## IMF Executive Board Concludes 2023 Article IV Consultation with Denmark _IMF News, June 26, 2023_ ## Source details **Canonical URL:** [IMF Executive Board Concludes 2023 Article IV Consultation with Denmark](https://www.imf.org/en/news/articles/2023/06/23/pr23236-denmark-imf-exec-board-concludes-2023-art-iv-consult) ## Other formats - [Markdown version](/en/news/articles/2023/06/23/pr23236-denmark-imf-exec-board-concludes-2023-art-iv-consult/index.md) - [Structured JSON version](/en/news/articles/2023/06/23/pr23236-denmark-imf-exec-board-concludes-2023-art-iv-consult/index.json) - [Bundle manifest](/en/news/articles/2023/06/23/pr23236-denmark-imf-exec-board-concludes-2023-art-iv-consult/bundle-manifest.json) ## Bibliographic details - Published: June 26, 2023 --- ### Overview - On June 16, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark and endorsed the staff appraisal without a meeting. - The Danish economy recovered strongly from the pandemic: a relatively mild contraction in 2020 was followed by growth of around 5 percent in 2021 and 3¾ percent in 2022. - Headline harmonized consumer price index inflation reached a 40-year high in October 2022 before decelerating. - Economic activity is cooling recently as inflation lowers real incomes, financial conditions tighten, and external demand weakens, while labor markets remain relatively tight. - GDP growth for 2023 is projected at 1¼ percent, with inflation expected to decelerate but stay above 2 percent in the near term. - Risks to growth are broadly balanced; risks to inflation are tilted to the upside due to possible renewed supply shocks and stronger-than-expected and persistent wage pressures. ### Executive Board Assessment - Directors endorsed staff’s appraisal, highlighting: - Denmark’s impressive recovery from the pandemic, with strong output and employment growth contributing to inflationary pressures. - GDP growth expected to slow in 2023; inflation to remain elevated in the near term. - In the medium term, lower global growth and demographic challenges point to lower economic growth. ### Near-term fiscal policy recommendations - Near-term fiscal policy should support disinflation given persistently elevated inflation. - Because of uncertainty regarding contractionary effects in the fiscal plan, positive output gaps, and high inflation, the authorities should consider: - Keeping tight spending control. - Saving any revenue above budget forecasts aiming to improve the structural balance by ½ percentage points of GDP. - If downside growth risks materialize and inflation eases, automatic stabilizers should be allowed to operate fully. ### Medium-term fiscal policy recommendations - Medium-term fiscal policy should be recalibrated as needed to adhere to the fiscal rules. - The structural balance is expected to weaken to a deficit over the medium term mainly due to defense and demographic-related spending. - Authorities’ forward-looking efforts to contain the structural deficit within 0.5 percent of GDP by 2030 via supply-side measures are commended. - If fiscal trends suggest risk of breaching the structural deficit limit (one percent of GDP), authorities should be ready to recalibrate policy. - Any changes to indexation of statutory retirement age to life expectancy should safeguard long-term fiscal sustainability. ### Financial system stability and supervision - The financial system remains sound, but rising risks warrant continued vigilance and close monitoring. - Recommendations and observations: - Closely monitor banks’ liquidity risk management and ensure impairment charges are continuously updated as economic prospects change. - Commercial real estate (CRE) risks should continue to be closely watched; further efforts are needed to close data gaps. - Consider an increase in risk weights on CRE exposures or introduction of a sectoral systemic risk buffer. - The supervisor’s initiative to develop a pilot stress test for pension and insurance companies is welcome. - Continue efforts to monitor cyber security risks and strengthen resilience against cyberattacks. ### Macroprudential policy - Consider tightening macroprudential policies to target pockets of vulnerability. - The increase of the countercyclical capital buffer was appropriate. - Consider tightening borrower-based macroprudential measures to contain riskier mortgages, especially variable-rate mortgages with deferred amortization. - Once house prices and inflation stabilize, review: - High tax deductibility of mortgage interest expense. - Complex rental market regulations from the financial stability perspective. - The government’s plan to link property taxes to market valuations starting in January 2024 is welcome. - Authorities are encouraged to consider reforming the institutional setting of financial sector policy making in line with the 2020 Financial Sector Assessment Program. ### AML/CFT - Denmark is exposed to money laundering and terrorist financing threats. - Progress has been made in strengthening the anti-money laundering/combatting the financing of terrorism (AML/CFT) framework. - Authorities should continue efforts to increase the use of cross-border data and technological solutions in assessment of AML/CFT risks. ### Labor market and structural reforms - Authorities’ strong focus on labor market reforms is welcome given the expected decline in the working-age population. - Policy moves noted: - Canceling a public holiday to help increase annual hours worked. - Proposed personal income tax reform to help improve work incentives. - Planned reforms to early retirement schemes to increase employment. - Additional measures to explore, consistent with Denmark’s flexicurity model: - Review the structure of marginal effective tax rates, including benefits, to minimize work disincentives, especially for lower-income households. - Continue efforts to increase employment rates of immigrants. - Enhance education outcomes of students with immigrant backgrounds. ### Climate policy - Further measures are needed to achieve Denmark’s ambitious climate goals. - In addition to strengthening carbon pricing (Green Tax Reform), policy should consider complementary fiscal incentives at the sectoral level, including feebates in agriculture. ### Timing of next consultation - It is recommended that the next Article IV consultation be held in the standard 12-month cycle. ### Denmark: Selected Economic Indicators, 2022–24 - Output - Real GDP growth (%): 2022: 3.8; 2023: 1.3; 2024: 1.4 - Employment - Unemployment rate (%): 2022: 4.5; 2023: 5.0 - Prices - Inflation (%, Q4 on Q4): 2022: 10.2; 2023: 3.3; 2024: 2.6 - General government finances - Revenue (% GDP): 2022: 48.6; 2023: 49.5; 2024: 49.3 - Expenditures (% GDP): 2022: 45.3; 2023: 47.5; 2024: 48.4 - Fiscal balance (% GDP): 2022: 2.0; 2023: 0.9 - Public debt (% GDP): 2022: 30.1; 2023: 30.5; 2024: 30.3 - Money and credit - Domestic credit growth (%): 2022: -4.0; 2023: … - 3-month interbank interest rate (%): 2022: 0.3 - 10-year government bond yield (%): 2022: 1.2 - Balance of payments - Current account (% GDP): 2022: 13.1; 2023: 9.1; 2024: 7.8 - International reserves (% change): 2022: 1.9 - Exchange Rate - ULC-based REER (% change): 2022: -1.8 *Source: IMF press release, June 26, 2023.* --- ## References - [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg) - [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx) - [Denmark and the IMF](http://www.imf.org/external/country/DNK/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Press Releases](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/2023/06/23/pr23236-denmark-imf-exec-board-concludes-2023-art-iv-consult_