Norway: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, June 9, 2022
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- Published: June 9, 2022
Economic outlook and near-term risks
- The economy bounced back strongly from the Covid-19 pandemic, and the recovery is well entrenched in 2022.
- Risks: uncertainty over spillovers from the war in Ukraine, the intensity of the pandemic globally (particularly in Europe), and supply bottlenecks.
- Norway is relatively shielded given its strong fundamentals; risks are balanced in the short term and ample policy space provides room to mitigate adverse shocks.
- Mainland real GDP is expected to grow around by 4 percent in 2022, driven primarily by strong domestic demand, especially private consumption.
- The forecast is particularly sensitive to where energy prices settle; high energy prices have resulted in a hefty windfall in public revenue to date, which could lead to higher petroleum investment and energy exports in the medium term.
- Household consumption could be affected by high global energy prices; electricity subsidies, together with the agreed wage increase, should help support real incomes and spending.
- The current account is projected to remain in a large surplus.
Fiscal policy assessment and recommendations
- Fiscal management has been strong and policy accommodative, but spending should be lowered significantly, and the policy stance should return to neutral over the medium term.
- The revised 2022 budget aims at a reduction in the structural non-oil deficit.
- A tighter fiscal policy is needed to counter the risks of overheating.
- Expansion of the green transition and associated technologies, and objectives to pursue inclusive growth and tackle inequality are welcome.
- Support to households to compensate for high electricity prices should be targeted rather than across-the-board.
- Challenges: adverse demographic trends and the transition away from oil may, if unaddressed, put a serious strain on public finances.
- Over the past decade, growth in transfers from the Government Pension Fund Global (GPFG) and tax revenues has exceeded growth in pension and aging-related spending, creating policy space to finance additional initiatives to promote long-term growth.
- With GPFG transfers projected to decline over the coming decades, the ability to finance the current high level of spending will be challenged.
- Future increases in aging and healthcare spending will require some fiscal adjustment in the longer term.
- Policy options suggested:
- Reforms to increase labor supply (including changes to sickness and disability benefit schemes).
- Promote improvements in the quality and cost efficiency of public services delivery.
- Expand the mandate of the Advisory Panel on Fiscal Policy Analysis to advise on long-term fiscal sustainability.
- Consider further strengthening the fiscal framework by complementing it with a medium-term expenditure framework guided by an operational rule.
Monetary policy and financial stability
- Monetary policy has been responding in a timely manner, with effective communication and safeguarding against financial risks, and should continue to do so.
- The policy rate has been raised a timely manner to maintain price stability and address financial stability risks.
- Further gradual tightening, as per current forward guidance, is appropriate, given the inflation outlook under the baseline.
- High uncertainty calls for continued flexibility in decision making accompanied by clear communication.
- Providing the Norges Bank with new policy setting powers on the countercyclical capital buffers are a welcome addition to its regulatory toolkit.
- Risks to financial stability appear broadly manageable, though a sharp tightening of global financial conditions will put pressure on balance sheets.
- The banking system is well capitalized and, according to recent stress tests by the authorities, should withstand the potential shock despite the high level of household debt and exposure to commercial real estate.
- Recommendations to mitigate vulnerabilities:
- Continue steps to improve the macroprudential policy framework and broaden the toolkit, including introducing sectoral capital tools.
- Preserve tighter mortgage regulation limits for Oslo.
- Consider a gradual phasing out of mortgage interest deductibility.
- Enhance the framework to facilitate exits for businesses, especially small- and medium-size enterprises.
- Continue improving data collection to better monitor risks.
- Continue efforts to alleviate constraints on the supply of new housing.
Structural reforms, labor market, and inclusion
- Over the longer-term, policies should focus on making the labor market more inclusive, improving educational opportunities, completing climate commitments, and ensuring intergenerational fairness by reining in public spending.
- Structural objectives should focus more strongly on boosting and diversifying labor force participation, including among vulnerable groups, and raising non-oil productivity.
- Policy priorities include reducing school dropouts, upskilling, changing the sickness and disability benefit system, and implementing the provisions under the new Integration Act to give more opportunities to immigrants.
- Closing remaining digitalization gaps will help further improve productivity.
- The new government’s policy objectives are focused on instilling progressivity in the tax system, encouraging full-time and permanent employment, and providing greater support for families and rural communities.
Climate policy and international engagement
- Norway is actively promoting climate adaptation and mitigation strategies, including globally.
- Plans to support innovation and digitalization for increased climate-smart productivity within agriculture, strengthen the ability of low-income countries to adapt to climate change, manage climate-related risks, and fund research, technology, and innovation by involving Norwegian and international research communities are welcome.
- Current efforts to achieve climate objectives through 2030 are appropriately centered on carbon taxation and other initiatives such as research and development of carbon capture options, but gaps in the coverage of carbon taxation remain and more effort is needed.
- Norway endorsed the EU’s objectives of reorienting financial capital towards sustainable investment, managing financial risks stemming from climate change, and fostering transparency in financial and economic activity.
Regulatory, cybersecurity, and AML/CFT measures
- The application of the new anti-money laundering/combating the financing of terrorism law is welcome, including increased frequency and coverage of inspections.
- To mitigate cybersecurity risks, authorities are testing critical infrastructure and working with the private sector to encourage boosted cyber security capabilities.
Closing and acknowledgements
- The IMF mission thanks the authorities and other counterparts for a constructive policy dialogue.
IMF Communications Department, June 9, 2022.