Sweden - Staff Concluding Statement of the 2021 Article IV Mission
IMF News, February 2, 2021
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- Published: February 2, 2021
Mission context and summary assessment
- Publication date: February 2, 2021.
- IMF team conducted virtual meetings during January 19–29, 2021; mission led by Khaled Sakr and met with Minister of Finance Magdalena Andersson, Minister of Financial Markets and Housing Per Bolund, and Riksbank Governor Stefan Ingves; other senior officials; and representatives of parliamentary finance committee, labor unions, the banking sector, and academics.
- Key judgment: Sweden entered the COVID-19 pandemic with substantial buffers from prudent fiscal and financial management; the recession in 2020 was moderated by strong support measures and structural features of the economy.
Macroeconomic impact and policy response
- Fall in output in 2020: around 3 percent (less than the EU average).
- Fiscal support package announced for 2020: about 12 percent of GDP.
- Fiscal outcome: fiscal balance expected to have moved from a small surplus in 2019 to an estimated deficit of around 4 percent of GDP in 2020.
- Monetary policy:
- Policy (repo) rate: kept at zero since it moved from negative territory effective January 2020 just prior to the pandemic.
- Riksbank measures: reduced overnight lending rate; ample liquidity provision including a funding-for-lending facility, weekly market operations at longer maturities at the repo rate, and the asset purchase program.
- Asset purchase program expansion contributed to stabilizing corporate and mortgage bond markets.
- Macroprudential measures by Finansinspektionen: reduced the countercyclical buffer, temporarily suspended the amortization requirement, and urged banks to refrain from paying out dividends.
Recovery prospects and risks
- Recovery expected to start in 2021, but downside risks have recently increased.
- Main downside risks identified:
- New wave of infections.
- Mutations of the virus.
- Slower-than-expected rollout of vaccinations.
- Any necessary tightening of containment measures.
- Policy implications:
- Fiscal stance appropriate; scope exists for additional support if the recovery or inflation expectations falter.
- Riksbank should stand ready to complement fiscal support as needed.
- Avoid premature return to the surplus target.
- As recovery starts, support measures should be gradually withdrawn in a coordinated and well-communicated manner to balance avoiding economic scarring and preventing prolonged support of non-viable firms.
Structural challenges and policy recommendations
- Labor market and inclusion:
- Crisis highlighted long-standing inequities; increase in unemployment larger than in countries with deeper recessions.
- Temporary employment (common in hospitality, among youth and foreign-born) decreased substantially.
- Recommendations:
- Strengthen inclusive growth by advancing structural reforms and increasing growth-enhancing and green spending to meet health and demographic challenges.
- Make the short-term work scheme more flexible to better support temporary workers and new hiring, and to incentivize retraining.
- Further reduction of the high labor tax wedge is desirable.
- Continue higher spending on training and education and initiatives geared towards the foreign-born, especially women (noted in the 2021 Budget Bill).
- Housing market and construction:
- Challenges: shortages in affordable housing; extremely low property taxes; overly regulated rental market with long queues that favors existing tenants; complex local regulations impeding supply and competition in construction.
- Recommendations:
- Gradually increase property taxes from their extremely low level together with other reforms to make the housing market more dynamic and facilitate labor mobility.
- Introduce a simpler market-based rental system complemented with adequate housing allowances to better meet economic and social objectives.
- Streamline local regulations to increase supply and competition in the construction sector and drive down cost.
- Welcome ongoing public inquiries aimed at proposals to improve the functioning of the rental market.
Financial stability, vulnerabilities, and data needs
- Financial sector resilience: banks entered the crisis with high profitability and strong capital buffers; banks’ performance remains robust despite some deterioration in indicators.
- Long-standing vulnerabilities highlighted:
- Exposures to the commercial real estate (CRE) sector.
- High household debt and accelerating house prices.
- Specific concerns and monitoring needs:
- Increasing share of CRE funding via bond issuance requires close monitoring of the corporate bond market from a financial stability perspective.
- A prolonged recession or structural shifts (e-commerce, teleworking, less travel) could reduce CRE revenue streams for highly exposed companies.
- Need for enhanced data collection on household and private sector balance sheets to inform authorities’ management of buildup of risks; recently launched inquiry on household balance sheet statistics is welcome.
- Possible further strengthening of prudential regulations, especially for CRE.
- Anti-money laundering: amendments to the Swedish framework and enforcement are welcome; robust implementation of recent reforms should continue.
Role of the Riksbank and digital currency
- Monetary policy stance judged appropriate for crisis stabilization; Riksbank communication that all policy options will be considered if recovery or inflation expectations falter is noted as reassuring.
- Operational considerations:
- Any amendments to the Riksbank law should preserve operational independence and ability to quickly deploy a broad range of instruments in future crises.
- E-krona:
- Riksbank at the forefront of exploring central bank digital currency.
- The e-krona pilot project will help design an e-krona proposal to maximize benefits while minimizing risks, including risks for financial intermediation and cybercrime.
Source: Sweden - Staff Concluding Statement of the 2021 Article IV Mission (February 2, 2021).