## _cr15249 - 0.1 percentage points since June 2014. Inflation has been stable and close to the 2.5 percent

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---

### Recent economic developments
- Oil prices: fell sharply toward the end of 2014 and remained about 40 percent lower than their peak in mid-2014; some recovery in 2015.
- Mainland economy:
  - Mainland GDP growth: grew at 2.2 percent in 2014 and continued to grow at 0.5 percent (q/q) in Q1 2015.
  - Real mainland GDP growth projections: 1.3 percent in 2015 and 1.7 percent in 2016.
- Unemployment:
  - Labor-force survey unemployment edged up to 4.2 percent recently.
  - Registered unemployment shows a lower and more stable trend.
  - Unemployment rate (percent of labor force) historical/projections (2009–2016): 3.2, 3.6, 3.3, 3.2, 3.5, 3.5, 4.0, 4.1.
- Inflation and wages:
  - CPI-ATE averaged 2.3 percent during the first five months of 2015.
  - CPI (average) historical/projections (2009–2016): 2.2, 2.4, 1.3, 0.7, 2.1, 2.0, 2.3, 2.3.
  - Nominal wage growth slowed to 3.1 percent last year.
- Exchange rate and competitiveness:
  - CPI-based REER is about 13 percent below its 10-year historical average.
  - Bilateral rate (NOK/USD), end-of-period (2009–2014): 6.3, 6.0, 5.6, 5.8, 5.9, 6.3.
  - External Balance Assessments suggest the exchange rate is now slightly undervalued.
- Housing and household balance sheets:
  - House prices grew at 7 percent in nominal terms in Q1 2015.
  - Household debt reached about 220 percent of disposable income.
- Fiscal outturn and public finances:
  - 2014 structural non-oil deficit: 2.9 percent of Government Pension Fund Global (GPFG) assets and 5.8 percent of trend mainland GDP.
  - Structural non-oil balance (percent of mainland trend GDP) row (2009–2016): -5.1, -5.1, -4.5, -5.0, -5.1, -5.8, -6.4, ...
  - Central government overall balance (percent of mainland GDP) row (2009–2016): 9.3, 8.3, 12.6, 12.8, 9.4, 6.1, 3.8, 3.9.
  - General government net financial assets (percent of mainland GDP) row (2009–2016): 194.7, 208.6, 209.4, 220.5, 259.3, 303.6, 317.5, 318.5.
  - Capital of Government Pension Fund Global (GPF-G) row (2009–2014): 134.2, 148.2, 153.3, 166.1, 207.8, 254.3, 269.8, ...
  - Gross public debt is about 30 percent of GDP and net financial assets are about 250 percent of GDP.
- Financial sector:
  - Banks’ profitability has been solid and banks have strengthened capital ratios, but reliance on wholesale funding continues.
  - FSAP update concluded the Norwegian financial system is generally sound and well managed.
  - Areas of concern: high house prices, rising household debt, banks’ reliance on wholesale funding.

### Outlook and risks
- Near-term outlook:
  - Weakened due to lower oil prices; mainland GDP growth projected to slow to 1.3 percent in 2015 with weaker private investment and consumption.
- Medium/longer-term challenge:
  - Manage transition away from oil-dependent growth as oil investment expected to decline further.
  - Resources need to shift toward other tradable sectors or exports of oil-related goods and services.
  - Unemployment likely to increase during the transition.
  - Common currency unit labor costs will need to adjust downward from current high levels.
- Downside risks:
  - Protracted low oil prices from global demand deceleration or excess supply could undercut growth via reduced oil-related demand for mainland goods and services.
  - Significant reduction in property prices could depress private demand.
  - Expected decline in oil-related output may not be offset by pick-up elsewhere in the mainland economy.

### Monetary policy findings and guidance
- Assessment:
  - Current monetary policy stance is appropriately supportive.
  - Inflation has been relatively stable and close to the 2.5 percent target.
  - Lower wage growth this year likely reduces risk of imported prices spilling over to higher domestic inflation.
- Guidance:
  - If growth turns out significantly weaker than projected, monetary policy should be the first line of defense against economic weakness, provided inflation expectations remain well anchored.
  - Monetary policy should be carefully monitored against inflation and financial stability risks.
- Norges Bank actions and stance:
  - Policy rate cut twice by a quarter point in December 2014 and June 2015 bringing it to 1.00 percent.
  - March and May 2015 decisions had held the rate at 1¼ percent prior to June.
  - Spring 2015 wage agreements likely to result in 2.7 percent growth in nominal wages (y/y), down from 3.1 percent last year.
  - Longer-term guidance: gradual return to a normal nominal interest rate of about 4 percent—corresponding to a normal real interest rate of about 1½ percent—needed over time.

### Financial sector policy recommendations and vulnerabilities
- Banking sector key findings:
  - Banks' profitability has been solid and capital ratios strengthened.
  - Roughly 60 percent of funding is wholesale funding, more than half in foreign currency—vulnerability to global market turbulence.
  - High house prices and household debt-to-disposable income among the highest in OECD.
  - Staff analysis: a 10 percent decline in real house prices could reduce private consumption by 0.9 percent in Norway.
- FSAP and macroprudential recommendations:
  - Timely implementation of macroprudential measures to contain rising household credit to give monetary policy room to support growth.
  - Further measures: improve liquidity stress tests; stricter loan-to-value, loan-to-income or debt service ratios; more frequent comprehensive assessments of small banks; strengthen toolkit and funding arrangements for bank resolution.
  - Given low stock of high-quality liquid assets in krone, proposal that LCR requirement be set at 60 percent in domestic currency and total “all currency” LCR at 100 percent.
  - FSA proposed Norwegian SIFIs and other large institutions fulfill 100 percent LCR from January 1, 2016; phase-in for other institutions in line with EU regulation.
- Staff recommendations to mitigate systemic risks (selected):
  - Improve data on cross-border ownership of bank-issued unsecured and covered bonds.
  - Resume regular monitoring of bank-to-bank direct and indirect exposures; perform liquidity stress tests by cash-flow maturity structure.
  - Strengthen institutional structure for macroprudential policies; consider greater delegation to Norges Bank or the FSA.
  - Ensure de jure operational independence of the FSA; strengthen FSA supervision of small banks and upgrade AML/CFT supervision.
  - Initiate resolution planning for largest banks; enhance legal framework for resolution to comply with FSB Key Attributes; clarify Bank Guarantee Fund (BGF) conflict-of-interest policies.
- Authorities’ measures and views:
  - Government strengthened guidelines on mortgage loan-to-value limits by changing them into requirements as of July 1, 2015.
  - Countercyclical capital buffer increased from 1 percent to 1½ percent from July 1, 2016.
  - Authorities generally agreed with risk assessment and noted banks and households had increased buffers through higher capital and saving.

### Fiscal policy assessment and recommendations
- Short run (2015):
  - Fiscal policy broadly appropriate in 2015 given projected slowdown.
  - 2014 fiscal outturn entailed a positive fiscal impulse but remained within fiscal rule targeting a structural non-oil deficit equal to 4 percent of GPFG assets.
  - Budget well insulated from oil and gas prices through the fiscal rule.
- 2015 budget specifics:
  - 2015 budget entails an expansionary fiscal stance with a non-oil structural deficit of 6.4 percent of trend mainland GDP.
  - Equivalent to 2.6 percent of the value of the GPFG.
  - Fiscal stance implies a fiscal impulse of about 0.6 percentage point.
- Medium run:
  - Shift to a neutral fiscal stance would be more appropriate over the medium term to allow reallocation to tradable industries.
  - If growth weaker than expected in 2016, allow automatic stabilizers to operate but stop short of using fiscal stimulus to replace declining oil-related demand (which would also put appreciation pressures on the exchange rate).
- Fiscal rule and GPFG:
  - GPFG assets growing much faster than mainland GDP; transfers even at a constant share imply a trend toward a positive fiscal impulse.
  - Depreciation of the krone increases the size of the GPFG relative to GDP because GPFG is invested abroad.
  - Fiscal Rule Commission recommendations (reported): supplementary rules to (i) limit use of GPFG over next 10–15 years to better align peak use with population aging costs; and (ii) set a limit on fiscal impulse to 0.1–0.2 percent of mainland GDP.
- Staff advice:
  - Refrain from using stimulus to offset declines in oil-related demand that would inhibit necessary resource shifts; public sector employment to replace declining oil-related employment would inhibit structural transformation.

### Structural reforms and competitiveness
- Competitiveness and labor market flexibility:
  - Recent depreciation of the krone has offset some deterioration in ULC competitiveness, but Norway’s ULC in common currency remains high relative to trading partners.
  - About 9 percent of total employment linked to Norwegian petroleum industry; including exports of oil-related goods and services other estimates put the figure at 13 percent.
  - Short-run productivity gains are hard to deliver; continued restraint in wage settlements may be necessary for several years.
  - Collective bargaining delivered a nominal increase in national negotiations of only 0.3 percent.
- Taxation and investment incentives:
  - More neutrality in taxation of assets advised to promote efficiency and support transition.
  - 2015 budget reduced valuation discount for commercial property and second dwellings from 40 to 30 percent of market value.
  - Staff welcomed Tax Commission recommendations to shift tax burden toward indirect taxes and reduce preferential tax treatment for residential real estate.
- Pensions, sickness, and disability benefits:
  - Further reform needed; staff urged completion of pension reform by aligning public sector pension rules with private sector principles.
  - Norway’s expenditure on health-related benefits highest among OECD; large inflows into disability and high sickness absence incidence.
  - Productivity Commission’s final report expected to be presented early next year.
- Other structural reforms:
  - Relax unnecessary supply restrictions in the housing market; lower agricultural protection and subsidies to improve efficiency.
  - Staff recommends measures to reallocate investment toward tradable industries.

### Executive Board assessment (summary of Directors' views)
- Commendations:
  - Norway’s strong economic performance in the previous year: steady growth, low inflation, and low unemployment.
- Concerns and advice:
  - Near-term outlook weakened with lower oil prices and ongoing slowdown in offshore investment; housing and financial sector risks present a challenge.
  - Urged vigilance and prudent policies to safeguard growth and financial stability.
  - Supported current monetary policy stance and recommended careful monitoring of inflation and financial stability risks.
  - Recommended timely implementation of macroprudential measures to contain rising household credit.
  - Considered fiscal policy broadly appropriate for the year; several Directors favored maintaining fiscal impulse next year given growth risks, while over the medium term a more neutral stance necessary to allow resource shift to tradable industries.
  - Welcomed recommendations of the commission on the fiscal rule and FSAP update conclusions; urged additional measures to reduce financial sector risks.
  - Emphasized importance of further structural reforms listed above.

### Box 1 — External Sector Assessment and Competitiveness (key statistics and estimates)
- Current account surplus narrowed to 11.8 percent of (mainland) GDP, driven by lower oil exports.
- Net international investment position (NIIP) increased to 213 percent of GDP (up from 160 percent in 2013).
- International reserves increased to over 19 percent of GDP.
- IMF EBA analysis (data up to March 2015) yields krone misalignment estimates:
  - EBA CA Analysis: 1.0 percent (mild undervaluation)
  - EBA REER (Index) Analysis: 4.8 percent (mild undervaluation)
  - EBA REER (Level) Analysis: 19.3 percent (undervaluation)
  - EBA External Sustainability (ES) Approach: -13.4 percent (CA gap) and 38.0 percent (REER gap; overvaluation)
- Staff places greater emphasis on the CA and REER index estimates (1.0 and 4.8 percent).
- ULC-based REER has appreciated by over 50 percent during the past two decades; ULC growth has been among the highest in the OECD.
- Much of rapid ULC increase concentrated in mining and utilities (includes oil and gas extraction and services incidental to oil and gas).

### Box 2 — Risk Assessment Matrix (highlights)
- Risks to energy prices:
  - Relative Likelihood: Medium; Expected Impact if Realized: Medium/High.
  - Policy response: Monetary policy is the first line of defense while there is ample fiscal space.
- Significant reduction in house prices:
  - Relative Likelihood: Medium; Expected Impact if Realized: High.
  - Policy response: Take additional macroprudential measures to contain risks from further buildup of high household debt.
- Protracted slower growth in key advanced and emerging economies:
  - Relative Likelihood: High/Medium; Expected Impact if Realized: High.
  - Policy response: Allow automatic stabilizers to operate.
- Side-effects from global financial conditions:
  - Relative Likelihood: High; Expected Impact if Realized: Medium.
  - Policy response: Strengthen liquidity monitoring; consider supplements to fiscal rule to limit GPFG volatility impact on budget.
- Failure of non-oil-related mainland economy to pick up slack:
  - Relative Likelihood: Medium; Expected Impact if Realized: Medium.
  - Policy response: Stop short of fiscal stimulus to replace declining oil-related demand; adopt competitiveness and productivity enhancing reforms.

### Annex I — Debt Sustainability Analysis (key projections and indicators, baseline as of April 01, 2015)
- Sovereign spreads:
  - EMBIG (bp) 3/1: 19
  - 5Y CDS (bp): 258
- Nominal gross public debt (2013–2020): 41.5, 29.2, 30.1, 32.5, 32.2, 32.7, 33.3, 34.4, 34.8.
- Public gross financing needs (2013–2020): -10.6, -10.6, -14.4, -3.8, -1.5, -1.1, -0.7, -0.1, 1.9.
- Real GDP growth (2013–2020): 1.7, 0.7, 2.2, 1.0, 1.3, 1.7, 1.9, 2.0, 2.0.
- Inflation (GDP deflator, 2013–2020): 5.3, 2.7, 0.4, 1.4, 2.1, 2.1, 2.3, 2.3, 2.3.
- Nominal GDP growth (2013–2020): 7.1, 3.5, 2.6, 2.4, 3.5, 3.9, 4.3, 4.4, 4.4.
- Effective interest rate (2013–2020): 3.2, 3.3, 3.3, 2.8, 1.4, 1.6, 1.3, 1.5, 1.7.
- Change in gross public sector debt (2013–2020): -1.4, 0.3, 1.0, 2.4, -0.3, 0.5, 0.6, 1.1, 0.4; cumulative change (2013–2020): 4.7.
- Identified debt-creating flows (2013–2020 and cumulative): -13.5, -9.1, -5.7, -4.2, -5.1, -4.9, -5.1, -4.7, -4.2; cumulative -28.2.
  - Primary deficit (2013–2020 and cumulative): -11.9, -9.2, -6.6, -4.3, -4.4, -4.1, -4.1, -3.8, -3.4; cumulative -24.2.
  - Primary (noninterest) revenue and grants (2013–2020 and cumulative): 52.6, 51.6, 50.7, 48.8, 48.8, 49.0, 49.0, 49.0, 48.8; cumulative 293.4.
  - Primary (noninterest) expenditure (2013–2020 and cumulative): 40.7, 42.4, 44.0, 44.4, 44.4, 44.9, 44.9, 45.1, 45.5; cumulative 269.2.
- Automatic debt dynamics (2013–2020 and cumulative): -1.7, 0.1, 0.9, 0.1, -0.7, -0.7, -0.9, -0.9, -0.9; cumulative -4.0.
- Residual, including asset changes (2013–2020 and cumulative): 12.2, 9.4, 6.7, 6.6, 4.8, 5.4, 5.7, 5.8, 4.7; cumulative 32.9.
- Baseline macro assumptions (2015–2020): Real GDP growth: 1.0, 1.3, 1.7, 1.9, 2.0, 2.0; Inflation: 1.4, 2.1, 2.1, 2.3, 2.3, 2.3; Primary Balance: 4.3, 4.4, 4.1, 4.1, 3.8, 3.4; Effective interest rate: 2.8, 1.4, 1.6, 1.3, 1.5, 1.7.

### Data dissemination and institutional notes
- Uses SDDS flexibility options on the timeliness of the general government operations and central government debt.
- SDSS metadata are posted on the Dissemination Standard Bulletin Board (DSBB).
- Data ROSC completed in 2003 is publicly available.
- Proposal: next Article IV consultation with Norway be held on the standard 12-month cycle.

*Source: Norway—Staff Report for the 2015 Article IV Consultation (July 30, 2015); IMF staff report (excerpt); Statement by Mr. Groenn, Executive Director of Norway, September 4, 2015, and accompanying country data table (As of July 13, 2015).*

### 0.1 percentage points since June 2014. Inflation has been stable and close to the 2.5 percent

### _cr15249 - 0.1 percentage points since June 2014. Inflation has been stable and close to the 2.5 percent

### Recent economic developments
- Oil prices fell sharply toward the end of 2014 and remained about 40 percent lower than their peak in mid-2014; some recovery in 2015.
- The mainland economy grew at 2.2 percent in 2014 and continued to grow at 0.5 percent (q/q) in Q1 2015.
- Real mainland GDP growth projections: 1.3 percent in 2015 and 1.7 percent in 2016.
- Unemployment:
  - Labor-force survey unemployment edged up to 4.2 percent recently.
  - Registered unemployment shows a lower and more stable trend.
  - Unemployment rate (percent of labor force) historical/projections: 3.2, 3.6, 3.3, 3.2, 3.5, 3.5, 4.0, 4.1 (2009–2016 row).
- Inflation:
  - CPI-ATE averaged 2.3 percent during the first five months of 2015.
  - CPI (average) historical/projections: 2.2, 2.4, 1.3, 0.7, 2.1, 2.0, 2.3, 2.3 (2009–2016 row).
  - Nominal wage growth slowed to 3.1 percent last year.
- Exchange rate and competitiveness:
  - CPI-based REER is about 13 percent below its 10-year historical average.
  - Bilateral rate (NOK/USD), end-of-period: 6.3, 6.0, 5.6, 5.8, 5.9, 6.3 (2009–2014).
  - External Balance Assessments suggest the exchange rate is now slightly undervalued.
- Housing and household balance sheets:
  - House prices grew at 7 percent in nominal terms in Q1 2015.
  - Household debt reached about 220 percent of disposable income.
- Fiscal outturn and public finances:
  - The 2014 structural non-oil deficit was 2.9 percent of Government Pension Fund Global (GPFG) assets and 5.8 percent of trend mainland GDP.
  - Fiscal targets and balances:
    - Structural non-oil balance (percent of mainland trend GDP) row (2009–2016): -5.1, -5.1, -4.5, -5.0, -5.1, -5.8, -6.4, ...
    - Central government overall balance (percent of mainland GDP) row (2009–2016): 9.3, 8.3, 12.6, 12.8, 9.4, 6.1, 3.8, 3.9.
    - General government net financial assets (percent of mainland GDP) row (2009–2016): 194.7, 208.6, 209.4, 220.5, 259.3, 303.6, 317.5, 318.5.
    - Capital of Government Pension Fund Global (GPF-G) row (2009–2014): 134.2, 148.2, 153.3, 166.1, 207.8, 254.3, 269.8, ...
  - Gross public debt is about 30 percent of GDP and net financial assets are about 250 percent of GDP (debt sustainability not an important consideration).
- Financial sector:
  - Banks’ profitability has been solid and banks have strengthened capital ratios, but reliance on wholesale funding continues.
  - FSAP update concluded the Norwegian financial system is generally sound and well managed.
  - Areas of concern: high house prices, rising household debt, banks’ reliance on wholesale funding.

### Outlook and risks
- Near-term outlook weakened due to lower oil prices.
  - Mainland GDP growth projected to slow to 1.3 percent in 2015 with weaker private investment and consumption.
- Medium and longer-term challenge: manage transition away from oil-dependent growth model as oil investment is expected to decline further.
  - Resources need to shift toward other tradable sectors or exports of oil-related goods and services.
  - Unemployment will likely increase during the transition.
  - Common currency unit labor costs will need to adjust downward from the current high level to facilitate the transition.
- Downside risks:
  - Deceleration of global demand or excess oil and gas supply could produce a protracted period of low oil prices, undercutting growth through reduced oil-related demand for mainland goods and services.
  - A significant reduction in property prices could depress private demand.
  - Risk that expected decline in oil-related output in the mainland economy would not be offset by a pick-up elsewhere in the mainland economy.

### Monetary policy findings and guidance
- Assessment:
  - The current monetary policy stance is appropriately supportive.
  - Inflation has been relatively stable and close to the 2.5 percent target.
  - Lower wage growth this year likely reduces the risk of imported prices spilling over to higher domestic inflation.
- Guidance:
  - If growth turns out significantly weaker than currently projected, monetary policy should be the first line of defense against economic weakness, provided that inflation expectations remain well anchored.
  - Monetary policy should be carefully monitored against inflation and financial stability risks.

### Financial sector policy recommendations
- FSAP recommendations and staff/Directors' emphasis:
  - Timely implementation of macroprudential measures to contain rising household credit, to leave room for monetary policy to support growth while pursuing the inflation target.
  - Further measures needed to reduce risks, including:
    - Improving liquidity stress tests.
    - Stricter loan-to-value, loan-to-income or debt service ratios.
    - More frequent comprehensive assessments of small banks.
    - Strengthening the toolkit and funding arrangements for bank resolution.
- Vulnerabilities:
  - Reliance on wholesale funding makes banks vulnerable to turbulence in global financial markets.

### Fiscal policy assessment and recommendations
- Short run:
  - Fiscal policy is broadly appropriate in 2015 given the projected slowdown.
  - The 2014 fiscal outturn entailed a positive fiscal impulse but remained within the authorities’ fiscal policy rule targeting a structural non-oil deficit equal to 4 percent of GPFG assets.
  - The budget is well insulated from oil and gas prices through the fiscal rule.
- Medium run:
  - A shift to a neutral fiscal stance would be more appropriate over the medium term on the basis of current projections to allow reallocation of resources to other tradable industries.
  - If growth is weaker than expected in 2016, the authorities should allow automatic stabilizers to operate but stop short of using fiscal stimulus to replace declining oil-related demand in the mainland economy (fiscal stimulus would also put appreciation pressures on the exchange rate).
- Fiscal rule and fund:
  - GPFG assets have been growing much faster than mainland GDP; transfers even at a constant share imply a trend toward a positive fiscal impulse.
  - Depreciation of the krone increases the size of the GPFG relative to GDP because the GPFG is invested abroad.

### Structural reforms and competitiveness
- Priority reforms to support transition and improve efficiency:
  - Reduce preferential tax treatment for residential properties relative to productive investments (more neutrality in taxation of assets).
  - Further reforms to the pension system and sickness and disability benefits.
  - Investment in infrastructure, education, and research to raise productivity.
  - Lower Norway’s extensive agricultural protection and subsidies.
  - Relax unnecessary supply restrictions in the housing market.
- Objective: support transition to a growth model less reliant on oil- and gas-related demand and improve overall economic efficiency.

### Executive Board assessment (summary of Directors' views)
- Commendations and concerns:
  - Commended Norway’s strong economic performance in the previous year: steady growth, low inflation, and low unemployment.
  - Noted that the near-term outlook has weakened with lower oil prices and an ongoing slowdown in offshore investment; housing and financial sector risks present a challenge.
- Policy advice:
  - Urged vigilance and prudent policies to safeguard growth and financial stability.
  - Supported the current monetary policy stance and recommended careful monitoring of inflation and financial stability risks.
  - Recommended timely implementation of macroprudential measures to contain rising household credit.
  - Considered fiscal policy broadly appropriate for the year; a number of Directors favored maintaining the fiscal impulse next year given risks to growth, while over the medium term a more neutral stance would be necessary to allow resource shift to other tradable industries.
  - Welcomed recommendations of the commission on the fiscal rule and the FSAP update conclusions, while urging additional measures to reduce financial sector risks.
  - Emphasized the importance of further structural reforms as listed above.

*Source: Norway—Staff Report for the 2015 Article IV Consultation (July 30, 2015).*

### 8.      Banks’ profitability has been solid and banks have strengthened their capital ratios,

### 8.      Banks’ profitability has been solid and banks have strengthened their capital ratios, but reliance on wholesale funding continues.

### Banking sector key findings
- Banks' profitability has been solid and banks have strengthened their capital ratios.
- Roughly 60 percent of funding is wholesale funding, more than half of it in foreign currency. This makes banks vulnerable to turbulence in global financial markets.
- High house prices and the household debt-to-disposable income ratio are one of the highest among the OECD countries.
- Staff’s empirical analysis suggests that a 10 percent decline in real house prices could reduce private consumption by 0.9 percent in Norway.

### Outlook and risks
- Near-term outlook weakened due to lower oil prices.
- Mainland GDP growth is projected to slow to 1.3 percent this year with weaker private investment and consumption as demand for mainland inputs to the offshore sector declines.
- Mainland growth is projected to recover moderately next year as private consumption rebounds in line with a modest increase in oil prices.
- Inflation is expected to increase slightly as import prices rise with the exchange rate depreciation but stay below the 2.5 percent target.
- Unemployment is expected to rise further but remain at a relatively low level.
- Medium- and longer-term challenge: transition away from an oil-dependent growth model as oil- and gas-related investment declines; staff’s central forecast is a recovery of growth in the medium term with somewhat higher unemployment in the transition process, and inflation that remains close to the target.

Downside risks (excerpted)
- Deceleration of global demand or excess oil and gas supply could lead to a protracted period of low oil prices, undercutting growth through a further reduction in the oil-related demand for mainland goods and services and making it more difficult for non-oil and gas export industries to expand.
- A significant reduction in property prices could occur. With high household debt, a large fall in house prices—for example, due to a slowdown in real income growth, higher unemployment, or a large increase in interest rates—could depress private demand with adverse consequences for retail trade, domestic services, construction and commercial real estate and lenders to these sectors.
- The expected decline in oil-related output in the mainland economy may not be offset by a pick-up elsewhere in the mainland economy; a less smooth transition might lead to a further increase in unemployment.
- Tighter or more volatile global financial conditions could cause renewed stress in the global wholesale funding markets, leading to liquidity strains for Norwegian banks that rely on wholesale funding.

### Authorities’ views (summary)
- Authorities generally agreed with the risk assessment and noted sustained lower oil prices will slow oil investment further.
- Authorities stressed the need to shift to a new growth model less dependent on offshore activity and noted that current fiscal and monetary policies are supportive of the transition.
- Authorities acknowledged high household debt is a risk but noted banks and households had increased buffers through higher capital and saving respectively.

### Monetary policy
- Norges Bank cut the policy rate twice by a quarter point in December 2014 and June 2015 bringing it to 1.00 percent.
- March and May 2015 decisions had held the rate at 1¼ percent prior to June.
- Updated projections in June showed only slightly weaker output, but inflation is now projected to be lower and slightly below the inflation target for the year.
- Spring 2015 wage agreements are likely to result in 2.7 percent growth in nominal wages (y/y), down from 3.1 percent last year.
- Staff view: current monetary policy stance is appropriately supportive; in the scenario that growth turns out significantly weaker, monetary policy needs to be the first line of defense provided inflation expectations are well anchored.
- Longer-term guidance: a gradual return to a normal (nominal) interest rate of about 4 percent—corresponding to a normal real interest rate of about 1½ percent—is needed over time.

Authorities’ policy actions
- Government strengthened guidelines on mortgage loan-to-value limits by changing them into requirements as of July 1, 2015.
- Countercyclical capital buffer increased from 1 percent to 1½ percent from July 1, 2016.

### Fiscal policy
- The 2015 budget entails an expansionary fiscal stance with a non-oil structural deficit of 6.4 percent of trend mainland GDP.
- This is estimated to be equivalent to 2.6 percent of the value of the GPFG.
- The fiscal stance implies a fiscal impulse of about 0.6 percentage point.
- Staff recommendation: in the medium term, a shift to a broadly neutral fiscal stance would be more appropriate on the basis of current projections; allow automatic stabilizers to operate if growth is weaker than projected in 2016.
- Staff advice: refrain from using stimulus to offset declines in oil-related demand that would inhibit necessary resource shifts; public sector employment to replace declining oil-related employment would inhibit structural transformation.
- Fiscal Rule Commission recommendations (reported): supplementary rules to (i) limit use of the GPFG over the next 10–15 years to better align the peak use of the GPFG resources with the costs of population aging; and (ii) set a limit on the fiscal impulse to 0.1–0.2 percent of mainland GDP.

Authorities’ view
- Government created a Commission to recommend modifications or supplementary provisions to the fiscal rule and is studying the recommendations and soliciting input.

### Financial sector policy and vulnerabilities
- FSAP update concluded the Norwegian financial system is generally sound and well managed.
- Authorities implemented CRD IV early; risk weights for residential mortgages used in banks’ IRB models have been tightened.
- A countercyclical capital buffer of 1 percent took effect on July 1, 2015, and the buffer will be increased to 1½ percent from July 1, 2016.
- FSAP bank stress tests suggest that financial institutions’ capital needs in the face of severe shocks would be nontrivial but manageable.
- Banks are vulnerable to turbulence in foreign financial markets as 60 percent of wholesale funding is from foreign sources.
- Given the low stock of high-quality liquid assets denominated in krone, Norges Bank proposed that the Liquid Coverage Ratio (LCR) requirement should be set at 60 percent in domestic currency and the total “all currency” LCR requirement at 100 percent.
- The FSA proposed that Norwegian SIFIs and other large institutions shall fulfill a 100 percent LCR from January 1, 2016 while LCR should be phased in for other institutions in line with the EU regulation. The FSA proposal does not specify LCR requirements for individual currencies in the regulation.

### Staff recommendations to mitigate systemic risks (selected)
- Bank stress tests:
  - Improve data on cross-border ownership of bank-issued unsecured and covered bonds.
  - Resume regular monitoring of bank-to-bank direct and indirect exposures.
  - Consider regional stress test exercises and perform liquidity stress tests using the structure of cash flows at various maturities.
- Macroprudential policy:
  - Take additional measures to contain systemic risks from the growth of house prices and household indebtedness, including stricter LTV and loan-to-income or debt service ratio to supplement the affordability test.
  - Take additional measures to contain risks related to banks’ wholesale funding.
  - Improve the existing institutional structure for macroprudential policies, including a transparent “comply or explain” approach by decision-makers.
  - Consider greater delegation of decision-making powers over macroprudential instruments in due course to Norges Bank or the FSA.
- Micro-supervision:
  - Ensure de jure operational independence of the FSA.
  - Strengthen the FSA’s supervision of small banks through more frequent comprehensive assessments.
  - Upgrade the FSA’s approach to AML/CFT supervision.
- Crisis management and bank resolution:
  - Initiate resolution planning for the largest banks, including assessing impediments of resolvability.
  - Make explicit delegations to the FSA regarding its role.
  - Enhance the legal framework for resolution to comply with the FSB Key Attributes in certain areas including the resolution toolkit.
  - Bank Guarantee Fund (BGF) should adopt policies specifying under what conditions board members must recuse themselves, considering actual and prospective conflicts of interest.

Authorities’ view
- Authorities generally agreed with staff’s conclusions and noted that FSAP recommendations will be carefully examined.
- New measures to strengthen mortgage lending practices implemented with effect from July 1, 2015.
- Countercyclical buffer will be increased to 1½ percent from July 1, 2016.
- Work for implementing the EU Banking Recovery and Resolution Directive (BRRD) is underway; transposition into national law would address some staff recommendations on bank resolution.
- Authorities emphasized countercyclical buffers should not be seen as a tool to fine-tune financial cycles.

*Source: IMF staff report (excerpt).*

### 25.      Competitiveness and the flexibility of

### _cr15249 - 25.      Competitiveness and the flexibility of

### Competitiveness and labor market flexibility
- Decline in oil prices and investment demand from the offshore economy will test competitiveness and labor market flexibility.
- Recent depreciation of the krone has offset some deterioration in ULC competitiveness, but Norway’s ULC measured in common currency remains high relative to trading partners.
- Labor will need to shift away from supplying the oil and gas sector as investment on the Norwegian continental shelf declines gradually over time.
- Statistics Norway estimates that about 9 percent of total employment in the Norwegian economy is linked to the activity in the Norwegian petroleum industry. Including exports of oil-related goods and services, other sources estimate the figure at 13 percent.
- Ideally, adjustment in common currency ULC should come from increased productivity growth, but short-run productivity gains are hard to deliver; continued restraint in wage settlements may be necessary for several years.
- The collective bargaining system delivered a substantial reduction in real wage growth with a nominal increase in the national negotiations of only 0.3 percent.

### Taxation and investment incentives
- More neutrality in the taxation of assets would promote efficiency and support transition to a new growth model.
- Reducing the extent to which the tax system promotes housing rather than productive investment would help redeploy new investment toward tradable industries.
- The 2015 budget reduced the valuation discount for commercial property and second dwellings from 40 to 30 percent of market value.
- Staff welcomed the Tax Commission’s recommendations to shift the tax burden toward indirect taxes and further reduce preferential tax treatment for residential real estate.

### Pensions, sickness, and disability benefits
- Further reform to the pension system and sickness and disability benefits is needed.
- Staff urged completion of pension reform by fully aligning public sector pension rules with private sector pension principles.
- Norway’s expenditure on health-related benefits is the highest among the OECD countries, with large inflows into disability cases and high sickness absence incidence, resulting in a large group being left out of the labor market.
- Large immigration inflows in recent years have put pressures on the welfare system amid the ongoing transition that could raise unemployment.
- Staff welcomed the Productivity Commission’s focus on improved use of manpower resources and noted the authorities’ measure of replacing disability pensions with disability benefits designed to create incentives to work while receiving disability benefits.
- The Productivity Commission’s final report is expected to be presented early next year.

### Other structural reforms (housing, agriculture, trade)
- Restrictions on new real estate construction have slowed building and raised housing costs; policies are under review and staff would welcome measures to relax unnecessary supply restrictions to ease housing price pressures.
- Norway’s extremely high trade restrictions and subsidies in agriculture divert private and public resources from more productive sectors and raise the cost of living, particularly for lower-income groups.
- Staff recommends lowering agricultural protection and subsidies to improve efficiency.

### Authorities’ view
- Authorities agreed on the need to improve productivity and efficiency and noted ongoing work, including the Productivity Commission’s final report in early 2016.
- Authorities are ready to take labor market measures if necessary but caution against measures that could lock in parts of the labor force and undermine the structural shift to non-oil competitive industries.

### Staff appraisal — near term and outlook
- The Norwegian economy has so far seen limited impact from lower oil prices, but the near term outlook has weakened.
- Economic growth held steady in 2014, inflation was close to target, house price growth was robust, and unemployment—although edging up—remained at a low level.
- The sharp depreciation of the krone improved competitiveness; staff assessed the krone to be moderately undervalued or close to its equilibrium level.
- Lower oil prices and the ongoing slowdown in offshore investment are expected to put a drag on mainland growth this year.
- Medium and longer term challenges: transition away from oil-dependent growth model; oil and gas investment has started to decline after a decade of providing demand stimulus to the mainland economy.
- To facilitate reallocation of resources, common currency unit labor costs will need to adjust downward from current high levels either via higher productivity growth or continued wage restraint for several years.

### Monetary, fiscal, and financial stability recommendations
- Monetary policy stance is appropriately supportive.
- If growth turns out significantly weaker than projected, monetary policy should be the first line of defense while inflation expectations remain well anchored.
- Prompt implementation of macroprudential measures to contain rising household credit would give monetary policy more room to support growth and pursue the inflation target.
- Fiscal policy is broadly appropriate this year given projected slowdown, but should shift to a more neutral stance in the medium term.
- If growth is weaker than expected in 2016, authorities should allow automatic stabilizers to operate but should stop short of using fiscal stimulus to replace declining oil-related demand in the mainland economy.
- Supplementary provisions for the fiscal rule are needed to limit the impact of the GPFG’s year-to-year asset return volatility on the fiscal position; staff welcomes the commission’s recommendations on the fiscal rule and adoption after public consultation.
- FSAP update: Norwegian financial system generally sound and well managed, but further measures would reduce risks:
  - Strengthen bank stress tests and liquidity monitoring, including improving liquidity stress tests.
  - Consider stricter LTV, loan-to-income or debt service ratio to supplement affordability tests.
  - More frequent comprehensive assessments of small banks.
  - Strengthen toolkit and funding arrangements for bank resolution.

### Structural reform priorities reiterated
- Less preferential tax treatment for residential properties relative to other assets (along the lines of the Tax Commission’s recommendations) to redeploy investment toward tradable industries.
- Complete pension reform and further reforms to sickness and disability benefits to prevent labor market dropouts and maintain participation amid aging.
- Lower agricultural protection and subsidies and relax unnecessary housing supply restrictions for efficiency gains.

### Institutional and procedural note
- It is proposed that the next Article IV consultation with Norway be held on the standard 12-month cycle.

### Box 1 — External Sector Assessment and Competitiveness (key statistics and estimates)
- Current account surplus narrowed to 11.8 percent of (mainland) GDP, driven by lower oil exports.
- Net international investment position (NIIP) increased to 213 percent of GDP (up from 160 percent in 2013), benefiting from profitable foreign equity investment by the Government Pension Fund Global (GPFG) and the depreciating exchange rate, even as the banking sector is a net external debtor.
- International reserves increased to over 19 percent of GDP.
- IMF EBA analysis (data up to March 2015) yields a range of estimates for krone misalignment:
  - EBA CA Analysis: 1.0 percent (mild undervaluation)
  - EBA REER (Index) Analysis: 4.8 percent (mild undervaluation)
  - EBA REER (Level) Analysis: 19.3 percent (undervaluation)
  - EBA External Sustainability (ES) Approach: -13.4 percent (CA gap) and 38.0 percent (REER gap; overvaluation)
- Staff places greater emphasis on the CA and REER index estimates (1.0 and 4.8 percent) given uncertainty around REER level and ES approaches.
- ULC-based REER has appreciated by over 50 percent during the past two decades, although this reversed somewhat due to the recent depreciation; ULC growth has been among the highest in the OECD.
- Much of rapid ULC increase concentrated in mining and utilities (includes oil and gas extraction and services incidental to oil and gas) where strong wage growth and declining productivity contributed to rapid unit labor cost increases.
- Productivity growth in non-oil tradable sectors (e.g., manufacturing) has slowed and export shares have declined despite the fiscal rule’s insulation of the mainland non-oil sector from Dutch disease effects.

*Source: _cr15249 - 25.      Competitiveness and the flexibility of (IMF staff).*

### Box 2. Risk Assessment Matrix

### Box 2. Risk Assessment Matrix

### Overview
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).  
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non mutually exclusive risks may interact and materialize jointly.

### Risks to energy prices
- Source of Risks and Relative Likelihood: Medium
  - Persistently low prices triggered by supply factors reversing only gradually, and weaker demand.
- Expected Impact if Risk is Realized: Medium/High
  - Prolonged low oil prices would undercut growth through a reduction in the oil-related demand for mainland goods and services, and undermine confidence.
- Policy response:
  - Monetary policy is the first line of defense while there is ample fiscal space.

### Significant reduction in house prices
- Source of Risks and Relative Likelihood: Medium
  - House prices picked up in 2014 and remain at high levels with a risk of significant overvaluation.
  - Household debt continues to stay elevated at 200 percent of household disposable income.
- Expected Impact if Risk is Realized: High
  - Substantial falls in house prices would dampen private consumption and reduce residential investment. Reduced retail sales could lead to an increase in default rates that would hurt banks’ balance sheets.
- Policy response:
  - Take additional macroprudential measures to contain risks from a further buildup of high household debt.

### Protracted period of slower growth in key advanced and emerging economies
- Source of Risks and Relative Likelihood: High/Medium
  - Euro area and Japan: Weak demand and persistently low inflation from a failure to fully address crisis legacies and appropriately calibrate macro policies, leading to “new mediocre” rate of growth.
  - Emerging markets: Maturing of the cycle, misallocation of investment, and incomplete structural reforms leading to prolonged slower growth.
- Expected Impact if Risk is Realized: High
  - Protracted slower global growth would weaken non-oil exports and contribute further to lower oil prices. This would result in economic slowdown and higher unemployment.
  - Lower asset prices may have negative impact on GPFG’s rate of return.
- Policy response:
  - When this risk materializes, allow automatic stabilizers to operate.

### Side-effects from global financial conditions
- Source of Risks and Relative Likelihood: High
  - A surge in financial volatility: as investors reassess underlying risk and move to safe-haven assets given slow and uneven growth as well as asymmetric monetary exit, with poor market liquidity amplifying the effect on volatility.
- Expected Impact if Risk is Realized: Medium
  - Renewed stress in global whole sale funding markets could lead to liquidity strains for Norwegian banks that rely on whole sale funding. The large presence of foreign-owned banks increases spillover risks.
  - Volatility in financial markets may have negative impacts on the rate of return of GPFG.
- Policy response:
  - Further strengthen monitoring of liquidity in line with FSAP recommendations. Consider supplements to the fiscal rule to limit the impact of GPFG volatility on the budget.

### A failure of non-oil-related parts of the mainland economy to pick up slack resulting from lower oil prices
- Source of Risks and Relative Likelihood: Medium
  - A shift to a less oil-dependent growth model could stall if wages fail to adjust or if exchange-rate induced inflation in imports becomes generalized inflation.
- Expected Impact if Risk is Realized: Medium
  - Resources need to shift from oil-related to non-oil related sectors, and labor market flexibility will be tested in the process. Exchange rate depreciation should also help the process unless offset by higher domestic inflation.
- Policy response:
  - Stop short of using fiscal stimulus to replace declining oil-related demand in the mainland economy. Adopt competitiveness and productivity enhancing reforms.

*Box note: The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non mutually exclusive risks may interact and materialize jointly.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Norway Public Sector DSA — Baseline Scenario (as of April 01, 2015)
- Units: percent of GDP unless otherwise indicated.
- Sovereign spreads:
  - EMBIG (bp) 3/1: 19
  - 5Y CDS (bp): 258
- Nominal gross public debt (2013–2020): 41.5, 29.2, 30.1, 32.5, 32.2, 32.7, 33.3, 34.4, 34.8
- Public gross financing needs (2013–2020): -10.6, -10.6, -14.4, -3.8, -1.5, -1.1, -0.7, -0.1, 1.9
- Real GDP growth (in percent, 2013–2020): 1.7, 0.7, 2.2, 1.0, 1.3, 1.7, 1.9, 2.0, 2.0
- Inflation (GDP deflator, in percent, 2013–2020): 5.3, 2.7, 0.4, 1.4, 2.1, 2.1, 2.3, 2.3, 2.3
- Nominal GDP growth (in percent, 2013–2020): 7.1, 3.5, 2.6, 2.4, 3.5, 3.9, 4.3, 4.4, 4.4
- Effective interest rate (in percent) 4/ (2013–2020): 3.2, 3.3, 3.3, 2.8, 1.4, 1.6, 1.3, 1.5, 1.7

### Contribution to Change in Gross Public Sector Debt (2013–2020 and cumulative)
- Change in gross public sector debt (2013–2020): -1.4, 0.3, 1.0, 2.4, -0.3, 0.5, 0.6, 1.1, 0.4
- Cumulative change (2013–2020): 4.7
- Identified debt-creating flows (2013–2020 and cumulative): -13.5, -9.1, -5.7, -4.2, -5.1, -4.9, -5.1, -4.7, -4.2; cumulative -28.2
  - Primary deficit (2013–2020 and cumulative): -11.9, -9.2, -6.6, -4.3, -4.4, -4.1, -4.1, -3.8, -3.4; cumulative -24.2
  - Primary (noninterest) revenue and grants (2013–2020 and cumulative): 52.6, 51.6, 50.7, 48.8, 48.8, 49.0, 49.0, 49.0, 48.8; cumulative 293.4
  - Primary (noninterest) expenditure (2013–2020 and cumulative): 40.7, 42.4, 44.0, 44.4, 44.4, 44.9, 44.9, 45.1, 45.5; cumulative 269.2
- Automatic debt dynamics 5/ (2013–2020 and cumulative): -1.7, 0.1, 0.9, 0.1, -0.7, -0.7, -0.9, -0.9, -0.9; cumulative -4.0
  - Interest rate/growth differential 6/ (2013–2020 and cumulative): -1.4, -0.1, 0.2, 0.1, -0.7, -0.7, -0.9, -0.9, -0.9; cumulative -4.0
    - Of which: real interest rate (2013–2020 and cumulative): -0.8, 0.2, 0.8, 0.4, -0.3, -0.2, -0.3, -0.3, -0.2; cumulative -0.8
    - Of which: real GDP growth (2013–2020 and cumulative): -0.6, -0.2, -0.6, -0.3, -0.4, -0.5, -0.6, -0.6, -0.7; cumulative -3.1
  - Exchange rate depreciation 7/ (2013–2020): -0.2, 0.2, 0.7, ..................
- Other identified debt-creating flows (2013–2020): 0.0 across years
- Contingent liabilities (2013–2020): 0.0 across years
- Residual, including asset changes 8/ (2013–2020 and cumulative): 12.2, 9.4, 6.7, 6.6, 4.8, 5.4, 5.7, 5.8, 4.7; cumulative 32.9

Notes on definitions and methodologies (as provided)
- 1/ Public sector is defined as general government.
- 2/ Based on available data.
- 3/ Long-term bond spread over German bonds.
- 4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
- 5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
- 6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
- 7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
- 8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
- 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

### Debt-Creating Flows (illustration highlights)
- Components driving changes in debt: Primary deficit; Real GDP growth; Real interest rate; Exchange rate depreciation; Other debt-creating flows; Residual.
- Graphical projections presented for:
  - Debt-Creating Flows (percent of GDP) over 2004–2020.
  - Public Gross Financing Needs (percent of GDP) projection 2013–2020.

### Composition of Public Debt and Alternative Scenarios
- Underlying macro assumptions (in percent) — Baseline (2015–2020):
  - Real GDP growth: 1.0, 1.3, 1.7, 1.9, 2.0, 2.0
  - Inflation: 1.4, 2.1, 2.1, 2.3, 2.3, 2.3
  - Primary Balance: 4.3, 4.4, 4.1, 4.1, 3.8, 3.4
  - Effective interest rate: 2.8, 1.4, 1.6, 1.3, 1.5, 1.7
- Historical Scenario (2015–2020):
  - Real GDP growth: 1.0, 1.4, 1.4, 1.4, 1.4, 1.4
  - Inflation: 1.4, 2.1, 2.1, 2.3, 2.3, 2.3
  - Primary Balance: 4.3, 11.4, 11.4, 11.4, 11.4, 11.4
  - Effective interest rate: 2.8, 1.4, 1.5, 0.9, 1.0, 1.1
- Constant Primary Balance Scenario (2015–2020):
  - Real GDP growth: 1.0, 1.3, 1.7, 1.9, 2.0, 2.0
  - Inflation: 1.4, 2.1, 2.1, 2.3, 2.3, 2.3
  - Primary Balance: 4.3, 4.3, 4.3, 4.3, 4.3, 4.3
  - Effective interest rate: 2.8, 1.4, 1.6, 1.3, 1.5, 1.7

### Public Debt Composition and Maturity (high-level)
- Gross Nominal Public Debt (projection 2013–2020) charted by scenario (Baseline, Historical, Constant Primary Balance).
- Public gross financing needs (in percent of GDP) projection 2013–2020.
- Debt by maturity (2004–2020): medium and long-term vs. short-term (percent of GDP).
- Debt by currency (2004–2020): Local currency-denominated vs. foreign currency-denominated (percent of GDP).

*Source: IMF staff.*

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

### _cr15249 - 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.
- SDSS metadata are posted on the Dissemination Standard Bulletin Board (DSBB).
- Data ROSC completed in 2003 is publicly available.
- Norway: Table of Common Indicators Required for Surveillance (As of July 13, 2015) — periodicity and timeliness entries noted for key datasets (exchange rates, international reserve assets and reserve liabilities, reserve/base money, broad money, central bank balance sheet, consolidated banking system balance sheet, interest rates, consumer price index, government finance statistics, government debt, external sector and national accounts statistics).

### Economic developments and main challenges
- Non-oil economy growth:
  - Grew on trend at around 2¼ percent both last year and the year before.
  - Growth expected to weaken to around 1¼ percent this year, then pick up next year to just below trend growth.
- Labor market:
  - Unemployment rate: 3½ percent in 2014, increased lately to 4½ percent.
  - Registered unemployment: currently just below 3 percent of the labor force.
  - Rise in young people searching for part-time employment beside studies/school contributes to differences between measures.
- Exchange rate and competitiveness:
  - Norwegian krone depreciated 12 percent over the last 12 months.
  - Moderate wage settlements have offset some deterioration in unit labor costs competitiveness.
- Oil price and petroleum sector:
  - Brent Blend fluctuating around USD 50 per barrel, down from around 65 during the staff mission in May and 110 a year ago.
  - Norway’s revenues have fallen; most of the decline reflected in lower public savings in the Government Pension Fund Global; revenues of oil companies have fallen.
  - Petroleum investments expected to fall this year and next year; demand from the petroleum sector to fall relative to the size of the mainland economy over the coming 3-4 years, dampened by large investments in Johan Sverdrup, the third largest field on the Norwegian continental shelf.
- Household sector vulnerabilities:
  - Household debt continues to stay elevated at more than 200 percent of disposable income.
  - Debt burden unevenly distributed; young households are vulnerable to adverse shocks.
  - High house prices and high household debt pose a risk to financial stability; fall in house prices could amplify or trigger a downturn.
- Productivity and structural transition:
  - Productivity growth subdued; cost level high compared to trading partners.
  - Productivity Commission findings: Norway performs only on average among OECD countries on innovation, entrepreneurship, and research in industries.
  - Government productivity measures include a central government obligation for public service providers to increase productivity by 0.5 percentage point per year.
  - Productivity Commission: first report published February (year not specified in source); second report due February 2016.

### Monetary policy
- Key policy rate:
  - Lowered by 25 basis points to 1 percent in June (historically low level).
  - Norges Bank Executive Board suggested the key policy rate could be reduced further in the course of the fall.
- Policy considerations:
  - Both the objective of keeping inflation close to target and the aim of sustaining capacity utilization could imply a lower key policy rate.
  - A lower interest rate could fuel house price inflation and debt growth.
- Exchange rate regime:
  - Norway has a floating exchange rate; the Norwegian currency has depreciated considerably since the beginning of last year due to lower oil prices, a more uncertain growth outlook, and a lower interest rate differential.

### Fiscal policy and fiscal rule
- Fiscal framework and current stance:
  - Government Pension Fund Global has grown considerably; spending of oil money in line with the 4 percent path would not have been consistent with a stable development in the economy.
  - Spending in 2015 is estimated at 2.6 percent of the Fund, i.e. well below the 4 percent path.
- Staff advice and authorities’ view:
  - Staff advises a more neutral fiscal policy in the medium term.
  - Given abating non-oil economic activity, the rise in unemployment and uncertain outlook for 2016, authorities consider continuation of a slightly expansionary fiscal policy may be better adapted to the current situation.
  - Authorities acknowledge fiscal policy cannot be the main tool to deal with a structural decline in demand from the petroleum sector; an overly expansionary fiscal policy could interrupt needed transition.
- Fiscal Commission recommendations:
  - Commission majority recommends phasing-in of petroleum revenues slower in the future, with a recommended fiscal impulse of 0.1-0.2 per cent of non-oil GDP in a normal cyclical situation, compared to an average of 0.33 in the years after the fiscal rule was introduced in 2001.
  - Commission’s report submitted for public consultation in July; government to present views to Parliament next year.
- Policy measures to support adjustment:
  - Government signaled new measures to address rising unemployment to be presented as part of the fiscal budget in early October.
  - Plans for increased spending on infrastructure, education, and research to facilitate structural adjustments and support short-term activity.

### Tax policy and structural reforms
- Tax policy objectives:
  - Focus on lowering taxes that hamper productivity and economic growth; high corporate tax rate is a particular concern.
  - Tax Commission recommended a significant reduction in the corporate tax rate and adjustments in taxation of personal income with balancing measures.
  - Authorities evaluating the commission’s report; will summarize plans for future tax reform in a white paper to Parliament this fall.
  - Government will continue to reduce taxes in forthcoming years.
- Wealth and housing taxation:
  - Steps toward more neutral taxation of assets by reducing the valuation discount in the net wealth tax for commercial properties and second dwellings.
  - Significant reduction in tax incentives for home ownership is not on the government’s agenda.
- Labor market and public sector reforms:
  - Technical discussions with social partners on comprehensive reform of occupational pensions in the public sector next spring.
  - Legislation on temporary contracts to be liberalized from 2016; regulations on working hours to be modified to ease use of overtime and compressed work-week schedules.
  - Productivity Commission’s second report scheduled for February 2016; government’s structural policy overview planned for budget documents for 2016.
- Other structural measures:
  - Local government reform to establish fewer and larger municipalities to enhance governance capacity.
  - Measures to increase efficiency in the agricultural sector and reduce costs and shorten planning in construction.
  - Establishment of a publicly owned company to plan, build, operate, and maintain major stretches of the road network.

### Financial sector policy and stability measures
- System soundness and vulnerabilities:
  - Staff’s FSSA concludes the Norwegian financial system has coped well with the global financial crisis but prolonged low interest rates and high oil prices have fueled credit and asset price growth leading to higher vulnerabilities.
  - Authorities broadly agree with FSSA analyses and will study policy recommendations.
- Household indebtedness and housing risks:
  - Authorities concur with staff on risks from household indebtedness, possible house price reversal, and banks’ reliance on wholesale funding.
  - New requirements on banks’ residential mortgage lending practices viewed as a move in the right direction; staff recommends additional measures including stricter LTV and LTI or debt ratio limits to supplement the required affordability test.
  - Authorities will continuously evaluate new regulation and are prepared to make adjustments informed by the evaluation, including imposing stricter limits and other requirements.
- Bank capital, funding, and liquidity:
  - Authorities implemented early new capital requirements (CRD IV package), Pillar 2 add-ons, and higher IRB risk weights for residential mortgage lending for both domestic and foreign banks via host country treatment.
  - Loan losses currently low, but banks should prepare for potential increased losses in the next few years.
  - Ministry of Finance announced the counter-cyclical buffer will be increased from today’s 1 percent to 1½ percent on June 30, 2016.
  - Staff recommends restricting dividend pay-outs in weakly capitalized insurance undertakings and achieving recapitalization; authorities note Solvency II will enter into force in 2016 and require more capital in life-insurance undertakings.
- Liquidity monitoring and wholesale funding:
  - Staff recommends improved liquidity monitoring and consideration of measures to contain risks related to banks’ wholesale funding.
  - Authorities state micro- and macroprudential supervision of liquidity risks has improved significantly since the international financial crisis; continuous efforts to improve supervision and monitoring, including cooperation between the FSA and Norges Bank.
  - Proposals on implementation of binding LCR requirements are under consideration; authorities foresee introducing such requirements next year.
- Macroprudential governance and crisis management:
  - Staff recommends improved institutional arrangements for macroprudential policies, including a transparent “comply or explain” approach and greater delegation of decision-making powers over macroprudential instruments to Norges Bank or the FSA.
  - Authorities note existing institutional structure builds on long tradition and clear division of responsibilities that has delivered timely measures with no signs of inaction bias; they take due note of staff advice on possible reforms.
  - Staff finds crisis management and bank resolution arrangements generally well developed but requiring more work; authorities are revising legal framework, including implementation of the EU Bank Recovery and Resolution Directive.
- Financial Supervisory Authority (FSA) issues:
  - Staff concludes Norway should ensure de jure operational independence of the FSA, strengthen FSA supervision of small banks through more frequent comprehensive assessments, and upgrade its approach to AML/CFT supervision.
  - Authorities note more intensive off-site monitoring of small banks has been established, Norway’s AML/CTF regulation is under revision, and the FSA has operational independence in supervision; delegation of further authority to the FSA is subject to continuous assessment.

*Source: Statement by Mr. Groenn, Executive Director of Norway, September 4, 2015, and accompanying country data table (As of July 13, 2015).*

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