## _cr1024

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### Executive summary and key policy recommendations
- Norway’s economy has returned to growth after a comparatively short and mild recession.
- Financial sector has withstood the crisis well, although credit risks remain elevated.
- Staff advocated the following policy priorities:
  - (i) a gradual withdrawal of fiscal and monetary stimulus as the economic recovery takes hold;
  - (ii) reducing the structural nonoil deficit to the fiscal target within the current term of Parliament;
  - (iii) effective steps to curb large inflows into sickness and disability benefit schemes;
  - (iv) further strengthening of the prudential framework for the financial sector.
- Authorities agreed with the mission on the key policy priorities.
- Norway’s offshore hydrocarbon sector contributed an average 27 percent to total value added in the economy during 2005–08, accounting for nearly half of total exports and about one‑third of general government revenue; a large part of the revenue is saved in a sovereign wealth fund which invests the money in international financial markets.
- Norway has a freely floating exchange rate; the exchange system is free of restrictions on the making of payments and transfers for current international transactions other than restrictions notified to the Fund in accordance with Decision No. 144-(52/51).
- Norway’s official development assistance (ODA) amounted to 0.9 percent of national income in 2008 and 1 percent in 2009.

### Recent developments, aggregate outlook, and risks
- Economy entered the crisis from a very strong cyclical position: brisk oil sector activity, rising asset prices, and rapid credit growth had boosted domestic demand.
- Mainland GDP returned to growth in the second quarter of 2009 after three quarters of declining output.
- Unemployment: dropped to 2.5 percent before the crisis and increased only modestly to about 3 percent during the downturn (Executive Board cites 3.2 percent September–November 2009).
- Inflation: rapid wage growth and surging commodity prices pushed inflation well above the 2.5‑percent target by early 2008; subsequently headline and core CPI inflation have fallen below the target. CPI (average): 2008: 3.8; 2009: 2.2; 2010 (Proj.): 1.4.
- Policy responses: decisive interest rate cuts (policy rate lowered by 450 basis points to 1.25 percent by June 2009), large fiscal stimulus (discretionary stimulus close to 3 percent of mainland GDP in 2009), and timely measures to shore up financial intermediation.
- Exchange rate: sharp depreciation in late 2008 supported net exports; krone depreciated sharply in late 2008 but steadily appreciated during 2009, recouping most earlier losses. Staff estimates suggest the krone is broadly in line with fundamentals; MB equilibrium current account surplus around 14 percent of GDP.
- Outlook: Mainland growth projected at 2¼ percent for 2010. Private consumption expected to drive recovery supported by low interest rates, limited unemployment, and improved asset valuations. Contribution from net exports likely to turn negative as the krone has regained strength and domestic demand is picking up.
- Key risks: households’ high indebtedness, richly valued housing market, high domestic wage growth, exposures to shipping and commercial real estate, and potential deterioration in hydrocarbon export prices/volumes. Spillovers from financial shocks abroad have a significant effect on Norway’s economic growth.

### Housing, household and corporate balance-sheet risks
- Residential house prices fell 9 percent below their mid-2007 peak by end-2008, but have rebounded strongly since then.
- Based on April 2008 WEO methodology, Norway’s house prices appeared to be 5 to 10 percent overvalued in mid-2009.
- Household debt was close to 200 percent of disposable income at end-2008.
- Consumers raised their saving rates significantly in late 2008; footnote: the saving rate rose to 8 percent by the third quarter of 2009. (Figure caption: 2009Q1‑Q3: 7.4 percent.)
- More than 90 percent of mortgage loans are at variable rates. "Nearly a quarter of all newly originated mortgages, excluding refinancing, have loan-to-value ratios above 100 percent."
- Household credit‑servicing capacity remains relatively strong in current environment but could deteriorate if downside risks materialize or interest rates rose sharply.
- Corporate debt increased rapidly during the boom; nonfinancial corporates have started slowing debt accumulation. Commercial property accounts for about one third of all corporate loans; commercial property and shipping together account for about half of all commercial loans.

### Financial institutions: exposures, resilience, and policy response
- Domestic financial institutions experienced a severe liquidity shortage after Lehman’s bankruptcy, although there were no solvency issues.
- Norwegian banks rely on US dollar interbank markets and fund themselves through dollar loans and cross-currency swaps; drying up of these markets sharply diminished term funding availability.
- Measures introduced to ease liquidity conditions included:
  - extended maturities and relaxed collateral requirements for Norges Bank loans;
  - a swap program to provide banks with government securities in exchange for covered bonds;
  - direct provision of foreign-currency loans;
  - establishment of a Government Bond Fund to support liquidity and pricing in the corporate bond market.
- These measures helped stabilize markets: interbank lending spreads have come down, and demand for bonds has returned.
- Norwegian banks had negligible exposure to U.S. subprime mortgages and structured credit products; overall bank leverage is relatively low. Regulatory regime is relatively conservative: securitization essentially limited to covered bonds; investment banks subject to similar supervision and capital requirements as commercial banks.
- Structural vulnerability: dependence on foreign funding markets—short-term funding from abroad caused a liquidity squeeze when those markets seized up.
- About one-third of the domestic banking system is foreign-owned; DnB NOR controls almost 38 percent of overall bank/MCI assets and has about 25 percent of its total lending outside Norway (mostly in the Nordic region). Moody’s downgrading of several Nordic banks, including DnB NOR, occurred in mid-2009.
- Nonperforming loans increased from about ½ percent prior to the crisis to just above 1 percent of all loans in the third quarter of 2009.

### Prudential framework, macroprudential recommendations, and cross-country cooperation
- Staff recommended further strengthening of the prudential framework with emphasis on:
  - greater emphasis on the management of liquidity risks;
  - restraining excessive balance sheet growth (for example through adoption of a maximum gross leverage ratio).
- Authorities support EU-wide initiatives and effectiveness if "implemented simultaneously across the whole Nordic region."
- Crisis lesson: need for close cross-country cooperation in supervision, regulation, and resolution of internationally active banks. Memoranda of Understanding on cross-border financial stability and regional agreements (Nordic-Baltic, Norway–EU) provide a foundation for collaboration.
- Staff proposed that the next Article IV consultation be held on the usual 24-month cycle.

### Fiscal policy assessment and medium-term priorities
- 2009 fiscal stimulus: discretionary impulse of 3 percent of mainland GDP supplemented automatic stabilizers estimated at 2¼ percent of mainland GDP. Final Budget Revision for 2009 revised estimated fiscal impulse from 3.0 to 2.7 percent of mainland GDP.
- 2010 budget envisages modest additional stimulus by expanding the structural nonoil deficit by a further ½ percent of mainland GDP.
- Structural nonoil deficit: 2009–10 stimulus increased the structural nonoil deficit to 5.7 percent of the wealth fund capital. Staff recommended reducing the nonoil deficit to the fiscal target of 4 percent of wealth fund capital, preferably within the current term of Parliament (by 2013).
- Structural nonoil balance (percent of mainland trend GDP): 2009: -7.2; 2010 (Proj.): -7.8. Structural non-oil balance (in percent of Government Pension Fund-Global capital): 2009: -5.7; 2010 (Proj.): -5.7.
- Mission advocated strict expenditure control in 2010 budget implementation and using any positive revenue surprises for deficit reduction. Authorities concurred.
- Pension reform: to be implemented in 2010–11, ties benefits to demographic developments. Even after reform, authorities’ projections imply a financing gap on the order of 6 percent of mainland GDP will emerge by 2060.
- Rising inflows into sickness and disability benefit schemes risk undercutting pension reform effectiveness; Norway’s share of work force receiving such benefits is the highest among all OECD countries. Staff recommended tighter conditionality and enhanced incentives:
  - stronger oversight by social security physicians;
  - extended employer co-financing;
  - possibly a moderate reduction in salary replacement rates;
  - disability benefits subject to tighter eligibility requirements and more frequent use of partial and temporary awards.
- Tax policy—housing subsidy distortion: mortgage interest tax-deductible, owner-occupied housing benefit untaxed, effective real estate taxes very low. Staff recommended a gradual increase in real estate taxes offset by tax reductions elsewhere to promote efficient private investment and attenuate macro risk. Authorities noted 2010 budget changes aligning tax assessments with market valuations; staff noted a net small cut in effective real estate taxes due to an increase in the tax-free threshold.

### Monetary policy stance and normalization
- Norges Bank switched from fairly tight to very loose stance in 2008–09; rates brought down to 1.25 percent by June 2009.
- Norges Bank initiated tightening with two consecutive 25 basis point hikes in October and December 2009, raising policy rate to 1.75 percent. Norges Bank projected the key policy rate to be raised gradually to around 2.75 percent by end-2010, with an interval guidance of 1.25 percent to 2.25 percent up to the Monetary Policy Report on March 24, 2010.
- Staff view: gradual move to a tighter stance warranted given stronger macro outlook, relatively tight labor market, and risks from strong house price appreciation; tightening should be gradual to avoid undermining the recovery.
- Inflation outlook: CPI inflation recently fell to 2 percent; core measures closer to 2.5 percent target. Under staff’s central scenario, inflation would gradually converge to target by end-2011.

### Authorities’ crisis response measures (selected)
- Norges Bank cut policy rate by 450 basis points between October 2008 and June 2009 to 1.25 percent.
- Revised 2009 Budget programs discretionary fiscal stimulus equivalent to 3 percent of mainland GDP; additional 0.6 percent of mainland GDP foreseen in 2010 budget.
- Liquidity measures:
  - October 2008 easing of collateral requirements by Norges Bank (to be reversed in October 2009);
  - NOK 350 billion bond swap program created; phased out in December 2009 with total utilization of NOK 230 billion;
  - longer-term F-Loan program with maturities up to three years (last auction February 2009);
  - temporary provision of NOK liquidity through cross-currency swaps.
- US$ funding measures: swap agreement with the U.S. Federal Reserve to provide US$ liquidity; program discontinued in October 2009.
- Capital support and market measures:
  - State Finance Fund set up in March 2009 to provide core capital support up to NOK 50 billion; 34 banks applied for a total of NOK 6.7 billion by September 30 deadline;
  - Government Bond Fund created to buy corporate bonds up to NOK 50 billion; as of August 17 the Fund had invested NOK 6.2 billion;
  - export guarantee scheme increased by NOK 50 billion; loan agreement for NOK 50 billion to Eksportfinans extended.
- Ban on short-selling of bank and insurance sector shares imposed in October 2008 and lifted in September 2009.

### Financial soundness and selected macro-fiscal indicators (highlights)
- Real mainland GDP (change in percent): 2008: 2.2; 2009: -1.2; 2010 (Proj.): 2.3.
- Mainland real GDP growth projection: 2010: 2¼ percent (staff projection stated as "around 2¼ percent in 2010").
- Unemployment rate (percent of labor force): 2008: 2.6; 2009: 3.1; 2010 (Proj.): 3.7.
- Household debt burden as percent of gross disposable income (annual averages): 2008: 194.0.
- Nonperforming loans to total gross loans (banks): 2008: 0.8; 2009: 1.1.
- Regulatory capital to risk-weighted assets (banks): 2009: 12.1.
- Total financial system assets (in billions of NOK): 2008: 6,109.5; 2009: 6,146.2.
- Government Pension Fund-Global capital (percent of GDP): 2009: 109.5; 2010 (Proj.): 112.6.
- Central government overall balance (percent of GDP, fiscal accounts basis): 2009: 6.2; 2010 (Proj.): 2.6.
- Current account balance (percent of mainland GDP): 2009: 18.7; 2010 (Proj.): 21.7.
- Per capita GDP (2008): $96,100; Population (2008): 4.69 million.

### Staff appraisal summary
- "The Norwegian economy has already returned to growth after a relatively mild recession."
- Recovery drivers: substantial fiscal and monetary stimulus, strong oil and gas sector activity, limited exposure to hardest-hit manufacturing, high public-sector employment, and a relatively stable financial system.
- Growth forecast: Mainland real GDP projected to grow at around 2¼ percent in 2010, with private domestic demand progressively replacing public spending.
- Main policy priorities: gradual withdrawal of stimulus, reduce structural nonoil deficit back to the 4-percent target within the current term of Parliament, curb inflows into sickness and disability benefits, further strengthen prudential framework, and coordinate prudential improvements regionally.

*Source: IMF staff report excerpts from _cr1024._*

### Executive summary: Norway’s economy has returned to growth after a comparatively short

### Executive summary: Norway’s economy has returned to growth after a comparatively short and mild recession

### Key findings and staff recommendations
- Norway’s economy has returned to growth after a comparatively short and mild recession.
- The financial sector has withstood the crisis well, although credit risks remain elevated.
- Staff advocated the following policy priorities:
  - (i) a gradual withdrawal of fiscal and monetary stimulus as the economic recovery takes hold;
  - (ii) reducing the structural nonoil deficit to the fiscal target within the current term of Parliament;
  - (iii) effective steps to curb large inflows into sickness and disability benefit schemes;
  - (iv) further strengthening of the prudential framework for the financial sector.
- The authorities agreed with the mission on the key policy priorities.

### Context of past surveillance and structural considerations
- In line with past Fund advice, the authorities combined tighter monetary policy with relative fiscal restraint to curb demand pressures during the pre‑Lehman boom in the domestic economy.
- Past Fund advice on addressing very high enrollment for sickness and disability benefits has not yet led to a lasting solution.
- Norway’s offshore hydrocarbon sector contributed an average 27 percent to total value added in the economy during 2005–08, accounting for nearly half of total exports and about one‑third of general government revenue. A large part of the revenue is saved in a sovereign wealth fund which invests the money in international financial markets.

### Exchange rate, external payments, and official development assistance
- Norway has a freely floating exchange rate.
- The exchange system is free of restrictions on the making of payments and transfers for current international transactions other than restrictions notified to the Fund in accordance with Decision No. 144-(52/51).
- Norway’s official development assistance (ODA) amounted to 0.9 percent of national income in 2008 and 1 percent in 2009.

### Recent developments and outlook — aggregate picture
- The economy entered the crisis from a very strong cyclical position: brisk oil sector activity, rising asset prices, and rapid credit growth had boosted domestic demand.
- After three quarters of declining output, mainland GDP returned to growth in the second quarter of 2009.
- Unemployment remains very low; the unemployment rate dropped to 2.5 percent before the crisis and has increased only modestly to about 3 percent during the downturn.
- Rapid wage growth and surging commodity prices pushed inflation well above the 2.5‑percent target by early 2008; subsequently headline and core CPI inflation have fallen below the target.
- The authorities responded forcefully: decisive interest rate cuts, large fiscal stimulus, and timely measures to shore up financial intermediation helped make the recession relatively shallow and short‑lived.
- The sharp depreciation of the currency in late 2008 supported net exports.
- Measures of labor market tightness and capacity utilization suggest output is now somewhat below potential.

### Households and corporations — balance‑sheet and credit risks
- Household debt was close to 200 percent of disposable income at end-2008, one of the highest levels among developed economies.
- Consumers raised their saving rates significantly in late 2008; footnote: the saving rate rose to 8 percent by the third quarter of 2009. (Figure caption: 2009Q1‑Q3: 7.4 percent.)
- Corporate debt also increased rapidly during the boom years; nonfinancial corporates have started slowing the pace of debt accumulation.
- More than 90 percent of mortgage loans are at variable rates.
- In the current environment of low interest rates and continued low unemployment, household debt‑servicing capacity remains relatively strong, but could deteriorate if downside risks to growth materialize or interest rates rose sharply.
- The commercial real estate market has remained weak; corporate bankruptcy rates have increased only moderately from a low base.

### Near‑term policy emphasis and medium‑term challenges
- Near term: manage the exit from very loose macroeconomic policies while keeping the overall policy stance supportive; the relatively limited degree of spare capacity calls for a gradual withdrawal of stimulus.
- Medium term: maintain competitiveness, regain fiscal space to deal with future shocks and aging‑related spending pressures, and strengthen the prudential framework to preserve financial stability.
- Specific areas highlighted for further action include reducing the structural nonoil fiscal deficit to the fiscal target within the current parliamentary term and curbing large inflows into sickness and disability benefit schemes.

*IMF staff report excerpt.*

### 6.      Residential house prices have recovered after a short-lived correction, but the

### _cr1024 - 6.      Residential house prices have recovered after a short-lived correction, but the

### Residential and commercial property markets
- Residential house prices fell 9 percent below their mid-2007 peak by end-2008, but have rebounded strongly since then.
- Based on the methodology used in the April 2008 World Economic Outlook, Norway’s house prices appeared to be 5 to 10 percent overvalued in mid-2009.
- There is no country-wide index of commercial property prices, but market reports for Oslo suggest that both prices and volumes have fallen in 2008 and remain subdued in 2009.
- Commercial property accounts for about one third of all corporate loans; the risk on these loans has increased markedly.
- A larger share of commercial property loans are fixed-rate, so interest rate reductions have provided less respite for these loans than for household mortgages.

### Financial institutions: resilience, exposures, and policy response
- Domestic financial institutions experienced a severe liquidity shortage in the wake of Lehman’s bankruptcy, although there were no solvency issues.
- Norwegian banks rely on US dollar interbank markets and fund themselves through a combination of dollar loans and cross-currency swaps; the drying up of these markets sharply diminished term funding availability and caused spreads to surge.
- The domestic corporate bond market became highly illiquid.
- Measures introduced by the authorities to ease liquidity conditions included:
  - extended maturities and relaxed collateral requirements for Norges Bank loans;
  - a swap program to provide banks with government securities in exchange for covered bonds;
  - direct provision of foreign-currency loans;
  - establishment of a Government Bond Fund to support liquidity and pricing in the corporate bond market.
- These measures helped stabilize financial markets: interbank lending spreads have come down, and demand for bonds has returned.
- Norwegian financial institutions had negligible exposure to U.S. subprime mortgages and structured credit products; overall bank leverage is relatively low.
- The regulatory regime is relatively conservative (legacy of the early 1990s banking crisis): securitization is essentially limited to covered bonds; investment banks are subject to similar supervision and capital requirements as commercial banks.
- Dependence on foreign funding markets remains a structural vulnerability—short-term funding from abroad caused a liquidity squeeze when those markets seized up.
- About one-third of the domestic banking system is foreign-owned; DnB NOR controls almost 38 percent of overall bank/MCI assets and has about 25 percent of its total lending outside Norway (mostly in the Nordic region).
- Moody’s downgrading of several Nordic banks, including DnB NOR, occurred in mid-2009.

### Credit developments and lending conditions
- Credit standards for both households and corporations started to ease in the second half of 2009 after tightening considerably during the global crisis (Norges Bank survey).
- Growth of credit to the corporate sector has declined sharply, partly due to weaker demand.
- Household credit growth remains robust at an annual rate of nearly 7 percent.
- Banks envisage no further tightening of credit standards and expect some increase in loan demand.
- Lending rates have fallen broadly in line with the reduction of the policy rate.
- Corporate bond issuance strengthened in 2009, boosted by government support measures and returning risk appetite.

### Nonperforming loans and sectoral vulnerabilities
- Nonperforming loans increased from about ½ percent prior to the crisis to just above 1 percent of all loans in the third quarter of 2009.
- Key cyclical exposures:
  - large bank exposure to shipping, which faces significant global excess capacity;
  - sizeable exposure to commercial real estate, which remains subdued.
- Households’ high indebtedness combined with a richly valued housing market makes bank portfolios vulnerable to adverse shocks.
- Some of Norway’s largest resident banks have operations in recession-hit neighboring economies, though those exposures are relatively small.

### Public finances and fiscal stance
- Fiscal policy was relatively restrained during 2006–07; policy shifted to very expansionary with the onset of the global crisis.
- Discretionary stimulus was close to 3 percent of mainland GDP in 2009.
- Rapid asset accumulation in the nation’s wealth fund helped reduce the structural nonoil deficit slightly below 4 percent of wealth fund capital.
- Despite lower hydrocarbon and cyclical tax revenue, Norway continued to post a significant overall fiscal surplus (Tables 6 and 7 referenced in source).

### External position and exchange rate
- Norway’s external position is strong; the overall current account remains in large surplus, although it narrowed in 2009 mainly due to lower prices and volumes of hydrocarbon exports.
- Norway’s net foreign assets continued to grow in 2008, supported by large inflows into the sovereign wealth fund.
- The krone depreciated sharply in late 2008 but steadily appreciated during 2009, recouping most earlier losses.
- Equilibrium estimates based on CGER methodologies (adjusted for oil and gas exporter status) suggest the krone is now close to equilibrium.
- The CPI-based real effective exchange rate was close to its long-term average in Q3 2009; the manufacturing ULC-based REER has appreciated more strongly reflecting high domestic wage growth.
- Continued high wage growth could cause strains in some export-oriented sectors if terms of trade were to turn.

### Outlook and risks
- A cyclical deterioration of credit quality remains a concern given exposures to shipping and commercial property.
- Nonperforming loans could rise further as shipping excess capacity persists and commercial real estate markets remain subdued.
- Structural dependence on foreign wholesale funding continues to pose an ongoing vulnerability despite policy measures that eased funding conditions.
- Key macro-financial risk factors include: households’ high indebtedness, richly valued housing market, high domestic wage growth, and potential deterioration in hydrocarbon export prices/volumes.

*Source: IMF staff analysis (excerpts from the chapter).*

### 14.      The economic recovery is expected to continue, with private domestic demand

### _cr1024 - 14.      The economic recovery is expected to continue, with private domestic demand

### Macroeconomic outlook and drivers of growth
- Staff projects mainland growth at 2¼ percent for 2010, broadly in line with the authorities’ and private analysts’ forecasts.
- Private consumption expected to drive the recovery, supported by:
  - low interest rates,
  - limited unemployment,
  - improved asset valuations.
- Inventory cycle turn should support growth; fixed investment may remain sluggish given existing spare capacity and a leveling-off in offshore activity.
- The contribution from net exports is likely to turn negative as the krone has regained strength and domestic demand is picking up.
- Near-term inflationary pressures should be kept in check by slower wage growth and the firmer krone, although tight cyclical conditions are set to reemerge sooner than in many other advanced economies.

### Uncertainty and risks to the outlook
- Substantial uncertainty around the central forecast:
  - Mainland growth could pick up faster if households considerably lower their saving rates.
  - A more rapid global recovery would boost exports.
  - A renewed weakening of global demand could undermine the recovery, especially if commodity prices fall back significantly, dampening offshore investment.
- Staff analysis shows spillovers from financial shocks abroad have a significant effect on Norway’s economic growth.
- Main risks to the inflation outlook:
  - Uncertainty about the speed with which output will return to potential.
  - Exchange rate fluctuations.

### Real Effective Exchange Rate (Box 2) — assessment
- Staff estimates suggest the Norwegian krone is broadly in line with fundamentals.
- Methods used: macroeconomic balance approach (MB) and external sustainability (ES) approach (adjusted for temporary export revenues).
- MB estimates:
  - Exchange rate is close to equilibrium.
  - Equilibrium current account surplus is around 14 percent of GDP, reflecting relatively high hydrocarbon exports and fiscal balances.
- Adjusted ES approach (incorporating hydrocarbon reserves depletion and ensuring constant real per capita income from hydrocarbon revenues) suggests overvaluation of 2 percent based on conservative assumptions about hydrocarbon wealth.
- Note: Standard ERER and ES approaches can misinterpret large medium-term current account surpluses and NFA positions as signs of significant undervaluation when temporary hydrocarbon revenues are not accounted for.
- Additional technical note: assumptions cited include oil depleted in 8 and natural gas in 29 years in one adjusted ES scenario.

### Fiscal policy: stimulus, stance, and medium-term priorities
- 2009 fiscal stimulus:
  - Discretionary impulse of 3 percent of mainland GDP supplemented automatic stabilizers estimated at 2¼ percent of mainland GDP.
  - Stimulus emphasized timely and mostly temporary spending measures (stepped-up maintenance work and new public infrastructure investment).
- 2010 budget:
  - Envisages modest additional stimulus by expanding the structural nonoil deficit by a further ½ percent of mainland GDP.
  - Staff concern: many temporary 2009 measures have been replaced by more permanent spending increases, especially for welfare benefits.
  - Mission advocated strict expenditure control in budget implementation and using any positive revenue surprises for deficit reduction.
  - Authorities concurred; noted restraint would help ensure a consistent fiscal-monetary policy mix and reduce risk of excessive exchange rate appreciation.
  - Negative economic surprises should be addressed predominantly through monetary policy.
- Medium-term fiscal priorities:
  - Reduce the nonoil deficit to the fiscal target of 4 percent of wealth fund capital.
  - The 2009–10 stimulus increased the structural nonoil deficit to 5.7 percent of the wealth fund capital, effectively bringing forward the fiscal expansion originally envisaged over the next decade.
  - Finance Minister announced ambition to complete necessary fiscal consolidation within the current term of Parliament (by 2013); staff emphasized strengthening credibility via early identification of concrete measures.
  - Staff and authorities agreed on expenditure-side focus given pledge not to raise the real burden of taxation.
- Symmetry and credibility of fiscal guidelines:
  - Use flexibility under Norway’s fiscal guidelines symmetrically; avoid an expansionary bias from looser policy in downturns and insufficient tightening in upturns.
  - Important to avoid using the full resource envelope implied by the guidelines at times of cyclical strength or unusually high growth in fund capital.
- Long-term sustainability and benefit reforms:
  - Pension reform (to be implemented in 2010–11) aims to encourage longer working lives and limit rise in pension outlays by tying benefit levels to demographic developments.
  - Fiscal costs of aging expected to open a sizable financing gap over the longer term; authorities’ projections imply a financing gap on the order of 6 percent of mainland GDP will emerge by 2060, even after successful implementation of the pension reform.
  - Rising inflows into sickness and disability benefit schemes risk undercutting pension reform effectiveness; share of Norway’s work force receiving such benefits is the highest among all OECD countries.
  - Staff recommended tighter conditionality and enhanced incentives for employees and employers:
    - Stronger oversight by social security physicians.
    - Extended employer co-financing.
    - Possibly a moderate reduction in salary replacement rates.
    - Disability benefits subject to tighter eligibility requirements and more frequent use of partial and temporary benefit awards.
  - Authorities agreed and are seeking concrete steps under the Inclusive Workplace Agreement (to be renewed by March 2010).
- Tax policy — housing subsidy distortion:
  - Norway’s tax system provides strong incentives to invest in housing: mortgage interest is tax-deductible, owner-occupied housing benefit is untaxed, and effective real estate taxes are very low.
  - Staff recommended a gradual increase in real estate taxes offset by tax reductions elsewhere to promote efficient private investment decisions and attenuate macroeconomic risk.
  - Authorities noted changes in the 2010 budget to align tax assessments with market valuations of housing; staff noted a net small cut in effective real estate taxes due to an increase in the tax-free threshold.

### Monetary policy
- Norges Bank’s response in 2008–09:
  - Switched from a fairly tight to a very loose stance within a few months.
  - Rates brought down to a historic low of 1.25 percent by June 2009.
  - Expansionary stance provided quick relief to the household sector with predominantly variable-rate debt.
- Inflation outlook:
  - CPI inflation recently fell to 2 percent; core measures have remained closer to the 2.5 percent target.
  - Strengthening exchange rate, moderating wage growth, and still-subdued demand conditions expected to keep inflation low in coming months.
  - Under staff’s central scenario, inflation would gradually converge to target by end-2011.
  - Medium-term inflation expectations have remained well-anchored.
- Policy normalization:
  - Norges Bank initiated tightening with two consecutive 25 basis point hikes in October and December 2009.
  - Given stronger macro outlook, relatively tight labor market, and risks from strong house price appreciation, a gradual move to a tighter stance over the coming months is warranted.
  - Tightening should be gradual to avoid undermining the recovery amid uncertainty.
  - Staff noted monetary policy remains a powerful tool to deal with negative demand shocks so long as policy rates remain above the lower bound and transmission functions well.

### Financial system resilience and sectoral credit risks
- Overall, the Norwegian financial system has weathered the crisis well, although credit risks remain elevated.
- Some sectors face protracted cyclical weakness:
  - Large overcapacity in shipping; ship-building orders have declined sharply.
  - Lower collateral values and weaker profitability in commercial real estate may prompt higher credit losses.
  - Shipping and commercial real estate together account for about half of all commercial loans.

*Source: IMF staff report content provided in the supplied document.*

### 27.      Another potential vulnerability is the high household indebtedness, combined

### 27.      Another potential vulnerability is the high household indebtedness, combined

### Key vulnerabilities: household debt and housing market
- Banks view mortgage loans as individually safe, given full recourse and historically low default rates.
- "Nearly a quarter of all newly originated mortgages, excluding refinancing, have loan-to-value ratios above 100 percent."
- Systemic risk: even if households continue to service their mortgages in the case of a negative economic shock, the implied retrenchment of consumption could amplify the downturn, with adverse effects on banks’ broader credit portfolios.
- Staff recommended:
  - the introduction of targeted prudential measures, and
  - a phasing-out of the existing large tax incentives for housing investment.
- The authorities "agreed in principle with the need for macroprudential safeguards."

### Bank capital, stress tests, and recent recapitalization efforts
- "In September 2009, a number of institutions announced their intention to raise capital, both from private sources and from the State Finance Fund."
- Norges Bank’s December 2009 Financial Stability Report stress tests suggest:
  - under its baseline macroeconomic scenario (which is close to staff’s projections), bank capitalization will remain quite strong;
  - "Even in the very low-probability stress scenario, the tier 1 ratio for all large banks would remain above the regulatory minimum over the next three years (Annex IV)."
- State Finance Fund details (authorities’ disclosure):
  - "Thirty four banks, accounting for 15 percent of total assets of the banking system, applied for a total of NOK 6.7 billion (US$1.16 billion) of public capital by the end-September deadline."
  - "Separately, two of the largest banks—DnB Nor and Sparebank 1 SR—have announced plans to raise US$2.6 billion through rights issues and private placements (increasing their respective capital ratios by about 1½–2 percentage points)."
- Assessment: "With the strengthening of capital buffers, banks sector appear well placed to absorb possible credit losses, while maintaining credit provision for worthy borrowers."

### Prudential framework and regional coordination
- Norway implements all relevant European Union directives.
- Staff note scope for further strengthening general prudential framework, including:
  - greater emphasis on the management of liquidity risks,
  - restraining excessive balance sheet growth (for example through adoption of a maximum gross leverage ratio).
- Authorities support EU-wide initiatives and emphasized effectiveness if "implemented simultaneously across the whole Nordic region."
- Crisis lesson: need for close cross-country cooperation in supervision, regulation, and resolution of internationally active banks.
  - Memoranda of Understanding on cross-border financial stability and regional agreements (Nordic-Baltic, Norway–EU) provide a foundation for collaboration.
  - Staff and authorities agree supervisors and regulators across countries should "join forces to identify emerging problems early and take coordinated preventive action."

### Exit from crisis measures
- With normalization of market conditions, most crisis measures have been phased out:
  - Provision of longer-term NOK loans and exceptional foreign-exchange funding stopped in early 2009.
  - In October 2009, Norges Bank announced temporary relaxation of collateral requirements would be reversed shortly.
  - Government's covered bond swap program, which "had exhausted about two-thirds of the maximum allocation," was terminated in late 2009.
- Staff suggested planning for winding down the corporate bond purchase program.

### Staff appraisal — outlook and growth projections
- "The Norwegian economy has already returned to growth after a relatively mild recession."
- Drivers of resilience: "substantial fiscal and monetary stimulus, strong activity in the oil and gas sector, limited dependence on the hardest-hit segments of manufacturing, high public-sector employment, and a relatively stable financial system."
- Recovery projection: "Mainland real GDP is projected to grow at around 2¼ percent in 2010, with private domestic demand progressively replacing public spending as the main driver of growth."
- Private consumption support: continued low interest rates, steady employment, higher asset prices, and inventory cycle turnaround.
- Main risk: uncertainty about the strength of the global recovery.

### Exchange rate, competitiveness, and inflation
- "Model-based assessments suggest that the value of the krone is broadly in line with fundamentals."
- "CPI-based real effective exchange rate was close to its long-term average in the third quarter of 2009."
- Manufacturing concerns: "the manufacturing ULC-based real effective exchange rate has appreciated more strongly in recent years, reflecting high domestic wage growth is a favorable terms-of-trade environment."
- Risk: continued increase in wage costs could cause strains in some export-oriented sectors, especially if the terms of trade were to turn around.

### Fiscal policy evaluation and recommendations
- 2009 fiscal stimulus assessment:
  - "The large fiscal stimulus implemented in 2009 has been effective in softening the economic downturn, but may prove difficult to rein in."
  - The 2009 stimulus was "timely and well-designed, with an emphasis on expenditure measures."
  - Concern: many temporary spending measures introduced in 2009 "have been replaced by more permanent expenditure increases in the 2010 budget."
  - "The expected rise in social security spending is particularly large."
- Policy recommendations:
  - "Strict expenditure control in the 2010 budget implementation is warranted."
  - "Any upside surprises to revenue should be used to reduce the deficit."
  - Emphasis on spending restraint to ensure a consistent fiscal-monetary policy mix.
- Medium-term fiscal target:
  - "A steady reduction of the nonoil deficit will be appropriate as the economic recovery takes hold."
  - Future budgets should aim to reduce the structural nonoil deficit to "the 4-percent target, preferably within the current term of Parliament."
  - Credibility enhanced by early identification of concrete measures; emphasis on expenditure-side measures consistent with the government's commitment not to raise the real level of taxes.

### Social insurance, pensions, and labor-market recommendations
- Pension reform: "appropriately aims to encourage longer working lives and contain the rise of pension outlays by tying benefits to demographic developments."
- Critical need: reform must be supplemented to curb very high inflows into sickness and disability benefit schemes.
- Recommended measures: improve incentives for employees and employers (private and public sector), including "greater use of cost-sharing and increased reliance on specialized social insurance physicians in assessing and verifying eligibility for benefits."

### Monetary policy stance
- Given cyclical position, "Norges Bank appropriately has been one of the first central banks to start raising rates again."
- Rationale: strengthening outlook, relatively tight labor market, macroeconomic risks from strong house price appreciation.
- Recommendation: continue withdrawal of extraordinary monetary stimulus as envisaged in the October 2009 monetary policy report, but "the tightening should proceed at a gradual pace to avoid undermining the economic recovery."

### Financial system assessment and remaining risks
- Overall assessment: "The financial system has weathered the global financial crisis well, but vulnerabilities remain."
- Contributing factors to resilience: timely liquidity and capital support measures, robust domestic economy, low exposure to toxic assets, sound prudential framework.
- Remaining risks:
  - further deterioration of credit quality in shipping and commercial real estate,
  - macroprudential risks associated with high household debt and high loan-to-value ratios for mortgage loans.
- Recommendations to contain risks:
  - consider targeted prudential measures, and
  - address distortion from large existing tax incentives for housing investment, for example "through an increase of property taxes offset by tax reductions elsewhere."

*Source: IMF staff report excerpts (paragraphs 27–40).*

### 41.      Further strengthening of the prudential framework and closer cross-country

### _cr1024 - 41.      Further strengthening of the prudential framework and closer cross-country cooperation in supervision and regulation will enhance the resilience of the financial system.

### Prudential framework and cross-country cooperation
- Further strengthening of the prudential framework and closer cross-country cooperation in supervision and regulation will enhance the resilience of the financial system.
- Efforts should be based on international practices as promulgated by the Basel Committee and embodied in amended European Union Directives.
- Given the regional character of the Nordic financial market, close coordination with Norway’s neighbors could be used to ensure higher common standards as appropriate.
- Enhanced cross-country cooperation would help identify emerging problems early and take coordinated preventive action.

### Priority areas and instruments
- Particular priority should be placed on strengthening the management of liquidity risks.
- To limit excessive balance sheet growth, supplementing existing capital adequacy rules with a maximum gross leverage ratio could be considered.

### Procedural recommendation
- It is proposed that the next Article IV consultation be held on the usual 24-month cycle.

### Selected macroeconomic and fiscal indicators (highlights from tables)
- Real GDP (change in percent): 2004: 3.9; 2005: 2.5; 2006: 2.1; 2007: 2.7; 2008: 1.8; 2009: -1.1; 2010 (Proj.): 1.2.
- Real mainland GDP (change in percent): 2004: 4.4; 2005: 4.4; 2006: 4.6; 2007: 5.6; 2008: 2.2; 2009: -1.2; 2010 (Proj.): 2.3.
- Unemployment rate (percent of labor force): 2004: 4.5; 2005: 4.6; 2006: 3.4; 2007: 2.5; 2008: 2.6; 2009: 3.1; 2010 (Proj.): 3.7.
- CPI (average): 2004: 0.5; 2005: 1.5; 2006: 2.3; 2007: 0.7; 2008: 3.8; 2009: 2.2; 2010 (Proj.): 1.4.
- Gross national saving (percent of GDP): 2004: 32.7; 2005: 37.4; 2006: 39.2; 2007: 39.1; 2008: 41.6; 2009: 35.9; 2010 (Proj.): 36.7.
- Central government overall balance (percent of GDP, fiscal accounts basis): 2004: 7.1; 2005: 10.8; 2006: 14.4; 2007: 13.9; 2008: 15.9; 2009: 6.2; 2010 (Proj.): 2.6.
- Structural nonoil balance (percent of mainland trend GDP): 2004: -3.2; 2005: -3.4; 2006: -3.4; 2007: -3.5; 2008: -4.2; 2009: -7.2; 2010 (Proj.): -7.8.
- General government overall balance (national accounts basis, percent of GDP): 2004: 11.1; 2005: 15.1; 2006: 18.5; 2007: 17.8; 2008: 18.7; 2009: 7.3; 2010 (Proj.): 8.5.
- Net financial assets (percent of GDP): 2004: 86.5; 2005: 99.6; 2006: 109.4; 2007: 115.1; 2008: 112.9; 2009: 134.7; 2010 (Proj.): 136.2.
- Government Pension Fund-Global capital (percent of GDP entry shown): 2004: 58.3; 2005: 71.8; 2006: 82.5; 2007: 88.8; 2008: 89.4; 2009: 109.5; 2010 (Proj.): 112.6.
- Current account balance (percent of mainland GDP): 2004: 16.4; 2005: 21.8; 2006: 23.5; 2007: 18.6; 2008: 26.0; 2009: 18.7; 2010 (Proj.): 21.7.
- Holdings of currency (percent of quota, Fund position as of November 30, 2009): 80.6.
- Holdings of SDR (percent of allocation): 102.7.
- Quota (SDR millions): 1,671.7.
- Exchange rates (end of period, Bilateral rate (NOK/USD) 2004–2009): 2004: 6.0; 2005: 6.8; 2006: 6.3; 2007: 5.4; 2008: 7.0; 2009: 5.9.

### Selected financial soundness indicators (banks and non-banks)
- Insurance sector solvency ratios (life insurance companies): 2003: 160.0; 2004: 171.0; 2005: 175.0; 2006: 193.0; 2007: 244.0; 2008: 223.0.
- Household debt burden as percent of gross disposable income (annual averages): 2003: 146.1; 2004: 156.3; 2005: 166.4; 2006: 179.3; 2007: 187.9; 2008: 194.0.
- Total financial system assets (in billions of NOK, memorandum): 2003: 2,927.6; 2004: 3,122.1; 2005: 3,618.9; 2006: 4,235.1; 2007: 5,003.7; 2008: 6,109.5; 2009: 6,146.2.
- Regulatory capital to risk-weighted assets (banks): 2003: 12.4; 2004: 12.2; 2005: 11.9; 2006: 11.2; 2007: 11.7; 2008: 11.2; 2009: 12.1.
- Nonperforming loans to total gross loans (banks): 2003: 1.6; 2004: 1.0; 2005: 0.7; 2006: 0.6; 2007: 0.5; 2008: 0.8; 2009: 1.1.
- Liquid assets as percent of total assets (banks): 2003: 16.8; 2004: 15.4; 2005: 15.9; 2006: 19.5; 2007: 20.0; 2008: 26.2; 2009: 19.7.
- Customer deposits as a percent of total (non-interbank) loans (banks): 2003: 69.3; 2004: 67.6; 2005: 63.8; 2006: 62.3; 2007: 63.0; 2008: 63.1; 2009: 68.0.
- Foreign currency-denominated loans as percent of total loans (banks): 2003: 10.3; 2004: 8.4; 2005: 8.5; 2006: 10.0; 2007: 10.1; 2008: 15.5; 2009: 12.8.

### Governance and data notes
- Recommendations reference Basel Committee standards and amended European Union Directives.
- Country-specific coordination emphasized with Norway’s Nordic neighbors given the regional character of the financial market.
- Table and projection sources: Ministry of Finance; Norges Bank; Statistics Norway; International Financial Statistics; IMF staff estimates and projections; WEO; IMF staff projections as of December 2009; IMF staff projections as of end-October and December 18, 2009 for selected series.

*Source: _cr1024 - 41.      Further strengthening of the prudential framework and closer cross-country cooperation in supervision and regulation will enhance the resilience of the financial system.*

### ANNEX I. AUTHORITIES’ RESPONSE TO THE CRISIS

### ANNEX I. AUTHORITIES’ RESPONSE TO THE CRISIS

### Macroeconomic policies
- Between October 2008 and June 2009, Norges Bank cut the policy rate by 450 basis points to 1.25 percent.
- The revised 2009 Budget programs discretionary fiscal stimulus equivalent to 3 percent of mainland GDP.
- An additional 0.6 percent of mainland GDP is foreseen in the 2010 budget.

### Measures to shore up banks’ NOK liquidity position
- In October 2008, Norges Bank eased collateral requirements—by waiving requirements related to minimum credit ratings, listing on an exchange, and minimum volumes outstanding—to increase banks’ access to its liquidity facilities.
- In October 2009, Norges Bank announced its intention to reverse these changes in the near future.
- The authorities created a NOK 350 billion bond swap program under which banks could obtain government securities in exchange for covered bonds; securities could be sold, used as collateral for obtaining funding, or kept to strengthen bank balance sheets.
  - The program was phased out in December 2009, with a total utilization of NOK 230 billion.
- Norges Bank established a longer-term F-Loan program, with maturities up to three years, to ease liquidity conditions for small banks.
  - The last such auction took place in February 2009.
- Norges Bank temporarily provided NOK liquidity through cross-currency swaps.
- The Norwegian government granted a special deposit guarantee to depositors in the Norwegian branch of Kaupthing Bank up to the amount guaranteed by the Icelandic deposit guarantee scheme.
  - In the event, Kaupthing’s Norwegian assets were sufficient to cover all liabilities.

### Measures to reduce stress in US$ funding markets
- Backed by a swap agreement with the U.S. Federal Reserve, Norges Bank provided banks with US$ liquidity through cross-currency swaps and term loans (with maturity of 84 days).
  - The program was discontinued in October 2009.

### Measures to strengthen banks’ capital and avert a credit crunch
- In March 2009, the government set up the State Finance Fund to provide core capital support of up to NOK 50 billion to banks.
  - The public capital injection takes the form of Tier I preference shares or hybrid Tier I capital.
  - 34 banks applied for a total of NOK 6.7 billion from the Fund by the September 30 deadline.
  - The capital injections are scheduled to be finalized by January 15, 2010.
- In March 2009, the government also created the Government Bond Fund to address illiquidity in the domestic corporate bond market.
  - The Fund is buying corporate bonds in the primary and secondary markets up to a maximum amount of NOK 50 billion.
  - As of August 17, the Fund had invested NOK 6.2 billion.
- The government increased the export guarantee scheme of the central government export guarantee agency (GIEK) by NOK 50 billion.
- The government extended a loan agreement for NOK 50 billion to Eksportfinans to support the extension of CIRR-loans.

### Measures to curb disruptive market speculation
- A ban on short-selling of bank and insurance sector shares was imposed in October 2008 in order to prevent excess market volatility.
  - The ban was lifted in September 2009.

*Prepared by Andre Meier and Jay Surti.*

### APPENDIX I: FUND RELATIONS

### APPENDIX I: FUND RELATIONS

### I. Membership and Quota
- Joined: 12/27/45
- Article status: Article VIII
- Quota (General Resources Account): SDR Million 1,671.70 (100.00 percent of quota)
- Fund holdings of currency: SDR Million 1,346.92 (80.57 percent of quota)
- Reserve position in Fund: SDR Million 324.79 (19.43 percent of quota)
- Lending to the Fund: SDR Million 78.40

### II. SDR Department
- Net cumulative allocation: SDR Million 1,563.07 (100.00 percent of allocation)
- Holdings: SDR Million 1,604.55 (102.65 percent of allocation)

### III. Outstanding Purchases, Loans, and Financial Arrangements
- Outstanding Purchases and Loans: None
- Financial Arrangements: None

### IV. Projected Obligations to Fund (SDR Million)
- Charges/Interest:
  - 2009: 0.12
  - 2010: 0.12
  - 2011: 0.12
  - 2012: 0.12
  - 2013: 0.12
- Total (per year): 0.12 (each year shown above)

### V. Exchange Rate Arrangement
- Currency: krone
- Classified arrangement: independent float
- Inflation targeting regime adopted: March 29, 2001
- Exchange restrictions: none for current international transactions, except those notified under Decision No. 144-(51/52) (August 14, 1952) for security reasons
- Norges Bank foreign exchange intervention: has not intervened since January 1999

### VI. Article IV Consultation and Surveillance
- Discussions for 2009 Article IV Consultation: held in Oslo during November 12–23, 2009
- Staff Report consideration by Executive Board: January 22, 2010
- Norway: accepted obligations of Article VIII, Sections 2, 3, and 4
- Data dissemination: subscribes to the Special Data Dissemination Standard
- Membership: European Economic Area (free movement of goods, services, labor, and capital with the European Union)
- Authorities’ intention: to publish the report

### VII. Technical Assistance and Representation
- Technical Assistance: None (since 1998)
- Resident Representative: None

### VIII. Statistical Issues and Data Quality
- Overall: Norway maintains high standards in economic data; adequate for surveillance purposes
- Strong transparency examples:
  - Ministry of Petroleum and Energy and Statistics Norway: publish data on energy resources and activity
  - Norges Bank (manager of GPF-Global): publishes detailed quarterly and annual reports on portfolio and performance
  - Ministry of Trade and Industry: publishes state ownership reports
- Table of Common Indicators (as of December 17, 2009): reporting frequencies and data quality assessments noted across indicators (exchange rates, international reserve assets, reserve/base money, broad money, central bank balance sheet, consolidated banking system balance sheet, interest rates, CPI, government finance, external accounts, GDP, gross external debt). Data quality assessments referenced to the 2003 data ROSC and mission findings (operations observed as O, LO, LNO, NO as indicated in source).

### IX. Executive Board Assessment — Key Findings
- Norway entered crisis from a strong macroeconomic position and faced a relatively mild downturn.
- Resilience factors:
  - Effective fiscal and monetary stimulus
  - Favorable industrial structure (buoyant offshore hydrocarbon sector)
  - Relatively stable financial system
  - Temporary krone depreciation in late 2008
- Recovery outlook:
  - Private domestic demand expected to progressively replace public spending
  - Mainland GDP expected to grow by 2¼ percent in 2010
  - Near-term inflation expected to be contained by slower wage growth and regained krone strength
  - Outlook subject to uncertainty from global demand, commodity prices, and exchange rate

### X. Executive Board Assessment — Risks and Vulnerabilities
- Concern over 2010 budget introducing more permanent expenditure increases replacing temporary 2009 measures; call for strict expenditure control in 2010 budget implementation
- High non-oil deficit and relatively limited slack in the economy
- Financial sector vulnerabilities:
  - Elevated credit risks due to large bank exposures to shipping and commercial real estate
  - Systemic risk from large household debt and high loan-to-value mortgages

### XI. Executive Board Recommendations and Policy Advice
- Fiscal policy:
  - Steadily reduce the non-oil deficit to the 4-percent target as recovery takes hold
  - Early identification of concrete consolidation measures to enhance credibility
  - Emphasis on expenditure-side adjustment and strict expenditure control
  - Use flexibility to temporarily deviate from fiscal target symmetrically
- Pension and labor market:
  - Commend pension reform tying benefits to demographic developments to encourage longer working lives
  - Supplement reform with concrete actions to reduce inflows into sickness and disability benefit schemes and enhance incentives for employees and employers
- Monetary policy:
  - Moderate interest rate hikes in late 2009 appropriate
  - Gradual further withdrawal of extraordinary monetary stimulus recommended given strengthening outlook, tight labor market, and strong house price appreciation
- Financial sector and prudential framework:
  - Strengthen management of liquidity risks
  - Adopt measures to limit excessive balance sheet growth
  - Reduce tax subsidies for housing investment to contain systemic risks associated with household debt
  - Adopt targeted macroprudential measures
  - Base regulatory improvements on international practices and coordinate with neighbors to raise common standards across the Nordic financial region as appropriate

### XII. Public Information Notice — Summary of Macroeconomic Developments (selected)
- Recession depth and labor market:
  - Mainland GDP contraction in 2009: about -1.2 percent (source tables)
  - Unemployment increased to about 3 percent (text); Executive Director statement cites 3.2 percent (September–November 2009), up from 2½ percent in 2008
- Monetary policy action:
  - Norges Bank cut interest rates by a cumulative 450 basis points through June 2009; moderate hikes in late 2009
- Financial stability measures:
  - Liquidity support after Lehman’s bankruptcy, targeted measures to support banking sector liquidity, measures to improve corporate bond market functioning, capital injections from the State Finance Fund to strengthen bank capital buffers

### XIII. Selected Economic and Social Indicators, 2004–10 (key series, exact values)
- Real GDP (change in percent): 2004: 3.9; 2005: 2.5; 2006: 2.1; 2007: 2.7; 2008: 1.8; 2009: -1.1; 2010 (Proj.): 1.2
- Real mainland GDP (change in percent): 2004: 4.4; 2005: 4.4; 2006: 4.6; 2007: 5.6; 2008: 2.2; 2009: -1.2; 2010 (Proj.): 2.3
- Domestic demand (change in percent): 2004: 6.7; 2005: 5.5; 2006: 5.6; 2007: 5.0; 2008: 2.5; 2009: -2.3; 2010 (Proj.): 2.4
- Private consumption (change in percent): 2004: 5.6; 2005: 4.0; 2006: 4.8; 2007: 5.4; 2008: 1.3; 2009: -0.1; 2010 (Proj.): 3.3
- Private mainland fixed investment (change in percent): 2004: 11.3; 2005: 15.9; 2006: 12.0; 2007: 17.2; 2008: 0.1; 2009: -15.4; 2010 (Proj.): -3.2
- Unemployment rate (percent of labor force): 2004: 4.5; 2005: 4.6; 2006: 3.4; 2007: 2.5; 2008: 2.6; 2009: 3.1; 2010 (Proj.): 3.7
- Output gap (mainland economy, - = output below potential): 2004: -1.9; 2005: -0.6; 2006: 1.0; 2007: 3.5; 2008: 3.1; 2009: -0.3; 2010 (Proj.): -0.1
- CPI (average): 2004: 0.5; 2005: 1.5; 2006: 2.3; 2007: 0.7; 2008: 3.8; 2009: 2.2; 2010 (Proj.): 1.4
- CPI (end of period): 2004: 1.1; 2005: 1.8; 2006: 2.2; 2007: 2.8; 2008: 2.1; 2009: 2.0; 2010 (Proj.): 1.6
- Gross national saving (percent of GDP): 2004: 32.7; 2005: 37.4; 2006: 39.2; 2007: 39.1; 2008: 41.6; 2009: 35.9; 2010 (Proj.): 36.7
- Gross domestic investment (percent of GDP): 2004: 20.0; 2005: 21.2; 2006: 22.0; 2007: 23.6; 2008: 22.7; 2009: 21.8; 2010 (Proj.): 20.8

- Central government overall balance (percent of GDP, fiscal accounts basis): 2004: 7.1; 2005: 10.8; 2006: 14.4; 2007: 13.9; 2008: 15.9; 2009: 6.2; 2010 (Proj.): 2.6
- Structural non-oil balance (percent of mainland trend GDP): 2004: -3.2; 2005: -3.4; 2006: -3.4; 2007: -3.5; 2008: -4.2; 2009: -7.2; 2010 (Proj.): -7.8
- Structural non-oil balance (in percent of Government Pension Fund-Global capital): 2004: -5.2; 2005: -4.8; 2006: -3.7; 2007: -3.2; 2008: -3.6; 2009: -5.7; 2010 (Proj.): -5.7

- General government overall balance (national accounts basis, percent of GDP): 2004: 11.1; 2005: 15.1; 2006: 18.5; 2007: 17.8; 2008: 18.7; 2009: 7.3; 2010 (Proj.): 8.5
- General government net financial assets (percent of GDP): 2004: 86.5; 2005: 99.6; 2006: 109.4; 2007: 115.1; 2008: 112.9; 2009: 134.7; 2010 (Proj.): 136.2
  - Capital of Government Pension Fund-Global (percent of GDP): 2004: 58.3; 2005: 71.8; 2006: 82.5; 2007: 88.8; 2008: 89.4; 2009: 109.5; 2010 (Proj.): 112.6

- Broad money, M2 (end of period, 12-month percent change): 2004: 7.5; 2005: 11.7; 2006: 13.7; 2007: 16.7; 2008: 3.7; 2009: 1.5
- Domestic credit, C2 (end of period, 12-month percent change): 2004: 8.6; 2005: 13.2; 2006: 14.3; 2007: 14.0; 2008: 12.0; 2009: 5.1

- Interest rates (year average, in percent):
  - Three-month interbank rate: 2005: 2.0; 2006: 2.2; 2007: 3.1; 2008: 5.0; 2009: 6.2; 2009 (year average reported later): 2.5
  - Ten-year government bond yield: 2005: 4.4; 2006: 3.7; 2007: 4.1; 2008: 4.8; 2009: 4.5; 2009 (later figure): 4.0

- Current account balance (percent of mainland GDP): 2004: 16.4; 2005: 21.8; 2006: 23.5; 2007: 18.6; 2008: 26.0; 2009: 18.7; 2010 (Proj.): 21.7
- Balance of goods and services (percent of mainland GDP): 2004: 17.4; 2005: 22.1; 2006: 24.7; 2007: 20.2; 2008: 26.8; 2009: 17.5; 2010 (Proj.): 20.9
- Net exports of oil and gas (percent of mainland GDP): 2004: 24.8; 2005: 29.3; 2006: 31.4; 2007: 27.5; 2008: 33.7; 2009: 24.1; 2010 (Proj.): 27.6
- Exports of goods and services (volume change in percent): 2004: 1.1; 2005: 1.1; 2006: 0.0; 2007: 2.3; 2008: 0.9; 2009: -5.2; 2010 (Proj.): 0.2
- Imports of goods and services (volume change in percent): 2004: 8.8; 2005: 8.7; 2006: 8.4; 2007: 8.6; 2008: 2.2; 2009: -10.5; 2010 (Proj.): 3.5
- Terms of trade (change in percent): 2004: 7.7; 2005: 15.6; 2006: 11.9; 2007: -1.6; 2008: 12.2

- International reserves (end of period, in billions of US dollars): 2004: 44.4; 2005: 47.0; 2006: 56.5; 2007: 61.1; 2008: 51.1

- Fund position (as of November 30, 2009):
  - Holdings of currency (percent of quota): 80.6
  - Holdings of SDR (percent of allocation): 102.7
  - Quota (SDR millions): 1,671.7

- Exchange rates:
  - Exchange rate regime: Free float
  - Bilateral rate (NOK/USD) 7/: 2004: 6.0; 2005: 6.8; 2006: 6.3; 2007: 5.4; 2008: 7.0; 2009: 5.9
  - Nominal effective rate (2000=100): 2004: 110.6; 2005: 111.5; 2006: 110.9; 2007: 116.5; 2008: 100.7; 2009: 107.9
  - Real effective rate (2000=100): 2004: 109.7; 2005: 110.7; 2006: 110.3; 2007: 115.3; 2008: 100.4; 2009: 107.1

- Social indicators (reference year):
  - Per capita GDP (2008): $96,100
  - Income distribution (ratio top/bottom 20th percentile, 2007): 3.4
  - At-risk-of-poverty rate (2007): 11.7
  - Life expectancy at birth (2008): male: 78.3, female: 82.9
  - Population (2008): 4.69 million
  - Population density (2008): 14.5 inhabitants per square km

Sources: Ministry of Finance; Norges Bank; Statistics Norway; International Financial Statistics; IMF staff estimates and projections.

*Source: APPENDIX I: FUND RELATIONS (As of November 30, 2009).*

### 2.4 percent of mainland GDP. The January package was mainly targeted at public

### _cr1024 - 2.4 percent of mainland GDP. The January package was mainly targeted at public

### Fiscal policy and petroleum revenue spending
- The January package amounted to 2.4 percent of mainland GDP and was mainly targeted at public infrastructure (both maintenance and investments), supplemented by temporary tax reductions for businesses.
- In May 2009, the Revised National Budget made fiscal policy more expansionary, mainly due to higher estimated growth in expenditures in the social security system and estimated lower dividends from state-owned companies.
- In the Final Budget Revision for 2009 (late November), estimated public spending was revised somewhat down and structural taxes somewhat up, resulting in a downward revision of the estimated fiscal impulse in 2009 from 3.0 to 2.7 percent of mainland GDP.
- The 2010 Fiscal Budget included a further ½ percentage point expansionary fiscal impulse.
- The structural, non-oil deficit for 2010 is estimated at NOK 148.5 billion, or 7.8 percent of trend GDP for mainland Norway.
- The 2010 figure is NOK 45 billion above the 4 percent path and in line with the expected real return on the Fund for 2018.
- The Government has stated that spending of petroleum revenues should be brought back to the 4-percent path as the economic outlook brightens and economic growth picks up.
- The market value of the GPF, including both the international and domestic part, is estimated at NOK 2 700 billion or 115 percent of GDP at the end of 2009.
- The text notes that the capital in the Fund is considerably lower than the old age pension obligations under the National Insurance Scheme, highlighting long-term budget challenges from future increases in pension costs and other age-related expenses.

### Monetary policy
- Norges Bank increased policy rates by a total of 50 bp in October and December to 1.75 percent.
- According to Norges Bank’s Executive Board, the key policy rate should be in the interval of 1.25 percent to 2.25 percent in the period up to the publication of the next Monetary Policy Report on March 24, 2010.
- Norges Bank projects the key policy rate to be raised gradually to around 2.75 percent by the end of the year.
- The Bank emphasized considerable uncertainty surrounding interest rate projections, noting factors that could raise inflation (higher capacity utilization or a weaker krone, e.g., from falling oil prices) and factors that could lower inflation (a strong krone or rapid productivity pickup).
- Norges Bank warned that in an environment of very low interest rates internationally, higher interest rates in Norway may lead to an appreciation of the krone and stated: “should the krone appreciate considerably more than projected, the interest rate may be increased to a lesser extent or later than currently envisaged.”
- IMF staff calculations suggest a slight overvaluation of the krone based on conservative assumptions about the petroleum wealth, but these calculations are uncertain and sensitive to small changes in assumptions.
- Measured in relative wages in a common currency, the real effective krone exchange rate has strengthened considerably in recent years and is now approximately 15 percent higher than its long term average.

### Financial stability
- The authorities agree with the assessment that “the financial system in Norway has weathered the global financial crisis well, but vulnerabilities remain”.
- Norwegian financial institutions had limited exposure to risky assets, partly due to sound regulation.
- Extensive monetary and fiscal policy measures have limited the decline in activity and bank losses, making a solvency crisis in Norwegian banks unlikely.
- Banks are bolstering their Tier I capital to better procure new loans, bear losses, and provide credit.
- Remaining challenges for banks include credit risk in the commercial property and shipping sectors and a high household debt burden (debt as a percentage of disposable income) that is expected to edge up.
- Banks’ loan losses are likely to increase; however, unless exposed to new severe shocks, bank results are expected to remain favorable.
- Stress tests indicate that banks will satisfy capital adequacy requirements even if economic developments are considerably worse than expected.
- The crisis highlighted the importance of sound financial market regulation and supervision; Norway has emphasized uniform capital requirements for all types of financial institutions, conservative treatment of subsidiaries, off balance sheet assets and securitization, and a single supervisor combining entity-level supervision with macro-economic surveillance.
- A good deposit insurance scheme helped avoid bank runs; it was not necessary to increase the coverage level or provide a government guarantee for banks.
- Further strengthening of the prudential framework is foreseen in line with new recommendations from international fora like the BIS and through implementation of new EU provision through the EEA Agreement. The scope for Nordic cooperation on stricter prudential rules is being explored.

### Pension reform and benefit entitlements
- Labor market fundamentals are described as healthy with low unemployment and high participation rates, especially among women and older workers.
- A key to sustainable public finances in the long run is to keep labor supply high or preferably increase it, which is challenging given an ageing population and increasing inflow into sick leave and disability schemes.
- The authorities share concern about the high proportion of the working population on sick leave, disability and other health-related benefits and agree that measures should be taken to bring these numbers down.
- The Government, together with social partners, is working to revise the existing agreement on sick leave introduced in 2001, intending to reduce absentee levels and curb expenditure growth. Both administrative measures and extended employer co-financing are being discussed.
- The Norwegian pension system is undergoing fundamental reform, including introduction in the National Insurance Scheme from January 1, 2011, of a flexible retirement age from 62 years which is actuarially neutral with respect to retirement age.
- A similar reform of the early retirement system in the private sector is almost completed; some elements remain to be decided, notably adjustments of disability pensions, with the Government to present a proposal to Parliament this year based on the Disability Commission’s report from 2007.

*Source: _cr1024 - 2.4 percent of mainland GDP. The January package was mainly targeted at public*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1024.pdf_