Norway: Staff Concluding Statement of the 2021 Article IV Mission

IMF News, April 26, 2021

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Canonical URL: Norway: Staff Concluding Statement of the 2021 Article IV Mission

Publication date: April 26, 2021
PRESS OFFICER: Wafa Amr
- Phone: +1 202 623-7100
- Email: MEDIA@IMF.org
High-level assessment: The pandemic had major health, social, and economic impacts in Norway, but the strong policy response contributed to one of the lowest infection rates and among the smallest economic contractions in Europe. The authorities’ unprecedented fiscal, monetary and financial sector policies, a strong social safety net, and structural features of the economy supported outcomes.

Real mainland GDP growth is projected to be 3.2 percent in 2021, supported by domestic demand and continued policy support.
GDP will surpass its pre-pandemic level by year-end and is projected to be only slightly below its pre-pandemic trajectory in the medium-term, suggesting that economic scarring remains limited.
The majority of adults are expected to be vaccinated by late summer.
Key downside risks: slower-than-expected vaccine rollout, setbacks in the evolution of the pandemic, and adverse external conditions.
Policy space: Norway’s ample policy space can mitigate downside risks if they materialize.

Fiscal support in 2021 is described as appropriately calibrated to the rebound and remains substantial.
Staff projects the structural non-oil deficit to exceed 3 percent of the GPFG for a second consecutive year in 2021, albeit by less than was the case last year.
Recommendations:
- Gradually reduce extraordinary fiscal support and make it more targeted as the recovery gathers traction.
- Remain ready to deploy new measures should the pandemic unexpectedly worsen.
- Target support to households and (viable) firms most affected, while avoiding disincentives to economic activity.
- Integrate vulnerable groups into the workforce and prioritize education and skill-enhancing programs.
- Continue support for municipalities and the health sector to address social and health ramifications.

Structural drivers of a long-run revenues-expenditures gap: future demographic deterioration (inflating age-related expenditures) and declining oil revenues after the mid-2020s.
Observations:
- Government expenditure reached an historic high as a share of GDP in 2020.
Recommendations:
- Examine the composition of government spending (possibly via an expenditure review by an external committee).
- Pursue further changes to sickness and disability benefit systems to align with peer countries.
- Reform the VAT through broadening and simplification.
- Boost labor participation and transition away from oil toward green technologies to alleviate demographic pressures and revenue shortfalls.

Norges Bank entered the crisis with significant monetary policy space and strong transmission, enabling a swift and effective response.
Provided the economy recovers in line with NB’s projections, the projected gradual tightening of monetary policy is appropriate.
If recovery and inflation expectations falter, NB should stand ready to step up support.
Norges Bank’s continued exploration of Central Bank Digital Currency (CBDC) is welcome.

Concern: Acceleration in housing prices poses financial stability risks and could increase household debt.
Contributing factors: accommodative monetary policy and potential pandemic-induced shifts in housing preferences.
Existing and planned measures to curb house-price growth:
- Expiration of crisis-related relaxation of borrower-based requirements.
- Eventual hikes in the policy rate.
- Planned increases of the countercyclical capital buffer.
Additional recommendations if house price growth persists:
- Consider tightening mortgage regulations.
- Implement targeted measures to ease housing supply constraints (e.g., land-use restrictions).
- Gradually phase out mortgage interest deductibility to curb demand.

Banks entered the pandemic with strong capital buffers and high profitability, supported by prudent macro-prudential policies.
Performance during the crisis: strong, with only modest increases in non-performing loans and still-contained bankruptcies.
Vulnerabilities exacerbated by the crisis:
- High household debt.
- Exposure to commercial real estate (CRE), with potential lasting declines in demand for office, retail and hotel space.
Recommendations:
- Upgrade data collection to enhance monitoring of CRE-related risks.
- Consider broadening the toolkit for mitigating CRE vulnerabilities.
- Monitor bank balance sheets for potential deterioration as support is phased out and bankruptcies may rise depending on exposure to crisis-affected sectors.

Recent progress in addressing AML/CFT deficiencies is welcome.
Room for further improvement in supervisory tools and methodologies, including the frequency and coverage of inspections.

Priority reform areas:
- Boost labor force participation, including among vulnerable groups.
- Raise non-oil productivity.
- Support green growth amid the decline in the offshore sector.
Positive steps noted:
- Authorities’ plans to strengthen investment in R&D, physical infrastructure and green technologies.
- Efforts to promote digitalization, technology adoption and upskilling of vulnerable populations.
Caution: Prolonged policy support for the pandemic could impede structural transformation.

Norway is a global leader in climate mitigation policy with policies centered on carbon taxation and initiatives such as research and development of carbon capture.
Long-term commitment: Norway aims to become a low emission country by 2050, with net negative emissions when accounting for uptake by Norwegian forests and other land.
EV adoption policies are an important example to other countries but could be recalibrated to strengthen cost effectiveness, including steps aimed at accelerating replacement of the most polluting cars by EVs.

Information from Norway: Staff Concluding Statement of the 2021 Article IV Mission, April 26, 2021.