IMF Executive Board Concludes 2023 Article IV Consultation with Norway
IMF News, July 26, 2023
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- Published: July 26, 2023
Overview
- On July 24, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway and endorsed the staff appraisal without a meeting.
- Norway grew strongly in 2022 but the pace of output growth receded somewhat in 2023.
- Record-high energy and food prices together with much higher interest rates put pressure on households’ purchasing power.
- Mainland GDP growth is still expected to be positive, supported by strong business investment and exports.
- Norges Bank raised the policy rate to 3.75 percent by June 2023 after 9 policy rate hikes over 2022–23.
- Inflation has been stubborn, attributed in part to the weak krona and tight labor markets.
Executive Board Assessment — Key Findings
- Norway experienced one of the highest growth rates among advanced economies in 2022; risks remain balanced.
- Windfall gains from high petroleum and natural gas prices have so far countered global headwinds.
- The external position in 2022 was moderately stronger than the level implied by medium-term fundamentals and desirable policies.
- The fiscal position is strong, underpinned by very low public debt and high financial assets.
- In the near term, the fiscal stance should be more supportive of disinflation efforts; the structural non-oil deficit in the revised budget results in a mildly expansionary fiscal stance, contributing to higher aggregate demand.
- Spending on energy subsidies is projected to decline this year due to lower electricity prices; potential savings could be realized by narrowing coverage and calibrating support to help only vulnerable households.
- Over the medium term, aging-related spending pressures require additional measures to make room for new investment and promote climate initiatives.
- Proposals by the Expert Committee on Tax Reform could help make the tax system simpler and more efficient.
- Suggestions by the Pension Commission to link retirement age limits to life expectancy would benefit sustainability and labor force participation, but changes should be preceded by a comprehensive reform of Norway’s disability benefits.
Monetary Policy and Inflation
- Further monetary policy tightening is needed as inflation risks are to the upside.
- Rationale:
- GDP growth and the output gap are projected to be positive in 2023.
- The labor market is still tight.
- Consumption, backed by savings accumulated during the pandemic, is still resilient.
- Elevated inflation expectations, currency weakness, and broad-based inflation pose upside risks.
- Objective: Contain demand and durably bring down inflation to the 2 percent target to contribute to high and stable output and employment.
- Communication: Continue to clearly communicate how economic developments affect the current and future policy stance given uncertainties about policy transmission.
Financial Stability and Macroprudential Policy
- The banking system is strong but tightening global conditions pose risks.
- Risks to financial stability appear broadly manageable, but continued vigilance is needed given heightened uncertainty.
- Macroprudential recommendations:
- Further broaden the toolkit, such as gradually introducing a sectoral systemic risk or countercyclical buffer for CRE.
- Consider making the limits on the size of mortgage loans relative to value permanent, given high household debt and elevated house prices.
- Cyber risk: Strengthen resilience to cyber-attacks; Norges Bank together with the FSA rolled out the TIBER (Threat Intelligence-Based Ethical Red-teaming) framework.
- AML/CFT: Improvements are ongoing; implement recommendations from a recently concluded IMF assessment of regional cross-border threats and vulnerabilities to further enhance supervision.
Structural Reforms and Labor Market
- Progress on structural reforms has been piecemeal.
- Measures taken:
- Increased vocational training.
- Planned introduction of a youth guarantee scheme.
- Increased spending on retraining; effectiveness should continue to be assessed as it has not led to a decline in benefit recipients.
- Disability benefits:
- Participation in the generous disability benefit system remains very high, draining public finances and reducing labor market supply.
- Comprehensive reform of disability benefits is recommended prior to implementing pension age changes.
- Housing affordability has become more prominent under high inflation and rising interest rates.
Climate Policy
- Norway continues important efforts in climate mitigation and adaptation.
- Initiatives:
- Introduced a schedule of carbon-price increases.
- Launched large-scale publicly supported projects for carbon-capture and storage.
- Further efforts are needed to fulfil Norway’s 2030 ambition under the Paris Agreement.
Selected Economic Indicators and Projections (2020–28)
- Population (2022): 5.4 million
- Quota (3754.7 mil. SDR/0.78 percent of total)
- Per capita GDP (2022): US$ 106,328.4
- Literacy: 100 percent
- Main products and exports: Oil, natural gas, fish (primarily salmon)
- Real Economy (Real GDP change in percent)1/:
- 2020: -1.3
- 2021: 3.9
- 2022: 3.3
- 2023: 2.1
- 2024: 2.5
- 2025: 1.8
- 2026: 1.5
- 2027: 1.4
- Real mainland GDP (change in percent):
- 2020: -2.8
- 2021: 4.2
- 2022: 3.8
- 2023: 1.9
- 2024: 2.0
- Final Domestic demand:
- 2020: -3.9
- 2021: 4.0
- 2022: 4.8
- 2023: 0.9
- 2024: 1.6
- Private consumption:
- 2020: -6.2
- 2021: 4.4
- 2022: 6.9
- 2023: 0.6
- 2024: 1.1
- Public consumption:
- 2020: -0.5
- 2021: 5.0
- 2022: 0.1
- 2023: 1.7
- Gross fixed capital formation:
- 2020: -3.1
- 2021: 6.7
- 2022: 0.5
- 2023: 2.4
- 2024: 2.2
- Exports:
- 2020: -9.9
- 2021: 5.9
- 2022: 11.0
- 2023: 3.2
- 2024: 3.0
- 2025: 2.9
- Imports:
- 2020: -10.5
- 2021: 2.7
- 2022: 11.5
- 2023: 2.3
- Unemployment rate (percent of labor force):
- 2020: 4.6
- 2021: 3.6
- Output gap (mainland economy, - implies output below potential):
- 2020: -0.7
- 2021: -0.2
- 2022: 0.0
- CPI (average):
- 2020: 1.3
- 2021: 3.5
- 2022: 5.8
- 2023: 2.6
- Structural non-oil balance (percent of mainland trend GDP)2/:
- 2020: -11.7
- 2021: -10.8
- 2022: -9.8
- 2023: -10.3
- 2024: -10.1
- Fiscal impulse:
- 2020: -0.9
- 2021: -1.0
- 2022: -0.1
- In percent of Pension Fund Global Capital3/:
- 2020: -3.7
- 2021: -3.3
- 2022: -3.0
- 2023: -2.7
- 2024: -2.5
- 2025: -2.4
- 2026: -2.3
- Gross Public Debt (percent of GDP):
- 2020: 46.1
- 2021: 42.8
- 2022: 37.2
- 2023: 38.8
- 2024: 38.7
- 2025: 38.4
- 2026: 38.3
- 2027: 37.8
- 2028: 37.3
- Money and credit (end of period, 12-month percent change):
- Broad money, M2:
- 2020: 12.1
- 2021: 10.4
- 2022: 5.6
- Domestic credit, C2:
- 2020: 4.9
- Interest Rates (year average, in percent):
- Three-month interbank rate:
- 2020: 0.4
- 2021: 0.8
- Ten-year government bond yield: (values not provided)
- Balance of Payments (Percent of total GDP):
- Current account balance:
- 2020: 13.6
- 2021: 30.4
- 2022: 23.5
- 2023: 21.3
- 2024: 19.7
- 2025: 17.9
- 2026: 16.5
- 2027: 14.9
- Balance of goods and services (percent of mainland GDP):
- 2020: -1.1
- 2021: 16.6
- 2022: 44.2
- 2023: 33.1
- 2024: 29.7
- 2025: 27.0
- 2026: 24.2
- 2027: 21.9
- 2028: 19.4
- Terms of trade (change in percent):
- 2020: -16.1
- 2021: 43.3
- 2022: 45.1
- 2023: -10.4
- 2024: -5.2
- 2025: -4.2
- 2026: -5.4
- 2027: -4.8
- 2028: -5.0
- International reserves (end of period, in billions of US dollars):
- 2020: 73.6
- 2021: 83.0
- 2022: 72.1
- Gross national saving:
- 2020: 32.5
- 2021: 39.2
- 2022: 51.0
- 2023: 46.0
- 2024: 44.7
- 2025: 43.6
- 2026: 42.1
- 2027: 41.0
- 2028: 39.7
- Gross domestic investment:
- 2020: 31.4
- 2021: 25.6
- 2022: 20.6
- 2023: 22.4
- 2024: 23.4
- 2025: 23.9
- 2026: 24.3
- 2027: 24.5
- 2028: 24.8
- Exchange Rates (end of period):
- Bilateral rate (NOK/USD), end-of-period:
- 2020: 9.4
- 2021: 8.6
- 2022: 9.6
- Nominal effective rate (2010=100):
- 2020: 76.2
- 2021: 80.5
- 2022: 79.9
- Real effective rate (2010=100):
- 2020: 78.1
- 2021: 83.1
- 2022: 80.8
- Memo: Nominal GDP (in Billions of US Dollars):
- 2020: 367.6
- 2021: 490.3
- 2022: 579.4
- 2023: 524.9
- 2024: 527.6
- 2025: 534.2
- 2026: 536.6
- 2027: 549.5
- 2028: 561.0
Notes:
- 1/ Based on market prices which include "taxes on products, including VAT, less subsidies on products."
- 2/ Authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects. Non-oil GDP trend estimated by staff.
- 3/ Over-the-cycle deficit target: 3 percent of Government Pension Fund Global.
Source: IMF Executive Board Concludes 2023 Article IV Consultation with Norway (Press Release No. 23/274).
