## _cr14259

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---

### External stability, competitiveness, and the REER
- Mainland growth moderated to 2.0 percent in 2013.
- CPI-based REER:
  - About 5 percent below its 10-year historical average at end-2013.
- ULC-based REER and labor costs:
  - Real ULCs have doubled since 1995.
  - ULC-based REER is roughly 60 percent higher than the 1995 level.
  - Recent nominal depreciation (Norwegian krone depreciated by 10 percent in nominal effective terms in 2013) only modestly offsets competitiveness erosion.
- Non-oil external performance:
  - Non-oil export market share continued to decline.
  - Non-oil trade deficit has been gradually rising and worsened in 2013.
  - Current account surplus was 14 percent of mainland GDP in 2013 (declined in 2013 partly due to weaker petroleum exports).
- EBA estimates (as presented):
  - Macroeconomic balance (MB) approach: 0.6-2.0 (CA gap REER gap notation in source).
  - External sustainability (ES) approach: -2.8-9.0 (as shown in source).
  - Equilibrium real exchange rate approach: -0.0.
- Summary assessment:
  - CPI-based REER appears broadly in line with fundamentals; different EBA methodologies give mixed signals (MB: mild undervaluation; ES: opposite; RER approach: no significant misalignment).
  - Robust GDP growth driven by high oil prices and terms of trade gains has masked slowing productivity growth; insulation from Dutch disease effects has not been complete.

### Housing market, household balance sheets, and domestic demand
- Housing market:
  - House prices stabilized in mid-2013.
  - Staff average overvaluation estimate is roughly 40 percent.
  - A house price correction back to estimated equilibrium would trigger a decline in consumption by 4 percent.
- Household sector:
  - Households have increased their savings rate significantly in recent years, partly reflecting concerns about elevated debt levels.
  - Household debt around 200 percent of household disposable income (noted elsewhere in the source).
- Domestic demand developments:
  - Private investment weakened substantially in mid-2013 and private consumption growth decelerated; retail sales dropped substantially in mid-2013.

### Monetary policy and inflation
- Policy rate held at 1.5 percent since March 2012.
- Inflation developments:
  - CPI-ATE rose to about 2.5 percent early in 2013 after several years below the target.
  - CPI (average) series: 2008 3.8; 2009 2.2; 2010 2.4; 2011 1.3; 2012 0.7; 2013 2.1; 2014 2.0; 2015 2.0.
  - CPI (end of period) series: 2008 2.1; 2009 2.0; 2010 2.8; 2011 0.2; 2012 1.4; 2013 2.0; 2014 2.0; 2015 2.0.
- Staff view: Norges Bank’s monetary stance appropriate; policy rate will eventually have to normalize to a level somewhat above the inflation target.
- Capacity utilization:
  - May edge down in the coming year, expected to increase towards a normal level at the end of the projection period.

### Fiscal position, fiscal rule, and recommendations
- 2013 fiscal outturn:
  - Structural non-oil deficit was 3.1 percent of GPFG assets and 5.1 percent of trend mainland GDP.
  - Fiscal impulse slightly positive at 0.2 percent (change in structural non-oil deficit as share of mainland GDP).
- 2014 revised budget:
  - Non-oil structural deficit of 5.8 percent of mainland GDP.
  - Equivalent to 2.8 percent of GPFG assets (instead of the 4 percent average real return assumed in the fiscal rule).
  - 2014 fiscal impulse projected at 0.7 percent, adding stimulus in an economy roughly at capacity.
- Staff recommendations:
  - A neutral fiscal stance would be appropriate with still-low unemployment.
  - Keep the non-oil deficit well below 4 percent of GPFG assets; an even smaller transfer to maintain neutrality would be better while the economy is near potential.
  - Phase out tax preferences for housing and eliminate other distortions in capital taxation to promote efficiency and support transition.
- 2014 budget tax changes (exact measures and impact):
  - Reduction of the tax rate on personal income from 28 percent to 27 percent.
  - Reduction of the tax rate on net wealth by 0.1 percentage point to 1 percent.
  - Elimination of the inheritance tax.
  - These changes reduce taxes by ¼ percent of GDP in 2014 on an accrual basis.
- Fiscal impulse time series (annual change in the structural balance as a percentage of trend mainland GDP): -0.1, 0.3, 1.9, 0.0, -0.8, 0.5, 0.2, 0.7.

### Macroprudential policy, capital, and banking system soundness
- Capital and buffers:
  - All major banks meet the minimum CET1 requirement of 10 percent.
  - Some banks will need to raise capital to meet the overall capital requirement of 13.5 percent in mid-2015 (14.5 percent for systemically-important banks).
  - Counter-cyclical capital buffers set to go into effect from end-June 2015; Ministry set buffer at 1 percent following Norges Bank advice.
  - Three domestic SIBs designated; these banks account for more than 45 percent of lending and will face an additional capital surcharge of 1 percent in mid-2015 rising to 2 percent one year later.
- Mortgage and LGD changes:
  - Minimum LGD parameter raised from 10 percent to 20 percent in October 2013.
  - Risk weights for residential mortgages ranged from 10-15 percent before; minimum LGD requirement of 20 percent expected to increase average risk weighting of residential mortgage loans to about 20 percent.
  - Same capital requirements for mortgages expected to apply to branches of Danish and Swedish banks through Nordic agreements.
- Liquidity and funding:
  - Banks continue to rely on wholesale funding, mostly covered bonds.
  - Many banks still have some way to go before meeting the Liquidity Coverage Ratio (LCR) and many still do not meet the Net Stable Funding Requirement (NSFR).
  - Deposit-to-loan ratio has not improved much.
- Staff recommendations:
  - Maintain tighter capital standards and LTV limits on mortgages even if house prices weaken further; consider tighter limits on interest-only mortgage loans.
  - Support harmonization among Nordic countries for mortgage capital standards.

### Financial integration and systemic considerations
- Norway’s financial system integrated into Nordic-Baltic system.
  - Inward links mainly from Swedish and Danish banks with combined market shares of a quarter to a third.
  - DNB’s external operations relatively small and concentrated in Nordic and Baltic countries and the shipping industry.
- Prudential cooperation:
  - Nordic cooperation to improve comparability among Nordic banks and facilitate transparency and market discipline.
  - Implementation challenge: integrating Nordic-Baltic agreements with the Banking Union and European institutions.

### Structural reforms to support rebalancing and productivity
- Rationale: With oil and gas investment peaking, mainland economy must shift to growth less dependent on petroleum-sector demand; high wage levels and rising unit labor costs have eroded competitiveness.
- Priority reform areas identified:
  - Improve efficiency of public services at the local level; consider consolidation of municipalities guided by cost-benefit and quality assessments.
  - Use cost-benefit analysis more systematically in public investment, particularly transportation projects.
  - Reduce agricultural protection: high trade restrictions and subsidies divert resources away from more productive sectors and raise cost of living.
  - Greater differentiation in wage formation to align compensation with sectoral productivity; consider relaxing restrictions on working hours and schedules.
  - Pension and sickness/disability benefits reforms to boost labor force participation:
    - Complete pension reform by aligning public sector pensions with private sector principles.
    - Further reform to sickness and disability benefits to improve efficiency and growth.
  - Tax reforms:
    - Increase neutrality of tax system; reduce tax incentives that favor housing over productive investment.
    - Simpler tax system with fewer exemptions (e.g., equalize VAT on services, remove exemptions for high-value electric cars) to create fiscal space for lower overall tax rates including corporate income tax.
- Authorities’ initiatives:
  - Productivity Commission established; first report due February 2015.
  - Processes underway to reassess state ownership and review municipal and agricultural policies.
- Authorities’ stance:
  - Strong agreement on need for competitiveness and productivity improvements, but more cautious on reductions to tax preferences for housing.

### Near-term outlook, projections, and risks
- Near-term projections:
  - Mainland GDP growth projected to slow to 1.9 percent in 2014.
  - Inflation projected to slow to about 2 percent.
  - Economy described as "roughly at potential."
  - Unemployment projected to rise slightly through 2015.
- Medium-term risks:
  - Tailwinds from offshore activity coming to a halt; competitiveness erosion and weaker non-oil exports are key downside risks.
  - Key vulnerabilities: house price overvaluation roughly 40 percent, elevated household debt, erosion of cost competitiveness (ULC-based REER), reliance on wholesale funding in banking sector.
- Risk Assessment Matrix (summarized):
  - Protracted slower growth in advanced and emerging economies: Relative likelihood Medium/High; Expected impact Medium/High; Channels include weaker non-oil exports, lower oil prices, lower asset prices affecting GPFG returns.
  - Sustained decline in commodity prices (medium-term): Relative likelihood Medium; Expected impact High; Channels include large/prolonged reduction in oil prices reducing oil-related demand and housing/immigration effects.
  - Significant reduction in house prices: Relative likelihood Medium; Expected impact High; Notes: house price growth slowed but level historically very high; household debt around 200 percent of household disposable income; Channels: consumption and residential investment cuts, increased NPLs in construction, commercial real estate, retail.
  - A more difficult transition away from oil/gas dependence: Relative likelihood Medium; Expected impact Medium; Notes: competitiveness challenges from high wage levels could impede labor reallocation and growth.

### Key macro and fiscal indicators (selected exact series and values)
- Population (2013): 5.1 million.
- Per capita GDP (2013, USD): $100,318.
- Real GDP (change in percent) 2008–2015: 0.0, -1.4, 0.6, 1.1, 2.8, 0.7, 1.6, 1.9.
- Real mainland GDP 2008–2015: 1.5, -1.4, 1.7, 2.5, 3.3, 2.0, 1.9, 2.4.
- Unemployment rate (percent of labor force) 2008–2015: 2.6, 3.2, 3.6, 3.3, 3.2, 3.5, 3.7, 3.8.
- Output gap (mainland economy) 2008–2015: 1.2, -1.1, -1.3, -0.9, 0.2, -0.1, -0.3, -0.3.
- Structural non-oil balance (percent of mainland trend GDP) 2008–2014: -3.2, -5.1, -5.1, -4.4, -4.9, -5.1, -5.8, ... .
- Net financial assets (percent of mainland GDP) 2008–2014: 177.8, 202.3, 215.9, 216.0, 228.9, 269.4, 275.9, 276.8.
  - Capital of GPFG 2008–2014: 122.0, 140.6, 154.7, 159.5, 174.1, 217.6, 226.3, 229.6.
- Current account balance (percent of mainland GDP) 2008–2015: 21.9, 14.9, 15.3, 17.9, 19.0, 14.4, 13.2, 12.0.
- Mainland trade balance of goods 2008–2015: -7.8, -6.5, -6.8, -7.5, -8.0, -8.0, -9.4, -9.1.
- Offshore trade balance of goods 2008–2015: 31.4, 21.7, 22.0, 26.0, 26.4, 24.8, 24.1, 21.7.

### Debt, projections, and DSA highlights
- Sovereign spreads and debt metrics (As of March 10, 2014):
  - EMBIG (bp): 133.
  - 5Y CDS (bp): 180.
- Projections (selected series):
  - Real GDP projections 2012–2019: 2.8, 0.7, 1.6, 1.9, 2.0, 2.1, 2.1, 2.1.
  - Real mainland GDP projections 2012–2019: 3.3, 2.0, 1.9, 2.4, 2.5, 2.6, 2.6, 2.6.
  - Unemployment rate LFS 2012–2019: 3.2, 3.5, 3.7, 3.8, 3.8, 3.8, 3.7, 3.7.
  - Consumer prices (avg) 2012–2019: 0.7, 2.1, 2.0, 2.0, 2.2, 2.3, 2.5, 2.5.
  - Current account balance (percent GDP) 2012–2019: 14.3, 11.1, 10.2, 9.4, 9.4, 8.7, 8.6, 8.2.

*Source: IMF staff report section and tables from content unit "_cr14259".*

### 1. External Stability, Competitiveness, and the Real Effective Exchange Rate (REER) _____________ 12

### 1. External Stability, Competitiveness, and the Real Effective Exchange Rate (REER) _____________ 12

### Context and near-term macroeconomic overview
- A conservative minority government took office in October 2013; platform emphasizes lower taxes, more infrastructure investment, greater private ownership, and measures to improve productivity and competitiveness.
- Oil-related investment is peaking and competitiveness concerns are becoming more pressing.
- Both mainland and offshore growth slowed in 2013.
  - Mainland growth moderated to 2.0 percent.
- Households have increased their savings rate significantly in recent years, partly reflecting concerns about elevated debt levels.
- Employment continued to rise while the unemployment rate edged up slightly but remained low at around 3.5 percent.
- Net immigration has added nearly 1 percent annually to the population in recent years and accounted for most of the gains in net employment.

### Housing market and domestic demand
- The housing market showed signs of cooling; house prices stabilized in mid-2013 although staff estimates suggest a substantial overvaluation:
  - Average overvaluation estimate is roughly 40 percent.
- A house price correction that would bring house prices back to estimated equilibrium levels would trigger a decline in consumption by 4 percent.
- Private investment weakened substantially in mid-2013 and private consumption growth decelerated; retail sales dropped substantially in mid-2013.

### Inflation, exchange rate, and prices
- Inflation rose toward target partly due to exchange rate depreciation.
  - The Norwegian krone depreciated by 10 percent in nominal effective terms in 2013.
  - The main inflation index (CPI-ATE) rose to about 2.5 percent early in the year after several years below the target.
- Producer price inflation increased sharply throughout 2013.
- Wages in the mainland economy continued to rise; monthly earnings growth notable in retail and wholesale sectors.
- Near-term inflation expectations are approaching the target while medium-term inflation expectations remain well anchored.

### Fiscal position and public finances
- The 2013 fiscal outturn was well within the authorities’ fiscal policy rule.
  - Structural non-oil deficit was 3.1 percent of GPFG assets and 5.1 percent of trend mainland GDP.
  - The fiscal impulse (change in the structural non-oil deficit as a share of mainland GDP) was slightly positive at 0.2 percent.
- Debt and asset context:
  - Gross public debt is about 30 percent of GDP and net financial assets are above 170 percent of GDP.

### External sector and external balances
- The overall current account surplus remains high but declined in 2013.
  - Current account surplus was 14 percent of mainland GDP.
  - Decline in 2013 partly due to weaker petroleum exports.
- Non-oil trade deficit has been gradually rising and worsened in 2013.
- Energy production and energy exports have declined; non-energy balance worsened further in 2013 partly due to little recovery in manufacturing exports.

### Competitiveness and the REER
- CPI-based REER:
  - CPI-based REER is about 5 percent below its 10-year historical average at end-2013, reflecting recent nominal depreciation.
- ULC-based REER and cost competitiveness:
  - ULC-based REER has appreciated significantly over the past two decades.
  - Real ULCs have doubled since 1995.
  - ULC-based REER is still roughly 60 percent higher than the 1995 level.
  - The recent depreciation only modestly offsets the erosion of competitiveness.
- Non-oil export performance:
  - Non-oil export market share continued to decline.
- EBA (External Balance Assessment) estimates (as presented):
  - Macroeconomic balance (MB) approach: 0.6-2.0 (CA gap REER gap notation in source).
  - External sustainability (ES) approach: -2.89.0 (as shown in source).
  - Equilibrium real exchange rate approach: -0.0.
- Summary assessment:
  - The CPI-based REER appears broadly in line with fundamentals; different EBA methodologies give mixed signals (MB: mild undervaluation; ES: opposite; RER approach: no significant misalignment).
  - Robust GDP growth driven by high oil prices and terms of trade gains has masked slowing productivity growth; insulation from Dutch disease effects has not been complete.

### Financial sector and banking soundness
- Banks’ profitability improved and capital ratios strengthened.
  - All major banks meet the minimum Common Equity Tier 1 (CET1) requirement of 10 percent.
  - Some banks will need to raise capital to meet the overall capital requirement of 13.5 percent in mid-2015 (14.5 percent for systemically-important banks).
  - Return on equity for the largest banking groups rose to 14 percent in 2013 Q3.
- Liquidity and funding:
  - Banks continue to rely on wholesale funding, mostly in the form of covered bonds.
  - Many banks still have some way to go before meeting the likely Liquidity Coverage Ratio (LCR) requirement.
  - Many banks still do not meet the Net Stable Funding Requirement (NSFR).
- Financial integration:
  - Norway’s financial system is tightly integrated into the Nordic-Baltic system.
  - Inward links mainly from Swedish and Danish banks with combined market shares of a quarter to a third.
  - DNB’s external operations are relatively small and concentrated in Nordic and Baltic countries and the shipping industry.
- Supervisory context:
  - A Financial Sector Assessment Program mission planned for late 2014/early 2015 (as noted in the source) and Norway’s financial sector is considered systemically important; subsequent financial stability assessments expected every five years.

### Outlook and risks (headline)
- Tailwinds from offshore activity are coming to a halt; competitiveness erosion and weaker non-oil exports are key downside risks.
- Key vulnerabilities include: high house price overvaluation (roughly 40 percent estimate), elevated household debt concerns, erosion of cost competitiveness (ULC-based REER), and reliance on wholesale funding in the banking sector.

*Source: IMF staff report section "1. External Stability, Competitiveness, and the Real Effective Exchange Rate (REER) _____________ 12".*

### 11.      The near-term outlook remains stable with moderate growth and inflation. With

### _cr14259 - 11.      The near-term outlook remains stable with moderate growth and inflation. With

### Near-term outlook
- Mainland GDP growth is projected to slow to 1.9 percent in 2014.
- Inflation is projected to slow to about 2 percent.
- The economy is described as "roughly at potential."
- Unemployment is projected to rise slightly through 2015.
- Rebalancing is expected as domestic consumption and investment moderate and a modest recovery in trade partners’ growth boosts external demand.

### Medium- and long-term challenges
- A projected slowdown in oil and gas investment poses new challenges.
- Oil and gas investment grew steadily over the last decade, culminating in a 17 percent growth rate in 2013.
- Investment and provision of goods and services to the oil and gas sector have provided persistent stimulus to the mainland economy, boosted growth, and provided highly-paid jobs, but also pushed up unit labor costs and undercut competitiveness elsewhere.
- Oil and gas investment is expected to flatten out in 2014-15 before beginning a slow decline; new sources of growth are needed.
- Staff’s central forecast: continuation of growth with only a modest rise in unemployment in the next few years, conditional on a smooth shift of sources of growth away from supplying the oil and gas sector.

### Risks to the central scenario
- A sustained decline in oil and gas prices (e.g., triggered by slower global growth) would:
  - Be largely insulated on the fiscal side by the fiscal rule for direct oil revenue effects.
  - Undercut growth via reduced demand for mainland goods and services and reduced private demand from confidence and income effects.
- A significant reduction in housing prices could be triggered by lower oil prices or other demand/confidence shocks:
  - House prices have stabilized recently, but a sustained price decline cannot be ruled out.
  - A large house price decline would likely reduce household consumption and adversely affect retail trade, construction, commercial real estate, and lenders to those sectors.
- A more difficult transition to a growth model less dependent on supplying the oil and gas sector could produce slower growth and higher unemployment during the shift.
  - Competitiveness challenges from high wage levels could inhibit the transition.

### Authorities’ views (summary)
- Authorities generally agreed with the risk assessment.
- They noted global shocks would affect Norway mostly through oil and gas prices.
- They agreed housing prices and related household debt levels presented complex risks.
- They did not forecast sustained declines in house prices and noted increased buffers: banks with higher capital and households with higher saving.
- Authorities placed considerable emphasis on risks from the slowdown and eventual reversal of demand from the oil and gas sector.

### Policy discussions: overview
- Norway’s medium-term prospects remain favorable but face potential challenges from a projected peak in oil-related activity in the mainland economy.
- Oil and gas production expected to pick up over the medium term but start to decline around 2021; decline in investment and other demand from the oil and gas sector is expected to begin in 2015.
- Actions are needed to ensure the mainland economy is a robust source of growth when offshore activity winds down.

### A. Monetary policy to meet the inflation target
- Key facts:
  - The policy rate has been held at 1.5 percent since March 2012.
  - Inflation is now roughly at its 2.5 percent target.
  - Growth is slowing, unemployment edging up, and house prices have leveled off.
- Staff view: Norges Bank’s monetary stance is appropriate in this context.
- Expectation: The policy rate will eventually have to normalize to a level somewhat above the inflation target.
- Authorities’ view: Agreed policy stance assessment; agreed the policy rate would need to normalize but noted it would take several years under current forecasts or market expectations.

### B. Fiscal policy to stabilize the economy and save for the future
- Key fiscal numbers and developments:
  - The 2014 revised budget entails an expansionary fiscal stance with a non-oil structural deficit of 5.8 percent of mainland GDP.
  - This is equivalent to 2.8 percent of GPFG assets rather than the 4 percent average real return on GPFG assets assumed for the fiscal rule.
  - The 2014 fiscal impulse is projected at 0.7 percent, adding stimulus in an economy roughly at capacity.
- Staff recommendations:
  - A neutral fiscal stance would be appropriate with still-low unemployment.
  - Because GPFG assets are growing more rapidly than the mainland economy, keeping the non-oil deficit at the current share of assets would imply a growing deficit relative to GDP and a positive fiscal impulse.
  - Government implementation that keeps the non-oil deficit well below 4 percent of GPFG assets is appropriate; an even smaller transfer to maintain a neutral stance would be better while the economy is near potential.
  - Staff argued for phasing out tax preferences for housing and eliminating other distortions in capital taxation to promote efficiency and support the transition to a new growth model.
- 2014 budget tax changes (exact measures and impact):
  - Reduction of the tax rate on personal income from 28 percent to 27 percent.
  - Reduction of the tax rate on net wealth by 0.1 percentage point to 1 percent.
  - Elimination of the inheritance tax.
  - These changes reduce taxes by ¼ percent of GDP in 2014 on an accrual basis.
- Authorities’ view: Recognize risk of excessive fiscal stimulus from spending too large a fraction of GPFG assets; emphasize reducing overall tax burden to promote competitiveness via tax-code simplification, lower overall rates particularly on corporate income taxes, and improving efficiency of public expenditures without reducing services.

### C. Macroprudential policies to insure against banking crises
- Implementation progress:
  - Implementation of the CRD IV/Basel III requirements is moving ahead of schedule required by Basel III.
  - All large Norwegian banks already meet the CET1 capital requirement, effective from July 2014.
  - Counter-cyclical capital buffers will go into effect from end-June 2015.
  - Three financial institutions designated as domestic systemically important banks (SIBs); these banks account for more than 45 percent of lending and will be subject to an additional capital surcharge of one percent in mid-2015 that will rise to 2 percent one year later.
  - While DNB and other larger commercial banks meet the likely LCR requirement as of 2013 Q3, many savings banks still have some way to go to meet the LCR in its current form.
- Mortgage risk-weight changes:
  - Government raised the minimum loss-given-default (LGD) risk model parameter from 10 percent to 20 percent in October 2013.
  - Risk weights for residential mortgages ranged from 10-15 percent before; a minimum LGD requirement of 20 percent is expected to increase the average risk weighting of residential mortgage loans to about 20 percent.
  - Same capital requirements for mortgages expected to apply to branches of Danish and Swedish banks through Nordic agreements; details still being worked out.
  - Staff supported tighter capital standards for mortgage lending for domestic and foreign banks and harmonization among Nordic countries.
- Remaining vulnerabilities and recommendations:
  - Vulnerabilities remain: valuations still high despite measures; banks continue to rely on wholesale funding; deposit-to-loan ratio has not improved much.
  - Recommendation: Maintain tighter capital standards and LTV limits on mortgages even if house prices weaken further; consider tighter limits on interest-only mortgage loans.

### Box: Counter-cyclical capital buffers (high-level points)
- Norges Bank advises the Government on the countercyclical capital buffer; the Ministry of Finance sets the level quarterly.
- Buffer range: between 0 and 2.5 percent of banks’ risk-weighted assets.
- Norges Bank’s first advice issued December 2013; Ministry set the buffer at 1 percent in line with recommendation; effective from end-June 2015.
- The buffer will eventually apply to all banks operating in Norway; will apply to branches of foreign banks after 2016.
- Norges Bank’s advice based mainly on four indicators:
  - (i) ratio of total credit to mainland GDP;
  - (ii) wholesale funding ratio of Norwegian credit institutions;
  - (iii) ratio of house prices to household disposable income;
  - (iv) commercial property prices.
- These indicators produced a buffer guide of ¼ to 1¾ percent in mid-2013; final recommendation of 1 percent took into account other regulatory changes, the fact imbalances were no longer building up, and slower growth.
- The indicator set is expected to be expanded over time; advices will also consider EU recommendations from the European Systemic Risk Board.

*Source: _cr14259 - 11.      The near-term outlook remains stable with moderate growth and inflation. With*

### 24.      The authorities generally agreed with staff’s assessment. New capital adequacy

### _cr14259 - 24.      The authorities generally agreed with staff’s assessment. New capital adequacy

### Capital adequacy and macroprudential framework
- New capital adequacy regulation for banks adopted by the parliament in June 2013 contains a set of macroprudential tools and powers, which are already in place to increase capital levels for Norwegian banks.
- It remains important to follow up Norwegian banks’ capital adequacy to ensure they are well prepared to meet downturns in the economy.
- Nordic cooperation will continue, including efforts to improve comparability among Nordic banks and facilitate transparency and market discipline.
- Staff view: Stronger capital requirements for banks are welcome, in particular the higher capital requirements for mortgage lending; these increased capital requirements are still in their early stages and may need to be adapted in line with experience as implementation proceeds to ensure that they are sufficient.
- Agreement among Nordic authorities on aligning capital requirements for mortgage lending by branches as well as subsidiaries to Norwegian conditions is commendable.
- Recommendation: Maintain tighter capital standards and loan-to-value limits on mortgages in light of vulnerabilities from high house prices and household debt even if the housing market softens further.
- Implementation challenges: Integrating existing Nordic-Baltic agreements with the Banking Union and European institutions remains a challenge.

### Structural reforms to promote a new growth model
- Context: Robust growth driven by high offshore activity and large terms of trade gains has masked a decline in wage competitiveness relative to peer countries; with demand from the offshore economy peaking, the mainland economy must shift to a growth model less dependent on the oil and gas sector.
- Authorities’ initiatives welcomed by staff: setting up a productivity commission to propose specific policies and starting a process to reassess the extent of state ownership.
- Competitiveness and productivity reform areas identified:
  - Public services at the local level could be improved and made more efficient; small municipalities struggle to achieve economies of scale with scope to improve services and save resources through consolidation guided by cost-benefit and quality of service assessments.
  - Many public investment projects have social and economic benefits below their costs, particularly in transportation; there is scope for greater efficiency by making more use of cost-benefit analysis in project selection.
  - Agricultural policy is constraining productivity: Norway’s high trade restrictions and subsidies are diverting private and public resources away from more productive sectors and raising the cost of living, particularly for lower-income groups.
  - Greater differentiation in wage formation could facilitate adjustment toward a new growth model. Norway’s tradition of labor agreements produces highly similar wage growth rates across sectors; wage formation may need to allow greater differentiation in compensation across sectors to better align wage developments with productivity in the private sector, particularly if transition costs in terms of lower growth and higher unemployment turn out to be greater than anticipated.
  - Competitiveness and efficiency could also be improved by relaxing restrictions on working hours and schedules.
- Tax system recommendations:
  - More neutrality in the tax system could promote efficiency and growth.
  - Reduce the extent to which the personal income tax system promotes housing rather than productive investment, including less preferential treatment for both residential and commercial real estate.
  - A simpler tax system with fewer exemptions and preferences (e.g., equalizing VAT taxes on services and removing exemptions for high-value electric cars) could create fiscal space for a reduction in overall tax rates, including the corporate income tax.
- Labor and social benefits:
  - Further reform to pension and sickness and disability benefits would help labor force participation.
  - Private sector employment of persons over 62 has risen as a result of the recent pension reform, but incentives for early retirement still remain in the public sector.
  - Staff urged authorities to complete the pension reform by fully aligning the rules for public sector pensions with the principles used in private sector pensions.
  - Further reform to sickness and disability benefits would likely improve efficiency, competitiveness, and contribute to growth and employment.

### Authorities’ views
- Authorities strongly agreed on the need for improvements to competitiveness and productivity in the transition away from oil and gas supported demand in the mainland economy.
- Noted that reforms in the corporate and personal income tax system, support and protection for agriculture, and the provision of local public services were under review.
- Some adjustments of labor market regulations were considered, but authorities were more cautious on reductions to the tax preferences for housing.

### Staff appraisal: macro outlook and policy stance
- Near-term outlook: Norway’s near-term outlook remains stable with moderate growth and inflation and low unemployment.
- Monetary policy:
  - Monetary policy is appropriate in terms of the authorities’ inflation targeting framework.
  - Tensions among considerations for monetary policy have abated in the last year: the economy roughly at potential output, inflation at about the target, and stabilizing house prices.
  - The policy rate will eventually have to normalize to a level somewhat above the inflation target.
  - The exchange rate is broadly in line with fundamentals, although high unit labor costs may become an obstacle to a shift toward a non-oil based growth model.
- Fiscal policy:
  - The government’s fiscal policy has been prudent, but it has entailed repeated fiscal stimulus for an economy roughly at capacity.
  - While the non-oil deficit has been maintained well below 4 percent of GPFG assets, the rapid growth of the GPFG has still allowed a rising non-oil deficit as a share of GDP.
  - The recent policy of keeping the non-oil deficit well below 4 percent of GPFG assets lessens overheating pressures, but a more neutral fiscal stance would be appropriate so long as the economy remains near capacity.
- Structural reform role:
  - Transition to a growth model less reliant on oil and gas-related demand could be eased by structural reforms: a simpler income tax system less skewed toward promoting housing; aligning public sector pensions with private sector reforms; reforms to sickness and disability pensions; efficiency gains in public services; improved use of cost-benefit analysis in infrastructure selection; removing labor market rigidities; and lower protection and subsidies in agriculture.
- Consultation cycle:
  - It is proposed that the next Article IV consultation with Norway be held on the standard 12-month cycle.

### Risk Assessment Matrix — summarized risks, likelihoods, and impacts
- Protracted period of slower growth in advanced and emerging economies
  - Relative likelihood: Medium/High
  - Expected impact if realized: Medium/High
  - Channels: weaker non-oil exports, lower oil prices, lower asset prices affecting GPFG returns.
- Sustained decline in commodity prices (medium-term)
  - Relative likelihood: Medium
  - Expected impact if realized: High
  - Channels: large and prolonged reduction in oil prices would reduce growth through lower oil-related demand for mainland goods and services and indirectly through housing demand effects or immigration reversals.
- Significant reduction in house prices
  - Relative likelihood: Medium
  - Expected impact if realized: High
  - Notes: house price growth slowed but level historically very high; household debt around 200 percent of household disposable income.
  - Channels: falling house prices could cause households to cut consumption and residential investment sharply, leading to slower growth and an increase in NPLs in construction, commercial real estate, and retail.
- A more difficult transition to a growth model less dependent on supplying the oil and gas sector
  - Relative likelihood: Medium
  - Expected impact if realized: Medium
  - Notes: competitiveness challenges from high wage levels could make shifting to a new growth model more difficult, resulting in slower growth and higher unemployment during the transition, particularly if real wage adjustments do not facilitate labor movements between sectors.

### Authorities’ response to past IMF policy recommendations (selected)
- Macroprudential policy recommendations from the 2013 Consultation endorsed by the Executive Board included:
  - increased capital requirements for banks;
  - tighter macroprudential policies and reduction of the relative tax advantages of housing investments, including tighter limits on loan-to-value ratios and interest-only mortgages; and
  - greater cross-border coordination on macroprudential measures to ensure that branches of foreign banks lend in line with economic conditions in Norway.
- Authorities’ actions:
  - Progress in implementing the CRD IV/Basel III requirements well ahead of the required schedule; tighter capital requirements are in place, including counter-cyclical capital buffers.
  - Higher capital standards for mortgage lending expected to increase the average risk weighting of residential mortgage loans to about 20 percent.
  - There have been no new measures on loan-to-value ratios or interest-only mortgages, and tax preferences for real estate are largely unchanged.
  - Norwegian, Danish, and Swedish authorities agreed that branches of Danish and Swedish banks in Norway would apply similar capital requirements on mortgages.
- Fiscal policy recommendation from 2013: Board considered that wage pressures and eroding competitiveness in the non-oil sector argued for a slower rate of spending in 2014 and beyond than 4 percent of GPFG assets.
  - Fiscal outturns cited: The 2013 fiscal outturn and 2014 budget are well below 4 percent of GPFG assets (3.1 and

*Source: _cr14259 - 24.*

### 2.8 percent respectively). However, the fiscal

### _cr14259 - 2.8 percent respectively). However, the fiscal

### Fiscal stance and projections
- Fiscal impulse was positive in 2013 outturn and it is projected to be 0.7 percent of GDP in 2014.
- Fiscal impulse (Table 4): -0.1, 0.3, 1.9, 0.0, -0.8, 0.5, 0.2, 0.7 (annual change in the structural balance as a percentage of trend mainland GDP).
- Central government (budget definition; excludes Pension Fund Global):  
  - Revenue: 58.6, 63.5, 60.1, 53.6, 59.0, 58.9, 55.8, 54.0 (2007–2014 series shown).  
  - Oil revenue: 19.2, 23.5, 16.2, 14.9, 17.9, 19.2, 16.4, 15.1.  
  - Non-oil revenue: 39.4, 40.0, 39.8, 38.7, 41.0, 39.7, 39.5, 38.9.  
  - Expenditure: 40.7, 41.8, 46.3, 44.9, 45.9, 45.5, 45.9, 46.5.  
  - Balance: 17.9, 21.7, 9.8, 8.6, 13.1, 13.4, 9.9, 7.4.  
  - Non-oil balance: -0.1, -0.6, -5.1, -5.2, -3.8, -4.6, -5.0, -6.0.  
  - Structural nonoil balance: -2.8, -3.1, -5.2, -5.2, -4.5, -4.9, -5.1, -5.8.

### Structural reforms to boost competitiveness
- Directors agreed structural reforms are needed to enhance competitiveness of the mainland economy through:
  - labor market,
  - pensions,
  - trade in agriculture products,
  - public sector services.
- Sickness and disability benefits:
  - Could be further reformed to improve efficiency and help contain future pressures on government spending.
  - No changes to sickness and disability benefits in 2013, but some changes will be implemented for disability benefits in 2015.
- Other policies under review (including by the Productivity Commission): state ownership, efficiency of local public services, agricultural policy.

### Real economy and labor market (selected indicators)
- Population (2013): 5.1 million.
- Per capita GDP (2013, USD): $100,318.
- Real GDP (change in percent) 2008–2015 (row): 0.0, -1.4, 0.6, 1.1, 2.8, 0.7, 1.6, 1.9 (series titled Real GDP 1/).
- Real mainland GDP 2008–2015: 1.5, -1.4, 1.7, 2.5, 3.3, 2.0, 1.9, 2.4.
- Domestic demand 2008–2015: 1.1, -4.0, 3.6, 3.2, 3.4, 3.3, 2.1, 2.4.
- Private consumption 2008–2015: 2.0, -0.1, 3.7, 2.6, 3.0, 2.2, 1.8, 2.3.
- Private mainland fixed investment 2008–2015: -2.3, -18.4, -4.1, 7.7, 5.9, 2.9, 2.9, 4.8.
- Government consumption 2008–2015: 2.4, 4.5, 1.2, 1.1, 1.8, 1.8, 2.1, 2.1.
- Unemployment rate (percent of labor force) 2008–2015: 2.6, 3.2, 3.6, 3.3, 3.2, 3.5, 3.7, 3.8.
- Output gap (mainland economy, - implies output below potential) 2008–2015: 1.2, -1.1, -1.3, -0.9, 0.2, -0.1, -0.3, -0.3.
- CPI (average) 2008–2015: 3.8, 2.2, 2.4, 1.3, 0.7, 2.1, 2.0, 2.0.
- CPI (end of period) 2008–2015: 2.1, 2.0, 2.8, 0.2, 1.4, 2.0, 2.0, 2.0.

### Savings, investment, and public finance highlights
- Gross national saving (percent of GDP) 2008–2015: 40.4, 34.0, 35.2, 37.3, 39.2, 37.5, 37.0, 36.8.
- Gross domestic investment (percent of GDP) 2008–2015: 24.5, 22.3, 23.3, 23.8, 24.9, 26.4, 26.8, 27.4.
- Central government overall balance (percent of mainland GDP) (fiscal accounts basis) 2008–2014: 21.7, 9.8, 8.6, 13.1, 13.4, 9.9, 7.4, ... (ellipsis in source).
- Structural non-oil balance (percent of mainland trend GDP) 2008–2014: -3.2, -5.1, -5.1, -4.4, -4.9, -5.1, -5.8, ... .
- General government overall balance (national accounts basis) 2008–2014: 25.8, 13.4, 14.2, 18.0, 18.5, 14.5, 14.0, 12.3.
- Net financial assets (percent of mainland GDP) 2008–2014: 177.8, 202.3, 215.9, 216.0, 228.9, 269.4, 275.9, 276.8.
  - Of which: capital of Government Pension Fund Global (GPFG) 2008–2014: 122.0, 140.6, 154.7, 159.5, 174.1, 217.6, 226.3, 229.6.

### External sector (selected indicators)
- Current account balance (percent of mainland GDP) 2008–2015: 21.9, 14.9, 15.3, 17.9, 19.0, 14.4, 13.2, 12.0.
- Balance of goods and services (percent of mainland GDP) 2008–2015: 23.7, 15.6, 15.3, 18.1, 17.7, 14.0, 13.6, 11.7.
- Mainland trade balance of goods 2008–2015: -7.8, -6.5, -6.8, -7.5, -8.0, -8.0, -9.4, -9.1.
- Offshore trade balance of goods 2008–2015: 31.4, 21.7, 22.0, 26.0, 26.4, 24.8, 24.1, 21.7.
- Exports of goods and services (volume change in percent) 2008–2015: 0.7, -3.7, 0.1, -1.4, 1.1, -3.3, 1.2, 1.3.
- Imports of goods and services (volume change in percent) 2008–2015: 4.1, -12.7, 9.3, 3.6, 2.2, 2.7, 2.4, 2.7.
- Terms of trade (change in percent) 2008–2013: 13.1, -17.3, 7.2, 9.9, 1.2, 0.8, ...... (ellipsis in source).
- International reserves (end of period, in billions of US dollars): 50.9, 48.9, 52.8, 49.4, 51.9, 58.5, ...... (ellipsis).

### Projections and medium-term indicators (selected)
- Real GDP projections 2012–2019 (Table 2): 2.8, 0.7, 1.6, 1.9, 2.0, 2.1, 2.1, 2.1.
- Real mainland GDP projections 2012–2019: 3.3, 2.0, 1.9, 2.4, 2.5, 2.6, 2.6, 2.6.
- Unemployment rate LFS (percent) 2012–2019: 3.2, 3.5, 3.7, 3.8, 3.8, 3.8, 3.7, 3.7.
- Consumer prices (avg) 2012–2019: 0.7, 2.1, 2.0, 2.0, 2.2, 2.3, 2.5, 2.5.
- General government fiscal balance (percent of GDP) 2012–2019: 13.9, 11.1, 10.8, 9.6, 8.7, 7.8, 7.0, 6.3.
- Current account balance (percent GDP) 2012–2019: 14.3, 11.1, 10.2, 9.4, 9.4, 8.7, 8.6, 8.2.
- Mainland balance of goods (percent of GDP) 2012–2019: -8.0, -8.0, -9.4, -9.1, -8.8, -8.4, -8.0, -7.7.

### Debt dynamics and DSA highlights
- Sovereign spreads and debt metrics (As of March 10, 2014):  
  - Nominal gross public debt: 44.0, 29.3, 28.4, 31.9, 30.3, 29.9, 28.1, 28.9, 27.9 (series shown across years).  
  - EMBIG (bp): 133.  
  - 5Y CDS (bp): 180.  
- Real GDP growth (projections in table): 1.4, 2.8, 0.8, 1.8, 1.9, 2.0, 2.0, 2.1.
- Inflation (GDP deflator, in percent) 2012–2019: 5.3, 2.9, 2.5, 3.0, 1.2, 1.7, 2.2, 2.5, 2.7 (as presented).
- Effective interest rate (in percent) series: 3.4, 3.4, 3.1, 3.2, 1.4, 1.7, 1.8, 1.6, 1.8.
- Change in gross public sector debt (cumulative contributions and identified flows):  
  - Change in gross public sector debt: -0.7, 0.9, -0.9, 3.5, -1.6, -0.4, -1.8, 0.8, -1.0, -0.5 (cumulative).  
  - Identified debt-creating flows cumulative: -13.1, -12.8, -9.0, -9.7, -8.4, -7.5, -6.6, -6.0, -5.3, -43.5.  
  - Primary deficit cumulative: -11.4, -12.0, -9.2, -9.2, -7.9, -6.9, -5.9, -5.1, -4.4, -39.5.
- Appendix I DSA — Baseline and alternative scenarios (selected assumptions):  
  - Baseline scenario (2014–2019): Real GDP growth 1.8, 1.9, 2.0, 2.0, 2.1, 2.1; Inflation 3.0, 1.2, 1.7, 2.2, 2.5, 2.7; Primary Balance 9.2, 7.9, 6.9, 5.9, 5.1, 4.4; Effective interest rate 3.2, 1.4, 1.7, 1.8, 1.6, 1.8.  
  - Historical scenario (2014–2019): Real GDP growth 1.8, 1.5, 1.5, 1.5, 1.5, 1.5; Inflation 3.0, 1.2, 1.7, 2.2, 2.5, 2.7; Primary Balance 9.2, 11.8, 11.8, 11.8, 11.8, 11.8; Effective interest rate 3.2, 1.4, 1.6, 1.7, 1.2, 1.3.  
  - Constant Primary Balance scenario (2014–2019): Primary Balance constant at 9.2 across years.  
  - Contingent Liability Shock scenario (2014–2019): Example values shown with Primary Balance 9.2, -5.1, 6.9, 5.9, 5.1, 4.4 and varying effective interest rates.

### Financial system structure (selected)
- Assets of all financial institutions (billions of NOK) 2007–2013: 5,004, 6,112, 5,201, 6,424, 7,042, 7,351, 7,746.
- Share of assets owned by Banks, Mortgage companies, Finance companies, State lending institutions, Life insurance companies, Non-life insurance companies (percent shares presented across years; examples):  
  - Banks: 62.4, 62.5, 71.1, 56.7, 56.1, 55.1, 55.1.  
  - Mortgage companies: 12.4, 16.4, 21.6, 21.5, 22.9, 23.3, 22.6.  
  - Life insurance companies: 14.9, 12.0, 11.5, 13.4, 12.9, 13.5, 14.1.
- Banks excluding foreign subsidiaries — assets composition (percent of assets, selected): Cash and deposits series: 8.0, 11.6, 9.9, 8.5, 14.2, 13.7, 10.9; Lending to households, municip. and non-finan. firms: 68.6, 59.5, 53.7, 53.7, 50.3, 48.5, 47.8.
- Covered bond companies — gross lending: 94.7, 87.5, 93.6, 94.7, 93.6, 92.2, 91.8 (percent of assets series).

### Fund relations and statistical issues
- Fund membership: Joined December 27, 1945; Article VIII.
- Quota: 1,883.70 (SDR millions) — 100.00 percent of quota.
- Fund holdings of currency: 1,515.80 (SDR millions) — 80.47 percent.
- Reserves tranche position: 367.92 (SDR millions) — 19.53 percent.
- Net cumulative allocations (SDR Department): 1,563.07 — 100.00 percent; Holdings 1,486.09 — 95.08 percent.
- Projected payments to the Fund (Charges/Interest): 2014: 0.04; 2015: 0.09; 2016: 0.09; 2017: 0.09; 2018: 0.09 (SDR Million).
- Exchange arrangements: de jure and de facto classified as freely floating; exchange system free of restrictions on current international transactions other than restrictions notified in accordance with Decision No. 144-(52/51).
- Article IV Consultation cycle: 12-month.
- FSAP Participation: review completed in 2005.
- Technical assistance: None.
- Resident representative: None.
- Statistical adequacy: Data provision is adequate for surveillance; national accounts breakdowns for oil-related parts of the mainland economy and other traditional sectors would be useful and work is under way.

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

### 1996. Uses SDDS flexibility options on the timeliness of the general

### _cr14259 - 1996. Uses SDDS flexibility options on the timeliness of the general

### Data dissemination and metadata
- Uses SDDS flexibility options on the timeliness of the general government operations and central government debt.
- SDDS metadata are posted on the Dissemination Standard Bulletin Board (DSBB).
- Data ROSC completed in 2003 is publicly available.
- Table of Common Indicators Required for Surveillance (As of June 6, 2014) reports frequencies and timeliness for datasets including:
  - Exchange Rates: Date of latest observation June 2014; Date received June 2014; Frequency D; Frequency of Reporting D; Frequency of Publication D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation May 2014; Date received May 2014; Frequency M; Frequency of Reporting M; Frequency of Publication M.
  - Reserve/Base Money: April 2014; April 2014; M; M; M.
  - Broad Money: April 2014; April 2014; M; M; M.
  - Central Bank Balance Sheet: April 2014; May 2014; M; M; M.
  - Consolidated Balance Sheet of the Banking System: 30/09/11; 07/11/11; M; M; M.
  - Interest Rates: June 2014; June 2014; Q; Q; Q.
  - Consumer Price Index: April 2014; April 2014; M; M; M.
  - Revenue, Expenditure, Balance and Composition of Financing – General Government: Apr. 2014; May 2014; A; A; A.
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Apr. 2014; May 2014; M; M; M.
  - Stocks of Central Government and Central Government-Guaranteed Debt: Q1 2014; 2013; A; A; A.
  - External Current Account Balance: Q1 2014; May 2014; Q; Q; Q.
  - Exports and Imports of Goods and Services: Q1 2014; May 2014; Q; Q; Q.
  - GDP/GNP: Q1 2014; May 2014; Q; Q; Q.
  - Gross External Debt: Q4 2014; 2014; Q; Q; Q.
  - International Investment Position: 2012; 2012; A; A; A.

### Economic developments (summary and recent performance)
- 2013 slowdown: Mainland growth moderated to 2.1 percent; offshore growth reduced by lower oil production.
- Unemployment: around 3.5 percent in 2013 despite growing labor force from immigration.
- House prices: stabilized in mid-2013 at high levels; housing market shows signs of cooling.
- Inflation: rose to about the inflation target, 2.5 percent, partly due to exchange rate depreciation.
- Structural non-oil deficit: 3.1 percent of Government Pension Fund Global (GPFG) assets and 5.1 percent of trend mainland GDP.
- Overall current account surplus: 14 percent of mainland GDP in 2013; declined partly due to weaker petroleum exports.
- Oil and gas investment: experienced 17 percent growth rate in 2013; expected to flatten out in 2014-15 before beginning a slow decline.

### Outlook and risks
- Near-term outlook: stable with moderate growth and inflation.
- Staff central forecast: continuation of growth with only a modest rise in unemployment in the next few years and inflation gradually rising back toward the target, conditional on a shift of growth sources away from supplying the oil and gas sector.
- Key risks:
  - Substantial decline in oil and gas prices could reduce demand for mainland goods and services and private demand via confidence and income effects.
  - Significant reduction in housing process would likely reduce household consumption, affecting retail trade, construction, commercial real estate, and lenders.
  - Difficult transition to a less oil-dependent growth model could result in slower growth and higher unemployment during the shift.

### Financial sector and stability
- Banks: profitability improved and capital ratios strengthened.
- Funding: banks continue to rely on wholesale funding, mostly in the form of covered bonds.
- Liquidity: many banks still have some way to go before meeting the Liquidity Coverage Ratio (LCR) requirement.
- Financial integration: Norway’s system is part of a tightly integrated Nordic-Baltic system; inward links mainly from Swedish and Danish banks with combined market share of a quarter to a third; outward links modest, concentrated in Nordic and Baltic countries and the shipping industry.
- Policy and regulatory stance:
  - Stronger capital requirements for banks ahead of Basel III deadlines, including higher capital requirements for mortgage lending.
  - Agreement among Nordic authorities on aligning capital requirements for mortgage lending by branches and subsidiaries to local economic conditions.
  - Recommendation to maintain tighter capital standards and loan-to-value limits on mortgages given vulnerabilities from high house prices and household debt and banks’ reliance on wholesale funding.

### Fiscal policy and structural issues
- Authorities’ fiscal rule: spending of oil revenues kept well below 4 percent specified under the fiscal rule.
- Staff and Directors: welcomed prudent fiscal policy; most Directors saw merit in a more neutral fiscal policy stance while the economy remains near capacity.
- Structural priorities identified by Directors:
  - Preserve financial stability.
  - Support transition to an economy less dependent on oil and gas.
  - Improve productivity and competitiveness.
  - Further reforms of the labor market, pensions and public services.
  - Greater wage differentiation across sectors.
  - Reduce protection and subsidies in agriculture.
  - Increased use of cost-benefit analysis in selection of infrastructure projects.
  - Simpler income tax system with fewer incentives for promoting housing to encourage productive investment.

### Executive Board assessment
- Commended Norway’s steady economic growth, moderate inflation, low unemployment, and large current account and fiscal surpluses.
- Agreed policy priorities and structural reforms should focus on preserving financial stability, supporting economic transition away from oil and gas, and improving productivity and competitiveness.
- Monetary policy: current stance under inflation-targeting framework considered appropriate; economy roughly at potential, inflation close to target, and house prices stabilizing reduce immediate case for a rate increase.
- Noted that the policy rate might eventually need to normalize to a level above the inflation target to meet objectives and mitigate overheating risks, particularly in real estate.
- Capital and macroprudential measures: recommended maintaining tighter capital standards and loan-to-value limits on mortgages; noted higher capital requirements may need adaptation as implementation proceeds.

### Key selected indicators and projections (2008–15)
- Population (2013): 5.1 million
- Per capita GDP (2013, USD): $100,318
- Real GDP (change in percent): 2008 0.0; 2009 -1.4; 2010 0.6; 2011 1.1; 2012 2.8; 2013 0.7; 2014 1.6; 2015 1.9
- Real mainland GDP (change in percent): 2008 1.5; 2009 -1.4; 2010 1.7; 2011 2.5; 2012 3.3; 2013 2.0; 2014 1.9; 2015 2.4
- Private consumption (change in percent): 2008 2.0; 2009 -0.1; 2010 3.7; 2011 2.6; 2012 3.0; 2013 2.2; 2014 1.8; 2015 2.3
- Private mainland fixed investment (change in percent): 2008 -2.3; 2009 -18.4; 2010 -4.1; 2011 7.7; 2012 5.9; 2013 2.9; 2014 2.9; 2015 4.8
- Unemployment rate (percent of labor force): 2008 2.6; 2009 3.2; 2010 3.6; 2011 3.3; 2012 3.2; 2013 3.5; 2014 3.7; 2015 3.8
- Output gap (mainland economy, - implies output below potential): 2008 1.2; 2009 -1.1; 2010 -1.3; 2011 -0.9; 2012 0.2; 2013 -0.1; 2014 -0.3; 2015 -0.3
- CPI (average): 2008 3.8; 2009 2.2; 2010 2.4; 2011 1.3; 2012 0.7; 2013 2.1; 2014 2.0; 2015 2.0
- Structural non-oil balance (percent of mainland trend GDP): 2008 -3.2; 2009 -5.1; 2010 -5.1; 2011 -4.4; 2012 -4.9; 2013 -5.1; 2014 -5.8
- Structural balance in percent of Pension Fund Global capital: 2008 -2.9; 2009 -4.3; 2010 -3.9; 2011 -3.0; 2012 -3.3; 2013 -3.1; 2014 -2.8
- General government net financial assets (percent of mainland GDP): 2008 177.8; 2009 202.3; 2010 215.9; 2011 216.0; 2012 228.9; 2013 269.4; 2014 275.8; 2015 277.5
- Capital of Government Pension Fund Global (GPFG) (percent of mainland GDP): 2008 122.0; 2009 140.6; 2010 154.7; 2011 159.5; 2012 174.1; 2013 217.6; 2014 226.3; 2015 230.4
- Current account balance (percent of mainland GDP): 2008 21.9; 2009 14.9; 2010 15.3; 2011 17.9; 2012 19.0; 2013 14.4; 2014 14.0; 2015 13.3
- Offshore trade balance of goods (percent of mainland GDP): 2008 31.4; 2009 21.7; 2010 22.0; 2011 26.0; 2012 26.4; 2013 24.8; 2014 24.9; 2015 22.9
- Mainland trade balance of goods (percent of mainland GDP): 2008 -7.8; 2009 -6.5; 2010 -6.8; 2011 -7.5; 2012 -8.0; 2013 -8.0; 2014 -9.4; 2015 -9.1
- Exports of goods and services (volume change in percent): 2008 0.7; 2009 -3.7; 2010 0.1; 2011 -1.4; 2012 1.1; 2013 -3.3; 2014 1.2; 2015 1.3
- Imports of goods and services (volume change in percent): 2008 4.1; 2009 -12.7; 2010 9.3; 2011 3.6; 2012 2.2; 2013 2.7; 2014 2.4; 2015 2.7
- International reserves (end of period, in billions of US dollars): 2008 50.9; 2009 48.9; 2010 52.8; 2011 49.4; 2012 51.9; 2013 58.3
- Exchange rate regime: Floating
- Bilateral rate (NOK/USD), end-of-period: 2008 7.0; 2009 6.2; 2010 5.8; 2011 5.7; 2012 5.8; 2013 6.0

*Source: IMF staff report and associated tables (IMF Executive Board conclusions, Press Release No.14/406, August 29, 2014).*

### 2017. Capacity utilization may edge down in the coming year, but is expected to increase

### 2017. Capacity utilization may edge down in the coming year, but is expected to increase

### Monetary policy and capacity utilization
- Capacity utilization may edge down in the coming year, but is expected to increase towards a normal level at the end of the projection period.
- Both the objective of keeping inflation close to target and the objective of sustaining capacity utilization in the years ahead could, ceteris paribus, imply a somewhat lower key policy rate.
- A lower key policy rate today may increase the risk that financial imbalances build up again.
- Norges Bank’s overall assessment in June was that the key policy rate should remain at today’s level for a period ahead.

### Fiscal policy: framework and implementation
- Norway’s fiscal framework, including the Government Pension Fund Global, is designed to support a stable development of the economy in both the short and medium term and to make sure that the petroleum wealth also benefits future generations.
- Public revenues from petroleum are described as large, volatile and temporary; a key feature of the framework is that it delinks the earning of petroleum revenues from its use.
- On the earning side:
  - Norway’s oil tax system and the state’s direct ownership in the oil production are set up to capture the resource rents from the industry.
  - The government’s net cash flow from the petroleum industry is transferred to the Government Pension Fund Global, which is invested abroad to insulate the government budget from volatility in petroleum revenues and to help protect the krone against fluctuations in export income.
- On the utilisation side:
  - The fiscal rule for gradually phasing oil and gas income into the fiscal budget was adopted in 2001.
  - The fiscal rule specifies that the expected real return of the Fund, estimated at 4 percent, over time shall be transferred to the central government’s budget.
  - The rule is intended to even out economic fluctuations and support low unemployment; spending of petroleum revenues in a particular year must therefore be adjusted to the macroeconomic situation.
- Current policy stance relative to the four-percent path:
  - In a period with steep growth in the Fund’s capital, spending oil revenues in line with the expected return (the four-percent path) would have provided a very strong boost in the short term.
  - Therefore, spending of oil revenues is at present held well below the four-percent path (with current spending being at 2.8 percent of the Fund).
- Historical and projected fiscal impulse:
  - Since 2001, the structural non-oil budget deficit has increased from 1¾ to 5¾ percent of trend-GDP Mainland Norway, or on average by 0.3 percentage points a year.
  - The Fund’s capital is expected to reach a peak at around 2 ½ times of Mainland GDP sometime in the period 2020-2030.
  - Once the peak has passed, the impulse from fiscal policy to aggregate demand is expected to be negative.
- Policy assessment and priorities:
  - The staff report suggests that a neutral fiscal stance would be preferable so long as the economy remains near potential.
  - Authorities view completely stopping the phasing in of petroleum revenues in an economy performing near trend as out of line with the framework.
  - Government priorities include strengthening the growth capacity of the Norwegian non-oil economy via lower taxes, investments in infrastructure and knowledge.
  - In the 2014 budget the government has started to redirect the use of oil revenues toward these priorities.
  - A tax commission is reviewing the corporate tax system; increasing taxes on housing as a balancing measure to reduced corporate taxes is not prioritized.

### Financial sector issues and macroprudential policy
- Norwegian banks have strengthened their solvency significantly in recent years due to new capital requirements and market demands.
- Loan losses are low, but banks must be prepared for the possibility of increased losses in the next few years.
- Banks' financial position strengthened in 2013, but further bolstering of equity capital is needed to tackle economic uncertainty and forthcoming regulatory requirements.
- Authorities concur with staff’s assessment of risks related to:
  - Households’ indebtedness,
  - A possible house price reversal,
  - Financial institutions’ reliance on wholesale funding.
- Regulatory and macroprudential measures:
  - A new capital adequacy regulation adopted by the Norwegian parliament in June 2013 contains a set of macroprudential tools and powers.
  - The counter-cyclical capital buffer, the buffer for systemically important banks, and minimum floors for mortgage risk weights are key elements of the regulation.
  - Authorities emphasize the need for tighter capital risk weights on mortgage lending for both domestic and foreign banks and efforts to harmonize prudential standards among Nordic countries through reciprocity.
  - Authorities note that different national circumstances may require different prudential responses and that greater host country regulation can contribute to financial stability and leveling the playing field in national credit markets.

### Structural policy and productivity
- Large terms of trade gains and rapidly increasing demand from offshore activities may have masked a decline in wage competitiveness relative to peer countries.
- As demand from the petroleum sector diminishes, the Mainland economy needs to shift to a growth model less dependent on oil and gas, requiring stronger emphasis on structural policies and productivity growth.
- Measures already introduced or proposed:
  - Consultation paper on reforming municipality structure to increase size and robustness.
  - Measures to increase efficiency in the agricultural sector.
  - Proposed changes in building and planning regulations to reduce costs and shorten planning processes in construction.
  - Consultation paper with proposals to soften labor market regulations on working hours to increase labor market flexibility.
  - A commission appointed to explore how regulations on working hours can be relaxed while protecting health and welfare.
  - Measures to increase efficiency in road construction.
- Productivity Commission:
  - Appointed soon after the present government took office; the Commission’s first report is to be presented in February 2015.
  - The government will consider all initiatives to increase productivity.
- Tax and spending strategy to support Mainland business:
  - Main strategy is to reduce taxes and direct government spending towards transport, research and development, and education.
  - The bulk of future increases in spending of oil revenues will be on tax reductions, combined with a broadening of the tax base and the mentioned expenditure items.
  - Several tax cuts have been introduced, notably a cut in the personal and corporate income tax rate from 2014.
  - Authorities concur with the staff report that a simpler tax system would underpin productivity; growth-enhancing tax cuts combined with simplifications and a broadening of the tax base will be prioritized.
  - The relatively high corporate tax rate is an area of particular concern.
- Pension and labor market reforms:
  - Comprehensive reforms of the old age pension and the early retirement scheme in the private sector have been implemented; benefits include increased labor market participation rates among the elderly.
  - Remaining challenges include reforming occupational pensions in the public sector and reducing high levels of disability and sickness.

*Source: _cr14259 - 2017. Capacity utilization may edge down in the coming year, but is expected to increase*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14259.pdf_