Public Information Notices
Norway and the IMF
On January 15, 1999, the Executive Board concluded the Article IV consultation with Norway1.
Since late 1993 the Norwegian authorities have relied upon an economic strategy called the Solidarity Alternative in an attempt to preserve the competitiveness of the non-oil economy and to help smooth income and employment during and after the period of maximum oil exports. Under this strategy the labor unions have consented to moderate wage settlements, in return for the government’s commitment to orient monetary policy toward stabilizing the exchange rate. Fiscal policy is used for demand management and helps to insulate the non-oil economy from developments in the oil sector by reinvesting abroad a substantial part of the government’s oil revenues in the State Petroleum Fund (SPF).
Since adopting these policies Norway has experienced six consecutive years of rapid economic expansion, with low rates of inflation. Most of the fundamentals—growth, unemployment, and the fiscal and external positions—are among the best in Europe. In 1998, mainland GDP grew by 3 percent, with strong domestic demand compensating for the withdrawal of stimulus from net exports. Mainland and offshore investments were significant and private consumption growth rose to about 4 percent, fueled by low interest rates, brisk employment growth and the healthy financial position of the household sector. Government consumption grew by 2½ percent, mainly on account of increased local authority spending.
The sustainability of this favorable performance, however, has been threatened by the absence of an adequate policy response to the emergence of excess demand pressures in 1997-98. The 1998 budget resulted in only a slightly contractionary fiscal impulse, at ¼ percent of non-oil GDP, despite the signs of overheating of the economy and the accommodative stance of monetary policy.2. To begin addressing this problem more forcefully, the 1999 budget adopted in December included a fiscal tightening of about ¾ percent of GDP for 1999 (with a roughly unchanged overall government surplus owing to a decline in oil revenues).
The failure to moderate demand pressures in the economy undermined the incomes policy in 1998. The tightness in labor markets has led to shortages of skilled labor in the health, education, construction, and industrial sectors. The number of unemployed per vacancy is at a record low, and an unusually large number of strikes have occurred this year. Wage growth accelerated to about 6 percent in 1998 and is projected to remain strong in 1999 as a result of a continued tight labor market, with the unemployment rate rising to about 3½ percent. Consumer price inflation was fairly subdued in 1998, at 2.3 percent but the staff foresees it picking up to about 3 percent in 1999 owing to wage pressures and the exchange rate depreciation experienced during 1998. Economic growth and inflation prospects have been moderated by the sharp decline in world oil prices, and wage and price inflation could be lower if the incomes policy becomes more effective this year.
In late August, the exchange rate fell well below its initial range following efforts by Norges Bank to maintain it through increases in official interest rates. In March 1998, Norges Bank had raised official short-term interest rates by 25 basis points to counter the depreciation in the currency associated with a decline in oil prices. Downward pressure on the exchange rate intensified in May in the face of high wage settlements and weak oil prices, leading Norges Bank to raise official interest rates future, in several stages, by a cumulative 425 basis points by late August. On August 24 Norges Bank declared that the monetary policy instruments had assumed an orientation towards returning the exchange rate over time to its initial range, and that it would not make further changes in the use of instruments for the time being. As of mid-January 1999, the currency remained about 2-3 percent below the bottom of the initial range. On January 28 the central bank cut its key interest rates by 50 basis points. As of end-January the three-month krone Euro deposit rate was about 7.2 percent, 400 basis points above the corresponding Euro rate.
Executive Board Assessment
Executive Directors commended Norway for its impressive track record of economic performance in recent years, characterized by vigorous economic growth, low rates of unemployment and inflation, and strong fiscal and external positions. This performance owed much to Norway’s macroeconomic strategy—the Solidarity Alternative. Now, however, the economy faces the twin challenges of emerging capacity constraints and an adverse external environment—the latter, particularly, on account of the fall in oil prices. Directors noted that developments in 1998 had complicated the task of meeting these challenges. Notwithstanding a series of interest rate increases by the Norges Bank, the exchange rate had depreciated in the face of weakening oil prices, while continuing tightness in the labor market had increased wage pressures, thus eroding the effectiveness of incomes policy and leading to a pickup in inflation. As a result, some of the conditions that underlay the operation of the Solidarity Alternative had ceased to apply. However, most Directors considered that the Solidarity Alternative should continue to make a valuable contribution in anchoring policies, and it was noted that occasional setbacks were a fact of life.
With regard to the near-term outlook, many Directors pointed to the continuing risk to the economy from increased wage and inflation pressures. They noted that containing wage growth would be crucial, especially in view of the slowing of the rapid growth in labor supply in recent years. While generally sharing these concerns, other Directors saw a more benign outlook for inflation, in view of weaker growth prospects and continued low oil prices, which could dampen wage and price pressures.
Regarding the policy response to these developments, Directors considered that an appropriate fiscal policy would be critical for Norway’s future economic prospects and in setting the stage for further sustained economic expansion. They generally considered that fiscal policy should have played a more active role in cooling the economy in 1997-98, although the view was expressed that it was appropriate for the emphasis to have been on financing rather than adjustment in response to the decline in oil prices. Most Directors considered the fiscal stance adopted in the 1999 budget to be broadly appropriate. They supported the authorities’ view that, given the recent signs of abating growth, the targeted budget tightening, together with the current high interest rate levels, would have the desired dampening effect on the economy without unduly stifling growth prospects. A few Directors, however, considered that the fiscal adjustment in the 1999 budget should have been more ambitious. Directors encouraged the Norwegian authorities to place the emphasis of fiscal adjustment on expenditure restraint, including steps to moderate the growth of pension expenditures, rather than revenue increases, in view of the already high tax burden in Norway.
Looking ahead, Directors noted that economic policies would need to take account of important changes in the external environment; in particular, fiscal and structural policies would have to adapt to the possibly secular change in world oil prices, while cost competitiveness would have to be enhanced with the advent of European Monetary Union (EMU). They commended the authorities for consistently transferring a significant portion of annual oil revenues to the State Petroleum Fund (SPF). This had helped to insulate the economy fromthe effects of fluctuations in oil exports, avoid excessive current consumption of oil wealth, and help ensure its availability to future generations. In line with that objective, some Directors considered it important for the authorities to take further measures to ensure that the SPF would not be depleted over the longer term by the growth in pension expenditures in line with demographic trends.
Turning to monetary and exchange rate policies, Directors supported Norges Bank’s decision to increase interest rates substantially in the second half of 1998, in view of the sharp upturn in wage settlements and inflation prospects and the downward pressure on the krone. However, they did discuss the possibility of Norway adopting an alternative monetary framework and expressed a range of views in this regard. Some Directors felt that the inflation objective should be given a greater weight in the conduct of monetary policy, and suggested that a shift—possibly gradual—to an explicit inflation targeting framework would be appropriate. Most Directors, however, noting that the exchange rate anchor had served the economy well for several years, advised against changing this policy—at least, under the present circumstances, not without further careful consideration. Some Directors noted that in the specific situation faced by Norway, the practical consequences of these alternative policy frameworks may not differ greatly. However, all Directors agreed that, whatever the adopted framework, fiscal and wage discipline would be essential. It was also noted that Norway’s policy options would change if at some point it were to join the EMU.
In view of the continuing challenge of improving efficiency and safeguarding competitiveness in an increasingly integrated global economy, Directors stressed the importance of further adaptations of Norway’s structural policies. In the financial sector, they recommended that the authorities liberalize restrictions on bank mergers and phase out more rapidly the government’s remaining ownership stakes in the largest commercial banks, while maintaining strong supervision of financial institutions. Directors also encouraged the authorities to reduce Norway’s high level of protection for the agricultural sector. Finally, they noted that there was scope to improve the functioning of the labor market through terminating the public sector monopoly on employment offices and liberalizing hiring rules.
Directors warmly welcomed Norway’s continued commitment to official development assistance, which was among the highest provided by the advanced economies, and applauded the authorities’ intention to raise such assistance to 1 percent of GDP over the medium term.
Directors noted that Norway maintained high standards of data quality and timeliness, subscribed to the Special Data Dissemination Standard, and had posted its metadata on the Data Standards Bulletin Board.
|Norway: Selected Economic Indicators|
|Real Economy (change in percent)|
|Of which: Mainland GDP2||2.9||4.1||3.7||3.0||½|
|Unemployment rate (in percent)||4.9||4.8||4.1||3.2||3½|
|Gross national saving3||27.0||30.1||30.3||26.0||25½|
|Gross domestic investment3||23.7||23.4||25.1||26.1||24|
|Public Finance (in percent of GDP)|
|State budget balance||0.4||4.6||6.2||2.7||3|
|General government financial balance||3.5||6.5||7.5||4.5||4½|
|Money and Credit (end-period, percent change) M2||5.0||5.7||4.6||4.65||...|
|Interest rates (period average, in percent)|
|Three-month interbank rate||5.5||4.9||3.7||5.7||7.86|
|Ten-year government bond yield||7.4||6.8||5.9||5.4||5.06|
|Balance of Payments (in percent of GDP)|
|Reserves (gold valued at SDR 35 per ounce, end of period, in billions of SDRs)||15.2||18.5||17.3||14.15||...|
|Exchange rate regime||Managed floating|
|Present rate (January 20, 1999)||US$1 = Nkr 7.42|
|Nominal effective rate (1990=100)||99.2||98.9||99.4||95||...|
|Real effective rate (1990=100)4||105.1||109.0||114.2||114.0||...|
|Sources: Statistics Norway, Norges Bank, International Financial Statistics and IMF staff estimates.
|1Norges Bank projections for real GDP, unemployment, and external sector; and IMFstaff projections for other items.
2Excluding petroleum and shipping activities.
3In percent of GDP.
4Based on relative normalized unit labor costs in manufacturing.
6January 20, 1999.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
2The fiscal impulse is measured as the change in the cyclically-adjusted non-oil budget balance in relation to non-oil GDP.
IMF EXTERNAL RELATIONS DEPARTMENT