Press Information Notice: IMF Concludes Article IV Consultation with Sweden
IMF News, September 2, 1997
Source details
- Canonical URL
- Press Information Notice: IMF Concludes Article IV Consultation with Sweden
Other formats
Bibliographic details
- Published: September 2, 1997
Background and recent macroeconomic developments
- Sweden recovered from the early 1990s recession with: fiscal deficit narrowed from above 12 percent of GDP in 1993 to 2 1/2 percent in 1996; inflation brought to record lows after the forced de-linking of the krona from the ECU in late 1992; and the banking crisis resolved.
- Credibility gains reflected in narrowing interest rate differentials against Germany and appreciation of the krona in the latter half of 1995 and through most of 1996.
- Unemployment rose from among the lowest in the industrial world to continental European levels in 1991-92 and remained elevated despite recovery.
- 1996 slowdown: GDP growth fell from above 3 percent to barely 1 percent as export-led recovery lost momentum; domestic demand stagnated due to contractionary fiscal policy, slowing investment in the export sector, and inventory declines.
- Employment contracted by more than 1/2 percent in 1996; open unemployment rose from 7 3/4 percent to 8 percent; total unemployment including labor market program participants rose to 12 1/2 percent.
Fiscal policy developments and targets
- The June 1995 convergence program led to a faster-than-expected improvement in general government finances.
- General government deficit: declined from 10 1/4 percent of GDP in 1994 to 2 1/2 percent in 1996 (original target was 5 percent of GDP).
- Strengthening of government finances resulted from revenue increases and expenditure reductions, largely reflecting a strengthening of the underlying structural balance.
- Government projections: deficit of 2 percent of GDP in 1997 and budget balance in 1998.
- Medium-term government target: fiscal surplus of 2 percent of GDP over the business cycle; intermediate targets of surpluses of 1/2 percent of GDP in 1999, rising to 1 1/2 percent in 2000.
- Directors endorsed the target of a balanced budget in 1998 and supported the long-term goal of an average annual surplus of about 2 percent of GDP over the cycle.
- Directors cautioned against weakening underlying structural balances during cyclical strength and expressed concern about recent use of fiscal room to fund new spending programs to reduce open unemployment.
- Directors emphasized that the high cyclical sensitivity of public finances reflected very high levels of government expenditure and revenue relative to GDP; they considered the heavy tax burden an obstacle to growth and employment creation.
Monetary policy stance and inflation outlook
- Monetary policy geared toward an inflation target of 2 percent with tolerance limits of +/-1 percentage point.
- Riksbank lowered repo-rate by almost 5 percentage points during 1996 to just above 4 percent—the lowest level of the Bank's instrumental rate in thirty years—permitting significant easing of monetary conditions.
- Appreciation of the krona through most of 1996 moderated the effect of repo-rate cuts; effective depreciation since October last year (mainly against the U.S. dollar) further eased monetary conditions.
- Projections indicate CPI inflation will gradually rise in the course of 1997 and 1998, and be close to the target of 2 percent at the end of next year.
- Directors commended the Riksbank's inflation-targeting conduct and welcomed the multiparty agreement to enhance Riksbank independence and enshrine price stability as the primary objective of monetary policy into law.
- Directors concurred that the overall monetary stance appeared, for the time being, well balanced.
Growth outlook and demand conditions
- Macroeconomic conditions supportive of accelerating growth in 1997 and 1998: most contractionary effects of consolidation already fed through, inflation and interest rates low, manufacturing competitiveness strong, private consumption supported by rising wealth.
- Growth projections: accelerate to 2 percent in 1997 and to 3 percent in 1998.
Labor market issues and structural reform recommendations
- Government priority: lower open unemployment by half by the year 2000; five-point program announced in 1997 Spring Budget Bill including increased resources for local government employment and expanded adult education.
- Executive Directors expressed serious concern about persistently high unemployment and the government plan’s reliance on shrinking the labor force via expanded education and early retirement rather than private sector employment creation.
- Directors’ recommendations and concerns:
- Expand education and training is essential but insufficient to resolve unemployment.
- Caution about temporary early retirement schemes becoming entrenched.
- Call for a bold and comprehensive program of labor market reforms drawing on international experience (e.g., the Netherlands) to address structural rigidities and foster private sector employment growth.
- Reforms should foster productivity gains and help maintain competitiveness in global markets.
- Labor market reforms are important for supporting fiscal consolidation; pension reform highlighted given population aging.
- Consider using fiscal room to narrow wide tax wedges (payroll and income taxes) to strengthen labor demand.
- Improve supply-side incentives by reforming unemployment benefits, social security, and easing job protection provisions.
- Encourage wider wage differentiation in Sweden.
Other assessments and recommendations
- Directors noted the importance of reducing both expenditure and taxes while meeting fiscal balance targets to lower cyclical sensitivity of public finances and reduce large tax wedges that impede job creation.
- Several Directors noted Sweden’s strong record of providing generous official development assistance and expressed hope it could be restored to its earlier level in relation to GDP.
Executive Board summary judgments
- Welcomed Sweden’s success in fiscal consolidation, low inflation, and successful resolution of the banking crisis.
- Considered credibility gains in financial markets fully warranted.
- Emphasized need for structural reforms to strengthen medium-term employment and growth prospects, with main task to reduce unemployment through continued fiscal consolidation and labor market reforms.
- Endorsed fiscal targets and cautioned against undoing structural gains during cyclical upturns.
- Supported Riksbank independence measures and stressed continued tight financial policies despite decision not to seek EMU participation from the start.
Sweden: Selected Economic Indicators (as presented)
- Real GNP (change in percent): 1994: 3.3; 1995: 3.6; 1996: 1.1; 1997¹: 2.1; 1998¹: 3.0
- Domestic demand (change in percent): 1994: 2.6; 1995: 2.3; 1996: 0.0; 1997¹: 1.3
- CPI (change in percent): 1994: 2.2; 1995: 2.8; 1996: 0.8; 1997¹: 1.0; 1998¹: 2.0
- Total unemployment rate (in percent): 1994: 13.2; 1995: 12.1; 1996: 12.5; 1997¹: 12.8
- Of which: Labor market programs (in percent): 1994: 5.2; 1995: 4.4; 1996: 4.5; 1997¹: 4.3
- Gross national saving (in percent of GDP)²: 1994: 14.5; 1995: 17.6; 1996: 17.2; 1997¹: 18.2; 1998¹: 19.2
- Gross national investment (in percent of GDP)²: 1994: 14.1; 1995: 15.5; 1996: 14.7; 1997¹: 15.2
- General government balance (in percent of GNP): 1994: -10.3; 1995: -7.9; 1996: -2.5; 1997¹: -2.1
- General government debt (in percent of GNP): 1994: 79.0; 1995: 78.2; 1996: 77.7; 1997¹: 75.1; 1998¹: 70.0
- M0 (end-year, percent change): 1994: -0.4; 1995: 5.3; 1996: 5.13; 1997³: . . .
- M3 (end-year, percent change): 1994: 0.3; 1995: 2.7; 1996: 11.5; 1997³: 4.33
- Three-month balance (year average interest rate): 1994: 7.6; 1995: 8.8; 1996: 6.0; 1997⁴: 4.37
- 10-year government bond yield (year average): 1994: 9.4; 1995: 10.2; 1996: 8.0; 1997⁴: 6.50
- Trade balance (in percent of GNP): 1994: 6.4; 1995: 7.0; 1996: 7.3; 1997¹: 7.9
- Current account (in percent of GNP): 1994: 0.4; 1995: 2.4; 1996: 3.1
- Reserves (gold valued at SDR 35 per ounce, end of period, in billions of SDRs): 1994: 16.1; 1995: 16.3; 1996: 13.5; 1997⁵: 9.8
- Exchange rate regime: Floating Exchange Rate
- Present rate (July 14, 1997): US$1 = Skr 7.7975
- Nominal effective rate (1990=100): 1994: 81.5; 1995: 80.9; 1996: 88.7; 1997⁵: 84.0
- Real effective rate (1990=100)⁶: 1994: 73.8; 1995: 72.3; 1996: 79.6; 1997⁵: 74.9
Public Information Notice: IMF Concludes Article IV Consultation with Sweden (September 2, 1997).