## FINLAND: STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION ## Source details **Canonical URL:** [FINLAND: STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION](https://www.imf.org/-/media/files/publications/cr/2024/english/1finea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1finea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1finea2024001.pdf.json) --- ### Recent developments and outlook - Economic activity stalled with a contraction of 0.5 percent estimated in 2023. - Growth projections: - GDP: 2.8 (2021), 1.6 (2022), -0.5 (2023), 0.4 (2024), 1.9 (2025), 1.9 (2026), 1.7 (2027), 1.6 (2028), 1.5 (2029). - Domestic demand: 2.8 (2021), 3.0 (2022), -3.0 (2023), 1.1 (2024), 1.9 (2025), 1.9 (2026), 1.7 (2027), 1.6 (2028), 1.6 (2029). - Private consumption: 3.2 (2021), 1.5 (2022), -0.8 (2023), 0.5 (2024), 1.3 (2025), 1.3 (2026), 1.2 (2027), 1.2 (2028), 1.2 (2029). - Gross fixed capital formation: 1.0 (2021), 3.1 (2022), -5.7 (2023), 2.0 (2024), 4.4 (2025), 3.4 (2026), 3.9 (2027), 2.4 (2028), 2.4 (2029). - Outlook summary: - A shallow recovery expected in 2024 as inflation pressures ease and real earnings modestly recover; growth expected around ½ percent in 2024 and rebound to around 1½ percent in the medium term. - Inflation has fallen to more normal levels and financial conditions appear to be easing. - Downside risks include: - resurgence of the energy crisis; - escalation of the war in Ukraine; - further tightening of global financial conditions; - possibility of a deeper “balance sheet recession.” ### Prices, inflation, and labor market - Consumer price inflation (harmonized): - Average: 2.1 (2021), 7.2 (2022), 4.3 (2023), 1.2 (2024), 1.9 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - End-year: 3.2 (2021), 8.8 (2022), 1.3 (2023), 1.9 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - Key inflation developments: - Headline HCPI fell from its peak in November 2022 (9.1 percent) to 1.3 percent in December. - Statistics Finland correction to the electricity price index affects HCPI yoy by 0.70 percentage points through July 2024. - Core inflation remained at 2.9 percent (Dec-23); momentum indicators slowing, especially for processed foods and non-energy goods. - Dec-23 Headline, yoy (SA): 1.3; Dec-23 Core, yoy (SA): 2.9. - Labor market indicators: - Participation Rate (15-74 years): 67.0 (2021), 68.0 (2022), 68.8 (2023), 69.3 (2024), 69.8 (2025), 70.2 (2026), 70.7 (2027), 71.2 (2028), 71.7 (2029). - Employment growth: 2.4 (2021), 2.6 (2022), 0.5 (2023), 0.1 (2024), 0.5 (2025), 0.4 (2026), 0.5 (2027), 0.6 (2028), 0.6 (2029). - Unemployment rate: 7.6 (2021), 6.8 (2022), 7.2 (2023), 7.6 (2024), 7.4 (2025), 7.3 (2026), 7.3 (2027), 7.2 (2028), 7.1 (2029). - Average wage settlement in 2023: 3.8 percent; implied contraction in real wages of -1 percent in 2023Q3. ### Fiscal outlook, public debt, and staff recommendations - 2023 fiscal outcomes and projections: - Fiscal deficit estimated at 2.5 percent of GDP in 2023. - Gross debt: 72.6 (2021), 73.3 (2022), 76.3 (2023); table projections: 79.6 (2024), 82.2 (2025), 84.0 (2026), 85.1 (2027), 85.6 (2028), 86.2 (2029). - Overall balance (percent of GDP): -2.8 (2021), -0.8 (2022), -2.5 (2023), -3.5 (2024), -3.4 (2025), -3.0 (2026), -2.7 (2027), -2.2 (2028), -2.3 (2029). - Primary balance (percent of GDP): -2.9 (2021), -0.8 (2022), -2.6 (2023), -3.2 (2024), -3.1 (2025), -2.7 (2026), -2.4 (2027), -2.0 (2028), -2.0 (2029). - Structural balance (percent of potential GDP): -2.2 (2021), -1.0 (2022), -1.6 (2023), -2.0 (2024), -2.4 (2025), -2.4 (2026), -2.3 (2027), -2.0 (2028), -2.1 (2029). - Net debt (negative of net financial worth): -72.9 (2021), -59.3 (2022), -54.5 (2023), -49.6 (2024), -44.3 (2025), -39.6 (2026), -35.5 (2027), -32.0 (2028), -28.6 (2029). - Government medium-term plan: - New government program (June 2023) targets medium-term consolidation of about €6 billion (2 percent of GDP) over four years: spending cuts about €4 billion, remainder via fiscal gains from additional employment; increased public investment to be financed by asset sales. - Identified fiscal headwinds: reduction in unemployment insurance contribution decreasing revenues by around ¼ percent of GDP annually; war-related discretionary defense spending averaging around ½ percent of GDP annually. - Staff recommended fiscal path: - Begin a structural adjustment of around ¼ percent of GDP in 2024, growing to ½ percent per year over the medium term, with the aim of balancing the budget by 2028. - A gradual but sustained adjustment advised to reverse public debt dynamics. - Recommended spending-side measures: further spending cuts and efficiency gains from the Wellbeing Service Counties. - Recommended revenue-side measures: excise tax indexation, expansion of carbon taxation, VAT rate standardization, and revising dividend taxation for non-listed companies. - Staff assessment of the government plan: - Existing measures fall short of achieving the government’s fiscal deficit target; staff baseline projects a 2.7 percent deficit by 2027; government target is 1 percent of GDP by 2027. - With no-policy change after 2023, deficits would grow and debt could reach over 85 percent of GDP by 2028. - Stock-flow adjustments averaging 1½ percent annually expected to contribute to debt dynamics. ### Structural reforms, labor market, and growth drivers - Long-standing constraints: adverse demographics and weak productivity leading to low trend growth. - Policy priorities and recommended reforms: - Support social benefit reforms to boost employment and reduce public spending. - Greater labor market flexibility and lowering the labor tax wedge to enhance employment. - Establish robust monitoring systems to track employment impacts of reforms. - Improve higher education, reduce skill mismatches, and more effectively attract and integrate international talent (Talent Boost initiative referenced). - R&D: authorities committed to increase R&D spending to 4 percent of GDP, with 1.2 percentage points from the public sector; 2024 budget increases allocation to R&D by €260 million (0.1 percent of GDP). - Beveridge Curve and matching efficiency: - If matching efficiency recovers toward its pre-GFC level (increase by approximately 20 percent), implied reduction in the unemployment rate at the pre-pandemic level of vacancies would be around 2 percentage points, equivalent to an increase in headcounts of about 55 thousand. - Government objective: create 100,000 new jobs; government estimates identify measures to deliver approximately three-quarters of that target. ### Green transition and climate policy - Finland aims to be carbon-neutral by 2035; current policies will further reduce emissions but are not sufficient to achieve the 2035 target. - Recommended additional measures: - Strengthen carbon pricing and prepare for the introduction of ETSII. - Increase the role of carbon sinks in the Land-Use, Land-Use Change, and Forestry (LULUCF) sector. - Forests’ role as carbon sinks is weakening due to increased lumbering and is currently insufficient to meet EU targets. ### Financial sector resilience, risks, and macroprudential policy - Resilience: - Banks have sufficient capital to withstand adverse macroeconomic shocks; regulatory and capital ratios are well above requirements. - Regulatory Capital to Risk-Weighted Assets (2016–2022): 23.3, 21.4, 21.5, 20.5, 20.6, 20.6, 20.3. - Regulatory Tier 1 Capital to Risk-Weighted Assets (2016–2022): 21.9, 19.6, 19.6, 18.3, 18.6, 18.6, 18.3. - Return on Assets (2016–2022): 0.7, 0.6, 1.8, 0.5, 0.5, 0.8, 0.8. - Return on Equity (2016–2022): 8.9, 7.6, 26.2, 6.2, 6.5, 9.3, 9.5. - Vulnerabilities and indicators: - Elevated systemic risks include high dependence on short-term wholesale funding, exposure to Nordic systemic events, CRE market volatility, falling house prices, and still high household indebtedness. - Household indebtedness: 124 percent of net disposable income. - House prices fell nearly 10 percent since peak; residential construction and transaction indicators steeply declined. - Non-performing corporate loans (excluding housing companies) rose from 1.6 percent in January 2023 to 1.9 percent in November 2023. - Gross external debt: 208.6 (2021), 215.4 (2022), 216.1 (2023), 218.0 (2024), 216.5 (2025), 215.3 (2026), 213.9 (2027), 212.6 (2028), 211.4 (2029). - Macroprudential and regulatory recommendations: - Tighten liquidity regulation and strengthen liquidity buffers to cover predetermined wholesale funding thresholds. - Legislate a positive neutral rate on the CCyB (countercyclical capital buffer). - Enhance the systemic risk monitoring framework. - Add borrower-based measures (debt-to-income and debt-service-to-income limits) to the macroprudential toolkit; activate these when concerns regarding adverse effects on demand and house prices subside. - Authorities reinstated the 1 percent systemic risk buffer (SyRB) on credit institutions to be in effect in April 2024. - Implementation progress: positive credit register expected to be fully operational in 2024. ### Monetary policy transmission — structural features and pass-through - ECB tightening: deposit rate increased from -0.5 percent in mid-2022 to 4 percent in September. - Structural factors strengthening transmission in Finland: - Virtually all household mortgage loans have variable interest rates (compared to euro area median 52 percent); about 30 percent of these are protected with interest rate collars. - Private credit around 100 percent of GDP (Euro Area average 81 percent). - Finland has lower net household savings built up since the pandemic compared with the euro area. - Measured pass-through: - Average mortgage rates increased fourfold, from below 1 to over 4 percent. - Pass-through to existing mortgages: three times the euro area average. - Pass-through to new mortgages: around one-third higher than the euro area average. - Pass-through to corporate loans: nearly 0.8 (around the euro area average). - Implications: - High share of variable mortgages and large mortgage rate increases compress household disposable income and consumption. - Private credit around 100 percent of GDP implies higher firm financing costs and reduced investment. ### External sector and external position assessment - Current account and NIIP: - Current account balance: 0.4 (2021), -2.6 (2022), -0.5 (2023), -0.4 (2024), -0.2 (2025), -0.1 (2026), 0.0 (2027), 0.0 (2028), 0.0 (2029). - NIIP weakened in 2022 to -2.2 percent of GDP; staff projects NIIP around -2.6 percent in 2023 model estimates. - Staff view: Finland’s external position in 2023 is moderately weaker than level implied by fundamentals and desirable policies; fiscal consolidation remains primary lever to strengthen external balance. - REER and CA model estimates: - ULC-based REER appreciated by 19 percent relative to 2020H1 by end-2023 and 2 percent compared to 2022. - Staff CA gap and REER gap estimates include REER Gap (in percent) 3.4 and model REER = 6.1; EBA level REER model suggests an overvaluation of about 9 percent in 2023. ### Risks, scenarios, and policy contingencies - Major risks (selected from Risk Assessment Matrix): - Intensification of regional conflicts — Relative likelihood: High; Impact if realized: High. - Deepening geoeconomic fragmentation — Relative likelihood: High; Impact if realized: High. - Abrupt global slowdown — Relative likelihood: Medium; Impact if realized: High. - Adverse shock in a neighboring Nordic country — Relative likelihood: Medium; Impact if realized: High. - Policy responses in downside scenarios: - Pause fiscal consolidation and allow automatic stabilizers to operate. - Implement targeted measures focused on the most vulnerable. - Consider delaying increases in capital risk buffers and use macroprudential tools to stabilize financial conditions. ### Staff appraisal and authorities’ views (summary) - Staff appraisal: - Growth has stalled; modest recovery expected in second half of 2024. - Inflationary pressures are diminishing; monetary tightening pass-through has weighed on consumption and investment. - Fiscal outlook worsened in 2023; debt ratio climbed to 76 percent (text) and table reports gross debt as 76.3 (2023). - Recommended a gradual fiscal consolidation: start with ¼ percent of GDP in 2024, rising to ½ percent per year, aiming to balance the budget by 2028. - Authorities’ views: - Agree economy faces a challenging year and that macro-financial impact of monetary tightening is contained, with stress in construction. - Expect weak or negative growth in 2024 with medium-term pickup driven by declining interest rates, moderating inflation, wage growth, and labor reforms. - Report lack of political consensus to legislate limits on DTI and DSTI; consider some revenue measures unlikely (e.g., increases in personal income tax, corporate income tax, carbon taxation, dividend taxation of non-listed firms). *Source: FINLAND STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (mission took place virtually January 8–9, 2024 and in Helsinki January 11–23, 2024).* ### 0.5 percent estimated in 2023. However, inflation has fallen to more normal levels and ### FINLAND: STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION ### Recent developments and outlook - Economic activity stalled with a contraction of 0.5 percent estimated in 2023. - A shallow recovery is expected in 2024 as inflation pressures ease and real earnings modestly recover; growth is expected to be around ½ percent in 2024 and rebound to around 1½ percent in the medium term. - Inflation has fallen to more normal levels and financial conditions appear to be easing. - Downside risks to the outlook include: a resurgence of the energy crisis; an escalation of the war in Ukraine; further tightening of global financial conditions; or the possibility of a deeper “balance sheet recession.” - Key projected and historical output and demand indicators (Percentage change, unless otherwise indicated): - GDP: 2.8 (2021), 1.6 (2022), -0.5 (2023), 0.4 (2024), 1.9 (2025), 1.9 (2026), 1.7 (2027), 1.6 (2028), 1.5 (2029). - Domestic demand: 2.8 (2021), 3.0 (2022), -3.0 (2023), 1.1 (2024), 1.9 (2025), 1.9 (2026), 1.7 (2027), 1.6 (2028), 1.6 (2029). - Private consumption: 3.2 (2021), 1.5 (2022), -0.8 (2023), 0.5 (2024), 1.3 (2025), 1.3 (2026), 1.2 (2027), 1.2 (2028), 1.2 (2029). - Gross fixed capital formation: 1.0 (2021), 3.1 (2022), -5.7 (2023), 2.0 (2024), 4.4 (2025), 3.4 (2026), 3.9 (2027), 2.4 (2028), 2.4 (2029). - Net exports (contribution to growth in percent of GDP): 0.0 (2021), -2.0 (2022), 2.6 (2023), -0.7 (2024), 0.0 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028), -0.1 (2029). - Prices and inflation: - Consumer price inflation (harmonized, average): 2.1 (2021), 7.2 (2022), 4.3 (2023), 1.2 (2024), 1.9 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - Consumer price inflation (harmonized, end-year): 3.2 (2021), 8.8 (2022), 1.3 (2023), 1.9 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - Labor market and potential output: - Participation Rate (15-74 years): 67.0 (2021), 68.0 (2022), 68.8 (2023), 69.3 (2024), 69.8 (2025), 70.2 (2026), 70.7 (2027), 71.2 (2028), 71.7 (2029). - Employment growth: 2.4 (2021), 2.6 (2022), 0.5 (2023), 0.1 (2024), 0.5 (2025), 0.4 (2026), 0.5 (2027), 0.6 (2028), 0.6 (2029). - Unemployment rate (in percent): 7.6 (2021), 6.8 (2022), 7.2 (2023), 7.6 (2024), 7.4 (2025), 7.3 (2026), 7.3 (2027), 7.2 (2028), 7.1 (2029). - Output gap (in percent of potential output): -1.0 (2021), -0.4 (2022), -1.9 (2023), -2.4 (2024), -1.7 (2025), -0.9 (2026), -0.5 (2027), -0.2 (2028), 0.0 (2029). - Growth in potential output: 0.9 (2021), 1.0 (2022), 1.1 (2023), 0.9 (2024), 1.1 (2025), 1.1 (2026), 1.3 (2027), 1.3 (2028), 1.3 (2029). - External sector: - Current account balance: 0.4 (2021), -2.6 (2022), -0.5 (2023), -0.4 (2024), -0.2 (2025), -0.1 (2026), 0.0 (2027), 0.0 (2028), 0.0 (2029). - Gross external debt: 208.6 (2021), 215.4 (2022), 216.1 (2023), 218.0 (2024), 216.5 (2025), 215.3 (2026), 213.9 (2027), 212.6 (2028), 211.4 (2029). ### Fiscal outlook and recommendations - The fiscal outlook worsened in 2023 due to higher discretionary spending and weaker growth; deficit estimated at 2.5 percent of GDP in 2023. - Gross debt climbed to 76 percent (text) and table reports gross debt as 76.3 (2023). - Existing measures fall short of achieving the government’s fiscal deficit target; the government plans to adjust the medium-term fiscal deficit by 2 percent of GDP through spending cuts and employment-driven fiscal gains, targeting overall fiscal deficit of 1 percent of GDP by 2027. - Staff assessment and recommended fiscal path: - A gradual but sustained adjustment is advised to reverse public debt dynamics. - Begin a structural adjustment of around ¼ percent of GDP in 2024, growing to ½ percent per year over the medium term, with the aim of balancing the budget by 2028. - Recommended spending-side measures include further spending cuts and efficiency gains from the Wellbeing Service Counties. - Recommended revenue-side measures include excise tax indexation, expansion of carbon taxation, VAT rate standardization, and revising dividend taxation for non-listed companies. - General government finances (Percent of GDP): - Overall balance: -2.8 (2021), -0.8 (2022), -2.5 (2023), -3.5 (2024), -3.4 (2025), -3.0 (2026), -2.7 (2027), -2.2 (2028), -2.3 (2029). - Primary balance: -2.9 (2021), -0.8 (2022), -2.6 (2023), -3.2 (2024), -3.1 (2025), -2.7 (2026), -2.4 (2027), -2.0 (2028), -2.0 (2029). - Structural balance (in percent of potential GDP): -2.2 (2021), -1.0 (2022), -1.6 (2023), -2.0 (2024), -2.4 (2025), -2.4 (2026), -2.3 (2027), -2.0 (2028), -2.1 (2029). - Net debt (defined as the negative of net financial worth): -72.9 (2021), -59.3 (2022), -54.5 (2023), -49.6 (2024), -44.3 (2025), -39.6 (2026), -35.5 (2027), -32.0 (2028), -28.6 (2029). ### Structural reforms and growth drivers - Long-standing structural challenges: adverse demographics and weak productivity have resulted in low trend growth. - Government reforms and recommendations: - Support for social benefit reforms to boost employment and reduce public spending. - Greater labor market flexibility and lowering the labor tax wedge to enhance employment. - Establish robust monitoring systems to track employment impacts of reforms. - Improve higher education, reduce skill mismatches, and more effectively attract and integrate international talent. - R&D investment should aim to catalyze private sector funding. - Green transition: - Finland’s ambition to become carbon-neutral by 2035 could support new growth opportunities. - More measures are needed to achieve the 2035 carbon neutral target, including strengthening carbon pricing and increasing the role of carbon-sinks in the land use sector. ### Financial sector resilience and macroprudential policy - The financial system remains resilient with banks having sufficient capital to withstand adverse macroeconomic shocks. - Elevated systemic risks include high dependence on short-term wholesale funding, exposure to Nordic systemic events, CRE market volatility, falling house prices, and still high household indebtedness. - Macroprudential and regulatory recommendations: - Tighten liquidity regulation. - Further strengthen macroprudential policy: legislating a positive neutral rate on the CCyB, enhancing the systemic risk monitoring framework, and adding debt-to-income and debt-service-to-income limits to the macroprudential toolkit. - These borrower-based measures could be activated when concerns regarding adverse effects on demand and house prices subside. - Financial indicators and vulnerabilities: - Household financial assets (percent of GDP) and other balance-sheet indicators show weakening buffers and evidence of household draw-down on savings. - Banking sector vulnerabilities warrant continuous and close monitoring despite currently strong capital and liquidity buffers. *Source: FINLAND STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (mission took place virtually January 8–9, 2024 and in Helsinki January 11–23, 2024).* ### 4. Inflation pressures are ### 4. Inflation pressures are ### Inflation developments - Headline inflation (HCPI) fell from its peak in November 2022 (9.1 percent) to 1.3 percent in December. - The decline in energy prices also reflects a correction in the electricity price index by Statistics Finland; the correction's impact on the yoy change rate of the HCPI is 0.70 percentage points and will affect the annual change of the CPI and the HCPI until July 2024. - Core inflation remains at 2.9 percent, with momentum indicators showing signs of slowing, especially for processed foods and non-energy goods. - Falling producer prices are expected to support disinflation. - Household inflation expectations are moderating. Key Inflation Indicators (Percent) - Dec-22 Headline, yoy (SA): 8.8 - Mar-23 Headline, yoy (SA): 6.7 - Jun-23 Headline, yoy (SA): 4.0 - Sep-23 Headline, yoy (SA): 3.0 - Dec-23 Headline, yoy (SA): 1.3 - Dec-22 Headline, 3mma*: 6.6 - Mar-23 Headline, 3mma*: 4.5 - Jun-23 Headline, 3mma*: -0.7 - Sep-23 Headline, 3mma*: 1.9 - Dec-23 Headline, 3mma*: -0.2 - Dec-22 Core, yoy (SA): 6.3 - Mar-23 Core, yoy (SA): 6.7 - Jun-23 Core, yoy (SA): 5.4 - Sep-23 Core, yoy (SA): 3.9 - Dec-23 Core, yoy (SA): 2.9 - Dec-22 Core, 3mma*: 5.6 - Mar-23 Core, 3mma*: 7.2 - Jun-23 Core, 3mma*: 2.5 - Sep-23 Core, 3mma*: 0.6 - Dec-23 Core, 3mma*: 1.5 *Average of the previous 3 months' m.o.m inflation rate; annualized and seasonally adjusted ### Labor market and wages - Labor participation and employment rates peaked in the first half of 2023 and then moderated. - Unemployment rate edged up to 7.6 percent in December (from persistently low levels since 2022). - The vacancy-to-unemployment ratio declined back to pre-pandemic level, suggesting cyclical reversal of the post-pandemic Beveridge Curve shift. - Average wage settlement in 2023: 3.8 percent; implied contraction in real wages of -1 percent in 2023Q3, reducing inflation pressure. - Employment rate is near record high levels; hours per worker continue a long-term downward trend. ### Fiscal developments and outlook - Fiscal deficit in 2023 estimated to have widened by around 1 ¾ percentage points of GDP. - Main drivers: higher spending—energy-related compensation, defense, high index-linked increases in social benefits, and support for health and social services through the local “Wellbeing Service Counties.” - Revenue ratio is estimated to have fallen in 2023 following contraction in the economy after strong tax buoyancy in 2022. - The fiscal deficit in 2023 is expected to deteriorate to 2.5 percent of GDP. - Gross public debt will increase to around 76 percent of GDP in 2023; already higher than Nordic peers and projected to continue growing. - With no-policy change after 2023, deficits would grow and debt could reach over 85 percent of GDP by 2028. - New government program (June 2023) targets medium-term consolidation of about €6 billion (2 percent of GDP) over four years: spending cuts about €4 billion, remainder via fiscal gains from additional employment; increased public investment to be financed by asset sales. - Identified fiscal headwinds in 2024: - Reduction in unemployment insurance contribution decreasing revenues by around ¼ percent of GDP annually. - War-related discretionary defense spending averaging around ½ percent of GDP annually. - Staff assessment: - Fiscal policy will be expansionary in 2024; structural primary balance will deteriorate by about ½ percentage points of GDP. - Overall fiscal deficit expected to widen by 1 percentage points, to 3.5 percent in 2024. - Staff baseline projects a 2.7 percent deficit by 2027; government target is 1 percent of GDP by 2027. - Public debt will continue to rise over the medium term; stock-flow adjustments averaging 1½ percent annually. ### External sector - In 2022 Finland’s terms-of-trade remained relatively stable despite large increases in export and import prices, supported by large electricity production. - 2022 current account deficit: -2.6 percent of GDP (deterioration due to net services—mainly tourism—and primary income balances). - 2023 current account deficit anticipated to have narrowed to an estimated -0.5 percent of GDP due to weak domestic demand and substantial improvement in net trade. - Staff view: current account in 2023 is moderately weaker than level implied by fundamentals and desirable policies. - Fiscal consolidation remains primary lever to strengthen external balance. ### Financial conditions, credit, and housing - Financial conditions tightened across all sectors and reached their tightest level since the global financial crisis; partial easing from 2023Q1 driven mainly by moderation in the price of risk. - Credit growth contracted by 0.5 percent yoy in November 2023. - Credit to households and non-financial corporations started to decline in 2023. - House prices fell nearly 10 percent since peak, returning to around pre-pandemic nominal levels; residential construction and transaction indicators steeply declined. - Household indebtedness remains high at 124 percent of net disposable income. - Banks: - Higher net interest margins increased bank earnings. - Liquidity positions remain strong; banks’ core tier 1 capital well above regulatory requirements. - More than 90 percent of Finnish banks’ bond holdings are booked at fair value. - Non-performing corporate loans (excluding housing companies) rose from 1.6 percent in January 2023 to 1.9 percent in November 2023. - Construction sector shows higher and increasing non-performing loans. ### Outlook and scenarios - Growth: - Preliminary estimate of 2023Q4 shows further weakness; growth of -0.5 in 2023 (carry-over effects). - 2024 projected growth: 0.4 percent (shallow recovery). - Medium-term growth projected to improve to around 1½ percent, supported by expected increase in investment and employment from recent reforms. - Inflation: - Inflation expected to stay below 2 percent in 2024 due to negative base effects and a growing output gap. - Negotiated wage increases for 2024 average around 2.8 percent, reducing risk of entrenched inflation. - Key Macroeconomic Indicators (In percent) - GDP Growth: 2022 1.6; 2023 -0.5; 2024 0.4; 2025 1.9 - Unemployment Rate: 2022 6.8; 2023 7.2; 2024 7.6; 2025 7.4 - Inflation (avg): 2022 7.2; 2023 4.3; 2024 1.2; 2025 1.9 - Current Account (% of GDP): 2022 -2.6; 2023 -0.5; 2024 -0.4; 2025 -0.2 ### Risks and vulnerable channels - Downside risks to the outlook: - Resurgence of the energy crisis. - Escalation of the war in Ukraine. - Adverse shock in other Nordic countries. - Further tightening of global financial conditions. - A “balance sheet recession” triggered by the combination of high household debt, falling house prices, higher unemployment, and rising interest rates. - Policy response in a downside scenario: - Pause fiscal consolidation and allow automatic stabilizers to operate. - Implement targeted measures focused on the most vulnerable. - Consider delaying increases in capital risk buffers. - Geoeconomic fragmentation: - Increasing trade barriers and high exposure of major Finnish multinational enterprises to China pose trade disruption risks. - Total foreign production exposure to China is substantial and has grown significantly over the past decade. ### Authorities’ views - Authorities agree the economy faces a challenging year with high uncertainty. - They judge the macro-financial impact of monetary tightening as contained, with particular stress in construction. - Authorities expect weak or negative growth in 2024 with a medium-term pickup driven by declining interest rates, moderating inflation, wage growth, and labor reforms. - Authorities acknowledge both downside risks (housing construction downturn, global uncertainties, geoeconomic fragmentation) and upside risks (technological innovation, planned investments in energy, improving household finances). ### Policy priorities (fiscal focus) - Secure fiscal sustainability amid new priorities: - Past discretionary measures (2019 onward), COVID-era measures, defense spending, and higher public sector wages weakened fiscal outlook. - New government consolidation plan (~€6 billion; 2 percent of GDP) aligns broadly with staff recommendations but faces risks of dilution from new spending pressures and revenue shortfalls. - Staff note challenges in achieving envisaged efficiency savings in Wellbeing Service Counties and warn that fiscal gains from higher employment will be hindered by weak growth and labor market mismatches. *Source: IMF staff compilation from the Finland country report chapter titled "4. Inflation pressures are" in the provided PDF content.* ### 21. Public debt sustainability is subject to potential risks and long-standing demographic ### 21. Public debt sustainability is subject to potential risks and long-standing demographic ### Debt sustainability and fiscal outlook - Overall debt sustainability risks are assessed to be low given the moderate projected debt level and manageable gross financing needs, however the medium-term risk of debt not stabilizing remains high (Annex VIII). - Health and long-term care spending is projected to increase by around 2 percentage points of GDP by 2045, stressing public finances (European Commission 2021). - While the pension system is broadly on a financially stable footing, increasing shares of equity and other riskier investments in pension insurance companies’ portfolios and uncertainty of future asset returns make a conservative approach to adjusting pension contribution rates crucial. - There is ample room for efficiency gains in the delivery of health care service. ### Recommended fiscal consolidation and projections - Staff recommendation: begin with a modest structural adjustment of ¼ percentage points of GDP in 2024, increasing to ½ percentage points of GDP over the medium term, with the aim of balancing the budget by 2028. This adjustment is consistent with the government’s 2027 objective. - Rationale: support credibility, build buffers against future negative shocks, and mitigate the rising opportunity cost of borrowing at higher interest rates. - Impact: such a stance would put public debt on a declining path by 2027 and create space to support the expected increase in age-related spending. - Additional consolidation needed: further expenditure reduction (including efficiency gains from the Wellbeing Services Counties) and higher revenues should be considered, including: - indexation of excise taxes; - expansion of carbon taxation; - greater standardization of VAT rates; - reforming the taxation of dividends from non-listed firms. - Recent discretionary fiscal measures summarized (June 2023 government program and October 2023 medium-term fiscal plan): net total impact (percent of GDP) series shown in the source table and charts (e.g., Total Impact, net entries include -1.9, -0.3, 0.4, 1.1, -0.7, -0.1, 0.1, 0.4 corresponding to projection years listed). ### Authorities’ views on fiscal position - Authorities agree current policies would sustain a substantial fiscal deficit and that debt-to-GDP ratio will further increase. - They concur that sufficient measures have yet to be identified to meet the government’s objective of a 1 percent of GDP fiscal deficit by 2027 and to curb the debt-to-GDP ratio in two parliamentary terms, but remain committed to the goal and open to adding revenue measures. - Certain measures (increases in personal income tax, corporate income tax, carbon taxation and changes in dividend taxation of non-listed firms) are considered unlikely by the authorities. - Authorities expressed concern about prospects of containing health care expenditure in the near term and showed confidence in the sustainability of the pension system, noting ongoing review by newly formed working groups. ### Achieving sustainable and resilient growth: labor, skills, and R&D - Labor market reforms aim to enhance incentives to work, including unemployment benefit reforms, social security and tax adjustments, and enhancements to employment services, with the objective to create 100,000 new jobs. Government estimates identify measures to deliver approximately three-quarters of that target (Annex VIII). - Education and skills: - Authorities plan to increase the proportion of young adults attaining higher education degrees to approximately 50 percent by 2030. - Reducing skill mismatches, strengthening tertiary education, and attracting and integrating talent from abroad remain priorities. - R&D: - Authorities committed to increase R&D spending to 4 percent of GDP, with 1.2 percentage points of which coming from the public sector. - The 2024 budget increases allocation to R&D spending by €260 million (0.1 percent of GDP) to fund both basic and applied research; procedures established for competitive allocation. - The mechanisms by which public funding will catalyze private finance are yet to be established; tracking effectiveness is important. ### Climate policy and carbon sinks - Authorities plan to expand cheap green energy production and facilitate investments in net-zero technology manufacturing, supported by a new nuclear power plant, expanded wind capacity, and private investments. - Plans include increasing the share of biofuels in vehicle and heating fuels while offsetting consumer burden with lower fuel excises. - Current policies will further reduce emissions but are not sufficient to achieve the 2035 carbon neutral target. - Forests’ role as carbon sinks is weakening due to increased lumbering and is currently insufficient to meet EU targets. - Further actions needed: - increase the role of carbon sinks in the Land-Use, Land-Use Change, and Forestry (LULUCF) sector, particularly in forestry; - strengthen carbon pricing and prepare for the introduction of ETSII. - Strengthening carbon pricing would support fiscal consolidation efforts in addition to emission reduction (¶23). ### Demography, skill gaps, and migration (Box 1) - Demographic facts and projections: - Old-age dependency ratio was 41% in 2022, higher than the OECD average of 33%, and is projected to reach 50% by 2050. - Population is expected to shrink by 2060. - Skills and labor market gaps: - Finland faces a skills shortage, particularly in technology sectors, projected to need 130,000 high-skilled workers in the next decade. - Younger population (25–34 years) shows stagnating tertiary education levels, now below the OECD average, in contrast to older generation (55–64 years) who previously exceeded it. - Exposure to AI: - Finland faces significant exposure to AI disruption, especially in sectors like professional services; women may be disproportionately affected, potentially increasing inequality. - A well-trained, dynamic workforce could harness AI for productivity gains. - Policy responses: - Talent Boost initiative aims to attract international talent and address integration challenges. - Integration barriers noted: linguistic and cultural barriers and persistent bureaucratic hurdles remain key to retaining international migrants. ### Financial sector: resilience, risks, and policy recommendations - Resilience and vulnerabilities: - The financial system has sufficient capital buffers to withstand a severe macroeconomic downturn, but is vulnerable to large-scale liquidity shocks and cross-border exposures. - Banks are highly capitalized and well positioned for the current economic slowdown per EBA/ECB and FIN-FSA stress tests, but a severe scenario would significantly erode buffers. - Key systemic risks identified: - Cross-border risks: exposures to Nordic countries through large banks’ lending to commercial real estate and construction sectors undergoing a steep downturn; credit losses so far limited. - Corporate sector risks: rising bankruptcies and bond spreads in certain sectors (notably construction); loans to housing companies have historically had high repayment rates but NPLs have increased modestly recently. - Household sector risks: high pass-through of ECB policy rates to mortgage rates poses credit quality risk; household indebtedness remains high and further house price declines, higher interest rates, or rising unemployment could undermine credit quality. - Liquidity risks: reliance on (particularly short term) wholesale funding leaves the banking sector vulnerable to severe but plausible liquidity shocks and potential procyclical credit contraction. - Cyberthreats: significant and persistent cyber threats, especially given the war in Ukraine. - Macroprudential and regulatory measures: - Recommendation to enhance liquidity regulation and tighten liquidity buffers to cover a predetermined threshold of wholesale funding (in line with FSAP recommendations). - Authorities reinstated the 1 percent systemic risk buffer (SyRB) on credit institutions to be in effect in April 2024. - Recommendation to legislate a positive neutral rate on the countercyclical capital buffer (CCyB) to allow release of capital in extreme stress; pace of increase involves a trade-off between building resilience and avoiding procyclical tightening. - When circumstances allow, introduce a complete set of borrower-based measures (BBMs); these could be activated only when concerns about adverse impacts on house prices and demand abate. A FIN-FSA Board recommendation to limit stressed debt-service-to-income (DSTI) ratio to 60 percent was made in June 2022 but not adopted by government, though many financial institutions have followed it unilaterally. - Progress and outstanding actions from FSAP recommendations: - Improvements to supervision and systemic risk monitoring welcomed; resources of FIN-FSA and FFSA increased. - Implementation of positive credit register in 2024 expected to address data gaps and strengthen granular macroprudential analysis. - Further work needed to: ensure effective operationalization of crisis management; enhance legal and operational framework of financial oversight agencies; conduct Nordic-wide stress tests; and address procyclicality in the pension insurance sector. *Source: IMF staff calculations.* ### 38. The authorities have made progress in strengthening the anti-money laundering and ### 38. The authorities have made progress in strengthening the anti-money laundering and combating for terrorism framework (AML/CFT). ### Authorities’ Views - Evaluated the financial system as resilient but recognized increasing macroeconomic risks requiring continued vigilant monitoring. - Noted recent tightening of macroprudential measures, including: - reinstatement of the systemic risk buffer, and - enhancement of the systemic risk monitoring framework. - Reported lack of political consensus to legislate limits on DTI and DSTI. - Agreed that the introduction of a positive neutral CCyB might strengthen the policy toolkit, but any decision should be taken with a holistic view of bank capital needs and the complexity of macroprudential measures; this would also require legislative changes. - Agreed with staff's evaluation of risks stemming from the banking sector's high reliance on short-term wholesale funding. - Highlighted ongoing efforts to introduce amendments to regulation and guidelines in light of the recent IMF technical assistance report and efforts to enhance AML/CFT supervision and risk assessment with focus on risks from cross-border and non-resident transactions, drawing upon the recently published Nordic-Baltic regional AML TA report. ### Staff Appraisal — Growth and Labor Market - Finland’s growth has stalled, with a modest recovery expected this year. - Headwinds: elevated interest rates, sluggish trading partner growth, and a declining housing market. - Labor market remains broadly resilient, but: - unemployment is expected to increase slightly, particularly as the construction industry cuts back on employment. - Inflationary pressures are diminishing. - An improvement in household purchasing power and loosening financial conditions are expected to contribute to a modest recovery in the second half of the year. - Growth projections: - Economic growth is expected to be around ½ percent in 2024. - Rebound to around 1½ percent in the medium term, driven by increase in investment and employment resulting from the labor market reforms. - External position in 2023 is assessed to be moderately weaker than implied by fundamentals and desirable policy settings. ### Staff Appraisal — Fiscal Outlook and Risks - Fiscal outlook has worsened due to higher discretionary spending and weaker growth. - Drivers of increased expenditure include energy-related compensation, defense, high index-linked increases in social benefits, and support for Well being Service Counties. - Expected fiscal outcomes: - Deficit increased to 2.5 percent of GDP in 2023. - Debt ratio has climbed to 76 percent surpassing those of other Nordic countries. - The worsened fiscal outlook is expected to persist, putting public debt on a risky path over the medium term. - Existing measures fall short of achieving the ambitious fiscal deficit target. - The new government plans to adjust medium-term fiscal deficit by 2 percent of GDP through spending cuts and employment-driven fiscal gains, targeting overall fiscal deficit of 1 percent of GDP by 2027. - Consolidation will likely be diluted by new spending pressures and expected revenue shortfalls. - Further measures are necessary as current policies would fail to curb the deficit and bring down the debt ratio. ### Policy Recommendations — Fiscal Adjustment - Through a gradual but sustained adjustment, fiscal policy should be calibrated to reverse the public debt. - Recommended path: - A structural adjustment of around ¼ percent of GDP should begin in 2024, growing to ½ percent per year over the medium term, with the aim of balancing the budget by 2028. - This would help place public financing on a more sustainable footing and make room for the expected increase in age-related spending. - Suggested measures: - Further spending cuts, including through efficiency gains from the Well being Service Counties, in addition to recent reforms to social benefits. - Revenue measures such as excise tax indexation, expansion of carbon taxation, VAT rate standardization, and revising dividend taxation for non-listed companies. ### Policy Recommendations — Employment, Productivity, and Innovation - Enhancing employment and productivity are essential for economic growth. - Mission supports government efforts to boost employment through: - social benefit reforms, - greater flexibility in the labor market, and - lowering the labor tax wedge. - Government should establish robust systems to closely monitor the impact of these reforms on employment. - Additional policy aims: - Improve higher education, - lower skill mismatches, and - more effectively attract and integrate international talent. - While the government's commitment to invest in research and development is commendable, the plan should focus on catalyzing private sector funding. ### Policy Recommendations — Climate Goals - Further measures are needed to achieve Finland’s ambitious climate goals. - Progress noted on expanding production of low-emission energy, but more is needed to achieve the 2035 carbon neutral target. - Policy should consider strengthening carbon pricing and increasing the role of carbon-sinks in the land use sector. *Source: IMF staff appraisal and authorities’ views as presented in the provided content.* ### 46. The financial system remains resilient, but rising systemic risks warrant vigilant ### The financial system remains resilient, but rising systemic risks warrant vigilant monitoring ### Financial system resilience and vulnerabilities - Banks have sufficient capital to withstand adverse macroeconomic shocks, including geoeconomic fragmentation and weakening of profits and capital ratios. - High dependence on short-term wholesale funding makes banks susceptible to liquidity shocks; liquidity regulation should be tightened. - Banks are exposed to: - systemic events in the Nordic region, - CRE market volatility, - falling house prices, - still high household indebtedness. - These exposures "call for continuous and close monitoring." ### Macroprudential policy: analysis and recommendations - Staff welcomes recent tightening of macroprudential policy, including reinstatement of systemic risk buffers to the pre-pandemic level. - Recommended measures: - Legislated positive neutral rate on the CCyB (countercyclical capital buffer). - Enhanced systemic risk monitoring framework. - Add loan-level borrower constraints to the toolkit: debt-to-income and debt-service-to-income limits to prevent excessive household indebtedness and improve borrower repayment capacity. - These borrower-based measures "could be activated when concerns regarding adverse effects on demand and house prices subside." ### Banking sector structure and indicators - System characteristics and risks: - The banking system is relatively large and concentrated, with large real estate exposures and a heavy reliance on wholesale funding. - Banks are highly liquid relative to peers, but their dependence on short-term market funding raises liquidity vulnerability. - Key banking metrics (selected): - Regulatory Capital to Risk-Weighted Assets: 23.3, 21.4, 21.5, 20.5, 20.6, 20.6, 20.3 (2016–2022). - Regulatory Tier 1 Capital to Risk-Weighted Assets: 21.9, 19.6, 19.6, 18.3, 18.6, 18.6, 18.3 (2016–2022). - Regulatory Tier 1 capital to Total assets: 6.6, 5.5, 7.8, 5.9, 6.1, 6.1, 5.7 (2016–2022). - Return on Assets: 0.7, 0.6, 1.8, 0.5, 0.5, 0.8, 0.8 (2016–2022). - Return on Equity: 8.9, 7.6, 26.2, 6.2, 6.5, 9.3, 9.5 (2016–2022). - Liquid Assets to Total Assets (Liquid Asset Ratio): 21.3, 14.2, 8.9, 17.7, 17.3, 18.2, 20.9 (2016–2022). - Liquid Assets to Short Term Liabilities: 25.1, 20.9, 19.1, 22.1, 21.7, 22.2, 23.8 (2016–2022). - Customer Deposits as Percent of Total (non-interbank) Loans: 72.4, 76.6, 109.9, 57.1, 60.0, 63.3, 62.2 (2016–2022). - Liquidity Coverage Ratio (2022) relative benchmark: shown above regulatory minimum in charting (table/chart context). ### Real estate, CRE, and household sector risks - House prices have fallen in real terms since 2022. - New housing construction slowed markedly in 2022 and 2023; house prices cooled more in the greater Helsinki area. - Commercial real estate: - Value growth in the CRE market described as "relatively benign," but the retail segment "faced strong headwinds." - Household sector vulnerability driving policy advice: - High household indebtedness motivates inclusion of debt-to-income and debt-service-to-income limits in macroprudential toolkit. ### Selected macroeconomic projections and fiscal/sectoral key statistics (selected from Tables) - Output and demand (percent change): - GDP: 2.8 (2021), 1.6 (2022), -0.5 (2023), 0.4 (2024), 1.9 (2025), 1.9 (2026), 1.7 (2027), 1.6 (2028), 1.5 (2029). - Private consumption: 3.2 (2021), 1.5 (2022), -0.8 (2023), 0.5 (2024), 1.3 (2025), 1.3 (2026), 1.2 (2027), 1.2 (2028), 1.2 (2029). - Gross fixed capital formation: 1.0 (2021), 3.1 (2022), -5.7 (2023), 2.0 (2024), 4.4 (2025), 3.4 (2026), 3.9 (2027), 2.4 (2028), 2.4 (2029). - Prices and labor market: - Consumer price inflation (harmonized, average): 2.1 (2021), 7.2 (2022), 4.3 (2023), 1.2 (2024), 1.9 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - Consumer price inflation (harmonized, end-year): 3.2 (2021), 8.8 (2022), 1.3 (2023), 1.9 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029). - Participation Rate (15-74 years): 67.0 (2021), 68.0 (2022), 68.8 (2023), 69.3 (2024), 69.8 (2025), 70.2 (2026), 70.7 (2027), 71.2 (2028), 71.7 (2029). - Unemployment rate (percent): 7.6 (2021), 6.8 (2022), 7.2 (2023), 7.6 (2024), 7.4 (2025), 7.3 (2026), 7.3 (2027), 7.2 (2028), 7.1 (2029). - Public finances and debt (percent of GDP): - Overall balance: -2.8 (2021), -0.8 (2022), -2.5 (2023), -3.5 (2024), -3.4 (2025), -3.0 (2026), -2.7 (2027), -2.2 (2028), -2.3 (2029). - Gross debt: 72.6 (2021), 73.3 (2022), 76.3 (2023), 79.6 (2024), 82.2 (2025), 84.0 (2026), 85.1 (2027), 85.6 (2028), 86.2 (2029). - Net debt: -72.9 (2021), -59.3 (2022), -54.5 (2023), -49.6 (2024), -44.3 (2025), -39.6 (2026), -35.5 (2027), -32.0 (2028), -28.6 (2029). - External sector (selected, percent of GDP and bln euros): - Current account balance (percent of GDP): 0.4 (2021), -2.6 (2022), -0.5 (2023), -0.4 (2024), -0.2 (2025), -0.1 (2026), 0.0 (2027), 0.0 (2028), 0.0 (2029). - Gross external debt: 208.6 (2021), 215.4 (2022), 216.1 (2023), 218.0 (2024), 216.5 (2025), 215.3 (2026), 213.9 (2027), 212.6 (2028), 211.4 (2029). - GDP at current prices (bln euros): 250.7 (2021), 268.4 (2022), 279.3 (2023), 286.6 (2024), 297.7 (2025), 309.4 (2026), 321.0 (2027), 333.4 (2028), 345.6 (2029). ### Policy implication and follow-up - Vigilant monitoring of bank liquidity and wholesale funding exposures is warranted. - Tightening liquidity regulation and legislating a positive neutral CCyB rate are recommended to bolster resilience. - Expanding macroprudential toolkit to include debt-to-income and debt-service-to-income limits would target household-level vulnerabilities and could be deployed when macro conditions allow. - The next Article IV consultation with Finland is proposed to take place on the standard 12-month cycle. *Source: IMF staff assessment and tables from the Finland Article IV package.* ### Annex I. Monetary Policy Transmission in Finland ### Annex I. Monetary Policy Transmission in Finland ### ECB tightening: scale and timing - The ECB deposit rate increased from -0.5 percent in mid-2022 to 4 percent in September. - This is the largest and fastest tightening cycle since the start of the euro area and is larger and faster than the episodes in the early 2000s and prior to the GFC. ### Structural factors implying stronger transmission in Finland - Share of variable rate mortgages: - Virtually all household mortgage loans in Finland have variable interest rates, compared to a euro area median of 52 percent. - Around 30 percent of the variable rate mortgages in Finland are protected with interest rate collars, which reduces full pass-through of policy rates to mortgage rates. - Private indebtedness: - Private credit is around 100 percent of GDP in Finland, compared with the Euro Area average of 81 percent. - Excess saving: - Finland has lower net household savings built up since the pandemic compared with the euro area, reducing the savings cushion that mitigates the impact of higher rates. - Bank concentration: - Finland has a relatively concentrated banking sector; the impact on transmission is theoretically ambiguous (could inhibit pass-through to deposit rates relative to lending rates, affect net interest margins, and influence saving incentives). ### Measured pass-through to “real economy” rates - Overall pass-through since June 2022: - Interest rates in the real economy have increased significantly, but the estimated pass-through—measured by “pass-through coefficients” over the period June 2022 to August 2023—appears to be smaller than in the 2005–08 tightening cycle. - The pass-through to household and NFC deposits has been particularly low, especially for overnight rates. - For mortgages, most interest rates are linked to the 12-month EURIBOR, which started to increase before the first ECB rate rise, reducing estimated pass-through in this analysis. - Mortgage rates: - Average mortgage rates have increased fourfold, from below 1 to over 4 percent. - Pass-through to existing mortgages has been three times the euro area average. - Pass-through to new mortgages has been around one-third higher than the euro area average. - Note: about 30 percent of variable mortgages are protected with collars, moderating full pass-through. - Corporate loans and deposits: - Pass-through to corporate loans is nearly 0.8, around the euro area average. - Pass-through to deposit rates is broadly similar to the euro area average despite Finland’s relatively high banking sector concentration. ### Implications for households, firms, and macro outlook - Households: - High share of variable mortgages and large mortgage rate increases compress household disposable income and consumption. - Lower “excess saving” in Finland reduces households’ ability to cushion higher rates, amplifying the consumption impact. - Firms: - Private credit around 100 percent of GDP implies interest rate increases have a proportionally larger impact on firms’ costs, reducing investment. - Pass-through to corporate loans near 0.8 contributes to higher firm financing costs and pressure on investment. - Aggregate transmission: - Structural features (variable mortgages, high private indebtedness, lower excess savings) suggest monetary transmission to inflation and output in Finland may be stronger than the euro area average, notwithstanding observed weaker pass-through coefficients relative to the 2005–08 tightening cycle. *Source: 1finea2024001 - Annex I. Monetary Policy Transmission in Finland* ### Annex II. Appendix I. Technical Details and Additional Results ### Annex II. Appendix I. Technical Details and Additional Results ### A. Dynamic Factor Model - Model representation: - π_{i,j,t} = β_{i,j}^g F_t^g + β_{i,j}^s F_t^s + β_{i,j}^c F_t^c + ε_{i,j,t} - π_{i,j,t} represents inflation for country i and component j in period t. - Factors: F_t^g (global factor), F_t^s (component-specific factor), F_t^c (country-specific factor). - ε_{i,j,t} is the idiosyncratic term. - Factor loadings β_{i,j}^{·} are component-country specific; identification via zero restrictions (e.g., only energy inflation loads on the energy-specific factor). - Unobserved factors and idiosyncratic term follow AR processes. - Estimation method: Bayesian techniques (see Karadimitropoulou and León-Ledesma (2013) for details as cited in source). ### Database and Measurement - Data source: Harmonized Index of Consumer Prices (HICP) from Eurostat via Haver Analytics. - Frequency and processing: - Compiled at quarterly frequency and seasonally adjusted. - For estimation: inflation enters as q/q growth rates of HICP levels (and then demeaned). - For exposition: inflation and estimated factors presented as y/y growth rates. - Estimated factors visualization: - Thick line: median estimate. - Dotted lines: 33–66 percentile bands. ### B. Decomposition of Core Inflation - Classification (following Gonçalves and Koeste (2022)): - Core inflation components at 2-digit HICP level categorized into four groups: - (i) sensitive to supply chain disruptions; - (ii) sensitive to re-opening, reflecting pent-up demand; - (iii) rent; - (iv) the remaining. - Components in each category aggregated using corresponding HICP weights. - Examples of component categorizations (as listed): - Reopening category includes: Clothing, Footwear, Transport services, Package holidays, Catering services, Accommodation services, Telephone & telefax equip. & services, Furniture & furnishings, Household textiles, Household appliances, Glassware, Tools & equipment for house & garden, Goods & services for routine household maintenance, Purchase of vehicles, Spare parts & accessories for personal transport equipment, Maintenance & repair of personal transport equipment, Financial services n.e.c., Others (e.g., Medical products, Out-patient services, Hospital services, Postal services, Audio-visual equip., Other recreational items & equipment, Newspapers, books & stationery, Education, Personal care, Personal effects n.e.c., Social protection, Insurance, Other services n.e.c.). - Rent category: Rent for housing. - (Supply Chain Disruptions category listed but specific items not reproduced in supplied excerpt.) ### Annex III. Beveridge Curve Shifts in Finland — Overview and Method - Objective: Decompose shifts in Finland’s Beveridge Curve (BC) to identify drivers; highlight reduced matching efficiency as a main driver and discuss policy implications to achieve government employment objectives. - Context: - Finland experienced a sharp rebound after Covid-19; unemployment fell rapidly while vacancies rose sharply. - Vacancy rate has increased steadily over the past decade. - BC in Finland: relatively flat before the Global Financial Crisis (GFC), shifted outward post-GFC, and further steepened after the Covid-19 pandemic. - Methodology: - Use Ahn and Crane (2020) two-step method: 1. Estimate parameters of a matching function: - H_t = σ_t U_t^{1-α} V_t^{α} (presented in source as 1 H_t = tttt HUV αα σ − = (0.1) — interpreted in source context as a matching function where H_t is hires, U_t unemployment, V_t vacancies, α elasticity, σ_t matching efficiency) 2. From (1.1) obtain job-finding probability: - f_t = σ_t (V_t / U_t)^α (presented in source with formula (0.2)) - Job-finding probability measured as in Shimer (2012): - f_t = 1 - (U_{t+1}^s + U_{t+1}^{11} - ... ) — source presents: 11 1 s tt t t UU f U ++ − = − (see original source for exact notation); in text: measure uses number of unemployed for less than five weeks at time t+1. ### Beveridge Curve Decomposition: Components and Periodization - BC intercept shifters from linearized decomposition: - Matching efficiency: lower σ shifts BC up (more vacancies needed for given unemployment). - Job-separation probability: higher separations shift BC up (more vacancies required to absorb inflows). - Out-of-steady-state unemployment dynamics: rising unemployment shifts BC down (less vacancies needed due to low job finding). - Periods analyzed: - Global Financial Crisis (2008–09); - Pre-Competitiveness Pact (2010–2016); - Competitiveness Pact (2017–2019); - Post-Pandemic (2020–present). ### Beveridge Curve Decomposition: Key Findings and Quantitative Results - Period-specific observations: - GFC (2008–09): unemployment dynamics (increase in unemployment) contributed to a net downward shift of the curve. - 2010–2016 (Pre-Competitiveness Pact): pronounced upward shift due to rise in job separations and reduced matching efficiency. - 2017–2019 (Competitiveness Pact): decline in job separations and unemployment (Pact-induced lower wages) contributed to a temporary downward shift, but persistent decline in matching efficiency was not fully offset. - Post-Pandemic (2020–present): matching efficiency further deteriorated; reductions in separations and unemployment did not offset this. - Quantitative policy-relevant result: - If matching efficiency in Finland recovers toward its pre-GFC level (an increase by approximately 20 percent), the implied reduction in the unemployment rate at the pre-pandemic level of vacancies would be around 2 percentage points, equivalent to an increase in headcounts of about 55 thousand. - This gain is a sizable portion of the government’s plan to raise employment by 100k but would still leave some scope beyond matching. ### Determinants and Policy Implications for Matching Efficiency - Potential determinants of lower matching efficiency (as noted in source and cited authorities): - Nature of job offers (contract terms, wage rate). - Undersupply of skilled labor in sectors such as healthcare and IT. - High spending on Active Labor Market Policies (ALMP) but limited take-up: Finland’s spending on ALMP is 0.8 percent of GDP; only about half of jobseekers contact the Public Employment Service (PES), and there is a significant share of workers with low labor attachment. - Suggested policy responses mentioned: - Improve migration flows to address undersupply of skilled labor in specific sectors. - Move toward a more decentralized wage bargain system to improve matching. - Thorough evaluation of ALMP (OECD (2023) recommended) to ensure effective use of public funds. ### Annex IV. External Sector Assessment — Overall Assessment and Key Metrics - Overall Assessment: - Based on projections of the current account, Finland’s external position in 2023 is estimated to be moderately weaker than the level implied by fundamentals and desirable policies. - Potential Policy Responses: Fiscal consolidation remains the primary lever to strengthen the external balance; moderation in wage bargaining settlements remains important given weak productivity growth and the need to preserve cost competitiveness; labor market reforms could bolster productivity. - Foreign Assets and Liabilities (Background and Assessment): - NIIP weakened in 2022 to -2.2 percent of GDP. - As of 2023Q3, NIIP showed signs of recovery but staff projects it might end up around -2.6 percent driven by a decrease in the stock of net direct investment. - Gross external debt: 208 percent of GDP in 2021; projected to reach 216 percent in 2023 (source text: "projected to reach 216 percent in 2023"). - Assessment: Near term NIIP projected to deteriorate slightly due to small and recurrent CA deficits, then stabilize over the medium term. Vulnerabilities stem from large cross-border exposures of the financial sector, including liquidity risk related to foreign-financed wholesale funding. - Selected 2023 model estimates (est., percent GDP): - NIIP: -2.6 - Gross Assets: 328 - Debt Assets: 47 - Gross Liab.: 331 - Debt Liab.: 100 ### Current Account: Background and Assessment - Background: - Current account deficit in 2022 reached around 2.6 percent of GDP, driven by deterioration in services and primary income balances. - First three quarters of 2023: current account balance improved; estimated current account deficit for 2023 is 0.5 percent (comprising a surplus in goods driven by shrinking goods imports that more than offsets a deficit in services). - Projection: current account projected to be negative in near-term due to less favorable external environment; expected to be balanced over the medium term supported by higher external growth and measures to preserve cost competitiveness. - Assessment (EBA and staff estimates): - Preliminary EBA estimate: cyclically-adjusted CA of -0.8 percent of GDP and a CA norm of 0.3 percent of GDP. - Staff’s estimated gap for 2023: -1.2 percent (with a range -0.7 and -1.7), decomposed as: - 1.2 percentage points attributed to a “policy gap” - -2.4 percentage points as an unidentified residual - Conclusion: external position in 2023 is moderately weaker than level implied by medium-term fundamentals and desirable policies; results subject to uncertainties and data revisions. ### Finland: Model Estimates for 2023 — Real Exchange Rate and CA/REER Gaps - Real exchange rate developments: - ULC-based REER: appreciated by 19 percent relative to 2020H1 by end-2023 and 2 percent compared to 2022. - CPI-based REER: depreciated approximately 7 percent from 2020 to 2022Q3, then appreciated about 6 percent through 2023Q4. - Assessment and model-derived gaps: - Staff CA gap implies REER gap of 3.4 percent after applying an estimated elasticity of 0.34; range: 2.0–4.9 (source presents REER gap = 3.4 and REER model = 6.1). - According to REER-gap index model: REER gap is 6.1 percent. - EBA level REER model suggests an overvaluation of about 9 percent in 2023. - Summary table entries from source (as presented): - CA-Estimate: -0.5 - Cyclical contributions (from model) (-): 0.3 - Adjusted CA: -0.8 - CA Norm (from model): 1/0.3 (presented in source) - Adjusted CA Norm: 0.3 - CA Gap: -1.2 -2.1 (source lines present both -1.2 and -2.1 in context of CA Gap and related entries) - o/w Relative policy gap: 1.2 - Elasticity: -0.34 - REER Gap (in percent): 3.4 6.1 (both model-based numbers presented in source) ### Capital and Financial Accounts; FX Intervention and Reserves - Capital and financial accounts — background and assessment: - Financial account deteriorated slightly to -3.3 percent of GDP in 2022 due to higher portfolio investment liabilities outpacing improvements in net FDI and net other investment balances. - Financial account showed modest recovery in first three quarters of 2023 compared to 2022, driven by stronger net other investment position. - Gross external debt rose to 215 percent of GDP in 2022 (reflects reliance of large financial sector on foreign wholesale funding). - Assessment: Finland has a fully open capital account and remains exposed to financial market risks given interconnected regional markets. - FX intervention and reserves: - Background: the euro has the status of global reserve currency. - Assessment: the currency is freely floating. *Source: Annex II. Appendix I; Annex III; Annex IV from the provided IMF Finland country material.* ### Annex V. Risk Assessment Matrix ### Annex V. Risk Assessment Matrix ### Global: Major risks, likelihood, impacts, and policy responses - Intensification of regional conflicts - Relative likelihood: High - Impact if realized: High - Key description: Escalation or spread of the conflict in Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism disrupt trade (e.g., energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increase refugee flows. - Expected macro effects: Further decline in economic activity, weakening investment and growth, worsening financial conditions; fiscal stance deteriorates due to automatic stabilizers; banks’ asset quality deteriorates leading to capital shortfalls; funding costs rise for corporate borrowers, reducing credit availability. - Policy response: - Provide targeted fiscal support to cushion the impact on households. - Support firms to preserve viable jobs and prevent liquidity problems from triggering defaults and bankruptcies. - Monetary policy miscalibration - Relative likelihood: Medium - Impact if realized: Medium - Key description: Major central banks loosen policy stance prematurely, hindering disinflation, or keep it tight for longer than warranted, causing abrupt adjustments in financial markets and weakening the credibility of central banks. - Expected macro effects: A vicious wage-price spiral could result from higher and persistent inflation; aggressive tightening may have adverse spillovers to corporate and household sectors through higher debt service, liquidity shortfalls, and reduced demand. - Policy response: - Stand ready to tighten fiscal policy while protecting the vulnerable. - Deploy prudential tools to mitigate financial stability risks. - Enhance wage bargaining coordination and flexibility to prevent wage-price spirals. - Abrupt global slowdown - Relative likelihood: Medium - Impact if realized: High - Key description: Global and idiosyncratic risk factors cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and markets fragmentation triggering sudden stops in emerging market and developing economies. Europe: Intensifying fallout from Russia’s war in Ukraine, supply disruptions, tight financial conditions, and real estate market corrections exacerbate economic downturn. - Expected macro effects: Aggressive central bank responses trigger tightening of financial conditions, higher borrowing costs, lower demand, and domestic slowdown. - Policy response: - Allow automatic stabilizers to operate; use fiscal policy space to support the most vulnerable but offset by other measures to avoid stimulating the economy if wage and inflation pressures persist. - Employ macro-prudential tools to mitigate financial stability risks. - Deepening geoeconomic fragmentation - Relative likelihood: High - Impact if realized: High - Key description: Broader conflicts, inward-oriented policies, weakened international cooperation produce a less efficient configuration of trade and FDI, supply disruptions, protectionism, policy uncertainty, technological and payments systems fragmentation, rising shipping and input costs, financial instability, and lower growth. - Expected macro effects: Higher input costs, supply disruptions and changed trade patterns generate transition costs and may result in lower real incomes and lower firm profitability. - Policy response: - In collaboration with partners, continue to support global cooperation and multilateralism. - Promote supply chain resilience, including by encouraging diversification. - Step up envisaged structural reforms to enhance flexibility and help sectors cope with shocks in a targeted manner. - Cyberthreats - Relative likelihood: Medium - Impact if realized: Medium - Key description: Cyberattacks on physical or digital infrastructure and service providers (including digital currency and crypto assets) or misuse of AI technologies trigger financial and economic instability. - Expected macro effects: Disruption to economic activity, weaker confidence, and capital outflows. - Policy response: - Continue to promote awareness and preparedness campaigns to inform the public. - Continue to invest in cyber defense. Note on RAM probability language: “low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent. ### Regional and domestic risks, impacts, and policy responses - Adverse shock in a neighboring Nordic country (housing/CRE correction, financial sector distress) - Relative likelihood: Medium - Impact if realized: High - Expected macro effects: Lower demand from trading partners reduces domestic output and employment; financial sector sees declining asset quality and funding difficulties. - Policy response: - Conduct regular Nordic-wide financial stress tests. - Reintroduce SyRB once macroeconomic uncertainties abate. - Systemic financial instability (housing/CRE correction, cross-border Nordic linkages) - Relative likelihood: Medium - Impact if realized: High - Key description: Correction in housing and CRE markets and/or adverse shock in a neighboring Nordic country could distress the financial sector given close interlinkages across the Nordic financial system. High household debt and variable rate mortgages amplify risks. Doubts about covered bond quality could elevate bank funding costs. - Policy response: - Continue to closely monitor risks, including households’ creditworthiness, cross-border macro-financial exposures, and liquidity. - Tighten liquidity regulation and enhance banks’ liquidity buffers to address systemic liquidity risks. - Social discontent (inflation, income loss, migration, inequality) - Relative likelihood: Low - Impact if realized: Medium - Key description: High inflation, real income loss, spillovers from conflicts (including migration), and worsening inequality can cause social unrest and detrimental populist policies, exacerbating imbalances, slowing growth, and leading to policy uncertainty and market repricing. - Assessment for Finland: The economy has shown resilience and social discontent due to price increases and shortages linked to the War in Ukraine are expected to be limited given broad consensus on support for Ukraine. - Policy response: - Provide targeted support to mitigate the impact of higher living costs on the most vulnerable. - Continue constructive dialogues among stakeholders. ### Annex VI: Geoeconomic fragmentation and Finland’s trade exposure — findings and implications - Definition and risks of GEF - Geoeconomic fragmentation (GEF) is the deliberate policy-driven move towards deglobalization that entails the disconnection of trade and investment between nations; it gained momentum since 2020 with increasing trade and investment restrictions. - GEF ramifications include elevated import prices, fragmented markets, restricted technology access, labor inefficiencies, diminished productivity, and increased financial instability. - Finland’s vulnerability as a small open economy - Finland is particularly susceptible to GEF; globalization has experienced ebbs and flows for Finland including “slowbalization.” IMF studies find that the welfare impact of a moderate global fragmentation scenario would range between -0.75 and -0.9 percent of GDP on the Finnish economy. - Trade measures and metrics - Gross trade (sum of imports and exports in final goods) has remained broadly stable since 2017 and hovered around 53 percent of GDP during the slowbalization era (except for 2022). Using this measure, trade patterns provide little evidence of GEF so far. - Total Foreign Production Exposure (FPE) is a metric that tracks sequences of inputs to inputs and gives a comprehensive perspective of trade reliance. Finland's FPE to Chinese inputs has seen a significant surge over the past two decades across most industries. Finnish manufacturing and high-tech sectors’ “Observed” trade with China−intermediate imports as percent of gross production−have increased by less than 3 percentage points of total intermediate inputs since 1995, while their FPE have respectively increased by more than 10 and 8 percentage points since 1995, surpassing Germany as the largest provider. - Shifts in exposure by partner and sector - Finland’s trade exposure to the US and EU is substantial but has declined over past decades. Reliance on intra-Nordic intermediate inputs has decreased; reliance on a few countries (India, Poland, Ireland) has increased besides China and Russia. The Finnish high-tech sector has experienced similar trends in reliance on Chinese inputs, though it has not yet surpassed all other countries. - Business concentration and exposure - The top ten companies (ranked by asset sizes) comprise 64 percent of total asset size of all listed Finnish companies. As of 2022, these largest companies collectively had substantial exposure to China and Russia in workforce, asset size, and revenues. - Policy implications and recommendations for resilience - Consider policy measures to enhance supply chain resilience, including diversifying suppliers and mitigating supply chain risks. - Pursue an open and rules-based trading system, broaden trade and development partnerships, and strengthen the EU’s single market. - Implement structural reforms focused on high-value-added sectors, address skilled labor shortages, and invest in technology and innovation to enhance competitiveness. - Prefer targeted de-risking over outright decoupling. - Maintain continuous supply chain monitoring (risk assessment and digitalization) and maintain strategic reserves of critical goods. ### Annex VII (selected elements): Fiscal consolidation — program and measures - Government Program (June 2023) medium-term plan overview - Plan horizon: 4-year program beginning 2024. - Envisaged fiscal adjustment: €6 billion (2 percent of GDP). - Composition: Spending cuts €4 billion (direct consolidation) and remainder via fiscal gains from additional employment (indirect consolidation). Tax measures and public investment (fully financed by asset sales) are neutral on budget in aggregate. - Assessment: Plan will partially reverse the upward sloping debt trajectory but will fall short of stabilizing it. - Spending cuts and reallocation (high-level) - Cuts aim to incentivize work and realize efficiency gains in health and social services. Indexation of benefits would be frozen with exemptions for vulnerable groups. Most cuts to health and social services are assumed efficiency gains about €900 million by 2027 to be reallocated ex-post only after realized. - Table 1: Finland: Spending Reduction Measures (selected totals preserved exactly) - Total spending reductions by year: - 2024: 1,433 - 2025: 2,392 - 2026: 3,251 - 2027: 4,195 - Tax measures are overall neutral on budget - Labor taxes reduced for low- and medium-income earners causing direct revenue loss of about €0.4 billion annually. Fuel excise lowered to offset distribution obligation costs. Revenue loss offset by moving items to higher VAT rates, raising real estate taxation, and increasing some other excises. - Employment measures and fiscal savings - Government program identified concrete measures to generate additional employment by 78,000 (out of the 100,000 envisaged). - Estimated fiscal savings: around €1.8 billion (0.7 percent of 2023 GDP) by 2027. - Table 2: Finland: Employment Measures (selected figures preserved exactly) - Incentive trap elimination subtotal: 41,400 headcount, 1.64 percent change, 1,100 million euros, 0.39 percent of 2023 GDP (as formatted in source). - Other Social Security and Taxation subtotal: 36,900 headcount, 1.46 percent change, 743 million euros, 0.26 percent of 2023 GDP (as formatted in source). - Grand Total: 78,300 3.10 1,843 0.66 - Public investment - Public investment worth €4 billion to be fully financed by asset sales and neutral on the budget; intended to offset negative growth effects of consolidation. *International Monetary Fund — Annex V. Risk Assessment Matrix (excerpts and adjoining annexes as provided).* ### 6. Following the government program, the 2024 Budget and the medium-term fiscal ### 6. Following the government program, the 2024 Budget and the medium-term fiscal plan (October 2023) ### Budgetary measures, assumptions, and near-term fiscal stance - War-related discretionary spending averages around ½ percent of GDP annually during 2024–27. - Of the €4 billion investment plan, €600 million is already budgeted for the period 2024–26—this will be fully financed by funds from the Housing Fund of Finland. - A reduction in unemployment insurance contribution will decrease revenues by around 0.2 percent annually. - Revenue shortfalls are also due to non-discretionary items: a deteriorating macroeconomic outlook (since the government program) and inflation-induced index adjustment of income tax brackets. - Spending reduction measures envisaged in the June government program will be partially implemented with the net effect of reducing the 2024 central government spending by €800 million. ### C. Assessing the Growth Impact - Staff separate the impact into direct consolidation and indirect consolidation. - Direct consolidation: - Using a fiscal multiplier of 0.8, the spending cuts in the government program—ceteris paribus—would result in growth downgrades of around 0.2 percentage points during 2024–27. - Indirect consolidation (employment effects and public investment): - Staff assess employment gains to be backloaded and assume gains start realizing only in 2025, rising to about 30,000 by 2027—well short of the 78,000 additional employment assumed in the government program. - The impact of these additional employment on growth is assessed using an estimated Okun’s relationship for Finland. - Along with the public investment budgeted so far, the additional employment would result in growth upgrade in the range of 0.1–0.3 percentage points during 2026–27. - Net growth assessment: - Staff assess the fiscal plan to have an expansionary impact on growth, both in the near term and the medium term. - The adverse growth impact of direct consolidation will be more than offset by the impact from the new loosening measures, resulting in a net growth impact that is mildly expansionary in the near term. - Over the medium term, the offset will also come from the employment impact, which—along with the public investment—will result in a net growth upgrade of about 0.3 percentage points relative to the no policy change scenario. ### D. Assessing the Fiscal Impact - Fiscal gains from additional employment measures: - Staff assess the fiscal gains from additional employment measures to be modest, around ¼ percent of GDP in 2027. - The revenue gains would come mostly from additional income tax with indirect tax (from implied larger consumption) making up the rest. - These gains are smaller than envisaged in the government program (0.7 percent of GDP)—this mainly reflects the smaller employment gains assumed in the staff’s assessment. - Debt outlook and consolidation adequacy: - Taken together, the consolidation plan will partially reverse the upward-sloping debt trajectory but will fall short of reversing it. - Staff do not incorporate the envisaged efficiency gains in health and social services as spending cuts in this area are not yet tangible. - In addition to the smaller fiscal gains from additional employment, staff consider the impact of new spending and revenue shortfalls (after the government program was put in place). - Debt will continue to rise over the medium term, but at a slower pace relative to the no-policy change scenario. ### Annex VIII — Debt Sustainability and Risk Signals (selected findings) - Staff assesses the medium-term risk of sovereign stress as low, aligning with a low risk of refinancing. - The mechanical medium-term signal from the fan chart suggests a moderate risk, predominantly due to a high probability of debt non-stabilization. - DSA Summary Assessment highlights: - Finland is at a low overall risk of sovereign stress and debt is sustainable. - Debt is expected to rise steadily for several years. - The medium-term risk of debt non-stabilizing has stayed at high levels due to spending pressures. - Liquidity risks as analyzed by the GFN Financeability Module are low due to a highly diversified investors' base. - Over the longer run, Finland is affected by population aging which requires a wide-ranging set of fiscal and structural reforms. - Commentary excerpts: - Debt stabilization in the baseline: No - Staff's assessment on the overall risk of sovereign stress is low, due to low risk of refinancing, relatively low debt, and diversified investors' base. - Long-term risks are moderate as aging-related expenditures on health and social security feed into debt dynamics. ### Annex IX — FSAP Key Recommendations (selected implementation status) - Oversight—Cross Cutting: - Strengthen legal/operational protection for oversight officials: Not Implemented; No plans to implement. (Timing: NT) - Secure FIN-FSA's independence through board composition and dismissal rules: Not Implemented; review may take place once CRD VI is transposed. (Timing: NT) - Increase resources for FIN-FSA and other oversight agencies: Partially Implemented; FFSA headcount and budget has grown and a proposal to amend the Supervision Fees Act has been submitted. (Timing: NT) - Macroprudential Policy: - Provide FIN-FSA Board with hard/semi-hard macroprudential powers: Not Implemented; No plans. (Timing: MT) - Add DTI and DSTI limits and introduce positive CCyB in neutral stance: Not Implemented; no political consensus. (Timing: MT) - Enhance systemic risk monitoring and data: Partially Implemented; positive credit register expected to be fully operational in 2024. (Timing: MT) - Systemic Risk Assessment and Crisis Management: - Enhance liquidity buffers for predetermined wholesale funding outflows over five days: Not Implemented. (Timing: NT) - Nordic-wide coordinated stress test effort: Not Implemented; authorities promoting exercise and plan to present initial framework at a Nordic-Baltic Macroprudential Forum. (Timing: MT) - Centralize cross-authority crisis coordination: Partially Implemented; common tasks centralized in 2023. (Timing: I, C) - Banking Regulation and Supervision: - Further analysis on banks’ IFRS-9 implementation: Partially Implemented; thematic analysis carried out in H1 2023; credit risk analysis remains a priority in 2024. (Timing: NT) - Include rules on appointment and independence of supervisory board members in legislation: Not Implemented; FIN-FSA has submitted a proposal and a discussion paper is expected by MoF in 2024. (Timing: NT) - Nonbank Financial Institutions and Financial Integrity: - Amend PIC solvency regulations to remove procyclical impacts: Not Implemented; working group established. (Timing: NT) - Enhance AML/CFT supervision and risk-based tools: Partially Implemented; progress made but more work needed. (Timing: I) *Source: IMF staff report content provided in the content unit.* ### Annex X. Past Fund Staff Recommendations and Implementation ### Annex X. Past Fund Staff Recommendations and Implementation ### Fiscal Policy - Recommendation: For 2023, fiscal policy should be supportive of monetary policy while prioritizing support to the vulnerable and security spending. A slightly tighter fiscal stance would strike a balance between containing aggregate demand and inflation pressures. - Implementation: Not implemented. Fiscal policy in 2023 is expected to be expansionary, mainly driven by discretionary spending. - Recommendation: Over the medium term, fiscal consolidation needs to put the debt ratio on a declining path and make room for aging-related spending. Revisiting fiscal policy objectives and identifying specific measures would be critical for the medium-term consolidation plan. - Implementation: Partially implemented. The medium-term fiscal consolidation plan in the new government program will slow the upward debt trajectory relative to no policy change. But it will fall short of reversing the debt trajectory as the consolidation plan is diluted by new spending and expected revenue shortfalls. The plan has specified consolidation measures which are broadly in line with previous staff’s recommendation. - Recommendation: Continue to close routes to early retirement for older workers and better target in-work and out-of-work benefits; maintain a margin of safety in the pension system and adopt a conservative approach to adjusting pension contribution rates. - Implementation: Partially implemented. The government program seeks to cut out-of-work (unemployment) benefits. Routes to early retirement are being closed and targeting of in-work benefits is a future agenda. A government working group is studying the sustainability of the pension system, with a plan to conclude by early 2025. ### Labor Market and Structural Policies - Recommendation: Increase flexibility within the coordinated wage bargaining framework to support employment and productivity. - Implementation: Not implemented. Wage agreements in the municipal and health sectors broke the tradition of following the private sector, having negotiated a premium over private sector wages. This weakened the wage coordination mechanism. - Recommendation: Increase employment by reducing work disincentives for women with care responsibilities, address skill shortages, improve access to tertiary education, and attract skilled foreign labor. - Implementation: Partially implemented. No specific measures on home care benefits for women. In the new government program, there is the intention to address skill shortages. The authorities are planning further develop the Talent Boost initiative aimed at amplifying Finland's appeal to international talent and bolstering its workforce with specialized expertise. - Recommendation: Direct R&D tax incentives toward startups and SMEs where the impact will be strongest. - Implementation: Partially implemented. The new government has committed to increase R&D spending to 4 percent of GDP. There are no firm-size thresholds for R&D tax incentives. - Recommendation: Further measures to achieve carbon emissions objectives, including higher and better harmonized carbon prices (when energy prices subside), addressing competitiveness and distributional concerns, and increased taxation of carbon-intensive peat production. - Implementation: Partially implemented. The authorities plan to expand the production of cheap green energy, with the goal to help “re-industrialize” Finland. The authorities also plan to reduce fuel excises to offset the impact of re-introducing the distribution obligation. The authorities do not have a plan to expand carbon taxation in the near future. No progress on peat taxation. ### Financial Sector and Macroprudential Policies - Recommendation: Expand the macroprudential toolkit and legislate caps on debt-to-income (DTI) and debt-service-to-income (DSTI) ratios to address borrower-side vulnerabilities from high household indebtedness. - Implementation: Not implemented. The government package of macroprudential enhancements were implemented in 2023. The FIN-FSA Board recommendation to limit stressed debt-service-to-income (DSTI) ratio to 60 percent. However, no caps on DTI or DSTI ratios have been legislated by the government. - Recommendation: Strengthen capital requirements and reinstate systemic capital buffer requirements as circumstances allow. - Implementation: Implemented. In addition to implementation of the already-planned increase in capital requirements, the authorities have reinstated a 1 percent systemic risk buffer (SyRB) on credit institutions to be in effect in April 2024. - Recommendation: In due time, legislate a positive neutral rate for the CCyB to increase resilience in the banking system. - Implementation: Not implemented. FIN-FSA monitors the set of indicators to adjust the CCyB in response to a buildup of potential risks. However, regulatory changes are needed to impose a positive neutral CCyB. - Recommendation: Regulatory changes to encourage financial institutions to enhance liquidity buffers to cover a predetermined level in a wholesale funding outflow scenario and improve high-quality-liquid-assets. - Implementation: Not implemented. There are no plans to implement these measures. - Recommendation: Enhance the systemic risk monitoring framework and supervision of the financial system (in line with FSAP recommendations). - Implementation: Partially implemented. Implementing the positive credit register is expected to be fully operational in 2024 which would help address existing data gaps and strengthen the analysis of granular data for macroprudential analysis and policymaking. The government has submitted a proposal to Parliament regarding amendments to the Supervision Fees Act, increasing the supervision fees for FIN-FSA. - Recommendation: Advance reform implementation, including by addressing ML/TF risks from non-resident and cross-border financial activity. - Implementation: Partially implemented. The Financial Supervisory Authority (FIN-FSA) has made amendments to regulations and guidelines and has announced to the EBA that it will comply with the new ML/TF guidelines. ### Fund Relations (selected operational facts) - Membership Status: Joined: January 14, 1948; Article VIII. - General Resources Account: Quota 2,410.60 SDR Million (100.00 percent); Fund holdings of currency (Exchange Rate) 1,773.37 SDR Million (73.57 percent); Reserve Tranche Position 637.23 SDR Million (26.43 percent). - New Arrangements to Borrow: 5.71 SDR Million. - SDR Department: Net cumulative allocation 3,499.96 SDR Million (100.00 percent); Holdings 3,581.90 SDR Million (102.00 percent). - Outstanding Purchases and Loans: None. - Latest Financial Arrangements: None. - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): Charges/Interest: 0.05 in 2024, 0.05 in 2025, 0.05 in 2026, 0.05 in 2027, 0.05 in 2028; Total: 0.05 in 2024, 0.05 in 2025, 0.05 in 2026, 0.05 in 2027, 0.05 in 2028. - Exchange Arrangements: Currency is the euro; the exchange rate arrangement of the euro area is free floating. Finland participates in EMU with 19 other EU members and has no separate legal tender. - Article IV Consultation: Last Article IV consultation concluded by the Executive Board on January 18, 2023. Staff report (IMF Country Report No. 23/38) published with Press Release No. 23/09 (January 23, 2023). - Outreach: Team met with representatives of the private sector, academics, labor, and financial institutions. - Press conference: Mission held a press conference on January 23, 2024. - Technical Assistance: None. Resident Representative: None. ### Statistical Issues and Data Adequacy - General: Data provision is adequate for surveillance. - National Accounts: Finland publishes national accounts according to ESA 2010 since September 2014. - Price Statistics: Finland is fully compliant with best practices regarding price statistics. - Government Finance Statistics: Published based on ESA 2010 methodology since September 2014. - Monetary and Financial Statistics: Monetary data reported for International Financial Statistics are based on the ECB framework. Central bank and depository corporations surveys reported monthly. Bank of Finland reports some key Financial Access Survey series and SDG Target 8.10 indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults). - Financial Sector Surveillance: Finland provides quarterly financial soundness indicators (FSIs) published on the IMF website and includes six more FSIs for deposit takers in regular reporting, in addition to the 14 core FSIs. - External Sector Statistics: Finland publishes external sector statistics based on BPM6 since December 2014. - Data Standards and Quality: Finland adhered to the Fund’s Special Data Dissemination Standard Plus (SDDS Plus) on June 2018 and has met all SDDS Plus requirements since then. Finland publishes data on its National Summary Data Page (NSDP). Metadata posted on the Dissemination Standards Bulletin Board. - Historical ROSC: Finland received a mission to produce a Data module of the Reports on Observance of Standards and Codes (data ROSC) in October 2005. ### Common Indicators Required for Surveillance (as of January 31, 2024) - Exchange Rates: Date of latest observation 01/31/2024; Date received 01/31/2024; 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 12/2023; Date received 01/2024; Frequency M M M. - Reserve/Base Money: 12/2023; 01/2024; M M M. - Broad Money: 12/2023; 01/2024; M M M. - Central Bank Balance Sheet: 01/2024; 01/2024; M M M. - Consolidated Balance Sheet of the Banking System: 12/2023; 01/24; M M M. - Interest Rates: 01/30/2024; 01/31/2024; D D D. - Consumer Price Index: 12/2023; 01/2024; M M M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2022; 09/2023; A A A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 2022; 09/2023; A A A. - Stocks of Central Government and Central Government-Guaranteed Debt: 12/2023; 1/2024; M M M. - External Current Account Balance: 11/2023; 01/2024; M M M. - Exports and Imports of Goods and Services: 11/2023; 01/2024; M M M. - GDP/GNP: 2023:Q3; 01/2024; Q Q Q. - Gross External Debt: 2023:Q3; 01/2024; Q Q Q. - International Investment Position: 2023:Q3; 01/2024; Q Q Q. *Source: Annex X. Past Fund Staff Recommendations and Implementation (staff report excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1finea2024001.pdf_