserved)
- Disability benefit participation: "11 percent of working age population."
- Carbon tax: from "$87 per ton of CO2-equivalent in 2023" to "about $200/T by 2030."
- EU ETS price: "currently around €100/T."
- Emissions change: "34 percent from 2022 to 2035" (already adopted policies); tax increase reduces emissions to "36 percent."
- CPAT sector coverage: "95 percent of emissions and 30 percent of Gross Value Added"; output prices could increase up to "2–3 percent."
- Estimated revenue increase from carbon tax: "0.5 percent of GDP by 2030."
- Inflation target: "2 percent."
- Proposed timing: New Youth Guarantee in "July 2023"; Education Act amendments in "2024."
- Staff proposal for consultation frequency: "12-month cycle."

*Source: IMF staff report (text excerpt provided).*

### Annex I. P ublic Debt Sustainability Assessment

### Annex I. P ublic Debt Sustainability Assessment

### Overall Sovereign Stress Assessment
- The overall risk of sovereign stress is low.
- Near-term assessment: Low (note on near-term assessment applicability: "The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement. In surveillance-only cases or in cases with precautionary IMF arrangements, the near-term assessment is performed but not published.").
- Medium-term assessment: Low (mechanical moderate in the fan chart only), based on high buffers and strength of institutions.
- Long-term risks: Moderate, driven by aging-related expenditures on health and social security feeding into debt dynamics.
- Commentary: "The overall risk of sovereign stres is low, reflecting a low level of public debt and high buffers."

### DSA Summary Assessment and Staff Commentary
- Summary: Norway is at a low overall risk of sovereign stress and debt is sustainable.
- Projection: Debt is expected to stabilize and decline over the medium term.
- Liquidity risk: "Medium-term liquidity risks as analyzed by the GFN Financeability Module are low."
- Policy recommendation: "Over the longer run, Norway should continue with reforms to tackle population aging and its impact on public spending. However, the large buffers will keep the risks low."

### Debt Coverage and Disclosures (Perimeter and Inclusion)
- Coverage chosen: indicated categories include CG (Central government), GG (General government), NFPS (Nonfinancial public sector), CPS (Public sector) (labels present in figure).
- Subsector inclusion in the baseline:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): Yes
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- Commentary: "N/A"
- Notes on definitions and recording present (abbreviations preserved): CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
- Footnotes retained: e.g., "Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable."

### Public Debt Structure Indicators (Key patterns and commentary)
- Commentary: "Public debt is predominantly in domestic currency, with a larger incidence of loans vs securities (less than 50 percent)."
- Visual indicators (perimeter shown is general government) include breakdowns by:
  - Debt by Currency (Foreign currency / Local currency / Local-linked)
  - Public Debt by Holder (External private creditors / External official creditors / Domestic other creditors / Domestic commercial banks)
  - Public Debt by Governing Law
  - Debt by Instruments (Marketable debt / Nonmarketable debt)
  - Public Debt by Maturity (≤ 1 year / 1-5 years / > 5 years; residual maturity: <5 years)

### Baseline Scenario (Public Debt and Key Fiscal Dynamics)
- Public Debt (Percent of GDP), actual and projections:
  - 2022: 37.2
  - 2023: 38.8
  - 2024: 38.7
  - 2025: 38.4
  - 2026: 38.3
  - 2027: 37.8
  - 2028: 37.3
  - 2029: 36.4
  - 2030: 35.5
  - 2031: 34.6
  - 2032: 33.7
- Change in Public Debt (percent of GDP):
  - 2023: 1.7
  - 2024: -0.1
  - 2025: -0.3
  - 2026: -0.1
  - 2027: -0.5
  - 2028: -0.5
  - 2029: -0.9
  - 2030: -0.9
  - 2031: -0.9
  - 2032: -0.9
  - (2022 change shown as -5.6)
- Contribution of identified flows (percent of GDP):
  - 2022: -7.5
  - 2023: 1.1
  - 2024: -0.8
  - 2025: -0.4
  - 2026: -0.2
  - 2027: -0.6
  - 2028: -0.6
  - 2029: -0.9
  - 2030: -0.9
  - 2031: -0.8
  - 2032: -0.8
- Primary deficit (percent of GDP):
  - 2022: 7.1
  - 2023: 8.3
  - 2024: 8.1
  - 2025: 8.3
  - 2026: 8.6
  - 2027: 8.5
  - 2028: 8.5
  - 2029: 8.4
  - 2030: 8.3
  - 2031: 8.1
  - 2032: 8.0
- Noninterest revenues (percent of GDP):
  - 2022: 31.0
  - 2023: 32.9
  - 2024: 33.7
  - 2025: 34.2
  - 2026: 34.8
  - 2027: 35.7
  - 2028: 36.6
  - 2029: 36.1
  - 2030: 35.5
  - 2031: 35.0
  - 2032: 34.4
- Noninterest expenditures (percent of GDP):
  - 2022: 38.2
  - 2023: 41.2
  - 2024: 41.8
  - 2025: 42.5
  - 2026: 43.4
  - 2027: 44.4
  - 2028: 45.1
  - 2029: 44.5
  - 2030: 43.8
  - 2031: 43.1
  - 2032: 42.5
- Automatic debt dynamics (contribution, percent of GDP):
  - 2022: -8.3
  - 2023: 0.0
  - 2024: -0.8
  - 2025: -0.7
  - 2026: -0.4
  - 2027: -0.4
  - 2028: -0.3
  - 2029: -0.6
  - 2030: -0.6
  - 2031: -0.6
  - 2032: -0.6
- Real interest rate and relative inflation (contribution, percent of GDP):
  - 2022: -6.0
  - 2023: 0.8
  - 2024: 0.1
  - 2025: 0.0
  - 2026: 0.2
  - 2027: 0.1
  - 2028: 0.2
  - 2029: -0.2
  - 2030: -0.2
  - 2031: -0.2
  - 2032: -0.2
- Real growth rate (contribution, percent of GDP):
  - 2022: 2.7
  - 2023: -0.8
  - 2024: -0.3
  - 2025: -0.2
  - 2026: -0.3
  - 2027: -0.2
  - 2028: -0.2
  - 2029: 0.0
  - 2030: 0.0
  - 2031: 0.0
  - 2032: 0.0
- Other identified flows (percent of GDP):
  - 2022: -6.4
  - 2023: -7.3
  - 2024: -8.0
  - 2025: -8.0
  - 2026: -8.4
  - 2027: -8.7
  - 2028: -8.8
  - 2029: -8.6
  - 2030: -8.5
  - 2031: -8.4
  - 2032: -8.2
- Contribution of residual (percent of GDP):
  - 2022: 1.9
  - 2023: 0.6
  - 2024: 0.6
  - 2025: 0.1
  - 2026: 0.1
  - 2027: 0.1
  - 2028: 0.0
  - 2029: -0.1
  - 2030: -0.1
  - 2031: 0.0
  - 2032: 0.0
- Gross Financing Needs (GFN) (percent of GDP):
  - 2022: 0.0
  - 2023: 8.3
  - 2024: 8.5
  - 2025: 8.8
  - 2026: 9.1
  - 2027: 9.1
  - 2028: 9.3
  - 2029: 9.1
  - 2030: 8.9
  - 2031: 8.7
  - 2032: 8.6
- Of which: debt service (percent of GDP):
  - 2022: -5.4
  - 2023: 2.7
  - 2024: 3.1
  - 2025: 3.4
  - 2026: 3.7
  - 2027: 3.8
  - 2028: 3.9
  - 2029: 3.8
  - 2030: 3.7
  - 2031: 3.6
  - 2032: 3.5
- Debt service by currency (percent of GDP):
  - Local currency (selected years): 2022: -3.3; 2023: 1.7; 2024: 1.7; 2025: 2.0; 2026: 2.4; 2027: 2.5; 2028: 2.6; 2029: 2.5; 2030: 2.4; 2031: 2.4; 2032: 2.3
  - Foreign currency (selected years): 2022: -2.1; 2023: 1.0; 2024: 1.4; 2025: 1.4; 2026: 1.3; 2027: 1.3; 2028: 1.3; 2029: 1.2; 2030: 1.2; 2031: 1.1
- Memo items:
  - Real GDP growth (percent):
    - 2022: 3.3
    - 2023: 2.1
    - 2024: 2.5
    - 2025: 1.8
    - 2026: 1.5
    - 2027: 1.4
    - 2028: 1.4
    - 2029: 1.2
    - 2030: 1.2
    - 2031: 1.2
    - 2032: 1.2
  - Inflation (GDP deflator; percent):
    - 2022: 8.1
    - 2023: -3.3
    - 2024: 0.0
    - 2025: 0.7
    - 2026: 0.1
    - 2027: 0.5
    - 2028: 0.3
    - 2029: 1.8
    - 2030: 2.0
    - 2031: 2.0
    - 2032: 2.0
  - Nominal GDP growth (percent):
    - 2022: 32.3
    - 2023: -1.2
    - 2024: 2.5
    - 2025: 2.5
    - 2026: 1.6
    - 2027: 1.9
    - 2028: 1.7
    - 2029: 3.0
    - 2030: 3.2
    - 2031: 3.2
    - 2032: 3.2
  - Effective interest rate (percent):
    - 2022: 1.1
    - 2023: 1.0
    - 2024: 1.2
    - 2025: 1.2
    - 2026: 1.3
    - 2027: 1.3
    - 2028: 1.3
    - 2029: 1.3
    - 2030: 1.4
    - 2031: 1.4
    - 2032: 1.4
- Staff commentary: "Public debt will stablize and decline over time, reflecting GDP growth, and low borrowing needs."

### Realism of Baseline Assumptions (Historical track record and bias)
- Commentary: "Realism analysis reflect large fluctuations due to oil price volatility and past forecast errors reveal some optimistic bias."
- Key indicators analyzed for realism:
  - Forecast track record (t+1, t+3, t+5) for Public Debt to GDP, Primary Deficit, r - g, Exchange Rate Depreciation, Historical Output Gap Revisions.
  - 3-Year Debt Reduction and 3-Year Adjustment in Cyclically-Adjusted Primary Balance distributions and percentile comparisons.
  - Fiscal adjustment and possible growth paths using multipliers (Multiplier=0.5, 1, 1.5) illustrated alongside baseline real growth and potential.
- Comparative percentile findings:
  - 3-year debt reduction above 75th percentile: reference value (5.9 ppts of GDP) with percentile rank 44.1 noted.

### Medium-Term Risk Analysis (Debt Fanchart and GFN Financeability)
- Debt fanchart and GFN key indicators (values preserved as displayed):
  - Fanchart width: 127.4 1.9 (values appear as printed)
  - Probability of debt not stabilizing (pct): 99.7 0.8
  - Terminal debt level x institutions index: 5.00.1
  - Debt fanchart index: ...2.8
  - Average GFN in baseline: 8.8 3.0
  - Bank claims on government (pct bank assets): 4.91.6
  - Change in claims on govt. in stress (pct bank assets): 1.00.3
  - GFN financeability index: ...4.9
- Module signals and commentary:
  - Debt Fanchart Module: pointing to a high level of risk due to high width of bands, but debt remains relatively low even in extreme scenarios.
  - GFN Financeability Module: suggests low level of risk.
- Medium-term index and probabilities:
  - "Prob. of missed crisis, 2023-2028 (if stress not predicted): 27.3 pct."
  - "Prob. of false alarm, 2023-2028 (if stress predicted): 20.5 pct."
- Normalized metrics and weights in MTI shown (debt fanchart index weight 0.5/0.6 and GFN financeability index weight 0.4), and overall MTI components indicate low-to-moderate signals.

*Source: IMF staff calculations.*

### Annex III. Krone Developments and Implications for Monetary

### Annex III. Krone Developments and Implications for Monetary Policy

### Exchange rate dynamics and recent deviation from trend
- An equilibrium model of the nominal exchange rate based on interest rate differentials between Norway and its main trading partners and the level of the (real) oil price has generally explained well movements of the exchange rates (Alstad, 2010).
- Since the beginning of the pandemic, the nominal exchange rate has been more depreciated than implied by its longer-term trend.
- Norges Bank (2023) notes the currently observed undervaluation could be explained by narrowing interest rate differentials and increased global economic uncertainty.
- Global factors largely influence Norway’s exchange rate dynamics.

### Contributing factors to krone weakness
- Narrowing interest rate differentials vis-à-vis trading partners.
- Increased global economic uncertainty leading investors to rebalance toward more liquid assets.
- Reduced relative liquidity of Norwegian currency and bond markets appears to be a contributing factor.
- A trade-weighted measure of the convenience yield for Norway’s one-year government bond yield vis-à-vis other advanced economies shows a downward trend since the beginning of the pandemic.
  - The convenience yield is defined as the forward premium plus the difference between foreign and domestic one year government bond yields.
  - Sample for the convenience yield construction: Australia, Canada, Euro Area, Japan, New Zealand, Norway, Sweden, Switzerland, United Kingdom, and United States.
- The unprecedented increase in oil revenues and the net sale of krone needed to manage these large inflows within the Petroleum Fund Mechanism may have also influenced the currency.

### Exchange rate pass-through and inflation implications
- Studies for Norway indicate:
  - A 1 percent depreciation of the currency results in a 0.65 percent increase in imported prices and a 0.1 percent increase in core inflation after a year (Bergset et al., 2016).
- Past depreciation episodes in Norway have kept inflation temporarily above target.
- Several studies suggest exchange rate passthrough may be asymmetric, e.g., it is higher during episodes of large depreciation (Caselli and Roitman, 2019; Holm, 2014).
- There is evidence that passthrough is asymmetric during periods of high inflation and elevated uncertainty (Carriere-Swallow et al., 2023).

### Policy implications and recommendations
- Because a weaker krone tends to lead to higher inflation, prolonged currency weakness points to upside inflation risks.
- From a risk management perspective, further policy tightening by Norges Bank appears warranted to mitigate the impact on inflation and to ensure durable disinflation towards its 2 percent target.

*Prepared by Salvatore Dell’Erba. Source: Annex III. Krone Developments and Implications for Monetary Policy.*

### Annex VI. Macroeconomic Impact of Pension Reform Proposals

### Annex VI. Macroeconomic Impact of Pension Reform Proposals

### Commission mandate and main reform options
- A Pension Commission was established in 2020 to evaluate the pension system and propose reforms.
- The Commission proposed three main options:
  - Increase in age limits in line with life expectancy.
  - Indexation of minimum-wage earner pension in line with old age pensions.
  - Compensating old-age pensions of previously disabled people in line with longer life expectancy.
- The Commission’s recommendations are intended to improve equity and incentives for increasing labor supply, and are supported by a majority of its members.
- The reforms can support a stronger and more equitable pension system in the longer term, if preceded by a reform of the disability benefits.

### Retirement age reform design and rationale
- Current notional retirement age is 67 years; it can be brought forward to 62 or deferred to 75 years, with early retirement conditional on meeting a welfare minimum criterion.
- Proposal: adjust the retirement age automatically by 2/3 of the marginal life expectancy change and do so in an actuarially neutral manner.
- Recommendation: increase early and deferred retirement ages in parallel with the change in the normal retirement age.
- Expected effects: aligns with best practice, improves equity, and maintains sustainability and adequacy.
- Note: “As old age pension is calculated considering life expectancy at retirement, the automatic retirement age increase does not affect the value of starting pensions relative to career earnings and in comparisons other cohorts’ benefits.”

### Minimum pension indexation proposal
- Proposal: index the starting level of the minimum pensions to wages (same as for old age pensions) to maintain the relationship between average wages and the starting level of the minimum pension constant.
- Proposed mechanics:
  - Index the starting benefit to wages.
  - Index paid minimum pensions and other pensions to a composite index of prices and wages.
- Recommendation: make the difference more pronounced between the “full career minimum” (sufficiently long contribution histories but low earned wages) and a lower minimum for people with short working careers.
- For short-career minimums, indexing starting pensions and further pension payments only with prices may strengthen incentives for labor supply and compliance.

### Disability pensions: issues and proposed adjustment
- Current system: permanent disability pension based on earnings prior to onset of disability; at retirement age disability pension is replaced by a newly calculated old age pension based on a full notional career but using earnings observed before disability—this provides preferential treatment to disability pensioners.
- Concerns:
  - Preferential treatment is problematic, particularly for people disabled at younger ages.
  - Norway’s permanent disability pensioner population is among the highest in the world, and benefits are generous, creating disincentives.
- Proposal: partially adjust the age at which disability pensions are replaced by old-age pensions to balance welfare and fiscal considerations.
- Caveat: the new rules will have no impact on disability pensioners’ likelihood of returning to the labor force.
- Commission priority: ensure disability pensioners do not take a loss when switching into old age pension relative to standard old age pensioners.
- Stronger reform needed: broader disability reform to curtail inflows, encourage outflows, and reduce use of disability pensions as an alternative to late-career unemployment.

### Model, calibration, and baseline projections
- Model used: four-region version of the IMF’s GIMF model (United States, euro area, Norway, rest of the world) adapted to analyze the impact of ageing population.
- Baseline “Current Policy” scenario (demographic trends): real GDP per capita projected to decline by 12 percent, while working age population would decline by 10 percent by 2100.
- Calibration notes:
  - The calibration of households’ utility function and elasticities and markups are assumed equal across countries.
  - Share of liquidity-constrained agents: 25 percent for the US, euro area, and Norway; 50 percent for the rest of the world.
  - Country specific data are used based on the most recent year or average of recent years (all in percent of nominal GDP).
- Key calibration parameters for Norway (as presented):
  - Inflation (percent)2
  - Share of working age population (Percent)59
  - Government consumption24.3
  - Government investment5
  - Tax revenue44.5
  - Labor tax revenue (incl. social sec.)21.1
  - Corporate tax revenue5.5
  - Consumption tax revenue12.2
  - Pension expenditures (net)8.5
  - Government debt (net)-65
  - Private investment19.5
- Bilateral trade flows between regions and each region’s share of the world population are essential in calibrating spillover effects.

### Simulation scenarios and quantitative results
- Scenario: increase age limits as envisaged by the Commission (calculated as roughly one year every fifteen years).
  - Result: compared to baseline, the decline in real GDP per capita is reduced by half.
  - Labor supply: declines by less than 5 percent compared to the baseline scenario.
- Scenario including interaction with disability (no disability reform):
  - Assumption: the share of the population on disability benefits and early retirement increases from the current level by 2.5 percent through the simulation period (approximately the growth observed over the past decade).
  - Result: decline in real GDP per capita is about -10 percent by the end of the simulation period, which nearly reverses the positive effect of age limits increases.
  - Labor supply: the increase is similarly reversed.
- Fiscal projection summary:
  - “Pensions expenditures are projected to increase by 20 percent under the reform proposals compared to the current policies.”

### Policy sequencing and recommendations
- Simulations suggest better macroeconomic outcomes with proper sequencing:
  - Initiate a broader disability reform first to curtail inflows, encourage outflows, and create stronger disincentives against use of disability pensions as an alternative to late-career unemployment.
  - Then implement retirement-age increases and minimum-pension indexation to secure labor supply gains and preserve equity.
- The Commission’s recommendation to protect the relative value of disabled old-age pensions achieves better long-term social sustainability and equity, but without prior disability reform the beneficial long-term effect of age limits reform can be undone.

*Prepared by Csaba Feher (FAD), Keiko Honjo (RES), and Salvatore Dell’Erba; Annex VI. Macroeconomic Impact of Pension Reform Proposals.*

### Annex VII. Status of 2020 FSAP Recommendations

### Annex VII. Status of 2020 FSAP Recommendations

### Systemic Risk Oversight and Macroprudential Policy
- Recommendation: Develop and publish a macroprudential policy strategy. (MoF, Norges Bank, FSA) — ST
  - Status: Expanded on key aspects in the Ministry’s annual Financial Markets Reports. Norges Bank published a framework for the systemic risk buffer, in addition to the framework for the CCyB.
- Recommendation: Use existing triparty meetings more effectively to discuss risks and policy actions. (MoF, Norges Bank, FSA) — I
  - Status: Adjustments implemented to facilitate candid and targeted exchanges and better align meeting schedules with planned policy decisions.
- Recommendation: Give Norges Bank recommendation powers over macroprudential policy tools that can be relaxed under stress, with a comply-or-explain mechanism. (MoF) — I
  - Status: Government in September 2021 tasked Norges Bank to advise the MoF on the systemic risk buffer rate at least every other year. In 2022 Norges Bank gave its first advice on the systemic risk buffer, and the MoF followed the advice.
- Recommendation: Make key household sector measures permanent features of the framework. (MoF) — ST
  - Status: Lending regulation remains temporary but extended to a period of 4 years (from January 2021 until year-end 2024), up from 1.5 years previously. The regulation was evaluated in 2022 and amended from January 2023.
- Recommendation: Consider broadening the toolkit for mitigating CRE vulnerabilities, including sectoral capital tools. (MoF) — MT
  - Status: MoF in December 2020 adopted a temporary floor for average risk weights for CRE exposures at 35 percent. The floor was renewed in 2022. Norges Bank’s systemic risk buffer framework assesses the buffer should serve as a main rule applying to all exposures in Norway.

### Banking and Insurance Supervision
- Recommendation: Strengthen the FSA’s prudential powers, operational independence, and budgetary autonomy. (MoF) — ST
  - Status: Government tasked a Commission in September 2021 to propose a new law to replace the Financial Supervision Act. Commission submitted report on 2 March 2023 proposing increased FSA independence (FSA can no longer, as a main rule, be instructed by the Ministry in processing individual cases) with exemptions. Proposed independent complaints board. Report subject to public consultation until 2 June 2023.
- Recommendation: Expand review of banks’ risks in supervisory activities to strengthen oversight over systemic foreign bank branches and domestic medium and small sized banks. (FSA) — ST
  - Status: FSA strengthened internal guidelines for monitoring and supervising foreign branches and provided additional resources. New automatic tool provides a risk dashboard for each institution quarterly, facilitating risk-based supervision of medium and small sized banks.
- Recommendation: Further enhance oversight of banks’ IRB models, in view of the implementation of CRD IV. (FSA) — I
  - Status: FSA published a circular clarifying supervisory practice and expectations regarding IRB models and is following up on the circular.
- Recommendation: Intensify oversight of banks’ risk management of real estate loans and funding/liquidity conditions. (FSA) — ST
  - Status: Improved supervisory framework; introduced new supervisory modules based on EBA Guidelines for loan origination and monitoring (EBA/GL/202/06). Updated credit risk module in December 2021. Strengthened reporting requirements to ENG database with more granular segmentation of CRE exposures in the largest banks. Thematic inspection of CRE exposures (office premises) planned in second half of 2022. Circular 5/2021 (September 2021) on valuation of residential mortgages published.
- Recommendation: Strengthen risk-monitoring of individual insurers. (FSA) — ST
  - Status: Project established to further develop the Early Warning Risk Dashboard.
- Recommendation: Complement EIOPA efforts with Norway-specific in-house stress tests of the whole insurance sector. (FSA) — MT
  - Status: EIOPA stress test conducted in 2021. FSA will consider modifying it for a larger share of the Norwegian market.

### Cybersecurity Supervision (FSA, Norges Bank)
- Recommendation: Make processes for cybersecurity risk supervision and oversight more structured and comprehensive. (FSA, Norges Bank) — I
  - Status: FSA will consider strengthening the approach and possible guidance; work ongoing. Norges Bank established a more structured process for oversight and supervision, including annual risk-based planning, active use of third-party reports and FMIs self-assessments. TIBER framework implemented and tests ongoing.
- Recommendation: Establish incident reporting and crisis management frameworks for systemic cyber incidents. (FSA, Norges Bank) — ST
  - Status: Updated routines for reporting incidents from FMIs to The Financial Infrastructure Crisis Preparedness Committee (BFI) in 2020. FSA works with Nordic Financial CERT (NFCERT) with "open line" and monthly status meetings. FSA and BFI plan to enhance reporting and crisis management leveraging EBA Guidelines, the European Commission’s Digital Operational Resilience Act, and the ESRB’s work. FSA revising incident reporting framework based on revised EBA Guidelines; crisis management handling improved.

### Anti-Money Laundering / Countering Financing of Terrorism (AML / CFT) Supervision
- Recommendation: Enhance AML/CFT supervision by increasing the frequency of targeted and thematic inspections and improving the risk-based approach and tools for AML/CFT risk assessments. (FSA) — I
  - Status: Full scope on-site inspections dedicated to AML/CFT and off-site inspections increasing. Risk-based approach adjusted; risk classification model further developed.
- Recommendation: Ensure appropriate use of sanctions, including monetary penalties, for AML/CFT violations. (FSA) — I
  - Status: Sanctioning power used in cases of serious breaches. Since 2019 FSA imposed monetary penalties on nine banks, five investment firms, nineteen estate agents, and 35 audit or accounting firms. Supervisory manual sets principles based on EBA risk-based supervision guideline and FSA Board sanctioning principles.

### Financial Crisis Management and Safety Nets
- Recommendation: Make the new resolution tools operational and strengthen the crisis preparedness framework. (FSA, MoF) — ST
  - Status: FSA continuously working to enhance crisis preparedness. In 2021 a project to develop a bail-in playbook was initiated. FSA preparing banks for EBA resolvability deliverables, including bail-in playbooks.
- Recommendation: Ensure BGF’s integration into the broader resolution framework. (BGF, FSA) — ST
  - Status: Discussions on draft MoUs between Norges Bank, BGF, and FSA ongoing; clarifications sought from MoF. BGF participated in a crisis simulation exercise with Norges Bank, MoF and FSA in April 2021.

### Systemic Liquidity
- Recommendation: Monitor banks’ collateral eligible for central bank liquidity. (Norges Bank) — ST
  - Status: Norges Bank has access to databases on banks’ assets and a collateral management system with detailed information on pledged securities. FSA obtains information on institutions’ holdings of securities during inspections and has information on assets registered in the Norwegian CSD. Norges Bank follows up potential mortgages via semi-annual survey and daily-updated commercial databases for issue and price data. Foreign mortgage bond information from general market insight and Norges Bank’s FX reserve management. Norges Bank established a model for analysis of cash flows in banks.
- Recommendation: Develop, test, and implement a mechanism for acceptance of mortgage loan collateral for emergency liquidity support to solvent banks. (Norges Bank) — ST
  - Status: Project initiated with larger Norwegian Banks and Finance Norway. Mechanism tested with five of the larger banks. Testing complete; implementation phase started.

### Financial Stability Analysis
- Recommendation: Upgrade data collection for risk monitoring to include more granular data on bank lending (including for commercial real estate), group mappings, and liquidity positions of foreign branches. (FSA, Norges Bank) — ST
  - Status: More data on banks’ CRE exposures included in FSA’s enquiry on banks’ exposures to non-financial firms (“ENGA database”). Norges Bank since 2021 subscribed to a private sector database on CRE buildings including owners and renters. Norges Bank now permanently collects payment remarks data for non-financial companies. FSA developed new sector specific bankruptcy models (10 sectors), expanding non-financial company coverage. Government initiated legislative process to expand mandatory credit registries from consumer debt to include collateralized debt (including housing loans).
- Recommendation: Improve collection and analysis of derivatives exposure data and analyze banks’ margin arrangements. (FSA, Norges Bank) — ST
  - Status: Norges Bank and FSA working to make more data on agents’ derivatives contracts accessible and usable (EMIR data) and collaborating to develop monitoring analysis and dashboards. Norges Bank analyzing effects of margining agreements (Norges Bank Staff Memo 2/2021 referenced). Norges Bank exploring collecting derivatives data from mutual funds to measure exposure to margining in times of stress. FSA analyzed banks’ and insurance companies' derivatives exposures using EMIR-data.

### Cybersecurity Risk Supervision (Finanstilsynet)
- Recommendation: Establish clear qualitative and/or quantitative thresholds, as well as clearer processes and formats, on the reporting of cybersecurity incidents. — I
  - Status: FSA established clear processes and requirements for reporting cybersecurity incidents. FSA decided to postpone revising incident reporting framework based on revised EBA Guidelines until DORA enters into force; will follow DORA reporting requirements when implemented in Norwegian law.
- Recommendation: Supplement the 2003 regulation on the use of information and communication technology with more detailed guidelines by the FSA that set minimum requirements. — ST
  - Status: FSA uses EBA's and EIOPA's guidelines for ICT security, outsourcing and governance in supervisory activities as published on FSA’s website. Implementation of DORA expected to place more specific requirements; assumed DORA will set sufficient minimum requirements.
- Recommendation: Follow a more structured approach for cybersecurity risk supervision including off-site supervision integration into overall risk assessments. — ST
  - Status: FSA establishing supervisory framework for ICT supervision where ICT security and risk will be a module based on the NIST framework. Existing frameworks used in parallel; some sub-modules tested during inspection. Work ongoing.
- Recommendation: Increase the intrusiveness of on-site cybersecurity risk inspections. — MT
  - Status: See above (ongoing development and testing of modules).

### Cybersecurity Risk Oversight (Norges Bank)
- Recommendation: Supplement CPMI-IOSCO guidance with more detailed expectations of Norges Bank regarding cybersecurity risk oversight of FMIs. — I
  - Status: Operators expected to conduct self-assessments of cybersecurity-maturity using internationally recognized standards; expectation stated in Norges Bank annual reports on financial infrastructure in 2021 and 2022. Maturity levels to be mapped against FMIs' objectives and gap-closure actions planned. Oversight function follows up whether assessments are performed. Norges Bank expects FMIs responsible for critical functions to run TIBER security-tests.
- Recommendation: Follow a more structured and comprehensive process for cybersecurity risk oversight, utilize a portfolio of tools, reach clear conclusions and identify remedial measures. — I
  - Status: Improved planning for oversight and supervision of FMIs with annual risk-based planning. Enhanced IT and cybersecurity competence enables more thorough assessments. TIBER-testing is an important part of oversight; TIBER-NO ensures oversight and supervisory functions do not operationally participate in testing or access test results.
- Recommendation: Establish, operationalize and exercise incident reporting and crisis management framework to maintain financial stability against systemic cybersecurity incidents. — ST
  - Status: Updated FMIs incident reporting routines to BFI in 2020. Crisis management handling by BFI improved. FSA and BFI plan enhancements leveraging EBA Guidelines, DORA, and ESRB work. Norges Bank follows ESRB recommendation to implement a “pan-European systemic cyber incident coordination framework (EU-SCICF)” and expects to implement a national framework in collaboration with national authorities based on EU-SCIF.
- Recommendation: Train Norges Bank overseers in cybersecurity to strengthen oversight capabilities. — ST
  - Status: Cyber competence improved by hiring a cybersecurity expert and a person with IT/cybersecurity as part of a larger skill set. A third person with IT/cyber-competence to start in June 2023. Two cybersecurity experts hired to the TIBER Cyber Team (TCT-NO). Overall oversight function cyber competence improved.
- Recommendation: Give the oversight function enough independence to conduct thorough oversight of the Norwegian RTGS system (NBO). — ST
  - Status: Reporting lines for the oversight function changed in 2023; head of Financial Infrastructure may meet the Deputy Governor for central banking operations when needed. Internal guidelines for oversight of the settlement function being revised to ensure coverage required by PFMI and necessary authority for the oversight function.
- Recommendation: Finalize the financial sector risk map in collaboration with FSA and MoF. — ST
  - Status: Project initiated by the Financial Ministry to complete mapping; expected to be finalized in 2023.
- Recommendation: Use existing legal power of the oversight function to seek greater assurance and transparency from critical service providers for interbank payment systems. — ST
  - Status: Improved supervision of FMI responsible for clearing by direct meetings with key vendors. For other FMIs direct dialogue with suppliers limited due to resource constraints; supplier management and service-quality remain key oversight subjects.
- Recommendation: Strengthen intrusiveness of interactions of Norges Bank’s risk management and internal audit with NBO’s external service providers to seek greater assurance and transparency. — MT
  - Status: Process established whereby Norges Bank’s risk management is involved in meetings with critical external service providers and participates in the quarterly Risk Committee for the settlement system (NBO).

*Annex VII. Status of 2020 FSAP Recommendations*

### Annex VIII. Progress in Strengthening the AML/CFT Framework

### Annex VIII. Progress in Strengthening the AML/CFT Framework

### Key findings on current AML/CFT stance
- Norway’s AML/CFT regime needs further reinforcement to address ML/TF risks from cross-border and non-resident financial activity.  
- Progress has been made on cross-border financial flows risks: in January 2023 the Financial Action Taskforce (FATF) re-rated Norway as compliant with Recommendation 16 on wire transfers.  
- The prior deficiency—financial institutions and intermediaries not being required to maintain beneficiary information as part of cross-border and domestic wire transfers—was rectified through Norway’s adoption of the EU regulation on information accompanying transfers of funds (TFR).  
- Norway has built strong domestic cooperation between the financial intelligence unit and financial supervisory authority for AML supervision and development of financial intelligence.  
- Effectiveness issues identified in the most recent Mutual Evaluation Report remain to be addressed, notably related to ML investigation and prosecution and confiscation.  
- The launch of the Norwegian register of beneficial owners has been delayed; authorities are examining implications of the European Court of Justice judgement regarding public access to information on beneficial ownership. Authorities note Norwegian law stipulates that the registered information shall be open for public access.  
- The legal framework for beneficial ownership transparency should be aligned with the revised FATF standards for transparency of beneficial ownership of legal persons and legal arrangements (Recommendations 24 and 25).

### Policy implications and recommendations
- Reinforce the AML/CFT regime to better address risks from cross-border and non-resident financial activity.  
- Continue strengthening risk-based supervision of banks, including enhancing the supervisory ML/TF risk assessment.  
- Address effectiveness shortcomings highlighted in the Mutual Evaluation Report, with emphasis on:  
  - improving ML investigation and prosecution capabilities, and  
  - strengthening confiscation frameworks and outcomes.  
- Expedite and operationalize the Norwegian register of beneficial owners, ensuring public-access considerations are resolved in light of the European Court of Justice judgement and that Norwegian law requirements are implemented.  
- Ensure Norway’s legal framework for beneficial ownership transparency is in line with the revised FATF standards (Recommendations 24 and 25).

*Prepared by Alexander Malden (LEG) — Annex VIII. Progress in Strengthening the AML/CFT Framework*

### Section 2(a), 3, and

### 1norea2023001 - Section 2(a), 3, and

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- General: Data provision is adequate for surveillance. Data is generally of high quality, timely, and comprehensive.
- Monetary and Financial Statistics:
  - Monetary statistics compiled by the authorities are consistent with the methodology of the 2016 Monetary and Financial Statistics Manual and Compilation Guide.
  - Norway reports regular and good-quality monetary statistics for publication in IFS, although there is room for improving the timeliness of the data on other financial corporations.
  - Norway reports data on several series and indicators in the Financial Access Survey (FAS), including two indicators of the United Nations Sustainable Development Goals.
- Financial Sector Surveillance:
  - Norway reports Financial Soundness Indicators (FSIs) to the Fund, which are published on the IMF’s FSI website.
  - All core FSIs for deposit takers are reported on a quarterly basis.
  - Only one of the encouraged FSIs for deposit takers is reported but many of the encouraged FSIs for other sectors are provided.

### Data Standards and Quality
- Subscriber status:
  - Subscriber to the IMF’s Special Data Dissemination Standard (SDDS) since 1996.
  - Uses SDDS flexibility option on the timeliness of the general government operations-financing.
  - SDSS metadata is posted on the Dissemination Standards Bulletin Board (DSBB).
- Data ROSC:
  - Data ROSC (Report on the Observance of Standards and Codes) completed in 2003 is publicly available.

### Norway: Table of Common Indicators Required for Surveillance (As of June 30, 2023)
- Date formats: (For all dates in table, please use format dd/mm/yy)
- Exchange Rates:
  - Date of latest observation: 22/06/23
  - Date received: 22/06/23
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: 05/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Reserve/Base Money:
  - Date of latest observation: 05/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad Money:
  - Date of latest observation: 05/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Data Quality – Methodological soundness: O, O, O, LO
  - Data Quality – Accuracy and reliability: O, O, O, O, O
- Central Bank Balance Sheet:
  - Date of latest observation: 0/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: 04/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest Rates:
  - Date of latest observation: 05/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consumer Price Index:
  - Date of latest observation: 05/23
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Data Quality – Methodological soundness: O, O, O, O
  - Data Quality – Accuracy and reliability: O, O, O, O, O
- Revenue, Expenditure, Balance and Composition of Financing – General Government:
  - Date of latest observation: 2022
  - Date received: 2023
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
  - Memo Items: LO, LNO, O, O
  - Data Quality – Methodological soundness: LO, O, O, O, LO
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest observation: 04/23
  - Date received: 05/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of latest observation: Q1 2023
  - Date received: 04/23
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance:
  - Date of latest observation: Q1 2023
  - Date received: 06/23
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Exports and Imports of Goods and Services:
  - Date of latest observation: Q1 2023
  - Date received: 06/23
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Memo Items: O, O, O, O
  - Data Quality – Methodological soundness: LO, O, O, O, LO
- GDP/GNP:
  - Date of latest observation: M4 2023
  - Date received: 06/23
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Memo Items: O, O, O, O
  - Data Quality – Accuracy and reliability: O, O, O, O, LO
- Gross External Debt:
  - Date of latest observation: Q1 2023
  - Date received: 04/23
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- International Investment Position:
  - Date of latest observation: Q1 2023
  - Date received: 04/23
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

- Footnotes (selected, verbatim):
  - 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 Including currency and maturity composition.
  - 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
  - 7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
  - 8 These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.
  - 9 This reflects the assessment provided in the data ROSC or the Substantive Update (published on July 15, 2003, and based on the findings of the mission that took place during November 11–26, 2002) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
  - 10 Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

*Source: 1norea2023001 - Section 2(a), 3, and (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1norea2023001.pdf_