## _cr04343 ## Source details **Canonical URL:** [_cr04343](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04343.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04343.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04343.pdf.json) --- ### Overview and key findings - Recovery described as "well under way" with domestic demand the key driver; downside risks centered on external factors. - Crucial reforms proceeding: pension and health care reforms implemented; labor market institutional changes limited by "social cohesion" concerns. - Financial System Stability Assessment (FSAP) found no systemic risks but urged further strengthening of supervision and phasing-out of state interventions in financial markets. - Staff view: labor market reforms need to be integral to growth-enhancing reforms to secure fiscal sustainability; until such reforms are in hand, direct expenditure restraint should aim at achieving a small structural surplus by the end of the decade. ### Economic performance and near-term outlook - GDP growth projections and consensus: - Consensus: GDP growth would average about 2.5 percent per year in 2004 and 2005. - Staff projection: GDP growth of 2.6 percent in 2004 and 2.3 percent in 2005 (mission section); staff later projects 2.5 percent in 2004 and 2.2 percent in 2005 (supplement). - Drivers of the recovery: - Rebound triggered by foreign demand in mid-2003, now led by private domestic spending. - Favorable starting conditions: atypically high household savings, very profitable financial sector, limited corporate balance-sheet difficulties, relatively robust housing sector. - Policy measures supporting confidence: pension reform, minimum wage increases, suspension of taxe professionnelle for new investments, and minor fiscal measures in 2004 (interest deduction for consumer credits; suspension of a tax on wealth transfers to the younger generation; agreement with the distribution sector to decrease prices on brand name products). - Private consumption and savings: - Household savings rate dropped sharply since mid-2003 as consumption backlog unwound; declining real interest rates also supported consumption. - Staff analysis: consumption (of nondurables) tracks real disposable income closely; wealth effects matter but are smaller than in the United States. - Investment and housing: - Fixed investment benefiting from catch-up as firms rebuild balance sheets and equity markets recover; residential construction has moved up. - Labor market and employment: - Employment held up better than in previous downswings; rise in unemployment appears to have ended in early 2004, aided by slowing labor supply growth. - Targeted cuts in social security contributions helped sustain employment, inducing substitution of low-skilled labor for capital and high-skilled workers and slowing measured labor productivity growth. - Reduction of the workweek to 35 hours increased labor costs, mitigated by cuts in social security contributions and improved labor organization, but with negative net effect on potential output and high budgetary costs. ### Inflation, monetary conditions, and external risks - Inflation: - Headline inflation ran well above 2 percent in early 2004, with regulated prices and indirect taxes accounting for over one-third of overall inflation by early 2004. - Underlying inflation around 1.6 percent despite slack. - Staff expects headline inflation to retreat to less than 2 percent in the course of 2005. - Supplement: "2.2 percent in September, is seen to remain persistent, slowly moderating in the course of 2005." - Monetary transmission and administered rates: - Monetary conditions considered supportive; short-term real interest rates close to zero. - Sluggish pass-through of ECB rate cuts to domestic retail rates estimated to have lowered consumption by 1.7 percentage points versus immediate pass-through. - New interest rate adjustment mechanism in place since mid-2003 expected to strengthen response, but administered savings schemes persist and impede transmission. - External risks: - Downside risks: higher oil prices, euro appreciation, weaker demand in Germany and Italy. - Current account projected to move into deficit near term as domestic demand outpaces trading partners. - Housing: not considered a key systemic risk; wealth effects small; household indebtedness low by international standards. ### Fiscal outlook, consolidation strategy, and sustainability scenarios - Fiscal stance and targets: - Fiscal deficit widened from 3.3 percent of GDP in 2002 to 4.1 percent of GDP in 2003. - Authorities aim to reduce overall deficit to less than 3 percent of GDP in 2005 and to 2.5 percent of GDP in 2006. - Supplement: Budget objective to reduce general government deficit from 3.6 percent of GDP in 2004 to 2.9 percent of GDP in 2005. - Staff assessment and recommendations: - Staff view: underlying structural adjustment implied by official target is small; medium-term consolidation pace unclear and should be strengthened. - Past Fund advice to consolidate at an annual average pace of 0.5 percent of GDP until structural balance or surplus was not followed during 2000–03. - Staff recommends stepping up reforms of employment protection and benefits to raise labor utilization; until reforms are enacted, pursue direct expenditure restraint to achieve a small structural surplus by decade-end. - Strengthen the fiscal framework and allow automatic stabilizers full play; staff warns against a new asymmetric fiscal rule under consideration. - Fiscal projections (Text Table 1 selected series, percent of GDP for 2001–2008 as shown): - Expenditure: 52.6, 53.6, 54.6, 53.8, 53.2, 52.8, 52.4, 51.8. - Revenue: 51.0, 50.3, 50.5, 50.5, 50.4, 50.3, 50.3, 50.3. - Tax revenue: 44.7, 43.8, 43.8, 43.8, 43.7, 43.6, 43.6, 43.6. - Balance: -1.6, -3.3, -4.1, -3.4, -2.8, -2.5, -2.1, -1.6. - Primary balance: 1.6, -0.2, -1.1, -0.4, 0.2, 0.5, 1.0, 1.5. - Structural balance: -2.1, -3.2, -3.2, -2.6, -2.1, -2.1, -1.8, -1.4. - Gross debt: 56.8, 58.8, 63.7, 64.3, 64.4, 64.4, 64.2, 63.4. - Fiscal sustainability illustrations: - If NAIRU lowered to 7 percent in next 5 years by reforms, up-front adjustment would require an overall structural surplus of 0.7 percent of GDP by 2008 — 2.2 percentage points more than under current policies. - A decisive reform raising employment from 63.4 percent in 2003 to 70 percent by 2010 would require lowering the structural deficit to about 0.5 percent of GDP by 2008 — implying additional adjustment of 1 percentage point compared to current policies. - Without such reforms, staff recommended sustained expenditure-based adjustment at a pace somewhat more than three-quarters of 1 percent of GDP per year until a small structural surplus is achieved. ### Health care reform (Box 3) — measures, estimates, and assessment - Health spending and pressure: - Public spending rose by 4.7 percent per year between 1997 and 2004 (March); norm cited as 3 percent; disposable income growth 3.3 percent. - Sources of pressure: widening coverage; increasing consultation tariffs; rising pharmaceutical prices; personnel costs due to workweek reduction; technological progress and aging-related costs. - 2004 reform objectives and official estimates: - Aim: balance the books by 2007 while increasing quality and preserving equal access. - Reform introduces possibility to modulate key parameters governing behavior of patients, medical professionals, and insurance agents. - Officially estimated budgetary savings of about €15 billion in 2007 (ministry of health’s projection of deficit before measures). - Budgetary impact (official estimates, billions of euro): - Lower expenditure: Medical cost control 3.5; Pharmaceuticals 2.5; Hospital procurement 1.5; Control sick leave 0.8; Improve administration 0.5; Cut financing costs 1.0; Total: 9.8. - Higher revenues: Copayment €1 0.65; Enterprise tax (C3S) 0.78; Increase in social security contributions and CSG 2.29; Contribution of the state 1.0; Increase of copayment hospital 0.3; Total: 5.0. - Assessment and risks: - Measures appear insufficient to eliminate projected budget deficit; CNAM projects trend deficit before measures of €23 billion by 2007. - Uncertainties: impact of expenditure control measures uncertain; transfers from the state do not lower general government deficit; higher costs of operating improved administration not taken into account. - Related public sector issues: - Pensions: 1993 and 2003 reforms reduced projected costs of aging and instituted five-year reviews; staff argued for phasing out early retirement schemes and reducing generosity of some special regimes. - Civil service hiring: nonreplacement used symbolically; of about 60,000 retiring civil servants in 2005, only 8,000 not to be replaced. - Decentralization: staff urged fiscal autonomy and own resources for local governments; suggested local surcharge on personal income tax or CSG (authorities concerned about implementation). - Taxe professionnelle: suspended in January 2004 initially for 18 months and now through end-2005; staff suggested relying more on charges/fees, real estate taxes, and abolition of preferential VAT rates to replace some TP revenue. ### Labor market and product-market reform priorities - Labor market diagnosis: - Key weaknesses: low participation and employment rates, declining hours worked, adverse demographics, declining total factor productivity growth. - Contributors: high minimum wages pricing low-skilled out of employment; high replacement income reducing labor supply. - Staff recommendations: - Comprehensive reform of labor market institutions to raise labor utilization. - Reshape employment protection to clarify judiciary role and reduce firing costs. - Reorient entitlements toward encouraging job search; index benefits and minimum wages to underlying inflation not to wages; shorten duration of benefits where appropriate. - Emphasize active labor market policies focused on on-the-job training and facilitate hiring of low-skilled youth. - Fund new "social cohesion" measures out of existing resources and focus on reforming employment protection and entitlements. - Policy interactions: - Authorities employed costly active labor market policies (cuts in social security contributions and earned income tax credit) estimated to amount to 1 percent of GDP by 2005. - Large scheduled SMIC increase in 2005: 3.8 percent in real terms, with partly offsetting cuts in social security contributions. - Options considered to mitigate budgetary impact: (i) spreading minimum wage increases over time; (ii) narrowing salary range over which social security contributions are reduced; (iii) reducing upper income limit of earned income tax credit; (iv) reforming workweek restrictions and employment protection. - Note: since the mission, option (i) was announced but then withdrawn, and option (ii) is being pursued. ### Financial sector assessment and policy recommendations - FSAP findings and recommendations: - Supervision and oversight judged high quality; no immediate systemic risks identified. - Recommendations: diminish state influence over savings allocation through administered savings schemes and fiscal incentives; orderly phasing out urged. - Improve disclosure and pricing transparency for banking services; preserve strong competition given concentration. - Separate postal office’s banking activities and subject them to standard prudential requirements; place newly created bank on a "level-playing field". - Eliminate notion of "national champions"; introduce positive credit registry to enhance competition. - Monitor banks’ corporate governance and risk-taking, especially as they expand into unfamiliar activities. - Improve creditor rights and reform bankruptcy law to facilitate restructuring and allow banks to write off nonperforming loans without jeopardizing legal claims. - Further improve AML/CFT implementation across sectors and enhance suspicious transaction reporting. - Administered savings and market distortions: - Administered savings schemes interfere with monetary transmission and efficient resource allocation and entail tax exemptions costing about 0.25 percentage point of GDP per year. - Usury rates set at four-thirds of actual average interest rates; impede access to financial services for segments of the population when rates are low. - Authorities more ready to contemplate changes in administered savings schemes and lift restrictions (e.g., remuneration of sight deposits, free checks). - Mortgage and consumer credit: - Removal of obstacles to financial innovation in mortgage and consumer credits seen as welfare improving. - Impediments: cumbersome and expensive approval procedures; problems in seizing collateral. - Supervisors emphasize safeguards for mortgage-related instruments due to asset price volatility. ### External policy, trade, and official development assistance - Trade policy stance: - Staff urged France to fully associate with efforts to bring the Doha round to a successful conclusion. - Authorities supported Doha but pressed for "balanced" results; emphasized concerns about unequal responses to EU initiatives. - France favored preferential trade agreements with ACP countries, insurance mechanisms for agricultural price volatility, and regional cooperation. - Staff encouraged early implementation in France of CAP reform scheduled for 2007 (as of report). - Official development assistance: - Authorities determined to increase ODA from 2003 level of 0.41 percent of GNP to U.N. target of 0.7 percent of GNP by 2012. - Current level noted as highest among G-7 countries and concentrated in Africa. ### Staff appraisal, Executive Board messages, and policy sequencing - Staff appraisal: - With upswing established and downside risks mainly external, staff saw no need for additional supportive measures and room for greater structural fiscal adjustment. - Long-term growth constraints from structural weaknesses and adverse demographics require comprehensive reforms. - Policy priority sequence (staff view and Board recommendations): - Deepen labor market reforms (employment protection and benefits) to raise labor utilization. - Strengthen fiscal consolidation through spending restraint to reach a small structural surplus by decade-end if labor reforms are not forthcoming. - Reinforce fiscal framework and permit automatic stabilizers to operate fully. - Continue product market deregulation and accelerate phasing out of state intervention in financial markets. - Once a small, enduring structural surplus is achieved, consider growth-enhancing tax cuts. ### Key numeric highlights and selected indicators (excerpts) - Growth and inflation: - GDP growth (selected projections): 2.5 percent (consensus 2004–05); staff projections include 2.6 percent in 2004 and 2.3 percent in 2005 (mission) and 2.5 percent in 2004 and 2.2 percent in 2005 (supplement). - Inflation (September): headline 2.2 percent; underlying 1.6 percent. - Fiscal and debt indicators: - General government deficit: 3.6 percent of GDP in 2004; authorities’ 2005 target 2.9 percent of GDP; staff projects 3.0 percent of GDP in 2005. - EDF pension fund transfer: 0.4 percentage point of GDP in 2005. - Civil service reductions: 7,200 staff in 2005; about 60,000 retirements expected in 2005. - Authorities intend medium-term structural improvement of about 0.5 percentage point of GDP per year over 2006–08; staff judges an additional 1 percentage point of GDP of structural effort will be necessary compared to authorities’ plans (excluding one-offs). - Public sector gross debt (selected series): 56.8, 58.8, 63.7, 64.3, 64.4, 64.4, 64.2, 63.4 (2001–2008 as shown). - Labor market and social spending: - Active labor market policies and cuts in social security contributions and earned income tax credit estimated to amount to 1 percent of GDP by 2005. - Large scheduled real SMIC increase in 2005: 3.8 percent in real terms. - Health care reform estimates: - Officially estimated budgetary savings about €15 billion in 2007. - Official lower-expenditure items total: 9.8 (billions of euro); higher revenues total: 5.0 (billions of euro). - CNAM projects trend deficit before measures of €23 billion by 2007. *Source: Executive Summary and selected chapters, IMF staff report and supplementary information for the 2004 Article IV consultation with France (_cr04343)._ ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview and key findings - The recovery is "well under way" with domestic demand as the key driver; downside risks are centered on external factors. - Crucial reforms have been proceeding (notably of pension and health care systems), but changes in labor market institutions and work incentives have been harder to come by, held back by "social cohesion" concerns. - The Financial System Stability Assessment found no systemic risks but urged a further strengthening of supervision and the phasing-out of state interventions in financial markets. - Staff view: labor market reforms need to be integral to growth-enhancing reforms to secure fiscal sustainability; until such reforms are in hand, direct expenditure restraint should aim at achieving a small structural surplus by the end of the decade. ### Economic performance and near-term outlook - GDP growth: consensus that GDP growth would average about 2.5 percent per year in 2004 and 2005. - Drivers of the recovery: - Rebound triggered by foreign demand in mid-2003, now firmly led by private domestic spending. - Favorable starting conditions: atypically high household savings, very profitable financial sector, limited corporate balance-sheet difficulties, relatively robust housing sector. - Policy measures that supported confidence: pension reform (preserved benefits, longer working), minimum wage increases, suspension of taxe professionnelle for new investments, and several minor fiscal measures in 2004 (interest deduction for consumer credits; suspension of a tax on wealth transfers to the younger generation; agreement with the distribution sector to decrease prices on brand name products). - Private consumption: - Strength reflects both fundamental and exceptional factors. - Household savings rate dropped sharply since mid-2003 as the consumption backlog unwound; declining real interest rates also supported consumption. - Staff analysis: consumption (of nondurables) tracks real disposable income closely; wealth effects matter but are smaller than in the United States. - Investment and housing: - Fixed investment benefiting from catch-up as firms rebuild balance sheets and equity markets recover; residential construction has moved up. - Labor market and employment: - Employment held up better than in previous downswings; rise in unemployment appears to have ended in early 2004, aided by slowing labor supply growth. - Targeted cuts in social security contributions helped sustain employment, leading to substitution of low-skilled labor for capital and high-skilled workers and a slowdown in measured labor productivity growth. - The reduction of the workweek to 35 hours increased labor costs, mitigated by cuts in social security contributions and improved labor organization, but with negative net effect on potential output and high budgetary costs. ### Fiscal outlook and consolidation strategy - Authorities' targets and staff assessment: - Authorities intend to reduce the fiscal deficit to under 3 percent of GDP in 2005 and to rely on growth-enhancing reforms for long-term fiscal sustainability. - Under current growth prospects, the overall deficit is likely to fall to less than 3 percent of GDP in 2005. - Staff view: the underlying structural adjustment implied by the official target is small; medium-term consolidation pace is unclear. - Past Fund advice and implementation: - The Fund's long-standing advice to consolidate at an annual average pace of 0.5 percent of GDP until structural balance or surplus is achieved was not followed during 2000–03. - Tax cuts and expenditure overruns increased the structural deficit in 2000–03. - Pension reform has appreciably diminished the projected cost of aging; health care reform is making inroads; civil service reform is yet to start in earnest. - Staff recommendations on fiscal strategy: - Step up reforms of employment protection and benefits to meaningfully increase labor utilization while securing structural fiscal adjustment. - Until such reforms are enacted, pursue direct expenditure restraint to achieve a small structural surplus by the end of the decade before higher costs of aging materialize. - Strengthen the fiscal framework and allow automatic stabilizers full play, in contrast to a new fiscal rule currently under consideration. - Vulnerabilities: - Fiscal sustainability is not yet secured due to a high structural deficit, rising dependency ratios, and increasing public spending on health care and labor market policies. ### Structural reforms: labor and product markets - Progress and impediments: - Product market deregulation is ongoing: simplification of administrative procedures, liberalization of network industries, and acceleration of divestiture have raised potential returns to increased labor market flexibility. - Labor market reform has reached an impasse. Reliance on budgetary measures to promote higher labor utilization conflicts with fiscal consolidation objectives. - Structural rethinking of labor market institutions has been left to reluctant social partners; entitlement reform (other than pensions) is largely off limits. - Social cohesion tension: - Authorities and social partners emphasize social cohesion, generous welfare arrangements, and narrow income distribution, which has led to a gradual approach to reform. - Labor unions argued that reforms (and adoption of Fund advice) would raise social exclusion and inequity; employers noted high labor costs and regulatory burdens. ### Financial sector and other issues - Financial sector stability: - Financial System Stability Assessment found no systemic risks. - Recommendations: continued vigilance on banks’ risk exposure; further strengthening of supervision; phase out state interventions in financial markets. - External policy and development assistance: - Staff urged France to associate itself fully with efforts to bring the Doha round to a successful conclusion. - Staff welcomed the relatively high level of official development assistance (ODA). ### Staff appraisal and policy implications - With the upswing well-established and downside risks mainly external, staff saw no need for additional supportive measures and saw room for greater structural fiscal adjustment. - Long-term growth constraints: - Structural weaknesses and adverse demographics require comprehensive structural reforms to raise long-term growth. - Policy priority sequence (staff view): - Deepen labor market reforms (employment protection and benefits) to raise labor utilization. - Strengthen fiscal consolidation through spending restraint to reach a small structural surplus by decade-end if labor reforms are not forthcoming. - Reinforce fiscal framework and permit automatic stabilizers to operate. - Continue product market deregulation and accelerate phasing out of state intervention in financial markets. *Source: Executive Summary, _cr04343.* ### 8. There was agreement that the recovery was well ### _cr04343 - 8. There was agreement that the recovery was well ### Recovery outlook and risks - Recovery was "well under way" with downside risks centered on external factors. - Authorities concurred that growth would be close to 2.5 percent in 2004, versus the 1.7 percent underlying the 2004 budget; new official forecasts not available until the fall. - Staff projection: GDP growth of 2.6 percent in 2004 and 2.3 percent in 2005. - Risks to the outlook: - Downside external: oil prices, the euro, and demand in the rest of the euro area. - Upside domestic: mainly private consumption; household savings still high and employment prospects could boost consumption. - Oil price effects: - Direct effect dampened by France’s high reliance on nuclear power. - Indirect effects via slower partner-country growth could be significant. - Exchange rate and partner demand: euro appreciation and weaker domestic demand in Germany and Italy could adversely affect growth. - Housing: house prices not considered a key risk — wealth effects small; recent increases largely driven by fundamentals; household indebtedness low by international standards. - Since the mission: domestic demand stronger than expected; oil prices much higher. ### External accounts and trade - Current account surplus projected to turn into a deficit in the near term, partly for cyclical reasons. - Cumulated effect of euro appreciation affecting external accounts, especially via tourism. - Export performance recently weak due to: - Real appreciation of the exchange rate vis-à-vis other EU countries. - Structural factors: pattern of regional trade (high weight of Germany where domestic demand remained weak) and product specialization (e.g., airline industry affected by geopolitical turmoil). - Near-term projection: with domestic demand running ahead of major euro-area trading partners, trade balance and current account projected to move into deficit. ### Inflation dynamics - Inflation expected to remain persistent for some time. - Headline inflation continued to run well above 2 percent, driven by energy and service price rises and increases in regulated prices and indirect taxes. - Authorities noted regulated price and indirect tax increases accounted for over one-third of overall inflation by early 2004, contributing to a large French-specific inflation component. - Underlying inflation at about 1.6 percent despite slack in the economy and past euro appreciation. - Contributing factors to persistent underlying inflation: low productivity gains, increases in minimum wages, and health care reforms likely to sustain underlying inflation in the near term. - Higher-than-expected oil prices foreshadow higher headline inflation. - Staff expects headline inflation to retreat to less than 2 percent in the course of 2005. - Policy concern: avoid second-round effects from energy and regulated price hikes. ### Monetary conditions and transmission - Monetary conditions considered supportive; a closer link between administered and market interest rates would facilitate monetary transmission. - Decline in real interest rates had offset most of the impact of the euro’s appreciation. - Short-term real interest rates were close to zero; long-term rates appeared consistent with growth at potential rates. - Domestic retail interest rates adjusted very slowly to reductions in the ECB’s policy rates due to administrative interventions. - Estimated effect of sluggish pass-through: consumption was lower by 1.7 percentage points compared to the counterfactual of immediate pass-through. - New interest rate adjustment mechanism in place since mid-2003 expected to strengthen response of domestic interest rates, though not instantaneous and not applying to all administered rates. - Authorities generally favored closer alignment but were not inclined to phase out administered savings schemes in the near term (partly used to finance social housing). ### Fiscal outlook, deficits, and public debt - Fiscal stance in 2003: supportive; deficit widened from 3.3 percent of GDP in 2002 to 4.1 percent of GDP in 2003. - For 2004–05: fiscal stance set to be moderately restrictive. - Fiscal measures implemented in early 2004 to boost consumption were judged unnecessary by staff but confidence-enhancing and with virtually no budget impact. - Agreement that all revenue windfalls from higher nominal growth in 2004 should be fully saved. - Authorities sold part of their stake in France Télécom in September (divestiture to reduce gross debt). - Near-term authorities' objectives: - Reduce overall deficit to less than 3 percent of GDP in 2005. - Reduce overall deficit to 2.5 percent of GDP in 2006. - On current projections, this implies only a modest structural adjustment: - Envisaged structural adjustment will be lower than originally targeted (0.6 instead of some 0.8 percentage point of GDP). - Achieving nominal targets would represent a cumulative structural adjustment of only about 0.5 percentage points of GDP over 2005–06. - Staff called for more ambitious consolidation. ### Fiscal consolidation strategy, sustainability scenarios, and projections - Authorities concerned with rising public debt and keen to resume fiscal adjustment. - Without adjustment, debt ratio vulnerable to significant increases over next five years, especially if growth faltered (standard debt sustainability analysis referenced). - Central government measures: freezing credits and postponing some expenditure to respect nominal budget limits; slippages continue in health care; delay in lowering duration of unemployment benefits will weigh on the budget. - Spending is falling as a share of GDP in part due to higher-than-projected inflation. - Text Table 1 (staff projections) key figures (selected): - Expenditure: 52.6, 53.6, 54.6, 53.8, 53.2, 52.8, 52.4, 51.8 (for years 2001–2008 as shown). - Revenue: 51.0, 50.3, 50.5, 50.5, 50.4, 50.3, 50.3, 50.3. - Tax revenue: 44.7, 43.8, 43.8, 43.8, 43.7, 43.6, 43.6, 43.6. - Balance: -1.6, -3.3, -4.1, -3.4, -2.8, -2.5, -2.1, -1.6. - Primary balance: 1.6, -0.2, -1.1, -0.4, 0.2, 0.5, 1.0, 1.5. - Structural balance: -2.1, -3.2, -3.2, -2.6, -2.1, -2.1, -1.8, -1.4. - Gross debt: 56.8, 58.8, 63.7, 64.3, 64.4, 64.4, 64.2, 63.4. - Fiscal sustainability scenarios (definitions): - Upfront consolidation: stabilizes debt-to-GDP ratio at the horizon when dependency ratio stabilizes; requires larger up-front adjustment. - Reform and consolidation: assumes structural reforms raising employment rate to 70 percent by 2010; public debt-to-GDP ratio stabilizes at a higher level, requiring less consolidation. - Fiscal sustainability implications (staff illustrations): - Assuming current structural reforms lower NAIRU to 7 percent in next 5 years, fiscal sustainability through up-front adjustment would require an overall structural surplus of 0.7 percent of GDP by 2008 — 2.2 percentage points more than under current policies. - A decisive reform strategy raising employment from 63.4 percent in 2003 to 70 percent by 2010 would require lowering the structural deficit to about 0.5 percent of GDP by 2008 — implying additional adjustment of 1 percentage point compared to current policies. - Without such reforms, staff recommended sustained expenditure-based adjustment at a pace somewhat more than three-quarters of 1 percent of GDP per year until a small structural surplus is achieved. - As future structural reforms pay off, further growth-enhancing tax cuts could be considered once a small, enduring structural surplus is achieved. ### Labor market, wage policy, and interaction with fiscal policy - Authorities recognized high budgetary cost of active labor market policies (mostly cuts in social security contributions and earned income tax credit), together estimated to amount to 1 percent of GDP by 2005. - These policies offset adverse consequences of high and rising minimum wages, the mandatory 35-hour workweek, and high marginal tax and benefit replacement rates. - A large step increase in the minimum wage (SMIC) scheduled in 2005: 3.8 percent in real terms, accompanied by partly offsetting cuts in social security contributions. - Options considered to mitigate budgetary impact: - (i) spreading the minimum wage increases over time; - (ii) narrowing the salary range over which social security contributions are reduced (currently reaches up to 1.7 times the SMIC); - (iii) reducing the upper income limit of the earned income tax credit; - (iv) reforming the workweek restrictions and employment protection. - Note: since the mission, option (i) was announced but then withdrawn, and option (ii) is now being pursued. - Staff recommendation: fund the new “social cohesion” plan out of existing resources and focus on reforming employment protection and entitlements to improve employment and fiscal outcomes. ### Health care, pensions, civil service reform, and decentralization - Consensus that effective health care, pension and civil service reforms and well thought-out decentralization are key avenues for fiscal consolidation. - Health care reform characterized as well designed; ultimate effectiveness depends on implementation. - Health care reform establishes instruments to gain control over the system’s budget by putting in place mechanisms that can adjust key parameters (details referenced to Box 3). _Italic line: Content derived from IMF staff report text in the provided chapter._ ### Box 3. Health Care Reform ### Box 3. Health Care Reform ### Health spending levels and trend - Total and public health care spending (three quarters of total) are relatively high in France. - Public spending rose by 4.7 percent per year between 1997 and 2004 (March), compared to a norm of 3 percent and disposable income growth of 3.3 percent. - Health care is generally perceived to be of high quality. ### Sources of spending pressure - Widening coverage. - Increasing tariffs of consultations. - Escalating prices of pharmaceuticals. - Mounting personnel costs due to the workweek reduction. - Rising service volumes related to technological progress and an increase in the share of population closer to death. ### 2004 comprehensive health care reform: objectives and mechanism - Aim: balance the books by 2007, while increasing quality and preserving equal access. - The reform introduces the possibility to modulate all key parameters governing the behavior of patients, medical professionals, and insurance agents. - Officially estimated budgetary savings of about €15 billion in 2007, equivalent to the ministry of health’s projection of the deficit before measures. ### Budgetary impact of measures (official estimates) - Lower expenditure (billions of euro): - Medical cost control 3.5 - Pharmaceuticals 2.5 - Hospital procurement 1.5 - Control sick leave 0.8 - Improve administration 0.5 - Cut financing costs 1.0 - Total: 9.8 - Higher revenues (billions of euro): - Copayment €1 0.65 - Enterprise tax (C3S) 0.78 - Increase in social security contributions of retirees; workers; financial services; and lotteries (CSG) 2.29 - Contribution of the state 1.0 - Increase of copayment hospital 0.3 - Total: 5.0 ### Assessment of reform adequacy and risks - The measures appear insufficient to eliminate the projected budget deficit, which itself may be underestimated. - Uncertainties and caveats: - The impact of expenditure control measures is highly uncertain. - Transfers from the state do not lower the general government deficit. - Higher costs of operating an improved administration of the health care system have not been taken into account. - CNAM projects the system’s trend deficit before measures to reach €23 billion by 2007. - General perception: initial parameters chosen were too timid to ensure the stated objective of a return to balance of the health system’s budget by 2007; estimating the budgetary impact of measures designed to affect behaviors was difficult. ### Related fiscal and public sector issues - Pensions: - The 1993 and 2003 pension reforms have brought the projected costs of aging in France to well below the euro-area average and established regular five-year reviews to secure the system’s sustainability. - Staff argued for phasing out early retirement schemes and reducing the generosity of some special retirement regimes, particularly when funded by the taxpayer. - Civil service hiring: - The nonreplacement of retiring civil servants had so far been used only symbolically, far short of the guideline that on average only one out of two positions should be retained. - Of about 60,000 retiring civil servants in 2005, only 8,000 are not to be replaced. - Personnel expenses topping 40 percent of the budget envelope (Table 4) — authorities agreed more efforts were needed but political appetite was lacking. - Decentralization: - Authorities saw decentralization as an opportunity to tailor public services and achieve efficiency gains, but staff urged sufficient fiscal autonomy and own resources to local governments. - Staff suggested a local surcharge on either the personal income tax or the general social security contribution (CSG); authorities were concerned about implementation difficulties. - Tax structure and the taxe professionnelle (TP): - Authorities reluctant to make wholesale tax-structure changes; the TP—suspended in January 2004 initially for 18 months and now through end-2005—is a major source of financing for local governments. - Staff suggested more reliance on charges and fees, higher real estate taxes, and abolition of preferential VAT rates to replace some of the TP, proposals met with little enthusiasm. ### Rules for cyclical windfalls and fiscal framework reforms - Authorities proposed enshrining a mechanism to avoid permanent tax cuts from cyclical windfalls: earmark at least two-thirds of higher-than-budgeted revenues for deficit reduction, limit use of remainder to temporary tax cuts or investment spending, and only in the year following the windfall. - Staff advocated full play of automatic stabilizers and warned authorities’ proposed rule was asymmetrical and procyclical; staff simulations showed application of the rule even with permanent tax cuts or spending increases would lead to a structural budget deterioration over a typical cycle of about 0.1 percentage point of GDP per year. - Authorities asserted no windfalls would be spent in 2004 and until the deficit fell below an acceptable threshold. - Other fiscal-framework measures under way or consideration: - New budget law to be fully applied in 2006 requiring zero-base budgeting and multi-year programming for spending agents. - Multiyear budgeting approach for social security and an internal stability pact with local authorities under consideration. - Authorities saw merit in establishing an independent agency for forward-looking budget assessments. - Staff called for higher frequency of publication of government accounts, including by sub-levels, to improve transparency and accountability. ### Labor and product market context and reform priorities - Key weaknesses: low participation and employment rates, declining numbers of hours worked, adverse demographics reducing the labor force, declining total factor productivity growth. - Contributing factors: high minimum wages pricing the low-skilled out of employment, high replacement income reducing labor supply. - Staff recommendations: - Comprehensive reform of labor market institutions to raise labor utilization. - Reshape employment protection to clarify the role of the judiciary and reduce firing costs. - Reorient entitlement system toward encouraging job search. - Indexation of benefits and minimum wages should be linked to underlying inflation and not to wages. - Shorten duration of benefits where appropriate. - Emphasize active labor market policies focused on training, especially on-the-job, and facilitate hiring of low-skilled youth. - Authorities’ response: - Several reforms under way or under consideration; lowering of benefits and replacement rates seen as counter to social solidarity. - Recent increases in benefits and minimum wages helped sustain confidence and household consumption. - Extended possibility for social partners to negotiate derogations from the 35-hour workweek; allowed establishment of private employment agencies. - Defer modifications to social partners; staff emphasized adverse long-term effects of increased benefits and minimum wages. ### Youth unemployment, job mobility, and training (Box 4) - Observed fact: similar average unemployment rates in France and Germany mask large differences in youth unemployment; in France youth unemployment has been about twice as high. - Staff analysis: - Youth in France are not in a beneficial search-induced high-mobility equilibrium. - Returns to on-the-job experience are lower in France. - Job mobility and its contribution to wage growth are similar in Germany and France; “between-jobs” wage growth contributes similarly to wage growth of young workers in both countries. - Differences in time spent working due to unemployment spells insufficient to explain lower on-the-job wage growth in France. - Lower returns to experience likely a partial culprit; workers with vocational and intermediate education might be undertrained in France compared to Germany. - Implication: more explicit training arrangements may be beneficial, provided costs are shared between worker and employer. - Social cohesion program critique: - Program aims to move large number of young unskilled unemployed into jobs combined with training with exoneration from social security contributions. - Public sector jobs will be created for 100,000 of them. - Staff argued for a better balance between rights and obligations to enhance focus on moving people into market jobs. - Recent measures to promote training contain elements moving in the direction recommended. ### Product market reform and state involvement - Progress: regulatory burden eased, formalities for creating new enterprises simplified, network industries opened to cross-border competition, statutes of EDF/GDF changed to allow private participation (while retaining majority stake), Agence de Participations de l’Etat strengthened governance of state participation, divestiture accelerated. - Authorities intend to modify legislation to strengthen competition in the retail distribution sector. - Staff concerns: - Criticized emphasis on “national champions” and state support in certain mergers and rescues as reducing competition and deterring private investors. - New bankruptcy law expected to ease restructuring and reduce need for state rescue operations. ### Financial sector assessment and FSAP recommendations - FSAP findings: supervision and oversight of the financial sector are of high standard; supervisory staff highly qualified. - With economic upturn, corporate deleveraging, and equity markets well above post-bubble lows, banks and insurance companies saw profitability and solvency strengthen. - No immediate systemic risks on present analysis, but recommendations included: - Diminish state influence over savings allocation through administered savings schemes and fiscal incentives, with a view to orderly phasing out and reducing distortions. - Preserve strong competition given system concentration; improve disclosure and pricing transparency for banking services. - Separate postal office’s banking activities and subject them to standard prudential requirements; newly created bank should be put on a “level-playing field”. - Eliminate notion of "national champions" and introduce the positive credit registry to enhance competition and availability of financial services. - Monitor corporate governance and risk-taking of banks, particularly when they expand into unfamiliar activities; reduce barriers to return of profits to owners to ease pressure to overexpand. - Improve creditor rights to facilitate credit provision; reform corporate bankruptcy legislation to clarify and limit creditor liability while enhancing survival chances of troubled companies; allow banks to write off nonperforming loans without jeopardizing legal claim on debtor. - Further improve AML/CFT framework implementation in areas such as UN Security Council Special Resolution on terrorism financing, quality of suspicious transaction reporting, AML/CFT regulation/supervision/enforcement for sectors beyond credit institutions and certain investment firms, and criteria for increased diligence by financial institutions. *Source: _cr04343 - Box 3. Health Care Reform — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04343.pdf* ### 29. There was consensus that the financial sector should be made more efficient by ### 29. There was consensus that the financial sector should be made more efficient by ### Financial-sector efficiency and administered savings - Consensus to make the financial sector more efficient by reducing state intervention. - Staff analysis suggests that administered savings schemes: - interfere with monetary transmission and efficient resource allocation (see Selected Issues paper). - entail tax exemptions that cost the budget about 0.25 percentage point of GDP per year. - Usury rates: - are set at four-thirds of actual average interest rates. - exclude some segments of the population from access to financial services, especially when interest rates are low. - Authorities expressed increased readiness to contemplate changes in administered savings schemes and to lift other restrictions (examples cited): - interdiction of remuneration of sight deposits. - obligation to provide checks free of charge. - Authorities emphasized: - need for full and swift implementation of measures to promote disclosure and transparency of pricing of financial services. - recent increases in bank fees were viewed as a normalization rather than an indication of lack of competition. - creation of a postal bank would level the playing field in terms of supervision because financial services hitherto provided by the post office would be subject to regular supervision. ### Mortgage, consumer credit, and financial innovation - Removal of obstacles to financial innovation in mortgage and consumer credits is likely to be welfare improving. - Authorities considered the French savings ratio as structurally too high and were reviewing options to facilitate household access to asset-backed credits such as mortgages and home equity loans. - Impediments identified: - no legal obstacles, but cumbersome and expensive approval procedures. - problems in seizing collateral. - Supervisory authorities' concerns: - volatility of asset prices and its repercussions on the amplitude of cyclical fluctuations in demand and banks’ and households’ financial stability. - emphasis on safeguards in the use of instruments such as home equity loans. ### Anti–money laundering, trade policy, and official development assistance - France continues to strengthen its framework to combat money laundering and terrorist financing and remains proactively involved at European and international levels, but further efforts are needed. - The OECD judged France’s legal framework as conforming to the anti-bribery convention’s requirements, but called for further strengthening of measures for more effective prevention and sanctioning of bribery of foreign public officials. - Trade policy stance: - Authorities supported the Doha round but pressed for a “balanced” result and emphasized concerns that other major trading nations had not drawn equivalent responses to EU initiatives (notably abolition of agricultural export subsidies). - Singapore issues—trade facilitation and protection of foreign investment—remained important. - Authorities warned that unfettered trade liberalization might not benefit developing countries lacking ability to compete in global markets. - France favored development of local agricultural production in Africa, preferential trade agreements with the ACP countries, insurance mechanisms against volatility in certain agricultural prices such as cotton, and closer regional cooperation reinforced by regional customs unions. - Staff pressed for a constructive approach toward the WTO framework agreement then under negotiation and encouraged early implementation in France of CAP reform (currently set for 2007). - Official development assistance (ODA): - Authorities were determined to further increase ODA from the 2003 level of 0.41 percent of GNP to the U.N. target of 0.7 percent of GNP in 2012. - Current level noted as the highest among G-7 countries and concentrated in Africa. ### Staff appraisal — macroeconomic outlook and policy priorities - Recovery and reforms: - Economy has staged a strong recovery and key reforms are making headway in tackling the costs of aging, but serious challenges persist to secure higher potential growth and long-term fiscal sustainability. - Recovery driven by domestic demand and aided by implementation of key structural reforms; pension reform accomplished last year and health care reform adopted. - Growth and monetary conditions: - Growth is set to average about 2½ percent per year during 2004–05, with risks broadly balanced and stemming predominantly from the external side. - Monetary conditions likely to remain quite accommodative as domestic demand is running ahead of that of the rest of the euro area. - Fiscal consolidation and sustainability: - Securing long-run fiscal sustainability requires growth-enhancing structural reforms and up-front fiscal consolidation. - In absence of reforms that raise labor utilization without burdening the budget, up-front consolidation should be pursued at a pace such as to achieve a small structural surplus by the end of the decade when the costs of aging set in. - Even with a more decisive reform agenda, consolidation efforts need to be strengthened compared to current plans. - Once a reasonable fiscal down payment has been made and the structural balance is in a durable small surplus, a larger share of spending restraint should be allocated to growth-enhancing tax cuts. - Labor market reform priorities: - Fundamental overhaul of labor market policies required to resolve tension between raising labor utilization and achieving fiscal consolidation. - Priority changes: modify the employment protection regime and the role of the judiciary in layoffs. - Shift entitlement focus from income support to moving people into market jobs. - Real increases in minimum wages and benefits should be avoided to prevent exclusion of potential workers or welfare recipients from activity. - Any new labor market programs should be funded by redeployment of existing resources (noted specifically for the new “social cohesion” program). - Ongoing initiatives to tighten job-search requirements, establish private employment agencies, and reduce duration of unemployment benefits will improve labor market performance with likely positive effects on the budget. - Near-term budget outlook: - Near-term nominal budget objectives appear within reach but are unambitious in terms of structural adjustment, especially given the stronger-than-envisaged recovery. - Targeted reduction of the deficit to just below 3 percent of GDP in 2005 should be feasible but would represent little structural adjustment. - Targets for 2005 and beyond should be made more ambitious. - Potential measures: advancing and strengthening health care reforms; reducing size of the civil service in context of ongoing wave of retirements; well-designed decentralization to achieve efficiency improvements. - Fiscal framework enhancements: - Ongoing implementation of an output-oriented budget law provides an improved framework to control spending. - Recommendations: implement multiannual social security budgets and an internal stability pact with local authorities; set multiyear spending ceilings for the general government in terms of the level of spending; consider establishing an independent agency to conduct forward-looking budget assessments; increase frequency of publication of general government accounts. - Favor a fiscal rule that permits full rather than partial operation of automatic stabilizers to enable broadly symmetrical cyclical policy behavior. - Tax and expenditure policy: - Reducing the tax burden is desirable while modifications in the tax structure could yield efficiency gains. - Phasing out the tax on capital (taxe professionnelle) is desirable but will require finding alternative options for local authority financing because it raises considerable revenues. - Options to explore: relying more on user fees, increasing intake from real estate taxes, phasing out VAT exemptions and reduced rates, placing a local surcharge on a broad revenue base. - Product-market reforms and competition: - Ongoing efforts to lighten regulatory burden, simplify administrative procedures, and promote divestiture are welcome. - Reform of the EDF/GDF statute is a major step forward. - Government should withdraw from commercial activities as market conditions permit. - Reform of corporate bankruptcy legislation will clarify and limit creditor liability and enhance survival chances of troubled companies. - More needs to be done to strengthen competition by improving price transparency in financial services and closing the transposition gap of EU directives. - Emphasis on “national champions” is discouraged as it risks manipulation by vested interests. - Financial system assessment: - This year’s FSAP confirmed the resilience of France’s financial system and high quality of oversight and prudential supervision. - Stress tests point to a resilient system and no systemic weaknesses were identified. - Continuing vigilance is needed, especially concerning potentially risky bank expansions; cooperation among supervisory agencies could be strengthened. - Identified weaknesses to address: system for countering money laundering and the financing of terrorism, and the payment systems area. - Policy recommendations summarized: - Phase out remaining administrative interventions in the financial system to improve resource allocation and economic dynamism. - Achieve social goals pursued through administered savings schemes more efficiently and at lower budget cost and with less drag on monetary policy transmission. - Lift limits on lending interest rates and restrictions on remunerating sight deposits and charging for the use of checks. - Develop mortgage-based lending further by lowering refinancing costs and removing cumbersome regulations. - Fully associate with efforts to bring the Doha round to a successful conclusion, supporting comprehensive liberalization of agricultural markets. - Move forward with national implementation of the June 2003 reform of the CAP. - Continue contribution to development through relatively high level of ODA and intention to reach the UN target by 2012. *Source: _cr04343 - 29. There was consensus that the financial sector should be made more efficient by* ### 45. It is proposed that the next Article IV consultation take place on the standard ### _cr04343 - 45. It is proposed that the next Article IV consultation take place on the standard ### Article IV consultation cycle - The next Article IV consultation is proposed to take place on the standard 12-month cycle. - The last Article IV consultation was concluded on October 8, 2003. France is on the standard 12-month consultation cycle. ### Main economic indicators: demand and supply (2000-09, annual percentage change unless otherwise indicated) - Gross domestic product: 4.2, 2.1, 1.1, 0.5, 2.6, 2.3, 2.2, 2.2, 2.1, 2.1 (2000-2009) - Private consumption: 2.9, 2.8, 1.8, 1.7, 2.5, 2.5, 2.3, 2.2, 2.2, 2.2 - Public consumption: 3.0, 2.9, 4.6, 2.5, 3.0, 1.9, 1.4, 1.4, 1.4, 1.4 - Gross fixed investment: 8.4, 2.1, -1.8, 0.1, 4.4, 5.4, 3.9, 3.3, 3.0, 3.0 - Business investment: 9.7, 3.1, -3.7, -1.5, 5.0, 6.9, 5.6, 4.6, 4.1, 4.1 - Residential investment: 3.4, 0.8, 0.8, 0.6, 3.8, 3.9, 1.3, 1.0, 1.0, 1.0 - Public investment: 10.8, -0.2, 1.8, 5.8, 3.0, 2.0, 1.3, 1.2, 1.2, 1.2 - Stockbuilding (change as percentage of previous year's GDP): 0.4, -0.6, -0.2, -0.2, 0.6, -0.3, -0.1, 0.0, 0.0, 0.0 - Total domestic demand: 4.5, 2.0, 1.5, 1.4, 3.6, 2.6, 2.3, 2.3, 2.2, 2.2 - Foreign balance (contribution to GDP): -0.2, 0.1, -0.4, -0.8, -1.0, -0.3, -0.1, -0.1, -0.1, -0.1 - Exports of goods and NFS: 13.4, 1.9, 1.7, -2.7, 4.8, 7.9, 6.8, 6.6, 6.5, 6.5 - Imports of goods and NFS: 15.2, 1.6, 3.3, 0.3, 8.3, 8.8, 6.9, 6.8, 6.6, 6.6 ### Prices and inflation - GDP deflator: 0.7, 1.7, 2.4, 1.4, 2.0, 1.9, 1.7, 1.6, 1.6, 1.6 - Consumer prices (average, Harmonized CPI): 1.8, 1.8, 1.9, 2.2, 2.4, 2.1, 1.8, 1.6, 1.6, 1.6 - Consumer prices (end of period, for 2004 year on year, July): 1.7, 1.4, 2.2, 2.4, 2.6 ### Employment, wages, productivity, and labor costs - Employment (annual change): 2.7, 1.7, 0.7, 0.0, 0.3, 0.9, 1.0, 0.6, 0.3, 0.3 - Unemployment (percent of labor force; harmonized index): 9.3, 8.5, 8.9, 9.4, 9.4, 9.0, 8.4, 8.0, 7.6, 7.5 - Productivity (GDP over total employment): 1.5, 0.4, 0.4, 0.5, 2.4, 1.4, 1.2, 1.6, 1.7, 1.7 - Unit labor costs (whole economy): 0.8, 2.8, 2.5, 1.8, 0.8, 1.9, 1.9, 1.6, 1.5, 1.6 - Output in manufacturing: 6.7, 3.1, -0.2, -0.1, 4.0, 4.5, 4.0, 4.0, 4.0, 4.0 - Hourly labor compensation in manufacturing: 4.3, 2.5, 3.7, 2.5, 3.7, 4.0, 4.0, 4.0, 4.0, 4.0 - Unit labor costs in manufacturing: -2.8, 0.3, 1.4, -0.5, -0.1, -0.1, 0.0, 0.0, 0.0, 0.0 ### Personal sector - Real disposable income (deflated by implicit deflator for private consumption): 3.4, 3.4, 2.5, 0.6, 1.7, 2.0, 2.1, 2.2, 2.1, 2.1 - Savings ratio (percent of household disposable income): 15.7, 16.2, 16.8, 15.8, 15.1, 14.6, 14.5, 14.5, 14.4, 14.4 ### Output gap and potential output growth - Output gap (percent of potential GDP): 1.2, 1.0, 0.0, -1.5, -1.1, -1.0, -0.7, -0.4, -0.2, 0.0 - Rate of growth of potential output: 2.4, 2.4, 2.3, 2.0, 2.3, 2.3, 1.9, 1.9, 1.9, 1.9 ### Balance of payments (billions of euros and percent of GDP) - Trade balance (billions of euros): -3.6, 3.9, 8.0, 1.6, -16.3, -20.6, -20.9, -22.5, -23.6, -24.7 - (in percent of GDP): -0.3, 0.3, 0.5, 0.1, -1.0, -1.2, -1.2, -1.2, -1.2, -1.2 - Current account (billions of euros): 19.5, 24.0, 15.4, 4.8, -10.5, -11.0, -9.8, -9.2, -8.9, -8.3 - (in percent of GDP): 1.4, 1.6, 1.0, 0.3, -0.6, -0.6, -0.6, -0.5, -0.5, -0.4 - Terms of trade (annual change): -2.7, 1.0, 2.8, 0.3, -1.3, 0.1, 0.3, 0.2, 0.2, 0.2 - Nominal effective exchange rate (index; Base 2000=100): 100.0, 100.4, 101.2, 104.7 - Real effective exchange rate (index; Base 2000=100): 100.0, 98.9, 99.7, 102.6 ### Public sector accounts (percent of GDP) - Revenue: 51.2, 51.0, 50.3, 50.5, 50.5, 50.4, 50.3, 50.3, 50.3, 50.3 - Expenditure: 52.6, 52.6, 53.6, 54.6, 53.8, 53.2, 52.8, 52.4, 51.8, 51.3 - General government balance: -1.4, -1.6, -3.3, -4.1, -3.4, -2.8, -2.5, -2.1, -1.6, -1.0 - Structural balance: -2.0, -2.1, -3.2, -3.2, -2.6, -2.1, -2.1, -1.8, -1.4, -1.0 - Primary balance: 1.8, 1.6, -0.2, -1.1, -0.4, 0.2, 0.5, 1.0, 1.5, 2.1 - Gross debt: 57.1, 56.8, 58.7, 63.7, 64.3, 64.4, 64.4, 64.2, 63.4, 62.2 ### Table highlights and sources - Table 1: France: Main Economic Indicators, 2000-09 (projections through 2009). Sources: Bank of France; data provided by the authorities; and IMF staff estimates. Notes include data sources and definitions for harmonized CPI, employment, productivity, etc. - Table 2: France: Vulnerability Indicators, 1999-2004 includes external indicators (exports/imports changes in U.S. dollars), market indicators (public sector debt, yields), credit market growth rates, sectoral risk indicators, and banking sector metrics (e.g., share of mortgage credit, nonperforming loan ratios). Selected figures: - Public sector debt (Maastricht definition): 57.2, 56.8, 58.8, 63.7 (years shown) - 3-month T-bill yield: 4.9, 3.3, 2.9, 2.2, 2.1 (various years; July) - Total reserves minus gold (end-of-period, billions of U.S. dollars): 37.0, 31.7, 28.4, 30.2, 33.3 (July) - Credit to the private sector (end-of-period 12-month growth rates): 9.6, 6.0, 4.0, 5.3, 6.4 (June) - Household savings ratio (March): 15.7, 16.2, 16.8, 15.8, 15.2 - Share of nonperforming loans in total loans: 5.0, 5.0, 5.0, 4.8 - Regulatory capital to risk-weighted assets: 11.9, 12.1, 12.3, 12.6 ### Public debt sustainability framework (Table 3, 1999-2009; percent of GDP unless otherwise indicated) I. Baseline projections and key macro-fiscal assumptions - Public sector debt (percent of GDP): 58.5, 57.1, 56.8, 58.7, 63.7, 64.3, 64.4, 64.4, 64.2, 63.4, 62.2 (1999-2009; 2050: 88.0) - Debt-stabilizing primary balance: 0.8 (2050 column) - Change in public sector debt: -1.0, -1.4, -0.3, 1.9, 4.9, 0.6, 0.1, 0.1, -0.3, -0.8, -1.3 - Identified debt-creating flows (4+7): -0.3, -1.4, -0.6, 1.3, 3.0, 0.5, 0.1, 0.1, -0.3, -0.8, -1.3 - Primary deficit (percent of GDP): -1.6, -1.8, -1.8, 0.1, 1.1, 0.4, -0.2, -0.5, -1.0, -1.5, -2.1 - Revenue and grants (percent of GDP): 51.8, 51.2, 51.0, 50.3, 50.5, 50.5, 50.4, 50.3, 50.3, 50.3, 50.3 - Primary (noninterest) expenditure (percent of GDP): 50.3, 49.4, 49.3, 50.4, 51.6, 50.8, 50.2, 49.8, 49.3, 48.7, 48.2 - Automatic debt dynamics contribution: 1.2, 0.4, 1.1, 1.2, 1.9, 0.1, 0.3, 0.6, 0.7, 0.8, 0.8 - Contribution from interest rate/growth differential: 1.2, 0.4, 1.1, 1.2, 1.9, 0.1, 0.3, 0.6, 0.7, 0.8, 0.8 - Contribution from real interest rate (of which): 3.1, 2.8, 2.3, 1.8, 2.2, 1.7, 1.8, 1.9, 2.1, 2.1, 2.1 - Contribution from real GDP growth (of which): -1.9, -2.3, -1.2, -0.6, -0.3, -1.6, -1.4, -1.4, -1.3, -1.3, -1.3 - Residual, including asset changes (2-3): -0.7, 0.0, 0.4, 0.6, 1.9, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0 - Public sector debt-to-revenue ratio: 112.9, 111.6, 111.3, 116.8, 126.1, 127.4, 127.8, 128.2, 127.7, 126.2, 123.7 - Gross financing need (percent of GDP): 1.8, 1.4, 1.5, 3.3, 4.1, 3.4, 2.8, 2.5, 2.1, 1.6, 1.0 - Gross financing need (in billions of U.S. dollars): 25.5, 18.4, 20.2, 47.0, 73.0 Key macroeconomic and fiscal assumptions (selected) - Average real GDP growth (in percent): historical and projected values include 3.2, 4.2, 2.1, 1.1, 0.5, 2.1, 1.2, 2.6, 2.3, 2.2, 2.2, 2.1, 2.1, 2.3 - Average nominal interest rate on public debt (in percent): 5.8, 5.8, 5.9, 5.7, 5.3, 6.5, 1.0, 4.9, 4.9, 4.8, 5.0, 5.0, 5.1, 5.0 - Average real interest rate (nominal rate minus change in GDP deflator, in percent): 5.4, 5.0, 4.2, 3.3, 3.8, 5.1, 1.0, 2.9, 2.9, 3.2, 3.4, 3.4, 3.5, 3.2 - Inflation rate (GDP deflator, in percent): 0.4, 0.7, 1.7, 2.4, 1.4, 1.4, 0.6, 2.0, 1.9, 1.7, 1.6, 1.6, 1.6, 1.7 - Growth of real primary spending (deflated by GDP deflator, in percent): 3.3, 2.4, 1.8, 3.4, 2.9, 2.1, 0.8, 1.2, 1.0, 1.5, 1.1, 1.0, 1.0, 1.1 - Primary deficit (percent of GDP, repeated): -1.6, -1.8, -1.8, 0.1, 1.1, -0.2, 1.4, 0.4, -0.2, -0.5, -1.0, -1.5, -2.1, -0.8 II. Stress tests and alternative scenarios (selected projected public debt paths, percent of GDP) - Baseline (2005-09): 64.3, 64.4, 64.4, 64.2, 63.4, 62.2 - A1. Key variables at historical averages in 2005-09: 64.3, 65.9, 67.6, 69.3, 71.1, 73.0 - A2. No policy change (constant primary balance) in 2005-09: 64.3, 64.9, 65.9, 67.0, 68.2, 69.4 - B1. Real interest rate at historical average plus two standard deviations in 2005 and 2006: 64.3, 67.0, 69.7, 69.5, 68.8, 67.6 - B2. Real GDP growth at historical average minus two standard deviations in 2005 and 2006: 64.3, 67.3, 71.7, 74.0, 75.8, 77.2 - B3. Primary balance at historical average minus two standard deviations in 2005 and 2006: 64.3, 67.2, 70.5, 70.3, 69.6, 68.4 - B4. Combination of 2-4 using one standard deviation shocks: 64.3, 68.7, 73.5, 73.3, 72.6, 71.5 - B5. One time 30 percent real depreciation in 2005: 64.3, 64.4, 64.4, 64.2, 63.4, 62.2 - B6. 10 percent of GDP increase in other debt-creating flows in 2005: 64.3, 74.4, 74.5, 74.4, 73.7, 72.6 ### General government accounts (Table 4, 1996-2003; in billions of euros) - Revenue (1996-2003): 623.1, 649.7, 668.4, 701.9, 728.0, 753.3, 768.6, 786.6 - Tax revenue: 542.5, 562.8, 584.9, 616.1, 638.4, 658.9, 668.2, 682.6 - VAT: 92.4, 96.3, 99.2, 102.6, 104.5, 106.2, 108.4, 109.0 - Income tax: 43.3, 40.2, 41.8, 46.3, 49.8, 48.7, 45.8, 46.7 - Corporate tax: 21.8, 26.3, 28.7, 34.4, 37.7, 44.3, 39.7, 37.4 - TIPP: 22.6, 22.8, 23.5, 24.7, 24.3, 23.6, 24.4, 23.4 - Nontax revenue: 80.6, 86.9, 83.5, 85.8, 89.6, 94.4, 100.4, 104.0 - Expenditures (1996-2003): 672.5, 687.7, 703.2, 725.8, 748.0, 775.8, 818.4, 851.1 - Salaries: 168.5, 172.7, 178.9, 185.6, 191.7, 199.2, 209.2, ... - Pensions: 121.2, 125.1, 129.3, 134.2, 137.8, 144.6, 149.6, ... - Health expenditure: 65.5, 66.3, 69.2, 70.5, 76.7, 81.2, 87.0, ... - Other social transfers: 104.2, 110.1, 111.0, 113.8, 115.0, 116.6, 128.3, ... - Balance and debt (1996-2003): Balance -49.4, -38.0, -34.9, -23.9, -20.0, -23.8, -50.4, -64.6; Primary balance -1.7, 8.3, 11.9, 21.1, 25.7, 23.7, -2.3, -17.3 - Gross debt (1996-2003): 691.8, 741.6, 777.3, 792.1, 812.1, 838.7, 897.5, 992.1 - Interest payments (1996-2003): 47.7, 46.3, 46.8, 45.0, 45.7, 47.5, 48.1, 47.3 - Memorandum: Nominal GDP (annual national accounts; Maastricht definition): 1,212.2, 1,251.2, 1,305.9, 1,355.1, 1,420.1, 1,475.6, 1,526.8, 1,557.2 ### Fund relations and financial positions (as of June 30, 2004) - Membership status: Joined December 27, 1945; Article VIII. - Quota: 10,738.50 SDR Million, 100.00 percent of quota. - Fund holdings of currency: 6,709.06 (62.48 percent of quota) - Reserve position in Fund: 4,029.39 (37.52 percent of quota) - SDR Department net cumulative allocation: 1,079.87 SDR Million (100.00 percent) - Holdings: 536.97 (49.73 percent) - Outstanding purchases and loans: None. Latest financial arrangements: None. - Projected payments to Fund (SDR million; forthcoming): - Charges/interest: 4.92 (2004); 9.96 (2005); 9.96 (2006); 9.96 (2007); 9.99 (2008) - Total: 4.92 (2004); 9.96 (2005); 9.96 (2006); 9.96 (2007); 9.99 (2008) - Exchange rate arrangements: Since January 1, 1999, France has participated in Stage III of the European Economic and Monetary Union (EMU). Certain payment and transfer restrictions are maintained per EU regulations and UN Security Council resolutions for specified countries and individuals; measures to freeze accounts of listed persons and entities linked to terrorists have been taken. ### FSAP participation, ROSC, and statistical capacity - Financial System Assessments / ROSC publications (dates and report numbers listed for Transparency in Monetary and Financial Policies; Fiscal Transparency Module; Data Module). - Statistical information assessment: - France’s economic database is comprehensive and of high quality; authorities regularly publish a full range of economic and financial data. - France is a subscriber to the Special Data Dissemination Standard (SDDS) and posts metadata on the Fund’s DSBB. - Monetary and banking statistics methodology changed since 1999 to reflect EMU standards; statistics for International Financial Statistics are prepared monthly and are timely. - France adopted ESA95 in 1999. GDP and components available since 1978; household, corporate, and public administration accounts available since 1992. Annual national accounts aggregates are produced on a quarterly and annual basis with slight differences due to revision practices. - Recent data issues: need to provide monthly or quarterly developments for central government finances and for social security and local governments on a national accounts basis to facilitate monitoring of public finances. *Prepared by the European Department; Staff Report for the 2004 Article IV Consultation, Supplementary Information (Approved October 15, 2004).* ### 1. This supplement to the staff report for the 2004 Article IV consultation with ### This supplement to the staff report for the 2004 Article IV consultation with France ### Executive update and context - Supplement provides an update on recent developments, notably the authorities’ 2005 budget proposal and medium-term fiscal plans; new information does not alter the thrust of the staff appraisal. - Confidence surveys confirm the strength of domestic demand, but recent indicators are somewhat mixed and a surge in oil prices has lowered the growth outlook. - Headline and underlying inflation (12-month rates) both eased in September to 2.2 percent and 1.6 percent, respectively. - EU Court of Justice ruled that the French prohibition of paying interest on sight deposits represents a restriction to the freedom of establishment guaranteed by the EC Treaty. - The Camdessus report (to be issued October 15) is expected to contain comprehensive recommendations on how to lift obstacles to growth; authorities intend to draw on it for action. ### Growth outlook and recent indicators - Authorities’ budget foresees steady growth of 2.5 percent in both 2004 and 2005; staff now expects a deceleration in 2005 to 2.2 percent reflecting a new, higher oil price baseline. - Recent data: consumer and business confidence improved; stocks are below average; perceived inflation has been falling; employment has so far failed to pick up; nonenergy industrial production growth slowed in August; trade balance posted a large deficit. - Notes on calendar adjustment: authorities’ estimate is calendar-day adjusted; because 2004 has 255 working days vs. 252 in 2003, actual nonadjusted growth could be 0.2–0.3 percentage points higher. Staff’s 2004 projection includes a 0.2 percentage point calendar effect. ### 2005 draft budget: targets and composition - Budget objective: reduce general government deficit from 3.6 percent of GDP in 2004 to 2.9 percent of GDP in 2005. - Measures relied upon: - Expenditure restraint at central government level. - Savings from the health care reform. - Transfer of the electricity company (EDF) pension fund (“soulte”) to the central government, counted as a 0.4 percentage point of GDP transfer in 2005. - Real expenditure growth planned at 1.6 percent in 2005 (same as estimated for 2004). - Health care spending: nominal growth projected to decelerate from 5.2 percent to 3.2 percent in 2005. - Civil service changes: reduction of 7,200 civil servants in 2005, corresponding to replacement of about 7 out of 8 retirees; some 60,000 civil servants are due to retire in 2005. - Revenue-side measures: - Exemption of new investments from the taxe professionnelle extended until end-2005. - Corporate income tax rate will decrease marginally. - Earned income tax credit (PPE) will rise by 4 percent. - Budget includes a number of small tax cuts and various new tax exemptions. - Net effect on tax burden: despite some tax cuts, tax burden rises marginally due to increases in social security contributions introduced by the health care reform. - Budget implements further steps toward the 2001 organic budget law emphasizing objectives, outputs, and quantitative performance indicators to increase transparency and accountability. - Proposed modification to organic law would require each budget law to contain an ex ante specification of the use of any revenue windfalls; original specificity on allocation (majority to debt reduction, remainder to temporary tax cuts or investment spending) was considered too specific by the Conseil d’État; allocation for 2005 remains under discussion. ### Medium-term (2006–08) fiscal plans and assumptions - Authorities intend to improve structural balance by about 0.5 percentage point of GDP per year. - Assumptions: - GDP growth of 2.5 percent per year (0.25 percentage point above authorities’ estimate of potential growth). - Overall real expenditure targeted to grow by 1.2 percent per year on average. - Recent health care reform expected to limit nominal growth of health spending to 3.6 percent per year during 2006–08. - Unemployment assumed to decline gradually; target to balance social security accounts by 2007. - Authorities estimate total underlying adjustment at about 2 percentage points of GDP over 2005–08, bringing the general government structural deficit to just below 1 percent of GDP by end-2008; staff estimates differ (see staff projections). ### Staff assessment: shortfall and risks - The draft 2005 budget falls well short of the staff’s recommended substantial structural adjustment, especially because it is not accompanied by further significant growth-enhancing reforms or durable spending restraint. - Nominal deficit: staff judges there is sufficient room to achieve the authorities’ 2.9 percent of GDP target with only marginal additional measures; under staff’s lower growth projections, the revised deficit estimate is 3.0 percent of GDP in 2005. - Structural effort (excluding EDF soulte) in the draft 2005 budget amounts to less than ¼ percent of GDP—about ½ percent of GDP less than staff advice. - Reduction in civil servants is welcome historically but remains limited given the large size and cost of public employment in France. - Health care reform is important for longer-term sustainability, but staff is skeptical about achieving nominal health care spending growth of 3.2 percent in 2005 without advancing or strengthening some measures. - Budget contains small tax cuts and exemptions that have little sustained effect on growth and employment and may increase tax niches contrary to announced intentions. ### Policy implications and recommended actions - Insufficient up-front adjustment increases the need for concrete and strengthened measures to achieve the underlying fiscal adjustment planned by 2008. - Under staff projections, an additional 1 percentage point of GDP of structural effort (excluding one-offs) will be necessary compared to authorities’ intentions, even in a strong reform scenario. - Given a record of spending overruns in social security and without more comprehensive spending reforms, doubts remain about feasibility of achieving the targeted slowdown in expenditure growth. - Reliance on a large one-off measure in 2005 (EDF transfer) makes the underlying structural adjustment more challenging, particularly in 2006. ### Key numeric highlights and projections (selected) - Inflation (12-month rates, September): headline 2.2 percent; underlying 1.6 percent. - GDP growth: authorities project 2.5 percent for 2004 and 2005; staff projects 2.5 percent in 2004 and 2.2 percent in 2005. - General government deficit: 3.6 percent of GDP in 2004; authorities’ 2005 target 2.9 percent of GDP; staff projects 3.0 percent of GDP in 2005. - EDF pension fund transfer: 0.4 percentage point of GDP in 2005. - Real expenditure growth: planned 1.6 percent in 2005. - Health care nominal spending growth: 5.2 percent (2004 estimate) decelerating to 3.2 percent in 2005; 3.6 percent per year in 2006–08 (authorities’ assumption). - Civil service reductions in 2005: 7,200 staff; about 60,000 retirements expected in 2005. - Authorities’ medium-term structural improvement target: about 0.5 percentage point of GDP per year over 2006–08. - Staff judgement on additional required effort: an additional 1 percentage point of GDP of structural effort over authorities’ plans (excluding one-offs). *IMF: Supplement to the staff report for the 2004 Article IV consultation with France (2005 budget and medium-term fiscal plans).* ### 2.2 percent in September, is seen to remain persistent, slowly moderating in the course of 2005. ### _cr04343 - 2.2 percent in September, is seen to remain persistent, slowly moderating in the course of 2005. ### Inflation outlook and short-term drivers - Headline inflation: "2.2 percent in September, is seen to remain persistent, slowly moderating in the course of 2005." - Factors continuing to influence inflation: - Base effects from the tobacco tax increase. - Changes in regulated prices. - Oil price volatility. - The price cut agreed by large distributors. ### Medium- and long-term growth constraints - Structural and demographic constraints: - Adverse demographics. - Structural weaknesses. - A high tax and regulatory burden. - Despite its increase in the 1990s, a low degree of labor utilization. ### Fiscal policy and budgetary projections - 2005 draft budget objectives: - Targets reduction in the general government deficit to "2.9 percent of GDP". - Continuation of decline from "3.6 percent of GDP in 2004" and a peak of "4.1 percent of GDP in 2003". - Structural balance: - Structural improvement of about "0.5 percentage point of GDP in 2004", achieved through expenditure restraint at the central government level. - Staff estimates structural balance to improve by "0.2 percentage point of GDP in 2005" (excluding the transfer of the electricity utility’s pension fund, equivalent to "0.4 percentage point of GDP"). - Expenditure and revenue dynamics: - Central government expenditure set to remain constant in real terms, while spending growth in other areas is relatively high. - Net tax burden rises marginally because the increase in contributions related to the health care reform is not fully offset by a variety of smaller tax cuts. - Civil service size set to decline: about "12 percent" of retiring civil servants will not be replaced. - Medium-term fiscal plans (2006–08): - Authorities plan a steady reduction in the structural deficit by "one-half of a percentage point per year on average", to reach a level of just below "1 percent of GDP by the end of the period". - Health care reform assumed to achieve a durable deceleration of annual nominal spending growth to "3.6 percent during 2006–08". - Volume of overall spending targeted to increase by "1.2 percent per year on average". ### Structural reforms and policy measures - Health care reform: - Established key instruments to gain control over the system’s budget, with adjustable parameters influencing revenues and behaviors of patients, providers, and insurance agencies. - Civil service reform and decentralization: - Ongoing reforms provide opportunity for efficiency gains and better tailoring of public services to local needs. - Product markets and public enterprises: - Statutes of the public electricity and gas companies changed, opening the door for private investment. - Authorities intend to accelerate divestiture from commercial activities as market conditions permit. - Steps being taken to accelerate transposition of EU internal market and competition directives. - Labor market measures: - Cuts in social security contributions set to continue to mitigate impact of rising minimum wages from implementation of the 35-hour workweek. - Social partners allowed to negotiate derogations from workweek regulations, including at the enterprise level. - Earned income tax credit has been raised. - Other changes to labor market institutions (notably employment protection) left to negotiations among social partners. - A “social cohesion” program adopted to bring people back to the labor market using fiscal incentives, closer administrative follow-up, and public sector employment schemes. ### Financial sector stability and supervision - Financial System Stability Assessment findings: - Found no immediate systemic financial sector risk. - Confirmed the high quality of oversight and prudential supervision of the financial sector. - Recommended further strengthening of supervision through enhanced coordination and vigilance on banks’ risk exposure. ### Executive Board assessment — key messages and recommendations - Commendations: - Directors congratulated the authorities for skillful pursuit of reform policies supporting early and robust economic recovery. - Welcomed resumption of structural fiscal adjustment in 2004. - Noted pension and health care reforms improved long-term fiscal outlook. - Fiscal policy guidance: - Urged authorities to build on performance by strengthening structural reforms and stepping up fiscal consolidation to secure higher long-term growth and fiscal sustainability. - Recommended proceeding decisively with fiscal adjustment and strengthening adjustment in 2005 compared to current budget plans. - Noted pension fund transfer from the electricity utility would be a one-off measure, not durable adjustment. - Suggested genuine structural adjustment through reinforced expenditure restraint, advancing and strengthening health care reform measures, and reducing large public employment by making more decisive use of retirements. - Considered intended cumulative fiscal consolidation by 2008 broadly appropriate but to be complemented by early implementation of comprehensive growth-enhancing reforms. - Stressed preserving cyclical revenue windfalls for fiscal consolidation and allowing full play of automatic stabilizers. - Tax and spending framework: - Stressed need for early fiscal adjustment and growth-enhancing structural reforms to create room for reduction in high tax burden. - Recommended consideration of changes in tax structure to yield efficiency gains and remove distortions, especially on capital and labor. - Questioned increased recourse to tax exemptions in the 2005 draft budget. - Welcomed implementation of the output-oriented budget law and efforts to address ingrained spending culture at central government level; recommended extension to social security and local authorities and setting multi-year limits on general government spending. - A few Directors considered establishing an independent agency to conduct forward-looking budget assessments would be useful. - Labor market reforms: - Emphasized need to reorient labor market policies away from heavy reliance on budgetary measures. - Called for comprehensive reforms of employment protection and benefits to sharpen incentives to work. - Viewed tightening job-search requirements and reducing duration of unemployment benefits as steps in the right direction. - Suggested reducing role of judiciary in layoffs, ensuring greater flexibility in workweek regulations, and slowing real increases in minimum wages and benefits. - Divergent views on “social cohesion” program: some Directors questioned public sector jobs role; a few felt it could help reconnect people and reduce structural unemployment and urged close monitoring of cost effectiveness. - Welcomed the Camdessus Commission report for far-reaching recommendations to enhance growth potential and reduce unemployment. - Product and financial market reforms: - Welcomed efforts to lighten regulatory burden, simplify administrative procedures, and promote divestiture of commercial activities. - Valued statutory changes enabling private capital participation in electricity and gas utilities. - Looked forward to pending reform of corporate bankruptcy legislation. - Recommended reforms in goods and labor markets and steps to strengthen competition to defend investor attractiveness rather than emphasis on "national champions." - Recommended continued vigilance on banks’ potentially risky expansions, intensified cooperation among supervisory agencies, improved price transparency in financial services, enhanced competition, and phasing out remaining administrative interventions in the financial system. - Welcomed France’s leadership on anti–money laundering and combating financing of terrorism and implementation of further reforms. ### External relations and development policy - Directors commended France’s contribution to official development assistance and looked forward to further increase toward the U.N. target level. - Encouraged France to promote efforts to bring the Doha round to a successful conclusion, particularly by supporting comprehensive liberalization of agricultural markets. - Several Directors suggested moving forward national implementation of the June 2003 reform of the Common Agricultural Policy would be helpful. ### Selected economic and social indicators (annual percentage change; unless otherwise indicated) - Real economy (change in percent): - Real GDP: 2000: "4.2", 2001: "2.1", 2002: "1.1", 2003: "0.5", 2004: "2.5" - Domestic demand: 2000: "4.5", 2001: "2.0", 2002: "1.5", 2003: "1.4", 2004: "3.5" - CPI (year average): 2000: "1.8", 2001: "1.8", 2002: "1.9", 2003: "2.2", 2004: "2.4" - Unemployment rate (in percent): 2000: "9.3", 2001: "8.5", 2002: "8.9", 2003: "9.4", 2004: "9.5" - Gross national savings (percent of GDP): 2000: "22.4", 2001: "22.1", 2002: "20.6", 2003: "19.3", 2004: "19.1" - Gross domestic investment (percent of GDP): 2000: "21.0", 2001: "20.4", 2002: "19.6", 2003: "19.0", 2004: "19.9" - Public finance (percent of GDP): - Central government balance: 2000: "-2.5", 2001: "-2.3", 2002: "-3.9", 2003: "-4.0", 2004: "-3.2" - General government balance: 2000: "-1.4", 2001: "-1.6", 2002: "-3.3", 2003: "-4.1", 2004: "-3.6" - General government gross debt: 2000: "57.1", 2001: "56.8", 2002: "58.7", 2003: "63.7", 2004: "64.7" - Money and interest rates: - M3 (end of year, percent change) 3/: 2000: "4.3", 2001: "10.9", 2002: "6.6", 2003: "6.4", 2004: "..." - Money market rate (in percent) 4/: 2000: "4.4", 2001: "4.3", 2002: "3.3", 2003: "2.3", 2004: "2.1" - Government bond yield (in percent) 5/: 2000: "5.5", 2001: "5.0", 2002: "4.9", 2003: "4.2", 2004: "4.2" - Balance of payments (percent of GDP): - Trade balance: 2000: "-0.3", 2001: "0.3", 2002: "0.5", 2003: "0.1", 2004: "-1.0" - Current account: 2000: "1.4", 2001: "1.6", 2002: "1.0", 2003: "0.3", 2004: "-0.8" - Official reserves (US$ billion) 6/: 2000: "37.0", 2001: "31.7", 2002: "28.4", 2003: "30.2", 2004: "30.6" - Fund position (as of August 31, 2004): - Holdings of currency (percent of quota): "64.3" - Holdings of SDRs (percent of allocation): "50.9" - Quota (SDRs million): "10,738.5" - Exchange rates: - Exchange rate regime: "Participant in EMU" - Euro per U.S. dollar (October 13, 2004): "1.23" - Nominal effective rate (2000=100): 2000: "100.0", 2001: "100.4", 2002: "101.2", 2003: "104.7", 2004: "105.3" - Real effective exchange rate (2000=100): 2000: "100.0", 2001: "98.9", 2002: "99.7", 2003: "102.6", 2004: "102.7" *Excerpted and organized from the IMF staff report text provided in the content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04343.pdf_