## 2016 Article IV Consultation with Sweden - Concluding Statement of the IMF Mission

_IMF News, September 28, 2016_

## Source details

**Canonical URL:** [2016 Article IV Consultation with Sweden - Concluding Statement of the IMF Mission](https://www.imf.org/en/news/articles/2016/09/28/ms092916-sweden-concluding-statement-of-imf-mission)

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## Bibliographic details
- Published: September 28, 2016

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### Overview and headline findings
- Sweden is enjoying a revival of growth and inflation after a difficult period, supported by accommodative monetary policy and migration‑related fiscal spending.
- Growth and labor market:
  - Growth is heading for about 3½ percent in 2016, after an expansion of just over 4 percent in 2015.
  - Employment has risen by 1½ percent so far in 2016, pushing unemployment down to about 7 percent.
- Key risks:
  - Domestic demand will cool as monetary and fiscal impulses fade; growth is expected to ease to about 2½ percent in 2017 and 2 percent thereafter.
  - External downside risks include weakness in major advanced and emerging economies, and political fragmentation in Europe (including post‑Brexit uncertainty).
  - High housing prices and rising household indebtedness increase downside risk to consumption and amplify the impact of shocks.

### Key policy priorities (mission summary)
- Return inflation to target to promote macroeconomic stability and rebuild space for monetary policy.
- Contain vulnerabilities from household debt and address housing market imbalances that crimp growth and threaten stability.
- Ensure that Sweden’s large financial sector remains resilient.
- Accelerate integration of refugees into the workforce.

### Monetary policy
- Historical context and outcomes:
  - Slack widened to 2-3 percent by 2013-14; core HICP inflation declined to only ½ percent; two-year ahead inflation expectations fell to just 1 percent by end‑2014.
  - Monetary easing has kept Swedish yields roughly in line with German Bunds and the krona broadly stable in 2015‑16.
  - Core HICP inflation has risen to about 1.2 percent and inflation expectations have moved up closer to the target.
- Outlook and guidance:
  - Core HICP inflation is expected to pick up from 2017 and approach target by 2019, though the rise is relatively gradual.
  - Monetary policy needs to remain stimulatory for some time; unwinding stimulus should await clear confirmation of a durable rise in inflation.
  - If inflation or expectations were to weaken, greater stimulus would be appropriate; foreign exchange intervention should be a last resort.
- Institutional recommendation:
  - The parliamentary review of the Riksbank law should:
    - Base the inflation target on HICP for international comparability.
    - Clarify the Riksbank’s financial stability mandate, including a specific role in identifying, monitoring, analyzing, and reporting systemic financial risks and authority to provide liquidity for financial stability purposes.

### Housing market and household debt
- Current situation:
  - Annualized housing price gains have slowed to about 5 percent since the Fall of 2015.
  - Prices stand at some 40 percent above their 20-year average relative to incomes.
  - Spending by highly‑indebted households is more sensitive to interest rate moves; deleveraging can worsen recessions.
- Structural reforms recommended:
  - Improve municipal land sale and planning processes to maintain an adequate supply of land ready for development and sustain construction.
  - Phase out rent controls to encourage more efficient use of housing.
  - Consider temporary removal of the capital gains deferral threshold.
  - Phase out mortgage interest tax deductibility to reduce incentives to finance housing with large debts.
- Macroprudential recommendations:
  - Implementation of minimum amortization requirements on mortgages is welcome.
  - Introduce a measure targeted at highly‑indebted households, such as:
    - A debt‑to‑income threshold that only a minority of borrowers may exceed; or
    - High risk weights on mortgages exceeding that threshold coupled with supervisory monitoring of such lending by each bank.
  - Timely implementation could be followed by regulation if needed; either approach would moderate lending responses when housing prices rise faster than income.

### Prudential supervision and financial stability
- Immediate legal and institutional needs:
  - Fix deficiencies in the legal framework for macroprudential policy to allow timely action; Finansinspektionen (FI) requires timely capacity to adopt new tools as risks emerge.
  - Expand joint work in the Financial Stability Council (FSC) on risk analysis and design/impact assessment of potential measures; structure FSC operations to support FI’s macroprudential mandate.
- Supervisory capacity:
  - FI should expand resources to increase supervisory inspection frequency, especially if Nordea’s regional subsidiaries are converted into branches.
  - Minimize delays in introducing regulations while legislation and ordinances are amended.
- Capital and liquidity measures:
  - A leverage ratio would provide a useful backstop to risk‑based capital requirements given modeling challenges of tail risks.
  - Evaluate strengthening bank liquidity requirements in foreign currency, considering potential sizable liquidity support needs in foreign currency depending on the duration of a funding shock and market liquidity in securities held by banks.
- Regional coordination:
  - Enhance regional cooperation in supervision, liquidity support, and resolution across the interconnected Nordic‑Baltic financial system.
  - Memoranda of Understanding being negotiated among regional supervisors should entail full access to supervisory information including participation in on‑site inspections.
  - Cooperative agreements are needed regarding liquidity support and to ensure financial stability is protected in the event of resolution.

### Fiscal policy
- Migration‑related spending and overall stance:
  - The surge in asylum seekers has almost doubled spending on refugee reception and introduction to about 1.5 percent of GDP.
  - The budget deficit is still expected to be small owing to robust revenues and lower‑than‑expected spending elsewhere; the fiscal stance is broadly neutral.
- 2017 Budget and initiatives:
  - The Budget for 2017 preserves a small fiscal deficit while providing initiatives totaling 0.6 percent of GDP in education, child and elder care, and active labor market policies.
  - Spending on refugee reception and introduction is expected to remain historically high.
- Fiscal framework and sustainability:
  - Proposed revisions to the fiscal framework strengthen Sweden’s fiscal health.
  - New surplus target of 0.33 percent of GDP (lowered from 1 percent) will continue to protect buffers.
  - New debt anchor at 35 percent of GDP is valuable.
  - These targets should be achieved over periods sufficient to avoid a pro‑cyclical fiscal stance.

### Migration-related and labor market policies
- Labor market integration challenges:
  - Job creation has been concentrated in skilled occupations; unemployment is high and rising among less educated workers born outside Sweden.
  - The large number and heterogeneity of new arrivals from 2015 is putting pressure on integration frameworks.
- Recommended actions to improve integration:
  - Improve refugee reception and establishment: provide affordable housing to avoid settlement delays; ensure sufficient municipal capacity for language training and basic education; improve coordination among agencies involved.
  - Medium-term fiscal projections show room to support such investments while observing the new fiscal targets.
  - Social partners should support integration through adult education, vocational training, and enabling on‑the‑job skills building.
  - Consider temporary and targeted flexibility in high entry‑level wages, combined with expanded tax credits and strengthened benefit conditionality, to boost demand for lower skill workers while protecting living standards.
  - Streamline employment subsidy programs to increase take‑up and improve employer‑employee matching to boost subsequent employment outcomes.

*Source: Mission Concluding Statement (2016 Article IV Consultation with Sweden)*

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## References

- [Sweden and the IMF](http://www.imf.org/external/country/SWE/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2016/09/28/ms092916-sweden-concluding-statement-of-imf-mission_