IMF Executive Board Concludes 2019 Article IV Consultation with Norway

IMF News, June 12, 2019

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• Published: June 12, 2019

Overview

• Executive Board concluded the 2019 Article IV consultation with Norway on June 10, 2019.
• Norway’s economic momentum remains strong, supported by higher oil prices, competitiveness gains from a weaker krone, and a robust labor market.
• After growing by 2.2 percent in 2018, mainland economic activity is expected to accelerate to about 2.5 percent in 2019, before slowing to 2.1 percent in 2020.

Growth, Outlook, and Risks

• Growth projections and short-term outlook:
  • Mainland economic activity: 2.5 percent (2019), 2.1 percent (2020).
  • Real GDP projections in table: 1.2 (2018), 2.0 (2019), 1.4 (2020), 2.2 (2021), 1.8 (2022).
• Risks to the outlook:
  • Global trade tensions and uncertainty about European growth.
  • Domestic: residential house price growth risks have abated but not disappeared.
  • Commercial real estate (CRE) valuations are growing strongly and appear stretched in some segments.
  • Upside: resilient oil prices could lead to stronger-than-expected oil-related investment and exports.

Fiscal Policy and Public Finance

• 2019 budget stance:
  • The 2019 budget deficit is likely to be mildly expansionary, following a better-than-expected outturn (and related small contraction) in 2018.
  • Overall, the structural non-oil deficit is expected to be broadly unchanged over the 2017–19 period.
• Fiscal strategy and reform:
  • Tax reform continues to shift taxation away from direct taxes toward less-distortionary indirect taxes.
  • Directors encouraged targeting a modest consolidation next year to minimize overheating risks, be consistent with monetary normalization, and help build buffers.
  • Spending pressures from worsening demographics and slower sovereign wealth fund growth will reduce space under the fiscal rule in the medium term; expenditure savings or new revenue sources will be required.
  • Authorities were encouraged to lower tax incentives on housing and broaden the VAT base.
• Selected public finance figures (as presented):
  • Non-oil balance (percent of mainland GDP): -7.7 (2018), -8.0 (2019), -7.5 (2020), -7.0 (2021).
  • Structural non-oil balance (percent of trend mainland GDP): -7.4 (2018), -7.6 (2019), -7.2 (2020).
  • Fiscal impulse: 7.4 (2018), 0.2 (2019), -0.4 (2020), 0.0 (2021).
  • In percent of Government Pension Fund Global: -2.7 (2018), -2.9 (2019), -2.5 (2020).
  • General government overall balance (percent of mainland GDP): 4.6 (2018), 5.8 (2019), 8.8 (2020), 9.0 (2021), 9.9 (2022).
  • Net financial assets: 326.1 (2018), 350.9 (2019), 329.4 (2020), 346.1 (2021), 348.4 (2022).
  • Capital of Government Pension Fund Global (GPF-G): 276.8 (2018), 303.2 (2019), 283.5 (2020), 302.6 (2021), 306.5 (2022).

Monetary Policy and Financial Sector

• Inflation and policy normalization:
  • Both headline and core inflation are now above target; Norges Bank has started normalizing policy.
  • Main policy rate has been raised by 50 basis points since August last year and is now at 1 percent.
  • Central bank forward guidance suggests further rate hikes ahead.
• Financial sector soundness and regulation:
  • Banks remain liquid, profitable, and well-capitalized.
  • New anti-money laundering, financing of terrorism law approved in parliament gives the Financial Supervisory Authority greater sanctioning powers.
  • Directors underscored that full compliance with the new AML/CFT framework is paramount given the regional context and welcomed increased budgetary resources for supervision.
• Credit, housing, and CRE risks:
  • Despite recent slowdown in credit growth, household debt continues to rise.
  • Authorities were encouraged to exercise caution against loosening mortgage regulations when reviewed at end 2019, barring unexpected changes.
  • CRE valuations appear stretched in some segments and pose increasing risks.
  • Support for planned increase in the counter-cyclical buffer to increase resilience to CRE risks.
  • Directors encouraged authorities to close existing data gaps on CRE.
• Interest rates and money/credit (presented figures):
  • Three-month interbank rate (year average): 0.9 (2018), 1.6 (2019).
  • Ten-year government bond yield (year average): 1.3 (2018).
  • Broad money, M2 (end of period, 12-month percent change): 5.1 (2018), 6.0 (2019), 5.3 (2020).
  • Domestic credit, C2 (end of period, 12-month percent change): 6.4 (2018), 4.8 (2019).

Structural Reforms, Labor Market, and Social Policy

• Long-term challenges:
  • Directors noted longer-term headwinds from demographic pressures and a declining contribution from oil.
  • Need to use the favorable environment to implement reforms to sustain prosperity, manage transition to a less oil-dependent economy, and increase productivity.
• Labor market reforms:
  • An expert commission issued proposals for reforming sickness and disability schemes within a broader remit to raise employment.
  • Social partners will convene to discuss the commission’s proposals.
  • Directors considered reform of sickness and disability benefits the most pressing labor market reform and urged tightening eligibility, improving incentives to work, better education and training of beneficiaries, and other measures to boost employment opportunities.
  • Directors underscored the need to carefully weigh distributional consequences and to offset measures with well targeted transfers to protect the most vulnerable.
  • Continued wage restraint is needed to underpin competitiveness.

Executive Board Assessment and Recommendations

• Directors welcomed Norway’s solid performance, stronger terms of trade, competitiveness gains, and robust labor market.
• Key recommendations and conclusions:
  • Use current favorable environment to implement reforms to manage the transition away from oil dependence and raise productivity.
  • Target a modest fiscal consolidation next year to reduce overheating risks and build buffers.
  • Pursue measures to make the tax system more efficient, lower tax incentives on housing, and broaden the VAT base.
  • Support ongoing monetary policy normalization while standing ready to adjust the pace if circumstances require.
  • Exercise caution on mortgage regulation loosening at end 2019 review.
  • Increase resilience to CRE risks via planned counter-cyclical buffer increases and close CRE data gaps.
  • Ensure full compliance with the new AML/CFT framework; leverage FSA’s broader sanctioning powers and increased resources.
  • Prioritize reform of sickness and disability schemes, tighten eligibility, improve work incentives, and enhance education and training for beneficiaries.

Selected Economic and Social Indicators (as presented)

• Population (2018): 5.3 million
• Per capita GDP (2018): US$ 81,848
• Quota (3754.7 mil. SDR/0.78 percent of total)
• Main products and exports: Oil, natural gas, fish (primarily salmon)
• Literacy: 100 percent
• Projections and indicators (selected):
  • Real mainland GDP: 1.1 (2018), 2.5 (2019), 2.1 (2020)
  • Domestic demand: 2.6 (2018), 2.4 (2019)
  • Unemployment rate (percent of labor force): 4.7 (2018), 4.2 (2019), 3.9 (2020), 3.7 (2021)
  • Output gap (mainland economy, -implies output below potential): -0.9 (2018), -0.6 (2019), -0.2 (2020), 0.5 (2021), 0.7 (2022)
  • CPI (average): 3.6 (2018), 1.9 (2019), 2.8 (2020), 2.3 (2021), 1.7 (2022)
  • Core inflation: 3.1 (2018), 1.5 (2019)
  • Gross national saving (percent of GDP): 32.7 (2018), 33.8 (2019), 35.7 (2020), 35.6 (2021)
  • Gross domestic investment (percent of GDP): 28.7 (2018), 28.2 (2019), 27.6 (2020), 28.3 (2021), 28.6 (2022)
  • Current account balance (percent of mainland GDP): 6.7 (2018), 9.8 (2019), 8.4 (2020)
  • Current account balance (percent of GDP): 4.0 (2018), 5.6 (2019), 8.1 (2020), 7.1 (2021)
  • Terms of trade (change in percent): -9.9 (2018), 4.9 (2019), 0.8 (2020)
  • International reserves (end of period, in billions of US dollars): 60.9 (2018), 65.1 (2019), 63.8 (2020), 63.6 (2021), 62.4 (2022)
  • Crude Oil Price: 42.8 (2018), 52.8 (2019), 68.3 (2020), 59.2 (2021), 59.0 (2022)
  • Holdings of currency (percent of quota): 93.9 (2018), 93.5 (2019), 88.0 (2020)
  • Holdings of SDR (percent of allocation): 88.3 (2018), 102.7 (2019), 97.9 (2020)
  • Quota (SDR millions): 3,755
  • Exchange rate regime: Floating
  • Bilateral rate (NOK/USD), end-of-period: 8.3
  • Real effective rate (2010=100): 86.6 (2018), 87.4 (2019)

IMF Executive Board Concludes 2019 Article IV Consultation with Norway

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Norway and the IMF
• IMF Policy Advice -- A Factsheet
• IMF Quotas -- A Factsheet
• Special Drawing Rights (SDRs) -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home