## 1. Selected Economic Indicators ## Source details **Canonical URL:** [1. Selected Economic Indicators](https://www.imf.org/-/media/files/publications/cr/2025/english/1norea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1norea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1norea2025001-source-pdf.pdf.json) --- ### Context and Recent Developments - Economy: - Real GDP rose 2.1 percent in 2024; petroleum value added up 5 percent in 2024 driven by record-high natural gas extraction. - Mainland real GDP expanded 0.6 percent in 2024 (broadly the same as in 2023). - Overall GDP contracted 0.1 percent in Q1 2025 (q/q sa); mainland GDP rose 1 percent (q/q sa). - Unemployment edged up to 4 percent in 2024; employment rose 0.4 percent; hours worked increased slightly. - Average nominal wages rose 5.6 percent in 2024. - Construction and fishing sectors contracted amid high borrowing costs. - Higher-frequency indicators point to somewhat resilient activity in Q2 2025. - Inflation and monetary policy: - Headline CPI: 3.1 percent in 2024 (5.5 percent in 2023). - Core inflation (CPI-ATE) averaged 3.7 percent in 2024 (6.2 percent in 2023). - Core inflation averaged above 3 percent y/y in Q1 2025; CPI and CPI-ATE stood at 3 and 3.1 percent in June 2025. - 3m/3m sa rates in 2025Q2: headline 1.5 percent; core 2.3 percent. - Rent inflation moderated; fiscal measures (electricity price stabilization, childcare cost reductions) expected to contribute to disinflation in H2 2025. - Monetary policy normalization and financial conditions: - Policy rate history: held at 4.5 percent from January 2024; lowered to 4.25 percent in June 2024; signaled further reductions in 2025. - Ex-ante real policy rate has been above the upper bound of the neutral interest rate range (0 to 1 percent, mid-point 0.5 percent) by 60 bps on average since mid-2024. - Bank lending rates, government yields, and corporate bond spreads remain above pre-pandemic levels; corporate bond spreads declined modestly recently. - Credit to the mainland economy stagnant since 2023 in real terms (credit to households picking up). - Lending standards tightened through most of 2024, eased somewhat in early 2025. - Basel credit gap negative since late 2021. - House prices fell in real terms for a second consecutive year but stabilized more recently; stock prices rose in 2024. - External and fiscal: - Current account surplus: 16.7 percent of GDP in 2024. - Trade balance: 13.6 percent of GDP in 2024. - NIIP nearly 484 percent of mainland GDP at end-2024 (driven by GPFG value up 25.3 percent). - Average CPI-based REER depreciated 5 percent in 2024. - Fiscal stance became increasingly expansionary over 2024–25. - 2024 structural non-oil deficit rose, delivering a fiscal impulse around 0.9 percent of mainland trend GDP. - 2025 budget revisions raised projected fiscal impulse for 2025 to 2.5 percent. - Overall structural deficit expected to reach NOK 542 billion (12.9 percent of mainland trend GDP). - GPFG withdrawals projected around 2.7 percent of the 2024 GPFG market value (below the 3 percent guideline). - Government committed to increase defense spending toward the 5 percent of GDP NATO target over the medium term. ### Financial System and Risks - Soundness and buffers: - Bank profitability reached multiyear highs in 2024; NII robust and profitability above US and European peers. - Credit losses and NPLs remain low overall but have edged up, especially among smaller banks and sectors with higher bankruptcy rates. - Stage 2 share stabilized; Stage 3 share falling. - Provision rates decreased since 2021 (NPL sales, write-offs, reversals notably in oil sector). - CET1 capital ratios above the 15.5 percent requirement; largest banks about 19 percent as of Q1:2025. - Average leverage ratio rose and remains above the 3 percent minimum. - Banks meet liquidity and stable funding requirements. - Pension and life insurance funds’ profitability/solvency solid in 2024; returns in early 2025 negatively impacted by market conditions. - Non-life insurers’ profitability weakened due to higher payouts. - A 2026 FSAP planned to review financial sector health in depth. - Elevated systemic risks and exposures: - Household leverage elevated and among the highest in Europe. - As of 2024H2, 95 percent of households’ loans had no or short fixed rate periods. - Interest burden more than doubled over the past two years. - Large financial sector exposures to real estate: RE sector ~60 percent of banks’ portfolios and 15 percent of pension funds and insurance companies’ portfolios. - CRE sector: CRE prices down about 20 percent from peak in mid-2022; falling firm profitability, lower ICRs, rising bankruptcies among smaller firms, rising vacancy rates, valuation uncertainty. - Bank impairment losses on CRE loans remain low despite some increase. - Macroprudential adjustments: - LTV limit for new residential mortgages raised from 85 to 90 percent. - Debt servicing capacity requirement for fixed-rate mortgages adjusted to incorporate income growth during fixed-interest period. - CCyB maintained at 2.5 percent; SRB maintained at 4.5 percent since 2023. - CRR3 transposed into national law and effective in April. - Risk-weight changes: standardized approach risk weights for loans secured by income-generating commercial property extended to all commercial property; recreational property loans with LTV < 40 set at 20 percent. - IRB floors retained: residential 20 percent and commercial property 35 percent (in place since 2022); floor on residential property raised to 25 percent effective July 1 until end-2026. - Following a bank merger, an additional institution designated systemically important. ### Financial stability policy priorities (key recommendations and supervisory actions) - Maintain macroprudential settings; avoid further easing until systemic risks meaningfully subside. - Preserve capital buffers and strengthen contingency planning amid CRE pressure; consider BBMs on CRE lending and sector-specific capital surcharges for insurance sector CRE exposures over the medium term. - FSA stress tests indicate: under a severe downside, capital adequacy ratios of a few banks may fall below the aggregate CET1 requirement even if CCyB reduced to zero; none would fail the minimum leverage ratio. - Recommended actions: - Continue conservative guidance on banks’ capital distribution strategies. - Participate in Nordic-Baltic regional stress test exercise. - Ensure IRB models adequately capture credit risk and prepare for CRR3 phase-in by 2030. - Limit exposures to covered bonds (guidance to cap holdings of covered bonds backed by Norwegian real estate at 50 percent). - Improve data collection and supervisory scrutiny of CRE lending; broaden toolkit for CRE vulnerabilities. ### CRE market (recent developments and near-term outlook) - Prices and transactions: - Transaction volumes up 37 percent to NOK 86 billion in 2024; domestic investors ~80 percent of office segment transactions. - Volumes subdued in H1 2025 as rate cuts did not materialize. - Financing, spreads, and maturities: - Sector heavily reliant on bank debt; NOK 75 billion in bonds maturing in 2025–2026. - CRE-listed bond credit spread tightened ~80 bps in 2024; spreads rose after April U.S. tariff announcements and remain above pre-pandemic levels. - Yield gap compressed; financing costs higher than prime yields—risk of further value write-downs. - Segment-specific rental dynamics: - Office: vacancy rates increased; rents slowing. - Logistics: demand supported by supply-chain reshaping but vacancy rates increased. - Hotels: occupancy recovered to pre-pandemic levels. - Residential buy-to-let: rising mortgage rates and higher property tax valuations raised costs; many individual owners selling secondary homes. - Sustainability: "green premiums" and disclosure/retrofit expectations rising. - Policy responses: - Supervise CRE lending closely; improve data collection; consider broadening supervisory toolkit; provide funding support to banks if material stress arises. ### Risk signals and contingency - Key vulnerabilities: high household debt, concentrated real estate exposures, compressed CRE yield gap, elevated interest-rate sensitivity. - Early warning: monitor household debt dynamics, LTV easing impact, CRE valuation uncertainty, and bank capital adequacy under stress. ### Authorities’ views (summarized) - Authorities concurred with staff: financial system sound with strong buffers but systemic vulnerabilities elevated. - Authorities do not support further relaxation of macroprudential policy at this stage. - Authorities emphasize sectoral measures (risk-weight floors, enhanced SREP scrutiny, tighter lending covenants) rather than BBMs currently. ### Planned reviews and legal/operational changes - FSA Act amendment (effective April 1st, 2025): limits MoF instructions in individual supervisory cases; strengthens FSA operational independence. - Lending regulation made permanent from January 2025. - FSA expanded housing market stress tests to banks with balance sheets exceeding NOK 6 billion. - New analytical platform (APO) for granular RE exposure analysis; enhanced quarterly Early Warning Report. ### Macro-financial outlook linkages - Continued tighter financial conditions could pressure households, firms, and CRE sector. - The easing of the LTV limit could increase credit by 6 percent, household debt by about 3 percent, and house prices about 11 percent (FSA estimate). ### Outlook and Risks - Baseline macro projections: - Overall GDP growth: 0.7 percent in 2025 (slowing due to lower oil demand). - Mainland growth: 1.5 percent in 2025. - Output gap: closed. - Unemployment: labor market expected to remain stable with unemployment near current low levels. - Inflation path: headline and core inflation decline to 2.2 and 2.6 percent by end-2025; continue converging to target by late-2027. - Credit growth: expected to gradually strengthen over the medium term. - Risks: - Growth tilted to the downside: trade disruptions, increased global risk aversion, prolonged geopolitical tensions, demographic headwinds, decline in petroleum activity. - Upside growth risk: resolution of the war in Ukraine could lift growth. - Inflation risks broadly balanced: upside from stronger wage growth or energy shocks; downside from currency appreciation or weaker domestic demand. - Financial conditions: continued tightening could amplify household/firm distress and CRE vulnerabilities. - Downside scenario and calibrated response: - Scenario aligned with WEO Scenario A: annual real GDP growth could decline by about 0.7 percentage points (cumulative) in 2025–26. - Policy response recommendations: - Allow automatic fiscal stabilizers to operate fully. - Use fiscal space for temporary, targeted discretionary support if slowdown deepens; target measures to households in financial distress if necessary. - Lower CCyB if constrained credit supply emerges. - Strong fiscal-monetary coordination; Norges Bank could cut rates faster if inflation eases and slack rises. - Authorities broadly concurred with these responses. ### Key macroeconomic baseline vs. risk scenario indicators (selected values) - Real GDP (percent change): Baseline 0.7 (2025), Riskier Scenario 0.4 (2025). - Real mainland GDP (percent change): Baseline 1.5 (2025), Riskier Scenario 1.3 (2025). - Trade Balance (percent of GDP): Baseline 12.7 (2025), Riskier Scenario 12.6 (2025). - Non-oil balance (percent of mainland GDP): Baseline -12.9 (2025), Riskier Scenario -13.0 (2025). - CPI Inflation (average): Baseline 2.4 (2025), Riskier Scenario 2.2 (2025). - Oil price (percent change): Baseline -13.9 (2025), Riskier Scenario -30.5 (2025). - Euro area Real GDP (percent change): Baseline 0.8 (2025), Riskier Scenario -0.2 (2025). - US Real GDP (percent change): Baseline 1.8 (2025), Riskier Scenario 0.3 (2025). ### Staff appraisal and core policy recommendations - Monetary policy: - Priority: bring inflation sustainably back to the 2 percent target. - Norges Bank should proceed cautiously with normalization and maintain a restrictive stance until inflation is clearly on track to return to 2 percent. - Suggested enhancements: expand scenario analysis, formalize contrarian forecasting roles, refine communications and criteria for strategic communications. - Macroprudential policy: - Do not ease settings further; postpone further easing until systemic risks recede or financial disintermediation risks emerge. - Current CCyB remains appropriate; be ready to raise it if cyclical vulnerabilities build up. - Monitor household debt and LTV easing impact on house prices and indebtedness. - Financial stability and supervision: - Preserve capital buffers; ensure IRB models capture credit risk; strengthen contingency planning for CRE sector. - Support measures to address increased bank reliance on covered bonds and participate in regional stress tests. - Fiscal policy: - Maintain a neutral fiscal stance over the medium term. - Complement the structural fiscal rule with explicit medium-term expenditure limits and strengthen multi-year budgeting, spending reviews, and expenditure efficiency. - Targeted tax relief in 2025 to support low- and middle-income households; maintain transfers from GPFG below the 3 percent guideline. ### Fiscal policy details and priorities - 2025 fiscal stance: - Estimated fiscal impulse: about 2.5 percent of mainland trend GDP. - Composition: transfers abroad and support to Ukraine and higher defense spending recorded mainly as transfers abroad: 1.3 percent of GDP; subsidies/transfers/compensation to employees add 1.4 percent of mainland GDP relative to 2024. - Structural non-oil deficit set to rise to 12.9 percent of mainland trend GDP (from 10.3 percent in 2024). - Selected 2025 fiscal measures (fiscal impact in 2025, percent of GDP): - Revenue loss ≈ 0.4 accrued (total tax changes). - Abolition of Temporary Additional Employer’s NIC (Discontinued January 1, 2025): Revenue loss ≈ 0.3 accrued. - Reduction of VAT on Water and Sewage Services (25% to 15% effective May 1, 2025): Revenue loss ≈ 0.1 full-year. - Targeted Personal Income Tax Relief (Reduce NICs for individuals): Revenue loss ≈ 0.1 accrued. - Higher Bracket Taxes for High-Income Earners: Revenue gain ≈ 0.04 accrued. - Climate/environment/car taxes (increase taxes on non-ETS emissions by 16 per cent) and others: Revenue gain ≈ 0.04 accrued. - Expenditure changes (fiscal impact in 2025, percent of GDP): - Defense and Security Spending Increase: 0.5 increase (NOK 19.2 bn vs. 2024). - Expanded Support to Ukraine (total) NOK 85 bn in 2025 (military + reconstruction support): 2.0 increase. - Transfers to municipal sector increased by 5 percent vs. 2024: 0.4 increase. - Fiscal framework strengthening: - Recommendations: explicit medium-term expenditure limits, enhanced multi-year budgeting, systematic spending reviews, cross-sector efficiency targets, and expanded mandate/benchmarking of the Advisory Panel on Fiscal Policy Analysis. - GPFG context: transfers projected around 2.7 percent of 2024 GPFG market value (below 3 percent guideline); GPFG large (~490 percent of mainland GDP per Annex VII overview). ### Structural policies: labor market, skills, diversification, climate - Labor market and skills: - Targets: raise employment rate for 20–64 year-olds to 82 percent by 2030 and 83 percent by 2035 (from 80.5 percent). - Labor market program expansions in 2025: ~5,800 additional participant slots vs. 2024; VTA program +500 slots in 2025 toward 2,000 new slots by 2027. - Proposed in-work tax allowance experiment for FY2026: randomized controlled trial targeting 100,000 individuals aged 20–35; consultation until August, 2025. - New Education Act effective August 1, 2024: right to graduate with academic or vocational qualifications. - Diversification and trade: - Services account for over half of value added in gross exports; services trade regime relatively restrictive. - Recommendations: streamline regulation, reduce state involvement, enhance supply-chain resilience, diversify trade partners. - Climate: - Target: 90–95 percent reduction in GHG emissions by 2050 compared to 1990 levels. - Hydropower: 98 percent of electricity generation. - Carbon tax plan: increase to NOK 2,000 at 2020 prices per ton CO₂ by 2030 (including a 19 percent increase this year). - Additional policies likely needed to meet emissions target; investments in CCS and adaptation highlighted. ### Debt sustainability and sovereign risk assessment (Annex I, selected figures) - Final overall risk of sovereign stress: Low. - Near-term: Low. - Medium-term: Low (mechanical signal: Moderate in fan chart only). - Long-term: Moderate. - Public debt (percent of GDP, baseline projections): - 2025: 43.8 - 2026: 43.7 - 2027: 43.6 - 2028: 43.3 - 2029: 43.0 - 2030: 42.5 - 2031: 40.4 - 2035: 40.8 - Primary deficit (percent of GDP): 10.2 (2025), 9.9 (2026), 9.8 (2027), 10.0 (2028), 10.1 (2029), 10.1 (2030), 10.1 (2031–2035). - Gross financing needs (GFN, percent of GDP): 10.4 (2025), 11.5 (2026), 11.9 (2027), 12.2 (2028), 12.4 (2029), 12.5 (2030). - Debt service (subset of GFN): 3.3 (2025), 4.1 (2026), 4.4 (2027), 4.6 (2028–2029), 4.6 (2030). - Memo: Real GDP growth (percent): 0.7 (2025), 1.7 (2026), 1.6 (2027), 1.3 (2028–2030), 1.5 (2031), then ~1.4 (2032–2035). - Medium-term risk indices: - Debt fanchart index (DFI): 2.8 (Risk signal: High). - GFN financeability index (GFI): 5.8 (Risk signal: Low). - Combination yields Medium-term index: Moderate. - Probability of debt non-stabilization: 99.4 percent (fanchart contribution noted). - Final assessment: Debt sustainable and expected to stabilize and decline over the medium term; long-term risks reflect aging-related expenditures. ### Enhancing Norway’s Fiscal Framework (Annex VII highlights) - GPFG size and risks: - GPFG around 490 percent of mainland GDP; reliance on GPFG transfers has expanded expenditure envelope and structural non-oil deficit. - Since 2010, primary spending rose by approximately 5 percentage points of mainland GDP. - Empirical findings on cyclicality: - Fiscal policy countercyclical with respect to domestic cycle; procyclical with respect to GPFG value swings. - Regression evidence (selected coefficients): - Output gap (overall): 0.450** (0.194) in change of structural non-oil balance regression (observations 23; R-squared 0.663). - Cycle in GPFG (pct. of GDP): -0.024*** (0.007) (same regression). - Policy recommendations: - Periodic recalibration of the 3 percent rule and consider an operational expenditure ceiling. - Integrate an expenditure target into a binding medium-term expenditure framework (MTEF). - Strengthen independent oversight (expand Advisory Panel mandate). - Improve expenditure efficiency; conditional/time-bound GPFG withdrawals for major investment projects subject to rigorous cost-benefit analysis. - Simulations indicate capping expenditure growth may be necessary to preserve GPFG real value under risk scenarios. ### Data and surveillance notes - Norway subscribes to SDDS since June 1996; data adequacy for surveillance assessed adequate. - Consistency of External Sector statistics assessed "B" due to errors and omissions averaging about 2 percent of GDP over the last decade. - Data reporting timeliness noted as of July 11, 2025 with several entries dated Jun-25, May-25, 2025:Q1, and 2025:Q4. _Italic: Source — IMF staff report excerpt provided in the content unit._ ### 1. Selected Economic Indicators _________________________________________________________________ 25 ### 1. Selected Economic Indicators ### Context and Recent Developments - The economy has shown resilience despite tight financial conditions and a more challenging external environment. A strong labor market and expansionary fiscal policy have partly offset tighter monetary policy. Financial stability risks are elevated due to high household leverage and concentrated exposures to real estate. The fiscal position is strong but increasingly reliant on returns from the GPFG. Slowing productivity growth, declining petroleum sector activity, geoeconomic fragmentation, and rising public expenditure pressures (defense, energy transition, ageing population) pose medium-term challenges to Norway’s welfare model. Further strengthening the fiscal framework is essential to meet emerging demands and preserve living standards. - Real activity and sectoral developments: - Overall real GDP rose 2.1 percent in 2024, bolstered by a 5 percent increase in value added from petroleum activities, underpinned by record-high natural gas extraction. - Mainland real GDP expanded by 0.6 percent in 2024 (broadly the same as in 2023), driven by public and private consumption; investment and net exports acted as the main drag on growth. - Construction and fishing sectors contracted amid high borrowing costs and sector-specific headwinds. - Unemployment edged up to 4 percent in 2024; employment rose by 0.4 percent and hours worked increased slightly. - Average nominal wages rose 5.6 percent in 2024. - Overall GDP contracted by 0.1 percent in Q1 2025 (q/q sa), driven by the hydrocarbons sector; mainland GDP rose 1 percent (q/q sa). - Higher-frequency indicators point to somewhat resilient activity in Q2 2025. - Inflation and monetary policy: - Headline inflation (CPI) slowed to 3.1 percent in 2024 from 5.5 percent in 2023. - Core inflation (CPI-ATE) averaged 3.7 percent in 2024, down from 6.2 percent in 2023. - Core inflation remained elevated in early 2025, averaging above 3 percent year-on-year in Q1 2025. - Headline and core inflation stood at 3 and 3.1 percent in June 2025. - Three-month/three-month seasonally adjusted rates (3m/3m, sa) point to slower momentum in 2025Q2: headline 1.5 percent and core 2.3 percent. - Rent inflation has moderated. - Fiscal measures to stabilize electricity prices and reduce childcare costs are expected to contribute to disinflation in the second half of the year. - Monetary policy normalization and financial conditions: - Norges Bank held the policy rate at 4.5 percent from January 2024, began lowering it to 4.25 percent in June 2024, and signaled further reductions in 2025. - Since mid-2024, the ex-ante real policy rate has been above the upper bound of the neutral interest rate range (0 to 1 percent, with a 0.5 percent mid-point) by 60 bps on average. - Bank lending rates, government yields, and corporate bond spreads remain above pre-pandemic levels; corporate bond spreads declined modestly recently. - Credit to the mainland economy stagnant since 2023 in real terms (with credit to households picking up). - Lending standards tightened through most of 2024 and eased somewhat in early 2025. - The Basel credit gap has been negative since late 2021. - House prices fell in real terms for a second consecutive year but stabilized more recently. - Stock prices rose in 2024 in anticipation of lower interest rates. - Fiscal developments: - The fiscal stance became increasingly expansionary over 2024–25 amid rising geopolitical and structural spending pressures. - The 2024 structural non-oil deficit rose more than anticipated, delivering a fiscal impulse of around 0.9 percent of mainland trend GDP. - The 2025 budget revisions (additional defense spending and support to Ukraine) raised the projected fiscal impulse for 2025 to 2.5 percent. - The overall structural deficit is expected to reach NOK 542 billion (12.9 percent of mainland trend GDP). - Withdrawals from the GPFG are projected around 2.7 percent of the 2024 GPFG market value (below the 3 percent guideline). - The government committed to increase defense spending toward the 5 percent of GDP NATO target over the medium term. - External sector: - The external position is broadly in line with fundamentals and desirable policies. - The current account recorded a surplus of 16.7 percent of GDP in 2024. - The trade balance narrowed to 13.6 percent of GDP in 2024. - The NIIP reached nearly 484 percent of mainland GDP at end-2024, driven by a 25.3 percent increase in the GPFG value. - The average CPI-based REER depreciated 5 percent in 2024. ### Financial System and Risks - Soundness and buffers: - Bank profitability reached multiyear highs in 2024, reflecting robust NII and remaining above US and European peers. - Credit losses and NPLs remain low overall but have edged up, particularly among smaller banks and in sectors with higher bankruptcy rates. - Share of loans in Stage 2 stabilized; Stage 3 share is falling. - Provision rates have decreased since 2021, partly reflecting NPL sales, write-offs and reversals (notably in the oil sector). - CET1 capital ratios remain above the 15.5 percent requirement; largest banks about 19 percent as of Q1:2025. - Average leverage ratio rose and remains comfortably above the 3 percent minimum. - Banks meet liquidity and stable funding requirements. - Profitability and solvency at pension and life insurance funds remained solid in 2024; returns in early 2025 were negatively impacted by adverse market conditions. - Profitability at non-life insurers weakened due to higher payouts. - A 2026 FSAP will review financial sector health in depth. - Elevated systemic risks: - Household leverage is elevated and among the highest in Europe. - As of 2024H2, 95 percent of households’ loans had no or short fixed rate periods. - Average DTI on new mortgages and share of new residential mortgages with high DTI have levelled off; interest burden has more than doubled over the past two years. - Many households continue to service debts due to accumulated savings and high employment, but a substantial labor market weakening could push households with limited margins into distress. - Large and interconnected financial sector exposures to the RE sector: the sector represents nearly 60 percent of banks and 15 percent of pension funds and insurance companies’ portfolios. - CRE sector challenges: falling firm profitability, lower ICRs, rising share of firms facing debt collection, rising bankruptcy rates especially among smaller firms, rising vacancy rates and valuation uncertainty. - CRE prices have fallen about 20 percent from their peak in mid-2022; compressed yields suggest potential for further downward adjustments. - Bank impairment losses on CRE loans remain low despite some increase. - Macroprudential policy adjustments: - LTV limit for new residential mortgages raised from 85 to 90 percent. - Debt servicing capacity requirement for fixed-rate mortgages adjusted to incorporate income growth during the fixed-interest rate period. - CCyB maintained at 2.5 percent; SRB maintained at 4.5 percent since 2023. - Following a bank merger, an additional institution was designated systemically important. - CRR3 transposed into national law and effective in April. - Risk weights under the standardized approach for loans secured by income-generating commercial property extended to all commercial property; risk weight for recreational property loans with LTV below 40 set at 20 percent. - Floors for IRB risk weights: residential 20 percent and commercial property 35 percent, in place since 2022, retained. - Floor on residential property raised to 25 percent effective July 1 until end-2026. ### Outlook and Risks - Baseline growth projections: - Overall GDP growth expected to slow to 0.7 percent in 2025 due to lower oil demand. - Mainland growth projected to strengthen to 1.5 percent in 2025, supported by rising private consumption (real income gains and easing financial conditions), stabilizing housing investment, continued public sector support, and recovery in business investment. - Labor market conditions expected to remain stable with unemployment near current low levels. - The output gap is closed. - Under staff’s baseline, headline and core inflation will decline to 2.2 and 2.6 percent by end-2025 and continue converging to target by late-2027, as restrictive monetary policy dampens domestic demand and a slightly negative output gap opens. - Credit growth is expected to gradually strengthen over the medium term, supported by easing financial conditions and stronger private domestic demand. *Source: 1. Selected Economic Indicators (Norway), IMF staff report content as provided.* ### 12. Risks to the growth outlook are tilted to the downside, while inflation risks are ### 12. Risks to the growth outlook are tilted to the downside, while inflation risks are balanced (Annex IV) ### Risks to the growth and inflation outlook - Growth outlook tilted to the downside due to: - Heightened concerns over trade disruptions that could dampen external demand and weigh on Norway’s exports (Annex V). - A renewed uptick in global risk aversion or sharper-than-expected trade tensions that could undermine market sentiment and investment. - Over the longer term, demographic headwinds and the expected decline in petroleum sector activity, which would weigh on potential GDP growth. - Upside growth risk: - An end to the war in Ukraine could pose an upside risk to growth. - Inflation risks characterized as broadly balanced: - Upside inflation risks include stronger-than-expected wage growth and potential energy price shocks. - Downside inflation risks include currency appreciation or weaker-than-anticipated domestic demand. - Inflation could take longer to converge to target if domestic demand recovers faster than expected or higher oil prices put pressure on headline inflation. - By contrast, further currency appreciation and higher productivity gains (e.g., from a faster-than-anticipated uptake of AI or automation) could bring inflation back to target more rapidly. - Financial conditions and sectoral vulnerabilities: - Continued tighter financial conditions could further pressure highly indebted households and firms, and the CRE sector. - The recent easing of the LTV limit on mortgages could further increase financial sector vulnerabilities. *Annex IV presents contingent policy advice in case specific risks materialize.* _Italic: Source — IMF staff report excerpt provided in the content unit._ ### Authorities’ views on outlook and risks - Authorities concurred with staff’s views on the outlook and risks. - They expect mainland GDP growth to strengthen in 2025, supported by: - Easing financial conditions, - A recovery in real incomes, - Continued fiscal support. - Authorities’ assessment of inflation and growth risks: - Risks to the inflation outlook are broadly balanced. - Risks to the growth outlook are tilted to the downside, reflecting persistent global policy and trade uncertainty, potential volatility in energy markets, and the possibility of renewed financial tightening. - Geo-economic fragmentation risks remain elevated. - A sharper-than-expected deceleration in global demand or deterioration in geopolitical conditions could weigh on exports and investment. ### Monetary policy (Norges Bank) - Policy guidance and stance: - Norges Bank should proceed cautiously with monetary policy normalization, ensuring further evidence that underlying inflation is firmly on a path back to target. - The monetary policy stance remains restrictive: the ex-ante real policy rate (nominal policy rate deflated by 1 year-ahead inflation expectations) is above Norges Bank’s upper bound estimate of the short-term neutral rate, which ranges between 0 and 1 percent. - Norges Bank’s published monetary policy rate path signals the nominal policy rate will be reduced further in course of 2025-2026, but the stance will remain restrictive into 2026. - The current restrictive stance should remain in place until inflation is clearly on track to return to the 2 percent target. - Inflation dynamics and evidence: - Recent developments in inflation momentum (e.g., 3m/3m sa), particularly the easing of rent inflation that has helped keep core inflation elevated, are encouraging. - These indicators are more volatile compared to year-on-year inflation measures; further evidence of a decline in the trend of underlying inflation is needed to continue normalization. - Strengthening policy process and communication: - Enhancements could include designating staff to present contrarian views and challenge the baseline, expanding the use of scenario analysis, and refining communication strategies (e.g., defining criteria for strategic speeches or interventions by central bank officials). - Norges Bank’s view: - Acknowledged staff advice and emphasized it will proceed cautiously with normalization. - Recent downside inflation surprises provided sufficient signaling power to move along the normalization path outlined since last autumn. - The Bank emphasizes capacity utilization and indications from interest rate-sensitive sectors in its assessment. - No major changes to its communication strategy are planned. ### Financial sector policies and risks - LTV easing and housing market effects: - The easing of the LTV limit for mortgages risks building further vulnerabilities. - Depending on the interest rate path, the LTV limit easing will lead to further increases in house prices and household indebtedness. - According to the FSA, the easing of the LTV limit would lead to a 6 percent increase in credit, about 3 percent in household debt, and about 11 percent on house prices. - Growth in credit to households bottomed out in early 2024 and has continued to pick up. - House prices increased about 7 percent in 2025Q1. - Structural distortions in the housing market: - Underdeveloped rental market, limited areas zoned for development in urban areas, high construction costs, and a tax system that encourages mortgage debt (including unlimited debt interest deductibility, non-taxation of capital gains on home sales, and wealth-tax discounts). - High DTIs, particularly among young and low-income households who comprise a large share of first-time buyers. - Policy recommendations: structural measures to enhance housing supply; gradually phasing-out mortgage interest deductibility (for example, starting with a limit on the maximum value of income-tax deductions); improved eligibility criteria for subsidized mortgages to contain demand and public spending. - Macroprudential policy stance: - Macroprudential policy settings should not be eased further. - Further easing should be postponed until systemic risks meaningfully subside or risks of financial disintermediation emerge. - Continued close monitoring is warranted. - The current setting of the CCyB remains appropriate, but Norges Bank should be ready to raise it if cyclical vulnerabilities build up. - Priority to preserve capital buffers and strengthen contingency planning amid continued pressure on the CRE sector. - Over the medium term, BBMs on CRE lending and sector-specific capital surcharges for insurance sector CRE exposures should be considered. - Bank profitability and stress tests: - Robust bank profitability provides an opportunity to strengthen resilience. - Earnings are expected to moderate over the medium term as NII recedes and credit losses increase. - Updated FSA stress tests: under a severe downside scenario capital adequacy ratios of a few banks may fall below the aggregate CET1 capital requirement, even if the CCyB were reduced to zero; none of the banking groups would fail to meet the minimum leverage ratio. - The FSA should continue to issue conservative guidance on banks’ capital distribution strategies. - Participation in a Nordic-Baltic regional stress test exercise is recommended to enhance cross-border risk assessment. - IRB versus SA banks and capital adequacy: - Lending survey data suggest a greater proportion of riskier new mortgage loans among IRB banks than in SA banks. - Interest rates on new loans are lower, and DTIs and LTVs are consistently higher for the median customer at IRB banks. - Risk weights are consistently lower at IRB banks, resulting in lower capital requirements on assets; differences expected to even out after CRR3 amendments are fully phased in by 2030. - CRR3 amendments include: a more risk-sensitive standardized approach, limits on IRB use, and an output floor of 72.5 percent of the standardized approach capital requirement. - Covered bonds and funding interconnectedness: - Banks’ main funding: deposits and long-term bonds, of which about two-thirds come from covered bonds, mostly secured against residential mortgages, increasing exposure to real estate. - Covered bonds are among the 10 largest covered bond markets in Europe. - Covered bonds make up more than half of bank liquidity reserves. - Hedge funds have doubled their share of covered bond holdings since 2020; these purchases are increasingly financed through repos with banks. - Repo volumes rose from around 10 percent to 20 percent of outstanding covered bonds issued in NOK—equivalent to about 4 percent of bank assets as of April 2025. - Measures to limit exposures—such as the FSA’s guidance to cap holdings of covered bonds backed by Norwegian real estate at 50 percent—will help reduce risks from interconnectedness. - Progress on supervision and crisis preparedness: - Authorities implementing 2020 FSAP recommendations on systemic risk oversight and monitoring (Annex VI); 2026 FSAP will assess progress. - Lending regulation made permanent; FSA Act amended to prohibit MoF from issuing instructions to the FSA in individual supervisory cases. - FSA expanded housing market stress tests to include banks with balance sheets exceeding NOK 6 billion. - New analytical platform (APO) enables more granular RE exposure analysis; FSA leveraging EMIR data for counterparty and margin-related liquidity risks. - Quarterly Early Warning Report enhanced to include more detailed information on individual insurers of RE investments and other capital components. - Guarantee Fund participating in supervisory colleges; Norges Bank joined the EU Systemic Cyber Incident Coordination Framework as a “Crisis Observer.” - Authorities’ views on financial stability: - Authorities concur that the financial system is sound with strong buffers but systemic vulnerabilities remain elevated amid increased uncertainty. - Main structural systemic risks: high household debt levels and significant financial sector exposures to real estate. - Households have managed the rise in debt servicing costs so far; bankruptcies in the CRE sector expected to increase but remain close to historical averages. - Authorities agree further relaxation of macroprudential policy is not warranted at this stage. - Emphasis on sectoral measures: risk weight floors, enhanced supervisory scrutiny via the SREP, tighter lending covenants. - BBMs for CRE exposures not currently under consideration due to design concerns. - Authorities support ensuring IRB models adequately capture credit risk, including through greater use of credit loss data from the 1990s banking crisis, while stressing the need for coordinated regional approaches. ### Fiscal policy - 2025 budget priorities: - Defense, support to households, and structural tax reforms. - Structural non-oil deficit: - Set to rise to 12.9 percent of mainland trend GDP, up from 10.3 percent in 2024. - Major budget measures: - Targeted tax relief for low- and middle-income households, partly offset by tax increases for people with the highest incomes. - VAT cuts on essential utilities and childcare cost reductions. - Discontinuation of the temporary employer National Insurance surcharge. - Raising climate-related taxes and tightening exit tax rules. - Spring Budget additional package: - Included an additional NOK 85 billion (around 2 percent of mainland GDP) package to support Ukraine through military and reconstruction aid. _Italic: Source — IMF staff report excerpt provided in the content unit._ ### 26. The 2025 fiscal policy stance is expansionary, with a large estimated fiscal impulse of ### 26. The 2025 fiscal policy stance is expansionary, with a large estimated fiscal impulse of ### Fiscal stance and near-term impact - Estimated fiscal impulse: about 2.5 percent of mainland trend GDP. - Major composition: - Increased support for Ukraine and higher defense spending, recorded mainly as transfers abroad: 1.3 percent of GDP. - Subsidies, transfers to households, and compensation to employees projected to jointly add 1.4 percent of mainland GDP in expenditures relative to 2024. - Total non-oil revenues: expected to rise modestly despite new tax relief measures. - Transmission to domestic activity: dampened by spending composition (including imported components and transfers abroad) but still expected to provide an important boost to the domestic economy. ### Medium-term pressures and fiscal framework - Growing medium- and long-term spending pressures: rising defense and security outlays, aging-related costs, and eventual decline in oil and gas revenues expected to narrow fiscal space. - Trend concerns: structural non-oil deficits and spending outpacing mainland GDP. - Recommendation: maintain a neutral fiscal stance over the medium term. - Reinforcement measures: - Complement the structural fiscal rule with explicit medium-term expenditure limits to curb volatility from market-driven GPFG changes and improve planning. - Norway’s fiscal rule: over time, the structural non-oil deficit should equal the estimated long-term real return on the GPFG, currently set at 3 percent of the Fund’s value. ### Selected measures in the 2025 National Budget (Text Table 1 highlights) - Tax changes (Fiscal Impact in 2025, in percent of GDP): - Revenue loss ≈ 0.4 accrued (total tax changes). - Abolition of Temporary Additional Employer’s NIC (Discontinued January 1, 2025): Revenue loss ≈ 0.3 accrued. - Reduction of VAT on Water and Sewage Services (Rate cut from 25% to 15% effective May 1, 2025): Revenue loss ≈ 0.1 full-year. - Targeted Personal Income Tax Relief (Reduce NICs for individuals): Revenue loss ≈ 0.1 accrued. - Higher Bracket Taxes for High-Income Earners (Upward adjustment in top brackets): Revenue gain ≈ 0.04 accrued. - Climate, Environmental and car taxes (Increase taxes on non-ETS emissions by 16 per cent) and others: Revenue gain ≈ 0.04 accrued. - Expenditure changes (Fiscal Impact in 2025, in percent of GDP): - Defense and Security Spending Increase. Initial budget Up by NOK 19.2 bn vs. 2024 budget: 0.5 increase. - Expanded Support to Ukraine (total) NOK 85 bn in 2025 (military + reconstruction support): 2.0 increase. - Transfers to the municipal sector Increased by 5 percent respect to 2024: 0.4 increase. - Note: Amounts represent net budgetary impact in 2025 relative to a no-policy-change baseline (Meld. St. 1 2024–2025). ### Strengthening fiscal institutions and expenditure efficiency - Recommended tools: - Enhanced multi-year budgeting. - Systematic spending reviews. - Cross-sector efficiency targets and explicit efficiency targets across sectors. - Benchmarking the Advisory Panel on Fiscal Policy Analysis against best practices for independent fiscal councils and expanding its mandate. - Purpose: ensure considerable resources deliver strong economic and social outcomes, internalize GPFG volatility, and improve planning. ### Tax and social policy reform priorities - 2025 budget: targeted tax relief for lower- and middle-income groups to support purchasing power and labor participation. - Further priorities: - Tax reforms to improve efficiency and broaden the base (e.g., consolidating multiple VAT rates). - Strengthening work and investment incentives. - Reforms to disability and sickness benefits to reduce disincentives to work, boost labor force participation, and contain long-term fiscal costs. - Enhancing public investment management practices and wider use of systematic spending reviews. ### Authorities’ views on fiscal policy - Authorities’ stance: - Broad agreement with staff recommendations. - Substantial share of expansionary stance reflects aid to Ukraine, with limited domestic impact. - Transfers from the GPFG remain below the 3 percent guideline. - Support for a broadly neutral fiscal stance in 2026 and scope to reprioritize spending and enhance efficiency. - Commitment to strengthening work incentives, including a proposed pilot scheme for in-work tax deductions targeting young adults. ### Structural issues: labor market and skills - Active labor market policies anchored in the “reinforced work line.” - Targets and program expansions: - Raise employment rate for 20–64 year-olds to 82 percent by 2030 and 83 percent by 2035, from 80.5 percent. - Labor market programs will expand in 2025 with approximately 5,800 additional participant slots compared to 2024, with priority given to vulnerable groups, including Ukrainian refugees (estimated at 70,000). - VTA program will expand by 500 individual participant opportunities in 2025, contributing to a broader target of 2,000 new slots by 2027. - Proposed in-work tax allowance experiment expected to be included in the FY2026 budget: randomized controlled trial targeting 100,000 individuals aged 20–35; consultation until August, 2025. - Education reform: - New Education Act effective August 1, 2024: replaces the right to upper secondary education with a right to graduate with either academic or vocational qualifications. - Challenges: - Declining average hours worked per employee; high share of part-time work. - Need to improve transitions to full-time work, vocational and tertiary education access, and reduce underemployment. ### Diversification, trade, and climate policy - Small open economy vulnerabilities: exposure to global trade disruptions and geoeconomic fragmentation; need for diversification as petroleum activity declines from its 2004 peak. - Services: account for over half of value added in gross exports; services trade regime remains relatively restrictive by international standards. - Recommendations: strengthen competitiveness in services through streamlined regulation and reduced state involvement; enhance supply chain resilience and diversify trade partners. - Climate targets and measures: - Ambitious target: 90–95 percent reduction in GHG emissions by 2050 compared to 1990 levels. - Electricity production: hydropower accounts for 98 percent of total generation. - Carbon tax plan: incrementally increase to NOK 2,000 at 2020 prices per ton CO₂ by 2030 (including a 19 percent increase this year). - Investments in carbon capture and storage and adaptation measures (e.g., coastal planning). - 2025 budget analysis: additional policies likely needed to meet emissions target. ### Downside scenario and policy response (Section E) - Downside scenario drivers: elevated trade tensions, policy uncertainty, tighter financial conditions; weaker trade and investment. - Sensitivity analysis (aligned with Scenario A in April 2025 WEO): annual real GDP growth could decline by about 0.7 percentage points (cumulative) in 2025–26, driven by reduced external demand, falling oil prices and lower private investment. - Calibrated policy response: - Allow automatic fiscal stabilizers to operate fully. - Use ample fiscal space for temporary and targeted discretionary support if slowdown deepens. - If households disproportionately affected: target measures to those in financial distress to safeguard consumption and ensure financial stability. - Lower the CCyB if signs of constrained credit supply emerge. - Strong fiscal-monetary coordination recommended. - Norges Bank would have room to cut rates faster than currently expected if inflation eases and slack rises. - Authorities’ views: - Broad concurrence with staff recommendations. - Norges Bank staff: trade conflict likely to slow activity growth; impact on inflation uncertain. - FSA: in a severe downside, preserve borrowers’ debt servicing capacity to avoid large banking sector losses; review regulatory and supervisory policies to avoid unintended adverse effects. - Ministry of Finance: allow automatic stabilizers and complement with temporary, targeted discretionary measures if needed. ### Key macroeconomic baseline and risk scenario indicators (Text Table 2 excerpts) - Baseline vs. Riskier Scenario (key variables, selected values shown as table entries): - Real GDP (percent change): Baseline 0.7, 2025 alternative 1.7, Riskier Scenario 0.4, 2026 alternative 1.2. - Real mainland GDP (percent change): Baseline 1.5, 2025 alternative 1.4, Riskier Scenario 1.3, 2026 alternative 1.0. - Trade Balance (percent of GDP): Baseline 12.7, 2025 alternative 12.3, Riskier Scenario 12.6, 2026 alternative 12.1. - Non-oil balance (percent of mainland GDP): Baseline -12.9, 2025 alternative -13.1, Riskier Scenario -13.0, 2026 alternative -13.6. - CPI Inflation (average): Baseline 2.4, 2025 alternative 2.4, Riskier Scenario 2.2, 2026 alternative 2.1. - Oil price (percent change): Baseline -13.9, 2025 alternative -5.7, Riskier Scenario -30.5, 2026 alternative 5.5. - Euro area Real GDP (percent change): Baseline 0.8, 2025 alternative 1.2, Riskier Scenario -0.2, 2026 alternative -0.5. - US Real GDP (percent change): Baseline 1.8, 2025 alternative 1.7, Riskier Scenario 0.3, 2026 alternative -0.5. ### Staff appraisal and policy recommendations - Outlook: - Mainland real GDP growth expected to reach 1.5 percent in 2025 and remain at that level over the medium term. - Under the baseline, headline and core inflation expected to decline to 2.2 and 2.6 percent by end-2025, returning to target by 2027. - Monetary policy: - Priority: bring inflation sustainably back to the 2 percent target. - Recommendation: Norges Bank should proceed cautiously with monetary policy normalization; maintain current restrictive stance until inflation is clearly on track to return to 2 percent. - Suggested enhancements: expand use of scenario analysis, formalize role for contrarian views in forecasting, refine communication strategies and criteria for strategic communications when market expectations deviate markedly from policy intentions. - Macroprudential policy: - Do not ease macroprudential settings further. - Wait to ease until systemic risks recede or financial disintermediation risks emerge. - Current CCyB setting remains appropriate; Norges Bank should be prepared to raise it if cyclical vulnerabilities increase. - Monitor household debt and the impact of relaxed LTV limits on house prices and indebtedness. - Financial stability: - Financial system sound with strong buffers but elevated vulnerabilities remain. - Priorities: preserve capital buffers, ensure bank models properly reflect credit risks, strengthen contingency planning for commercial real estate (CRE) sector pressure. - Support measures to address increased bank reliance on covered bonds and participation in a Nordic-Baltic regional stress test exercise. - Continue work addressing findings of the 2024 Nordic-Baltic crisis management exercise and the 2020 FSAP recommendations. *Source: 2025 Norway's National Budget and IMF staff analysis as presented in the provided text.* ### 44. A broadly neutral fiscal stance would support the disinflation process and improve ### 44. A broadly neutral fiscal stance would support the disinflation process and improve ### Fiscal stance and disinflation - Current expansionary fiscal stance is expected to provide significant support to economic activity, posing challenges to the disinflation effort. - A neutral fiscal position would enhance the effectiveness of the overall policy mix and may require offsetting new spending priorities with savings elsewhere to avoid fueling inflationary pressures. - CPI (average) projections (Table 1 / Table 2): - 2023: 5.5 - 2024: 3.1 - 2025: 2.4 - 2026: 2.4 - 2027: 2.0 - 2028: 2.0 - 2029: 2.0 - 2030: 2.0 ### Enhancements to the fiscal framework (findings and recommendations) - Reinforce countercyclicality of fiscal policy and spending discipline to enhance fiscal resilience. - Complement the fiscal rule with explicit medium-term expenditure limits to: - Reduce exposure to volatility from market-driven changes in the large and growing value of the GPFG. - Improve fiscal planning. - Strengthen multi-year budgeting. - Improve public investment management. - Conduct more systematic spending reviews and set efficiency targets to support strategic resource allocation and enhance public service delivery. - Benchmark the setup of the Advisory Panel on Fiscal Policy Analysis against best international practices for independent fiscal councils and expand its mandate to further enhance the fiscal framework. ### Fiscal reforms to bolster resilience and long-term growth - Tax reforms prioritized to improve efficiency and broaden the revenue base: - Consolidate multiple VAT rates. - Enhance incentives for work and investment. - Further reforms to disability and sickness benefits are needed (consistent with past IMF recommendations) to: - Reduce work disincentives. - Increase labor force participation. - Contain long-term fiscal costs. - Sustained reform efforts are crucial given rising structural spending pressures. ### Labor market, productivity, and climate objectives - Advance the “reinforced work line” agenda to: - Reduce reliance on disability benefits. - Raise labor force participation among underrepresented groups—including youth and immigrants. - Increase total hours worked. - Strengthen education-to-work transitions. - Promote full-time employment and accelerate digitalization to support productivity growth. - Further measures will be needed to achieve Norway’s 2035 emission reduction targets. ### Key macro-fiscal context and selected indicators - Population (2024): 5.6 million - Per capita GDP (2024): US$ 86,611 - Over-the-cycle deficit target: 3 percent of Government Pension Fund Global (GPFG). - Fiscal impulse (Table 1, projections): 0.4 - Structural non-oil balance (percent of mainland trend GDP; Table 1): - 2023: -9.4 - 2024: -10.3 - 2025: -12.9 - 2026: -12.8 - 2027: -12.8 - 2028: -12.8 - 2029: -12.8 - 2030: -12.9 - General government revenue and expenditure (percent of mainland GDP; Table 4, selected 2024–2025): - Revenue (2024): 80.2 - Revenue (2025): 80.2 - Expenditure (2024): 61.5 - Expenditure (2025): 63.3 - Government Pension Fund Global (percent of mainland GDP; Table 3): - 2024: 406.2 - 2025: 487.4 - 2026: 501.0 - 2027: 507.0 - 2028: 511.3 - 2029: 514.6 - 2030: 517.4 ### Institutional and forward-looking notes - Strengthening benchmarking and mandate of the Advisory Panel on Fiscal Policy Analysis recommended to align with best international practice for independent fiscal institutions. - The next Article IV consultation with Norway is expected to be held on the standard 12-month cycle. *Source: Norwegian Authorities; International Financial Statistics; and IMF staff calculations.* ### Annex I. Debt Sustainability and Sovereign Risk Assessment ### Annex I. Debt Sustainability and Sovereign Risk Assessment ### Overall Risk Assessment - Final assessment: Overall risk of sovereign stress: Low. - Near-term: Low. (Note: near-term assessment not applicable in cases with disbursing IMF arrangement; performed but not published in surveillance-only or precautionary arrangements.) - Medium-term: Low (mechanical signal: Moderate in the fan chart only). - Long-term: Moderate. - Rationale: - Low level of public debt and high buffers. - Medium-term liquidity risks as analyzed by the GFN Financeability Module are low. - Long-term moderation of risks reflects aging-related expenditures on health and social security feeding into debt dynamics. - Recommendation: Continue reforms to tackle population aging and its impact on public spending, including the generous disability and sickness benefits. - Note on sustainability: Debt is sustainable and expected to stabilize and decline over the medium term. Unsustainable debt would require exceptional measures (e.g., debt restructuring); sovereign stress can occur without debt being unsustainable and may be remedied by fiscal adjustment and new financing. *Commentary: Norway is at low overall risk of sovereign stress and debt is sustainable. Debt is expected to stabilize and decline over the medium term. Large buffers contribute to keep risks low.* ### Debt Coverage and Disclosures - Chosen coverage in the DSA: Central government (CG), General government (GG), Nonfinancial public sector (NFPS), Public sector (PS) indicated in figures. - Subsectors included in the baseline: - Budgetary central government: Yes - Extra budgetary funds (EBFs): Yes - Social security funds (SSFs): Yes - State governments: Yes - Local governments: Yes - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No - Instrument coverage and accounting principles: Referenced categories include market value, nominal value, face value, cash basis, non-cash basis, and other accounts payable; stock of arrears could be used as proxy in absence of accrual data. - Reporting on intra-government debt holdings: Commentary: N/A. ### Public Debt Structure Indicators - Perimeter: General government. - Key structure characteristics (commentary): - Public debt is predominantly in domestic currency. - Most public debt has medium and long-term maturity. - Residual maturity: 6. years (as reported). - Composition highlights (figures presented as percent of GDP in charts; specific chart values not reproduced beyond textual commentary). ### Baseline Scenario (Percent of GDP unless indicated otherwise) - Public debt (actual and projected): 43.8 (2025), 43.7 (2026), 43.6 (2027), 43.3 (2028), 43.0 (2029), 42.5 (2030), 40.4 (2031), 40.6 (2032), 40.7 (2033), 40.8 (2034), 40.8 (2035). - Change in public debt: 1.1 (2025), -0.1 (2026), -0.1 (2027), -0.3 (2028), -0.3 (2029), -0.5 (2030), -2.1 (2031), 0.1 (2032), 0.1 (2033), 0.1 (2034), 0.0 (2035). - Contribution of identified flows: 0.0 (2025), -0.4 (2026), -0.2 (2027), -0.2 (2028), -0.2 (2029), -0.4 (2030), 0.1 (2031), 0.2 (2032), 0.1 (2033), 0.1 (2034), n.a. (2035). - Primary deficit: 10.2 (2025), 9.9 (2026), 9.8 (2027), 10.0 (2028), 10.1 (2029), 10.1 (2030), 10.1 (2031), 10.1 (2032), 10.1 (2033), 10.1 (2034), 10.1 (2035). - Noninterest revenues: 38.0 (2025), 38.5 (2026), 38.8 (2027), 39.0 (2028), 39.1 (2029), 39.2 (2030), 39.1 (2031), 39.1 (2032), 39.1 (2033), 39.1 (2034), 39.1 (2035). - Noninterest expenditures: 48.2 (2025), 48.4 (2026), 48.6 (2027), 48.9 (2028), 49.3 (2029), 49.3 (2030), 49.3 (2031), 49.3 (2032), 49.3 (2033), 49.3 (2034), 49.3 (2035). - Automatic debt dynamics: -0.3 (2025), -0.6 (2026), -0.4 (2027), -0.3 (2028), -0.3 (2029), -0.4 (2030), -0.5 (2031), -0.4 (2032), -0.4 (2033), -0.5 (2034), n.a. (2035). - Real interest rate and relative inflation: 0.1 (2025), 0.2 (2026), 0.3 (2027), 0.2 (2028), 0.2 (2029), 0.2 (2030), 0.1 (2031), 0.1 (2032), 0.1 (2033), 0.1 (2034), n.a. (2035). - Real interest rate: 0.1 (2025), 0.2 (2026), 0.3 (2027), 0.3 (2028), 0.2 (2029), 0.2 (2030), 0.1 (2031), 0.1 (2032), 0.1 (2033), 0.1 (2034), 0.0 (2035). - Relative inflation: -0.1 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028), 0.0 (2029), 0.0 (2030), 0.0 (2031), 0.0 (2032), 0.0 (2033), 0.0 (2034), n.a. (2035). - Real growth rate: -0.3 (2025), -0.7 (2026), -0.7 (2027), -0.6 (2028), -0.6 (2029), -0.6 (2030), -0.6 (2031), -0.6 (2032), -0.6 (2033), -0.6 (2034), -0.6 (2035). - Other identified flows: -9.9 (2025), -9.7 (2026), -9.7 (2027), -9.8 (2028), -10.0 (2029), -10.2 (2030), -9.6 (2031), -9.6 (2032), -9.6 (2033), -9.6 (2034), -9.6 (2035). - Contingent liabilities: 0.0 (all years reported). - Interest revenues (minus): -3.1 (2025), -2.6 (2026), -2.3 (2027), -2.3 (2028), -2.3 (2029), -2.3 (2030), -2.3 (2031), -2.3 (2032), -2.3 (2033), -2.3 (2034), -2.3 (2035). - Other transactions: -6.9 (2025), -7.1 (2026), -7.3 (2027), -7.5 (2028), -7.7 (2029), -7.9 (2030), -7.3 (2031), -7.3 (2032), -7.3 (2033), -7.3 (2034), -7.3 (2035). - Contribution of residual: 1.1 (2025), 0.3 (2026), 0.1 (2027), -0.1 (2028), -0.1 (2029), 0.0 (2030), -2.2 (2031), 0.0 (2032), 0.0 (2033), 0.0 (2034), n.a. (2035). - Gross financing needs (GFN): 10.4 (2025), 11.5 (2026), 11.9 (2027), 12.2 (2028), 12.4 (2029), 12.5 (2030), 12.4 (2031), 12.3 (2032), 12.2 (2033), 11.2 (2034), 11.2 (2035). - of which: debt service: 3.3 (2025), 4.1 (2026), 4.4 (2027), 4.6 (2028), 4.6 (2029), 4.6 (2030), 4.5 (2031), 4.5 (2032), 4.4 (2033), 4.3 (2034), 3.4 (2035). - Local currency: 2.0 (2025), 2.4 (2026), 2.7 (2027), 3.0 (2028), 3.0 (2029), 3.1 (2030), 3.0 (2031), 3.0 (2032), 2.9 (2033), 2.9 (2034), 2.7 (2035). - Foreign currency: 1.3 (2025), 1.7 (2026), 1.6 (2027), 1.6 (2028), 1.5 (2029), 1.5 (2030), 1.5 (2031), 1.5 (2032), 1.5 (2033), 1.4 (2034), 0.6 (2035). - Memo: - Real GDP growth (percent): 0.7 (2025), 1.7 (2026), 1.6 (2027), 1.3 (2028), 1.3 (2029), 1.3 (2030), 1.5 (2031), 1.4 (2032), 1.4 (2033), 1.4 (2034), 1.4 (2035). - Inflation (GDP deflator; percent): 2.2 (2025), 2.2 (2026), 1.8 (2027), 1.8 (2028), 1.8 (2029), 1.9 (2030), 2.0 (2031), 2.0 (2032), 2.0 (2033), 2.0 (2034), 2.0 (2035). - Nominal GDP growth (percent): 2.9 (2025), 3.9 (2026), 3.4 (2027), 3.2 (2028), 3.2 (2029), 3.3 (2030), 3.5 (2031), 3.4 (2032), 3.4 (2033), 3.4 (2034), 3.4 (2035). - Effective interest rate (percent): 2.5 (2025), 2.5 (2026), 2.5 (2027), 2.5 (2028), 2.4 (2029), 2.3 (2030), 2.3 (2031), 2.3 (2032), 2.2 (2033), 2.2 (2034), 2.1 (2035). *Commentary: Public debt will stabilize and decline over time, reflecting GDP growth, and low borrowing needs.* ### Realism of Baseline Assumptions - Forecast track record: Uses t+1, t+3, t+5 comparisons with comparator group: Advanced Economies, Non-Commodity Exporter, Surveillance. - Commentary: Realism assessment reflects large fluctuations due to oil price volatility. - 3-year debt reduction distribution: - Max. 3-year reduction above 75th percentile: 5.9 ppts of GDP. - Percentile rank: 54.1. - 3-year adjustment in cyclically-adjusted primary balance: - 3-year adjustment above 75th percentile (2 ppts of GDP). - Percentile rank: 22. - Fiscal adjustment and possible growth paths illustrated with multipliers: Multiplier=0.5, Multiplier=1, Multiplier=1.5. ### Medium-Term Risk Assessment - Debt fan chart module: - Fanchart width (percent of GDP): 128.5 - Contribution: 1.9 - Debt fanchart index (DFI): 2.8 - Risk signal (DFI): High (signal thresholds: low if DFI < 1.13; high if DFI > 2.08). - Probability of debt non-stabilization (percent): 99.4 (contrib 0.8). - Terminal debt-to-GDP x institutions index: 5.5 (contrib 0.1). - Gross Financing Needs (GFN) module: - Average baseline GFN (percent of GDP): 11.8 (contrib 4.0). - Initial banks' claims on the general government (pct bank assets): 4.6 (contrib 1.5). - Change in banks' claims in stress (pct banks' assets): 0.8 (contrib 0.3). - GFN financeability index (GFI): 5.8 - Risk signal (GFI): Low (signal thresholds: low if GFI < 7.6; high if DFI > 17.9). - Medium-term index: Combination of DFI (2.8) and GFI (5.8) yields Medium-term index with final assessment: Moderate (normalized chart values shown). - Final assessment statistics: - Prob. of missed crisis, 2025-2030, if stress not predicted: 27.3 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 15.9 pct. - Commentary: Debt fan chart results point to a high level risk due to wide bands of confidence, but debt will remain relatively low even in the more extreme scenarios. The GFN Financeability model indicates a low level risk. *Source: IMF staff estimates and projections.* *Annex I. Debt Sustainability and Sovereign Risk Assessment — Source: IMF staff calculations.* ### Annex III. Recent Developments in the CRE Market ### Annex III. Recent Developments in the CRE Market ### CRE prices and transaction activity - CRE prices levelled off in 2024 and the first half of 2025 on market participants’ anticipation of interest rate cuts by Norges Bank. - Transaction volumes: - Increased by 37 percent to NOK 86 billion in 2024, primarily fueled by sales in the prime logistics and office segments, conducted through all-equity operations. - Domestic investors accounted for about 80 percent of total transaction volumes in the office segment. - Transaction volumes were subdued in the first half of 2025 as interest rate cuts did not materialize and uncertainty regarding trade policy weighed on activity. - Market breadth and risk appetite: - Risk appetite remains subdued, with fewer active buyers focusing on urban assets near Oslo and other established areas. - Prime markets have experienced more activity than non-prime areas. ### Financing conditions, yield gap, and credit metrics - Sector funding and maturities: - The sector is heavily reliant on bank debt, and NOK 75 billion in bonds are maturing in 2025–2026. - Spreads and refinancing: - Risk premiums and bank margins for the sector fell in 2024, with the average credit spread for CRE-listed bonds tightening by approximately 80 bps, which supported refinancing operations. - Credit spreads went up after the April U.S. tariff announcements, and while they have come down, they remain higher than pre-pandemic levels. - Asset quality and coverage: - Despite tighter spreads, the share of defaulted loans rose, and listed CRE companies’ ICR continued to fall in 2024. - Companies continued efforts to strengthen balance sheets, often selling properties at or above book value, and through interest rate hedging. - Yield gap and valuation risk: - Financing costs are still higher than prime yields and the yield gap remains compressed, suggesting potential further property value write-downs. - Uncertainty around property values is higher than usual in areas outside large cities where there are few or no transactions. ### Rental market developments by segment - Office: - The office rental market slowed in 2024 after strong growth in previous years. - Vacancy rates remained low due to limited new supply, supporting higher rental prices in central business districts in 2024, but rents are slowing down. - Vacancy rates have increased in the office segment and tenants show greater caution in lease renegotiations. - Logistics: - Reshaping of supply chains and expansion of e-commerce supported demand for logistics space, helping to stabilize rent levels, but operational conditions have weakened more recently. - Vacancy rates have increased in the logistic segment. - Retail: - Leasing activity overall remains subdued, with little investor appetite although demand for high-street retail locations stayed strong. - Hotels: - The hotel market remains a bright spot with solid demand; average occupancy levels have recovered to pre-pandemic levels. - Residential rental and buy-to-let: - Institutional investors continued to acquire entire buildings to subsequently divest units to retail buyers. - Rising mortgage rates and increased property tax valuations have significantly raised the cost of buy-to-let ownership, prompting many individuals to sell their secondary homes. - Numerous companies have offloaded residential units as part of broader portfolio adjustments. - Sustainability preferences: - A growing number of lease agreements are incorporating "green premiums," as companies increasingly prioritize buildings with high energy ratings, driven by new EU sustainability requirements. - Investors will have to publicly disclose and implement their climate transition plans aimed at retrofitting assets to align with the Net Zero Carbon Pathway and must address the financial implications associated with adaptation to prospective climate-related risks. ### Near-term outlook and key uncertainties - Near-term prospects hinge on the evolution of interest rates: - Improvements in transaction volumes will be contingent on the evolution of financing costs; high interest rates would prevent significant yield normalization and continue to weigh on investor demand. - Medium-term support factors: - Prices would be supported by sustained demand from population growth and constrained supply due to high construction costs. - Sector vulnerabilities: - Compressed yield gap and higher financing costs imply potential for further property value write-downs, particularly outside large cities where transaction activity is limited. ### Policy implications and recommended supervisory responses - From the Risk Assessment Matrix (relevant domestic risk and response): - Risk: Disorderly and protracted correction in the real estate sector due to higher-for-longer interest rates. - Impact if realized: High — bank buffers, while strong, would be adversely impacted from the deterioration of collateral values and asset quality, weighing on credit supply. - Policy response: - Improve data collection and supervise banks’ commercial real estate lending closely. - Consider broadening the toolkit for mitigating CRE vulnerabilities. - In the event of material stress, provide funding support to banks. _Prepared by Luisa Charry._ ### Annex VI. Status of 2020 FSAP Recommendations ### Annex VI. Status of 2020 FSAP Recommendations ### Systemic Risk Oversight and Macroprudential Policy - Recommendation: Develop and publish a macroprudential policy strategy. (MoF, Norges Bank, FSA) — Horizon: ST - Status: The authorities have expanded on key aspects of macroprudential policy in the Ministry’s annual Financial Markets Report. Norges Bank has published a framework for the SRB and the CCyB. - Recommendation: Use existing triparty meetings more effectively to discuss risks and policy actions needed to address them. (MoF, Norges Bank, FSA) — Horizon: I - Status: The authorities have implemented some adjustments to facilitate candid and targeted exchanges on risks, and to better align the meeting schedule with planned policy decisions. - Recommendation: Give Norges Bank recommendation powers over macroprudential policy tools that can be relaxed under stress, with a comply-or-explain mechanism. (MoF) — Horizon: I - Status: The Government tasked Norges Bank to advise the MoF on the SRB rate at least every other year in 2021. Norges Bank produced its first advice on the SRB in 2022, which was followed by MoF. - Recommendation: Make key household sector measures permanent features of the framework. (MoF) — Horizon: ST - Status: The lending regulation was made permanent from January 2025. - Recommendation: Consider broadening the toolkit for mitigating CRE vulnerabilities, including sectoral capital tools. (MoF) — Horizon: MT - Status: The MoF in December 2020 adopted a temporary floor for average risk weights for CRE exposures at 35 percent. The floor was renewed in 2022 and 2025, and will be in place until end-2026. According to Norges Bank’s framework for the SRB, the buffer should apply to all exposures in Norway as the effect of structural vulnerabilities on banks in a downturn is uncertain. ### Banking and Insurance Supervision - Recommendation: Strengthen the FSA’s prudential powers, operational independence, and budgetary autonomy. (MoF) — Horizon: ST - Status: A new FSA Act came into force on April 1st, 2025, writing into law the long-standing practice of prohibiting instructions by the Government or the MoF in the processing of individual cases before the FSA, which will only be allowed in cases of fundamental or great societal importance. General instructions are still allowed. The FSA board will decide individual matters for which the MoF’s ordinary authority to issue instructions is limited, and an independent appeals board would be established to adjudicate most appeals against the FSA’s decisions. The Act clearly state the FSA’s mandate to contribute to financial stability and well-functioning markets. Among others, current provisions relating to (i) the division of responsibility for macro-supervision between the MoF, Norges Bank and the FSA, (ii) rules on the implementation of supervision and (iii) rules on the FSA’s tools will remain in place. - Recommendation: Expand review of banks’ risks in supervisory activities to strengthen oversight over systemic foreign bank branches and domestic medium and small sized banks. (FSA) — Horizon: ST - Status: Systemic foreign branches and subsidiaries: The FSA has strengthened internal guidelines for monitoring, benchmarking, risk assessments and oversight of foreign branches and subsidiaries, as well as for information sharing with supervisory colleges. Discussions within the College Bank Committees have improved. Full-scope AML/CFT supervisory on-site visits have been conducted in all foreign branches, and the responsible supervisory teams have been provided additional resources. - Medium and small-size banks: A risk dashboard, a new early warning model (with drill down functionality) for each institution, a watch-list, and a new daily report that connects information from the public bankruptcy register with entity exposures are now available and inform the SREP. From 2024, institutions are required to report exposures on a quarterly basis, allowing for more granular analysis of risks. Data from the national shareholder register is used to analyze interconnectedness and identify weak reporting of connected clients. A new section for the supervision of medium and small-size banks was set up in 2022. - Recommendation: Further enhance the oversight of banks’ IRB models, in view of the implementation of CRD IV. (FSA) — Horizon: I - Status: Supervision of IRB-models is integrated with the supervision of large banks, and consists of on- and off-site inspections. When needed, add-ons are imposed, either as conditions for approval or as supervisory orders. The FSA takes part in inspections and approval processes for cross-border banks jointly with the ECB and the Nordic Supervisory authorities. Guidance to the institutions, which will replace the previous circular on IRB models will be published in 2025. - Recommendation: Intensify oversight of banks’ risk management of real estate loans and funding/liquidity conditions. (FSA) — Horizon: ST - Status: The FSA has introduced new supervisory modules based on EBA Guidelines for loan origination and monitoring (EBA/GL/202/06) and supervisory experience, and a Circular on requirements for valuation of immovable properties was issued in September 2021 (Circular 5/2021). Reporting frequency of banks' exposures to individual non-financial firms has increased from yearly to quarterly. A thematic inspection of CRE exposures, specifically loans secured by office premises, was conducted in 2022/23, with a report published in June 2023. In 2023–24 on-site inspections were conducted in the largest savings banks, the largest commercial bank, and several small/medium sized banks, with special emphasis on loan-loss provisioning, credit risk governance/risk management, and assessment of RE exposures. In 2024 the two companies specialized in CRE-covered bonds issuance were subject to on-site inspections. The FSA’s stress tests to a fall in house prices have been extended to cover all banks with assets of NOK6 billion or larger, and a new analytical tool (APO) allows for in-depth analysis of real estate exposures, development over time in exposures and loan loss provisions, geographic distribution etc., as well as comparison between banks. - Recommendation: Strengthen risk-monitoring of individual insurers. (FSA) — Horizon: ST - Status: The quarterly Early Warning Report now includes more detailed information on investments, and capital items. - Recommendation: Complement EIOPA efforts with Norway-specific in-house stress tests of the whole insurance sector. (FSA) — Horizon: MT - Status: The 2024 EIOPA stress test covered about two-thirds of the Norwegian insurance market. Developing an in-house test is not a priority currently. ### Cybersecurity Supervision (FSA, Norges Bank) - Recommendation: Make processes for cybersecurity risk supervision and oversight more structured and comprehensive. (FSA, Norges Bank) — Horizon: I - Status: The FSA has strengthened the approach for cybersecurity risk supervision and provided further guidance on IT/cybersecurity risk. The introduction of DORA in Norway will allow to further strengthen cybersecurity risk supervision. Norges Bank has established a more structured process for oversight and supervision. Important elements are annual risk-based planning, more active use of reports and other involvement from third parties and self-assessments by FMIs. The TIBER framework for cybersecurity-testing of critical functions has been implemented and tests are ongoing. The allocation of additional resources has allowed to increase the number of assessments and enhance quality. Upon the entry into force of DORA, significant financial institutions will be required to perform Threat-Led Penetration Testing. - Recommendation: Establish incident reporting and crisis management frameworks for systemic cyber incidents. (FSA, Norges Bank) — Horizon: ST - Status: Norges Bank and FSA updated routines for reporting of incidents from FMIs to The Financial Infrastructure Crisis Preparedness Committee (BFI) in 2020. The FSA works closely with Nordic Financial CERT (NFCERT) on cyber-attacks/incidents with "open line" and monthly status meetings. FSA and BFI have enhanced incident reporting slightly by leveraging the EBA Guidelines, the European Commission’s Digital Operational Resilience Act, and the ESRB’s work on systemic cyber risk. Processes for handling incidents reported by FMIs to BFI have been strengthened, and the introduction of DORA will allow for further enhancements. Crisis management by FSA and BFI has improved. ### Anti-Money Laundering / Countering Financing of Terrorism (AML / CFT) Supervision - Recommendation: Enhance AML/CFT supervision by increasing the frequency of targeted and thematic inspections and improving the risk-based approach and tools for AML/CFT risk assessments. (FSA) — Horizon: I - Status: Full scope on-site inspections dedicated to AML/CFT, and off-site inspections are increasing. The FSA has increased the use of targeted and thematic inspections. The risk-based approach to AML/CFT has been strengthened and the risk classification model, supervisory tools and methodologies have been further developed. - Recommendation: Ensure appropriate use of sanctions, including monetary penalties, for AML/CFT violations. (FSA) — Horizon: I - Status: The sanctioning power has been used as appropriate in cases of serious breaches. Since 2019 FSA has imposed monetary penalties on twelve banks, one virtual asset provider, five investment firms, twenty-two estate agents, and forty-three audit or accounting firms. The supervisory manual sets out principles for the FSA’s sanctioning practice, which is based on the EBA risk-based supervision guideline and principles for sanctioning set out by the FSA’s board. ### Financial Crisis Management and Safety Nets - Recommendation: Make the new resolution tools operational and strengthen the crisis preparedness framework. (FSA, MoF) — Horizon: ST - Status: The first version of the FSA’s bail-in mechanic was launched in 2023 and is being considered for revision. Bail-in playbooks from banks were received in 2023 and 2024. Self-assessments of EBA’s resolvability guidelines were conducted in 2022, 2023, and 2024 (with banks asked to provide a review by internal auditors). Further self-assessments are planned for 2025. The FSA is considering broadening the scope of banks subject to MREL decisions by applying a simplified obligations framework. The resolution plans have been streamlined and reduced in size to enhance their relevance and readability, with a greater emphasis on analytical content and the automation of historical data reproduction. - Recommendation: Ensure BGF’s integration into the broader resolution framework. (BGF, FSA) — Horizon: ST - Status: Discussions on draft Memorandums of Understanding (MoU) between Norges Bank and BGF (Bank’s Guarantee Fund) and FSA are ongoing (clarifications are being sought from the MoF regarding the financing of tasks the FSA might outsource to the BGF). A separate MoU between the FSA and BFG on data collection and sharing is expected to be finalized in 2025. The BGF participated in the April 2021 crisis simulation exercise alongside Norges Bank, the MoF and the FSA, and observed the Nordic-Baltic crisis simulation exercise in 2024. Additionally, the BFG takes part in resolution colleges coordinated by the Single Resolution Board, as well as the resolution college for DNB led by the Norwegian FSA. ### Systemic Liquidity - Recommendation: Monitor banks’ collateral eligible for central bank liquidity. (Norges Bank) — Horizon: ST - Status: Norges Bank has access to databases containing information on banks’ assets, and detailed information is available on pledged securities through Norges Bank’s system for collateral management. Information on the liquidity in the Norwegian bond market is available both through a semi-annual survey and daily issue and price data from commercial databases, and about foreign mortgage bonds (including information from Norges Bank’s own management of foreign exchange reserves) is used to assess developments in mortgage securities. Norges Bank has introduced a banks’ cash flow model to inform liquidity assessments. The FSA obtains information regarding an institution’s holding of securities (in all currencies) and information on banks assets registered in the Norwegian CSD. - Recommendation: Develop, test, and implement a mechanism for acceptance of mortgage loan collateral for emergency liquidity support to solvent banks. (Norges Bank) — Horizon: ST - Status: Norges Bank has implemented a mechanism for acceptance of mortgage loan collateral for emergency liquidity support for solvent banks and is considering accepting loans secured by CRE as collateral for emergency liquidity support for solvent banks. ### Financial Stability Analysis - Recommendation: Improve collection and analysis of derivatives exposure data and analyze banks’ margin arrangements. (FSA, Norges Bank) — Horizon: ST - Status: Norges Bank and the FSA are working on making data on agents’ derivatives contracts more accessible and usable (EMIR data) and are collaborating to develop analysis and dashboards suitable for monitoring. Norges Bank is using EMIR data to: (i) analyze the impact of rebalancing of currency hedging by NBFIs on exchange rates; and (ii) the effects of margining agreements (in combination with market data) for internal evaluations of liquidity policy measures. The FSA is using EMIR data to: (i) monitor counterparty exposures; and (ii) assess liquidity risks stemming from margining agreements. Norges Bank has introduced quarterly reporting from large mutual fund management companies, covering hedged exposures, instruments used, and margin requirements in case of a sharp weakening of the currency. ### Cybersecurity Risk Supervision (Finanstilsynet / FSA) - Recommendation: Establish clear qualitative and/or quantitative thresholds, as well as clearer processes and formats, on the reporting of cybersecurity incidents. — Horizon: I - Status: FSA has established clear processes for reporting cybersecurity incidents and has clear requirements for reporting incidents. Given DORA’s wider requirements on incident reporting and institutional coverage, the FSA has decided to postpone the revising of the incident reporting framework based on the revised EBA Guidelines until its implementation in Norway. DORA is expected to enter into force in Norway in 2025. - Recommendation: Supplement the 2003 regulation on the use of information and communication technology with more detailed guidelines, enacted by the FSA, that provide detail on the implementation of principles and set out minimum requirements. — Horizon: ST - Status: The FSA follows EBA's and EIOPA's guidelines for ICT security, outsourcing and governance in supervisory activities, as published on the FSA’s website. DORA will substitute the 2003 regulation on the use of information and communication technology. The implementation of DORA will place more specific requirements on the institutions than the current Norwegian ICT regulation. It is assumed that existing guidelines from the ESAs will be revised in accordance with DORA or be included in level two regulations under DORA, and that it will set sufficient minimum requirements for the companies' compliance. - Recommendation: Follow a more structured approach for cybersecurity risk supervision. This should include a clear description of how off-site supervision on cybersecurity should be conducted, and how assessments influence the overall risk assessments of institutions by the general supervisors. — Horizon: ST - Status: FSA has established a supervisory framework for ICT supervision with ICT security and risk (including cyber security and risk) as one of the modules (based on the NIST framework). A couple of sub-modules have been tested during inspection and the framework is now in use. The framework will be further enhanced when DORA enters into force in Norway. - Recommendation: Increase the intrusiveness of on-site cybersecurity risk inspections. — Horizon: MT - Status: See above. ### Cybersecurity Risk Oversight (Norges Bank) - Recommendation: Supplement the CPMI-IOSCO guidance with more detailed expectations of Norges Bank regarding cybersecurity risk oversight of FMIs. — Horizon: I - Status: Norges Bank has set the expectation that operators are to conduct self-assessments of cybersecurity-maturity using internationally recognized standards in its 2021 and 2022 Annual Reports on Financial Infrastructure. The assessed maturity level is expected to be mapped against the FMI’s defined objectives, and necessary actions to close gaps are expected to be planned and performed. The oversight function regularly follows up on whether such assessments are undertaken as part of the oversight process. Further, Norges Bank expects that FMIs responsible for critical functions in the Norwegian financial system run security-tests according to the TIBER-framework. - Recommendation: Follow a more structured and comprehensive process for cybersecurity risk oversight. This includes utilizing a portfolio of tools and techniques to assess cybersecurity risk against set expectations, reaching clear conclusions and identifying specific remedial measures or thematic findings to inform future action. — Horizon: I - Status: Norges Bank has improved its process for planning of oversight and supervision of FMIs. An important element in the updated process is annual risk-based planning. Improved competence in IT and cybersecurity (through the hiring of additional staff) enables the oversight function to perform more thorough assessments. Testing based on the TIBER-framework is an important part of Norges Bank’s oversight of the financial sector and infrastructure. To ensure the right incentives for the FMIs and other entities' willingness to undergo TIBER-testing, TIBER-NO stresses that oversight and supervisory functions shall not take part in TIBER-NO-testing on an operational level neither have access to test-results. - Recommendation: Establish, operationalize, and exercise an incident reporting and a crisis management framework to maintain financial stability against potential systemic cybersecurity incidents. — Horizon: ST - Status: Norges Bank and the FSA updated routines for reporting of incidents from FMIs to The Financial Infrastructure Crisis Preparedness Committee (BFI) in 2020. Routines in BFI for handling reported incidents from FMIs have been strengthened in 2024. Measures to maintain financial stability against potential systemic cybersecurity incidents require Norges Bank to collaborate with other authorities and entities in the financial sector. The European Systemic Risk Board (ESRB) has recommended to implement a “pan-European systemic cyber incident coordination framework (EU-SCICF).” Norges Bank follows the development of EU-SCICF as well as the implementation of DORA and will consider further action in collaboration with other national authorities based on the development of EU-SCICF and aligned with the implementation of DORA. Since 2025, Norges Bank is a “Crisis Observer” in the EU-Systemic Cyber Incident Coordination Framework. - Recommendation: Train Norges Bank overseers in cybersecurity, to strengthen the oversight function’s capabilities to conduct effective cybersecurity risk oversight. — Horizon: ST - Status: The oversight function’s competence in IT and cybersecurity has been significantly improved. Competence in the cyber-area for the oversight function has been further improved by hiring one cybersecurity expert and two people with a combined IT and cybersecurity skill set. Three cybersecurity experts have been hired to the TIBER Cyber Team (TCT-NO), responsible for TIBER-testing in Norway. TCT-NO is organized as part of the oversight function and may work on assignments for the oversight function that are not specifically oversight or supervision of FMIs, hence contributing to the total cyber-competence in the function. - Recommendation: The oversight function should be given enough independence to conduct thorough oversight of the Norwegian RTGS system (NBO). — Horizon: ST - Status: Norges Bank’s internal guidelines for oversight of the settlement function have been revised. Key objectives for the revision were to ensure that future oversight covers all areas as required by PFMI and that the oversight function has the necessary authority to fulfill its duties. According to the revised guidelines, the head of Financial Infrastructure will meet at least annually with top management. A new revision is planned to be finalized in mid-2025. - Recommendation: Finalize the financial sector risk map, in collaboration with the FSA and Ministry of Finance. — Horizon: ST - Status: A project to complete the mapping of the financial sector, initiated by the MoF, was finalized in 2023. - Recommendation: Use the existing legal power of the oversight function to seek greater assurance and transparency from critical service providers for interbank payment systems. — Horizon: ST - Status: Norges Bank and the FSA are collaborating in this area. The oversight function has improved its supervision of the FMI responsible for clearing transactions from banks in the Norwegian financial sector, by direct meeting with key vendors to the FMI. For other FMIs, the oversight function does not maintain a direct dialogue with the FMIs’ suppliers, due to resource constraints. Still, however, for all FMIs, supplier management including service-quality is a key subject in oversight, and highly prioritized. - Recommendation: Strengthen intrusiveness of the interactions of Norges Bank’s risk management and internal audit functions with NBO’s external service providers to seek greater assurance and transparency. — Horizon: MT - Status: The engagement of Norges Bank’s risk management function (second line of defense) and internal audit function (third line of defense) with the corresponding functions of NBO’s external service providers has been strengthened. *Source: Annex VI. Status of 2020 FSAP Recommendations (provided content).* ### Annex VII. Enhancing Norway’s Fiscal Framework ### Annex VII. Enhancing Norway’s Fiscal Framework ### Overview and context - The sovereign wealth fund (GPFG) is now worth around 490 percent of mainland GDP, promoting intergenerational equity. - Increased reliance on GPFG transfers, rising structural deficits, and expanding primary spending have enlarged the fiscal footprint and heightened exposure to GPFG volatility. - Empirical evidence points to fiscal policy turning procyclical during GPFG value swings, while remaining countercyclical with respect to the domestic output gap. - Key future fiscal pressures: ageing costs, defense needs, and a declining oil sector. ### Main findings - The authorities' fiscal framework has broadly achieved its core objective of managing petroleum revenues sustainably. - The GPFG’s rapid growth, notably during the past few years, has coincided with a rising reliance on the transfer guideline (3 percent of the value of the GPFG, annually). This has expanded the expenditure envelope and contributed to a steady increase in the structural non-oil deficit, as a share of mainland GDP. - Since 2010, primary spending has risen by approximately 5 percentage points of mainland GDP, mainly due to higher social transfers and health expenditures. - Empirical analysis indicates fiscal policy: - Behaves counter‑cyclically with respect to the domestic business cycle: when activity is above trend, the structural surplus rises, revenues strengthen, and spending contracts. - Has responded procyclically to large fluctuations in the GPFG’s value: windfalls in the GPFG prompt a looser stance—the surplus shrinks and spending increases. - Shows that fuel‑price fluctuations have little effect on the balance or revenues and only a mild impact on expenditure. - Long-term projections: - Baseline (Preservation Rule Scenario) assumptions: mainland GDP growth of 1.5 percent, real returns on the GPFG of 3 percent, and inflation near target. Under these assumptions, the non-oil deficit is projected to decline as a share of mainland GDP, consistent with current fiscal rule parameters. - Increasing Expenditure Needs Scenario: ageing-related spending and labor force pressures are expected to outpace non-oil revenue growth, leading to a widening of fiscal needs and a larger structural fiscal gap. - The comparison of scenarios underscores tension between current fiscal rule parameterization and the long-term expected additional fiscal gap, increasing the likelihood of a forced fiscal adjustment under adverse shocks. ### Empirical evidence and fiscal cyclicality (select regression results) - Econometric specification: a country-specific regression following a standard fiscal policy reaction function. Dependent variables include change in the structural non-oil balance, non-oil revenue and expenditure ratios to mainland GDP. Explanatory variables include measures of the output gap (overall and mainland), the cycle in the GPFG, and the international fuel price index. Lagged dependent variables capture fiscal inertia. - Selected coefficient estimates (robust standard errors in parentheses; significance: *** p<0.01, ** p<0.05, * p<0.1): - Column (1) Dependent = Diff Struct. Non-oil Balance - Output gap (overall economy): 0.450** (0.194) - Cycle in GPFG (pct. of GDP): -0.024*** (0.007) - Fuel Index: 0.003 (0.003) - Lagged, Diff(Structural Non-Oil Balance, % Mainland GDP): -0.452*** (0.093) - Observations: 23 - R-squared: 0.663 - Column (2) Dependent = Diff Struct. Non-oil Balance - Output gap (mainland GDP): 0.278 (0.191) - Cycle in GPFG (pct. of Mainland GDP): -0.020*** (0.007) - Fuel Index: 0.003 (0.003) - Lagged, Diff(Structural Non-Oil Balance, % Mainland GDP): -0.425*** (0.114) - Observations: 23 - R-squared: 0.428 - Column (3) Dependent = Non-oil Revenues/Mainland GDP - Output gap (overall economy): -0.029 (0.174) - Cycle in GPFG (pct. of GDP): 0.000 (0.008) - Fuel Index: -0.000 (0.005) - Lagged Non-oil Revenues/Mainland GDP: 0.573*** (0.165) - Observations: 24 - R-squared: 0.393 - Column (4) Dependent = Non-oil Revenues/Mainland GDP - Output gap (mainland GDP): 0.046 (0.153) - Cycle in GPFG (pct. of Mainland GDP): -0.001 (0.010) - Fuel Index: -0.001 (0.005) - Lagged Non-oil Revenues/Mainland GDP: 0.589*** (0.169) - Observations: 24 - R-squared: 0.396 - Column (5) Dependent = Non-oil Expenditure/Mainland GDP - Output gap (overall economy): -0.859*** (0.293) - Cycle in GPFG (pct. of GDP): 0.023 (0.018) - Fuel Index: -0.002 (0.008) - Lagged Non-oil Expenditures/Mainland GDP: 0.625*** (0.109) - Observations: 24 - R-squared: 0.722 - Column (6) Dependent = Non-oil Expenditure/Mainland GDP - Output gap (mainland GDP): -0.691** (0.273) - Cycle in GPFG (pct. of Mainland GDP): 0.022* (0.012) - Fuel Index: 0.004 (0.006) - Lagged Non-oil Expenditures/Mainland GDP: 0.535*** (0.107) - Observations: 24 - R-squared: 0.648 ### Policy recommendations - Periodic recalibration of the 3 percent rule, compatible with an operational expenditure ceiling: - Specific guidelines for recalibration should be carefully discussed among all stakeholders. - An option: establish a ceiling for central government non-oil spending growth to potential mainland GDP growth. - Internalizing GPFG value volatility and incorporating spending efficiency elements into the fiscal framework would enhance predictability, support countercyclical policy, and preserve intergenerational equity. - Integrate the expenditure target into a binding medium-term expenditure framework (MTEF): - Central government should incorporate baseline appropriations aligned with performance objectives. - New permanent spending initiatives should identify offsetting savings or revenue sources. - Preserve sufficient flexibility for timely fiscal responses to shocks; define adjustment mechanisms and emergency escape clauses for deviations beyond predefined margins. - Strengthen independent oversight and transparency: - Expand the mandate of the Advisory Panel on Fiscal Policy Analysis and benchmark it against international best practices for independent fiscal councils. - Broaden the Panel’s role to include regular assessments of adherence to the enhanced framework and periodic reports on the trajectory of Norway’s general government net worth—including the GPFG, remaining petroleum assets, and gross liabilities. - Improve expenditure efficiency and value for money: - Complementary expenditure review cycles to reduce lower-efficiency spending and create fiscal space for priorities. - Allow conditional, time-bound GPFG withdrawals to finance major investment projects only if subject to rigorous, independent cost-benefit analysis. - Simulations and risk management: - Staff simulations indicate that capping expenditure growth would be necessary to preserve the real value of the GPFG in the long term under a risk scenario. ### Institutional design and international experience - International experience (Nordic and euro area peers) highlights benefits of combining public sector net worth or fiscal balance anchors with enforceable multi-year expenditure ceilings, anchored in binding medium-term frameworks, supported by corrective mechanisms and independent oversight. - Expenditure ceilings embedded in medium-term fiscal frameworks have proven effective in curbing procyclicality, particularly during revenue windfalls. *Source: Annex VII. Enhancing Norway’s Fiscal Framework (prepared by Mauricio Vargas).* ### References ### References ### Bibliographic entries - Astinova D., Romain A. Duval, Niels-Jakob H Hansen, Ben Park, Ippei Shibata and Frederik G. Toscani, 2024. "Dissecting the Decline in Average Hours Worked in Europe," IMF Working Papers 2024/002, International Monetary Fund. - Norwegian Ministry of Labour and Social Inclusion (2024). “Meld. St. 33 (2023–2024) En styrket arbeidslinje – reform for økt arbeid og mindre utenforskap [White Paper No. 33 (2023–2024): A Reinforced Workline – Reform for Increased Work and Reduced Exclusion]. Oslo: Ministry of Labour and Social Inclusion. - Vargas, M, 2025. “Educated Choices: The Role of Skills in Sustaining Work Hours in Nordic Countries,” IMF Working Paper, forthcoming. ### Annex X. Transnational Aspects of Corruption — Update ### Previous recommendations / context - Norway volunteered under the 2018 Enhanced Framework on Governance to have its legal and institutional frameworks assessed in the context of bilateral surveillance on supply and facilitation of corruption. - The recommendations were provided under Annex X of the 2024 Norway Article IV staff report. ### Significant updates — Supply side (Criminalization and Prosecution of Foreign Bribery) - Draft Prosecutorial Guidelines that clarify the calculation of corporate fines and confiscation in foreign bribery cases are under discussion. Public consultations will run until August, with its approval and issuance by the Director of Public Prosecutions expected by end-of-2025. - The same Prosecutorial Guidelines also aim to improve the transparency of penalty notices. - In 2025, Norway earmarked 12 of the 90 million NOK allocated to the National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM) for targeting corruption and other serious crime. ØKOKRIM will establish a new Anti-Corruption Unit to facilitate corruption investigations, including foreign bribery offences. ### Significant updates — Facilitation of corruption (Preventing concealment of foreign corruption proceeds) - Authorities invested significantly in new transaction monitoring software for the Financial Intelligence Unit, including allowing for an increase in detection of cross-border transactions (also related to corruption). - The Register of Beneficial Owners was established on 1 October 2024, with a deadline to register of 31 July 2025. The system is operational, as of May 2025 (ahead of the deadline) already 62 percent of legal persons had registered, and authorities plan to follow-up with non-registered entities on 1 August 2025. The Register is accessible to those entities with AML/CFT obligations (e.g., banks). ### Annex XI. Implementation of Past IMF Recommendations ### Monetary policy - Recommendation: Keep monetary policy contractionary until inflation is durably on target. Maintain a data-dependent approach and stand ready to adjust the policy stance. - Authorities’ actions: After holding the policy rate unchanged at 4.5 percent since 2024, Norges Bank (NB) cut the policy rate by 25 bps in June/2025. NB’s guidance points to a gradual removal of the policy restriction over the medium term, depending on the evolution of the inflation and activity outlook. Norges Bank has indicated that inflation targeting is forward-looking and flexible. ### Fiscal policy - Recommendation: Remove the fiscal stimulus in place to lower risks of fiscal-monetary policy miscalibration. The 2025 budget should aim for a neutral fiscal stance. Prioritize spending efficiency and reduce reliance on petroleum revenues by reforming the tax system; strengthen the fiscal policy framework through medium-term budgeting and adoption of an expenditure rule. - Authorities’ actions: The 2024 fiscal outcome was expansionary and the 2025 budget remains stimulative. Authorities reason that increased defense and refugee-related spending justify the higher structural non-oil deficit. The 2025 budget introduced several tax progressivity measures aimed at supporting low- and middle-income households. Implementation of medium-term budgeting and the adoption of an expenditure rule is pending. ### Financial sector policies - Recommendation: Maintain tight macroprudential settings until risks subside. Strengthen contingency planning and preserve bank buffers, particularly in light of pressures from commercial real estate. - Authorities’ actions and facts: - The SRB and CCyB rates remain at 4.5 percent and 2.5 percent, respectively. - LTV limits on household mortgages were raised to 90 percent (from 85 percent) with effect on December 31, 2024. - Finanstilsynet conducted additional scenario testing in 2024 and emphasized CRE risks in supervisory communications. - The 35 percent floor for average risk weights on CRE exposures, in place since 2020, has been extended until 2026. ### Structural reforms - Recommendation: Restructure pension and social protection systems; reform sickness and disability benefit systems to bolster labor supply and contain spending; facilitate sectoral reallocation, innovation, and technology adoption; strengthen supply chain resilience; facilitate the green transition by maintaining carbon pricing and removing regulatory barriers. - Authorities’ actions and facts: - Pension reform: The government reached an agreement to increase the retirement age for public sector employees from 70 to 72 years. - Social protection and sickness and disability systems: The Ministry of Labor and Social Inclusion’s 2024 Reinforced Work Line strategy introduced stricter eligibility and activation requirements. - The 2025 National Budget outlines plans to promote digitalization, better use of public data, and streamline regulatory frameworks to spur innovation, though implementation remains gradual. - Norway is advancing international cooperation, including through the EU–Norway Green Alliance and InvestEU. Norway signed a new EFTA–India free trade agreement in 2024 to diversify trade partners. - The government remains committed to increasing the carbon tax to NOK 2,000 per ton by 2030. The government has increased funding for Enova to accelerate the deployment of climate and energy technologies. The CO₂ compensation scheme now requires participating firms to allocate at least 40 percent of received funds to emission-reducing and energy efficiency measures. ### Annex XII. Data Adequacy Assessment for Surveillance ### Overall assessment and participation - Norway subscribes to the Special Data Dissemination Standard (SDDS) since June 1996 and publishes the data on its National Summary Data Page. The latest SDDS Annual Observance Report is available on the Dissemination Standards Bulletin Board. - Norway has expressed interest in adhering to SDDS Plus. ### Staff assessment and rationale - Rationale: Data provided by Statistics Norway, Norges Bank, the Ministry of Finance, Finanstylnet, and other national sources are adequate for surveillance. The consistency of External Sector statistics is currently assessed as "B", considering the significant errors and omissions in BOP estimates, which average about 2 percent of GDP for the last decade. The errors and omissions arise from various factors, including data collection challenges; timing issues with recording specific types of transactions; underreporting of certain flows; and statistical adjustments due to revisions and methodological changes. ### Notable data details and timing - As of July 11, 2025: Annex XII. Table 3. Norway: Table of Common Indicators Required for Surveillance — Date of Latest Observation / Date Received entries include 11-Jul-25 and several entries dated Jun-25, May-25, 2025:Q1, and 2025:Q4, reflecting the dataset status as of July 11, 2025. - The data provided to the Fund has some shortcomings that somewhat hamper surveillance; no new data weaknesses have been identified since the last Article IV consultation. *Source: NORWAY — INTERNATIONAL MONETARY FUND (References and annexes).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1norea2025001-source-pdf.pdf_