Norway: Staff Concluding Statement of the 2023 Article IV Mission

IMF News, June 8, 2023

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The Norwegian economy continues to perform well; output grew strongly in 2022, and it is projected to expand in 2023, albeit at a slower pace.
Norway benefited from windfall gains from high petroleum and natural gas prices that have so far countered global headwinds.
The labor market has been resilient, with strong employment growth and registered unemployment rates close to historical lows.
Growth prospects remain favorable and imminent risks are described as balanced, with upside risks to inflation noted.
Over the longer term, boosting potential growth requires policy actions to strengthen labor force participation.

Findings:

The revised budget was adjusted to compensate for higher-than-expected inflation and increased support for Ukraine, including humanitarian aid.
Revenues were revised downwards due to lower-than-projected electricity prices.
The expected higher structural non-oil deficit leads to a mildly expansionary fiscal stance.
The government announced an extension of support measures to cushion high electricity prices on households until the end of next year.
Recent changes to resource rent taxation are characterized as welcome.
Proposals by the Expert Committee on Tax Reform and by the Pension Commission are noted as having beneficial effects if implemented.

Recommendations:

In the short term, fiscal policy should be more supportive of Norges Bank’s disinflationary efforts by avoiding contribution to aggregate demand amid persistent inflationary pressures.
Consider narrowing the coverage of electricity-price support measures and calibrating them to help only vulnerable households to realize potential savings.
Over the medium term, adopt additional measures to make room for new investment and climate initiatives in light of aging-related spending pressures.
Implement proposals by the Expert Committee on Tax Reform to make the tax system simpler and more efficient, thereby creating fiscal space and supporting economic growth.
Implement Pension Commission proposals to link retirement age limits to life expectancy and compensate old-age pensions of previously disabled people to improve sustainability and equity.
Precede compensation for previously disabled people with a comprehensive reform of sick leave and disability benefits to avoid large fiscal costs and disincentivizing labor force participation.
Tighten incentives and paths for early retirement and avoid reversals to boost labor force participation and potential growth.

Findings:

Inflation is elevated with upside risks; GDP growth and the output gap are projected to be positive in 2023.
The labor market remains tight; consumption is supported by savings accumulated during the pandemic.
Elevated inflation expectations, a weak currency, and broad-based inflation add to upside risks.
The Norwegian banking system has both contributed to and benefited from strong economic growth but is subject to risks from tightening global conditions.
Some banks are tightening standards for commercial real estate (CRE).
More data on the CRE sector are now available for surveillance (e.g., through a private sector database on renters and owners).
Macroprudential measures have been implemented; the roll out of the TIBER (Threat Intelligence-Based Ethical Red-teaming) framework by Norges Bank together with the Financial Supervisory Authority (FSA) to test cyber resilience is highlighted.
Improvements to the AML/CFT framework are ongoing; an IMF assessment of regional cross-border threats and vulnerabilities concluded recently.

Recommendations:

Further monetary policy tightening is needed to contain demand, keep long-term expectations anchored, and durably bring down inflation to the 2 percent target.
Continue clear communication on how economic developments affect the current and future policy stance given uncertainties about transmission of monetary policy.
Maintain vigilance over financial stability risks given heightened uncertainty.
Gradually introduce a sectoral systemic risk or countercyclical buffer for CRE to broaden the macroprudential toolkit.
Make limits on the size of mortgage loans relative to value permanent, given high household debt and elevated house prices.
Intensify efforts to identify cyber risks, enhance regulation, and broaden cooperation among authorities and financial-system participants nationally and globally to strengthen cyber resilience.
Implement recommendations from the IMF assessment of regional cross-border threats and vulnerabilities to enhance supervision.

Findings:

Progress on structural reforms has been uneven and piecemeal.
Steps taken include increased vocational training and the planned introduction of a youth guarantee scheme.
Spending on retraining has increased but has not led to a decline in benefit recipients; effectiveness should continue to be assessed.
Participation in the generous sick-leave benefit system remains very high, draining public finances and reducing labor supply.
Housing affordability has become more prominent under high inflation and rising interest rates.
Norway continues to lead in climate mitigation and adaptation, including a schedule of carbon-price increases and large-scale publicly-supported carbon-capture and storage projects.
Further efforts are needed to fulfil Norway’s 2030 ambition under the Paris Agreement.

Recommendations:

Continue assessing and improving the effectiveness of retraining and upskilling programs.
Reform sick leave and disability benefits to reduce high participation, improve public finances, and increase labor supply.
Immediate measures to improve housing affordability: increase portable allowances and reduce the income tax for the most vulnerable.
Medium-term measures: ease restrictions on supply of new housing and alter regulations to boost construction efficiency to increase supply of both rental and sale housing.
Complete ambitious climate commitments to meet the 2030 ambition under the Paris Agreement.

Risks to growth are broadly balanced, with upside risks to inflation.
Monetary policy has been responding in a timely manner, but further tightening is needed to bring inflation durably toward the 2 percent target.
Supervisory authorities should remain vigilant to potential pressures in real estate markets and global turbulence.
Structural policy agenda should focus on labor market inclusiveness, availability of affordable housing, completing ambitious climate commitments, and making room for new investments by containing aging-related spending.
The IMF mission thanks the authorities and other counterparts for the constructive discussions and policy dialogue.

Source: Norway: Staff Concluding Statement of the 2023 Article IV Mission (June 8, 2023).