IMF Executive Board Concludes 2021 Article IV Consultation with Switzerland
IMF News, June 21, 2021
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- Published: June 21, 2021
Overview and context
- The Executive Board concluded the Article IV consultation with Switzerland on June 11, 2021.
- Switzerland "has navigated the pandemic well." Contributing factors cited:
- early, strong, and sustained health and economic policy response;
- strong pre-pandemic fiscal, financial sector, and household buffers;
- robust exports (pharmaceuticals, chemicals, gold);
- low dependency on contact-facing sectors;
- a capable health system and targeted containment;
- coordinated efforts aimed at households and firms that "stemmed a loss of purchasing power and a rise of unemployment and bankruptcies."
Growth outlook and risks
- Recovery outlook:
- Growth is projected at 3.5 percent in 2021 and 2.8 percent in 2022.
- The rebound should deepen as vaccination proceeds, containment is eased, and domestic and global demand picks up.
- Main risks and uncertainties:
- Dominated by the pandemic and "still high uncertainty."
- Risks from lagged COVID-19 impacts, search-for-yield behavior, real estate market imbalances, and an uneven global recovery.
- Post-pandemic challenges highlighted:
- limiting scarring—especially among vulnerable groups and workers;
- sustaining competitiveness;
- tackling pension system gaps;
- addressing climate change.
Executive Board Assessment — key messages
- Directors commended the authorities for the "strong, timely, and multi-pronged policy response to the COVID-19 pandemic."
- Directors stressed the need to "maintain supportive policies until the recovery is on a firm path" and underscored the importance of rebalancing the policy mix and fostering green, digital, and inclusive growth.
- Fiscal policy:
- Given Switzerland’s "ample fiscal space," Directors welcomed the extension of targeted fiscal support to 2021 and the authorities’ readiness to deploy additional support, if needed.
- Recommended operational refinements to the fiscal rule to avoid headwinds to the recovery, and "welcomed the authorities’ consideration of a longer period to offset extraordinary expenditures."
- Noted that expeditious reforms of the withholding tax and stamp duty would "help ease tax and administrative burdens and improve capital market functioning."
- Encouraged increased spending in support of green, digital investment and emission reduction plans.
- Monetary policy:
- Agreed that monetary policy should remain accommodative, with clear communication to help anchor inflation expectations, and be mindful of potential risks to financial stability.
- Encouraged the authorities to review the monetary policy framework and tools regularly and adapt them to new challenges as needed.
- Took note of the external assessment and concurred that foreign exchange interventions should be limited to mitigating excessive appreciation and deflationary pressures, "provided trend appreciation is allowed."
- Financial sector and macroprudential policy:
- Welcomed the resilience of the banking sector.
- Highlighted the need to monitor asset quality and risks closely, particularly those related to residential and commercial real estate.
- Recommended that the authorities review and expand the macroprudential toolkit to enhance its ability to react swiftly to financial stability risks.
- Looked forward to further progress in implementing the 2019 FSAP recommendations.
- Structural reforms:
- Should focus on supporting post-COVID transformation and addressing important long-standing issues.
- Encouraged continued efforts to promote flexibility and mobility in the labor market.
- Urged "ambitious reforms of the pension system to better align it with demographic and economic trends."
- Called for decisive actions to achieve Switzerland’s climate change targets.
- Noted that some Directors pointed to the recent cessation in discussions on an institutional agreement with the European Union and encouraged the parties to engage constructively to avoid negative impacts over time.
Pre-pandemic strengths
- Pre-pandemic features cited:
- Robust growth underpinned by employment gains from immigration and cross-border workers.
- Well-diversified exports among high value-added goods and services.
- Banks were well-capitalized and liquid, with modest credit growth concentrated on mortgages.
- Public finances strong, anchored by the debt-brake rule, federal budget surpluses, and low and declining public debt.
- Swiss National Bank maintained a highly-negative policy interest rate amid low or negative inflation; sustained current account surpluses, appreciation pressures, and periodic safe-haven inflows contributed to accumulation of substantial foreign exchange reserves.
Switzerland: Selected Economic Indicators, 2019–22 (as presented)
- Population (2020): 8.55 million
- Quota (current; millions SDRs / % of total): 5,771.1 / 1.21%
- Key export markets: Euro area (44%), US (18%)
- Output
- Real GDP growth (%): 2019: 1.1; 2020: -3.0; 2021: 3.5; 2022: 2.8
- Unemployment
- Unemployment (%): 2019: 2.3; 2020: 3.1; 2021: 3.4
- Prices
- Inflation (period average, %): 2019: 0.4; 2020: -0.7; 2021: 0.1; 2022: 0.3
- General government finances
- Revenue (% GDP): 2019: 32.9; 2020: 33.6; 2021: 33.2; 2022: 33.0
- Expenditure (% GDP): 2019: 31.5; 2020: 36.2; 2021: 36.6; 2022: 33.7
- Fiscal balance (% GDP): 2019: 1.4; 2020: -2.6; 2021: -3.4
- Public debt (% GDP): 2019: 39.8; 2020: 42.9; 2021: 45.3; 2022: 44.5
- Monetary and credit
- Broad money (% change): 2019: 0.8; 2020: 6.5
- Credit to the private sector (% change): 2019: 4.2; 2020: 2.4; 2021: …
- 3-month Treasury bill interest rate (%): 2019: -0.8
- Balance of payments
- Current account (% GDP): 2019: 6.7; 2020: 3.8; 2021: 7.5
- Net FDI (% GDP): 2019: 4.8; 2020: 8.5; 2021: 3.6; 2022: 5.7
- Reserves (end-of-period, billions of US dollars): 2019: 854.8; 2020: 1083.6
- External debt (% GDP): 2019: 264.4; 2020: 284.9
- Exchange rates
- REER (% change): (data not presented)
Policy recommendations (summary)
- Maintain supportive fiscal and monetary policies until recovery is firmly established.
- Rebalance the policy mix toward growth-enhancing and stability-preserving settings.
- Operationally refine the fiscal rule and consider a longer period to offset extraordinary expenditures.
- Reform withholding tax and stamp duty to ease tax and administrative burdens and improve capital market functioning.
- Increase spending to support green, digital investment and emission reduction plans.
- Keep monetary policy accommodative with clear communication; regularly review the monetary framework and tools.
- Limit foreign exchange interventions to mitigating excessive appreciation and deflationary pressures while permitting trend appreciation.
- Monitor banking sector asset quality, especially real estate exposures; expand macroprudential toolkit.
- Pursue labor market flexibility and mobility reforms and ambitious pension system reform.
- Take decisive actions to achieve climate change targets.
- Encourage constructive engagement with the European Union to avoid negative impacts from stalled institutional agreement discussions.
Press Release No. 21/186 — IMF Executive Board Concludes 2021 Article IV Consultation with Switzerland
