Public Information Notice: IMF Concludes 2002 Article IV Consultation with Sweden
IMF News, August 7, 2002
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- Published: August 7, 2002
Background
- Credible, rule-based policy framework: Riksbank's inflation targeting regime and a sound medium-term fiscal framework.
- Growth averaged over 4 percent per annum during 1998-2000, driven by large productivity gains, especially in the technology sector.
- Pension reform restored actuarial balance to the public pension scheme.
- 2001 slowdown: cyclical slowdown in domestic demand and global weakness led to slower growth; private consumption stagnated despite rising disposable income due to adverse confidence and wealth effects from the plunge in stock prices.
- Telecom exports fell by about a third in 2001; exports suffered their weakest year in a quarter century.
- Weak krona and supportive fiscal and monetary policies helped contain the severity of the slowdown.
- Inflation dynamics:
- Inflation remained well above the Riksbank's 2 percent target before falling to 2 percent in May 2002.
- Wage growth accelerated to 4¼ percent, exceeding that in main trading partners.
- Exchange rate and capital flows:
- In the fifteen months through September 2001, the krona depreciated by 16 percent against the euro.
- The krona appreciated by 4½ percent against the euro through May 2002.
- Monetary policy:
- Riksbank cut policy rate by 50 basis points following September 11; easing fully reversed in March-April 2002.
- Subsequently policy rates kept unchanged, with a tightening bias maintained.
- Public finances:
- General government surplus rose to about 5 percent of GDP in 2001, benefiting from large dividend distributions and exceptionally high revenues from capital gains taxes.
- Fiscal stance was expansionary to the tune of 1 percent of GDP (change in structural balance corrected for timing effects).
- Outlook:
- Economic recovery began and expected to gather speed in second half of 2002; activity expected to strengthen further in 2003.
- Key downside risks: adverse confidence effects from world telecom sector difficulties and weaker-than-expected global recovery.
- Inflation projected to recede toward the Riksbank's 2 percent target over the two-year horizon.
- Structural constraints to medium-term growth: high Swedish price level relative to EU average, market imperfections in construction and retail trade, compressed wage scale, relatively high marginal effective tax rates, surge in sickness absenteeism, high levels of disability retirement, de facto rent control and employment protection regulations limiting labor market flexibility.
Executive Board Assessment
- Overall appraisal:
- Sound macroeconomic policies and structural reforms instrumental in recent strong performance.
- Growth relatively robust, employment rates high, general government and external current account with large surpluses, public debt declining.
- Sound policy framework increased resilience amid global slowdown.
- Near-term outlook and risks:
- Activity projected to pick up from second half of 2002 on rising external demand and favorable competitive position, but outlook uncertain.
- Recovery vulnerable to world telecom sector difficulties and declining equity markets.
- Concern that shrinking effective labor supply and rigidities in product and labor markets could undermine supply response.
- Recommendation: more emphasis on policies enhancing productivity and labor supply for sustainable high growth.
- Monetary policy:
- Directors endorsed Riksbank's tightening earlier in 2002 and welcomed decline in headline inflation to around target.
- Cautioned inflation could rise if recovery gathers pace; supported "wait-and-see" approach with bias toward further tightening in near term.
- Confidence that adopting the euro would allow smooth transition from inflation targeting to exchange rate stability, given sound fundamentals.
- Fiscal policy:
- Supported near-term fiscal plans; considered a moderately expansionary stance in 2002 warranted and shift to broadly neutral stance in 2003 appropriate.
- Stressed importance of implementing fourth and final step of income tax reform in 2003 with parallel measures to contain expenditure.
- Praised medium-term fiscal framework and targeting of a surplus of 2 percent of GDP over the business cycle.
- Noted surpluses projected by authorities appear consistent with target; welcomed commitment to nominal expenditure ceilings.
- Warned continued spending pressures may necessitate further adjustment; suggested modification of expenditure rule to protect cyclical margins.
- Structural and labor market reforms recommended:
- Further balanced lowering of taxation and spending to reduce distortions and maximize growth and welfare.
- Key measures: reduce high marginal effective tax rates on labor income, reform the wealth tax, contain rising budgetary costs of early retirement and sickness absence.
- Reform sickness benefits to rein in absenteeism while ensuring adequate social benefits; emphasize incentive changes to address moral hazard, tighten eligibility criteria, increase employers' financial responsibility.
- Enhance labor mobility by easing employment protection rules and liberalizing rental housing market; review policies for integrating immigrant labor.
- Widen compressed wage structure, restrain wage growth to reflect productivity gains, focus active labor market policies toward long-term unemployed and job search support.
- Competition and deregulation:
- Momentum of deregulation slowed; need to enhance competition especially in retail distribution, air transport, pharmaceuticals, construction, and rental housing.
- Further progress in privatizing public enterprises in competitive markets desirable.
- Financial sector and supervision:
- Welcomed Financial System Stability Assessment favorable findings; financial system and supervisory arrangements comply with international codes and standards.
- Stress tests and experience indicate major financial groups robust to market and credit risks, but concentration of exposures to a small number of counterparties and residual risks in securities settlement system are potential vulnerabilities.
- Welcomed authorities' intentions to review and strengthen supervisory resources and powers, address securities settlement system risks, and develop crisis prevention and management arrangements with other jurisdictions.
- Welcomed legislative efforts to combat money laundering and financing of terrorism.
- Official development assistance:
- Praised high level of Swedish official development assistance and welcomed intention to raise it further from current level of 0.73 percent of GNP.
Selected Economic Indicators (as reported and staff projections)
- Real economy (change in percent)
- Real GDP: 1997: 2.1; 1998: 3.6; 1999: 4.5; 2000: 1.2; 2001: 1.5; 2002 1/: 2.5; 2003 1/: (no value listed)
- Domestic Demand: 1997: 0.9; 1998: 4.2; 1999: 3.5; 2000: 0.3; 2001: 2.3; 2002 1/: (no value listed)
- CPI: 1997: 0.5; 1998: -0.1; 1999: 1.0; 2000: 2.6; 2001: 2.2; 2002 1/: (no value listed)
- Open unemployment rate (in percent): 1997: 8.0; 1998: 6.5; 1999: 5.6; 2000: 4.7; 2001: 4.0; 2002 1/: 4.1
- Participation in labor market programs (in percent): 1997: 3.3; 1998: 2.4; 1999: (no value listed)
- Gross national saving (percent of GDP): 1997: 19.0; 1998: 19.7; 1999: 20.7; 2000: 21.6; 2001: 20.9; 2002 1/: 20.3
- Gross domestic investment (percent of GDP): 1997: 15.2; 1998: 16.0; 1999: 16.8; 2000: 17.2; 2001: 17.1; 2002 1/: (no value listed)
- Public finance (in percent of GDP)
- General government balance: 1997: -1.6; 1998: 1.3; 1999: 3.7; 2000: 4.8; 2001: 1.8; 2002 1/: (no value listed)
- Structural balance 2/: 1997: -0.8; 1998: 4.4; 1999: 2.9; 2000: 2.8; 2001: (no value listed)
- General government debt: 1997: 74.5; 1998: 71.8; 1999: 64.8; 2000: 55.2; 2001: 52.0; 2002 1/: 49.8; 2003 1/: 47.4
- Money and credit (12-month, percent change)
- M0: 1997: 3.0; 1998: 5.1; 1999: 12.0; 2000: 1.9; 2001: 8.8; 2002 1/: ...
- M3: 1997: 9.9; 1998: 6.2; 1999: (no value listed)
- Credit to non-bank public: 1997: 6.4; 1998: 6.8; 1999: 9.1; 2000: 8.9; 2001: (no value listed)
- Interest rates (year average)
- Three-month interbank rate: 1997: 3.1; 1998: 4.3; 1999: (no value listed)
- Ten-year government bond yield: 1997: 6.7; 1998: 5.0; 1999: 5.4
- Balance of payments (in percent of GDP)
- Trade balance: 1997: 10.4; 1998: 8.3; 1999: 7.8; 2000: 7.2; 2001: 7.0; 2002 1/: 7.3
- Current account: 1997: 3.2
- Reserves (gold valued at SDR 35 per ounce, end of period, in billions of SDRs): 1997: 11.0; 1998: 14.3; 1999: 15.3; 2000: 15.1; 2001: 15.0
- Reserve cover (months of imports of goods and services): 1997: 2.7
- Exchange rate (period average, unless otherwise stated)
- Exchange rate regime: Floating exchange rate
- Present rate (June 24, 2002): US$ 1 = SKr 9.32
- Nominal effective rate (1995=100): 1997: 106.4; 1998: 104.9; 1999: 102.8; 2000: 101.7; 2001: 93.9
- Real effective rate (1995=100) 3/: 1997: 103.3; 1998: 100.4; 1999: 96.7; 2000: 95.2; 2001: 87.9
- Sources listed in original: Statistics Sweden; Riksbank; IMF, International Financial Statistics; INS; and IMF staff estimates.
- Notes provided in original:
- 1/ Staff projections.
- 2/ In percent of potential GDP, also adjusted for timing of tax revenues.
- 3/ Based on relative normalized unit labor cost in manufacturing.
Public Information Notice: IMF Concludes 2002 Article IV Consultation with Sweden — August 7, 2002