IMF Executive Board Concludes 2009 Article IV Consultation with Norway

Public Information Notice (PIN) No. 10/14
January 27, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Norway is also available.

On January 22, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway.1


Norway was affected by the global financial crisis, but less severely than most other advanced economies. Falling asset prices and a sharp rise in uncertainty pulled down private demand in the second half of 2008. However, the ensuing recession was comparatively shallow, with mainland GDP already returning to growth in the second quarter of 2009. Unemployment has increased only modestly to about 3 percent and consumer confidence has recovered strongly, in sync with a rebound in the housing market. Still, the economic downturn has reduced earlier pressures on capacity constraints. Wage growth has eased, and CPI inflation has fallen below the target.

The authorities’ response to the slowdown was forceful and effective. Norges Bank cut interest rates by a cumulative 450 basis points through June 2009. At the same time, a large fiscal stimulus was implemented and a number of timely measures to support financial stability were put in place. Norway’s resilience has also been underpinned by buoyant activity in the offshore hydrocarbon sector, limited dependence on the hardest-hit segments of global manufacturing, and the temporary depreciation of the krone in late 2008.

The Norwegian financial system has held up well. The authorities’ stepped-up liquidity support after Lehman’s bankruptcy helped contain the effect of the global crisis on domestic financial institutions. Norwegian banks did not face solvency issues, the rise in
non-performing loans has been limited so far, and profitability has strengthened in the course of 2009. Credit conditions have recently started to ease, after a sharp tightening in late 2008. Banks’ good performance reflects low exposure to toxic assets, a robust domestic economy, and a relatively conservative prudential framework. Still, credit risks remain elevated as the banking system has large credit exposures to the shipping and commercial real estate sectors.

Looking ahead, the economic recovery is expected to continue, with private domestic demand progressively replacing public spending as the main driver of growth. Private consumption is projected to strengthen further as households continue to benefit from low interest rates, limited unemployment, and improved asset valuations. A turn in the inventory cycle should also support activity, while fixed investment may remain subdued somewhat longer, and net exports are likely to weaken. On balance, mainland GDP is expected to grow by 2¼ percent in 2010. Near-term inflation should be kept in check by slower wage growth and regained krone strength, although tight cyclical conditions are set to reemerge sooner than in many other advanced economies. The outlook for Norway’s economy is, however, subject to significant uncertainty related to future developments in global demand, commodity prices, and the exchange rate.

Executive Board Assessment

Directors observed that Norway entered the global financial crisis from a strong macroeconomic position and has faced a relatively mild downturn. The economy’s resilience has been bolstered by effective fiscal and monetary stimulus, a favorable industrial structure, and a relatively stable financial system. Directors expected the economic recovery to continue, while recognizing that uncertainty about the global economic environment posed a risk to the outlook. The near-term policy challenge will be to manage the gradual withdrawal of stimulus as the recovery takes hold.

Directors considered the large fiscal stimulus implemented in 2009 timely and well designed. However, they expressed concern that many of the temporary spending measures introduced in 2009 have been replaced by more permanent expenditure increases in the 2010 budget. Given the relatively limited slack in the economy and the high non-oil deficit, Directors called for strict expenditure control in the 2010 budget implementation.

Directors welcomed the authorities’ intention to steadily reduce the non-oil deficit to the
4-percent target as the economic recovery takes hold. Fiscal consolidation will reaffirm commitment to Norway’s fiscal guidelines, help preserve competitiveness, and restore flexibility to deal with future adverse shocks. Directors called for early identification of concrete measures to help enhance the credibility of consolidation plans, and supported the authorities’ emphasis on expenditure-side adjustment. They viewed the fiscal guidelines as appropriate but stressed that the flexibility to temporarily deviate from the fiscal target should be used symmetrically.

Directors commended the authorities’ pension reform, which aims to encourage longer working lives and contain the rise of pension outlays by tying benefits to demographic developments. The reform should be supplemented by concrete actions to reduce the high inflows into sickness and disability benefit schemes, with measures enhancing the incentives of both employees and employers.

Directors noted that aggressive monetary policy easing through mid-2009 has played an important role in mitigating the domestic recession. The moderate interest rate hikes in late 2009 are an appropriate response to the stabilization of the situation. Looking ahead, the strengthening outlook, a relatively tight labor market, and the macroeconomic risks implied by strong house price appreciation all point to the need for a gradual further withdrawal of the extraordinary monetary stimulus.

Directors considered that Norway’s financial sector has weathered the crisis well but vulnerabilities remain. They welcomed the authorities’ targeted measures to support banking sector liquidity and improve the functioning of the corporate bond market, which helped preserve financial stability during the crisis. Recent efforts to strengthen banks’ capital buffers, including through capital injections from the State Finance Fund, will allow banks to continue lending to creditworthy customers.

Directors saw scope for a further strengthening of Norway’s general prudential framework. Priorities in this area are strengthening the management of liquidity risks and the adoption of measures to limit excessive balance sheet growth. To contain the systemic risk associated with large household debt and high loan-to-value mortgages, Directors recommended reducing tax subsidies for housing investment and adopting targeted macroprudential measures. While regulatory improvements should be based on international practices, Directors pointed out that close coordination with Norway’s neighbors could be used to ensure higher common standards across the Nordic financial region as appropriate.

Norway: Selected Economic and Social Indicators, 2004–10

2004 2005 2006 2007 2008 2009 2010
            Proj. Proj.

Real economy (change in percent)


Real GDP

3.9 2.5 2.1 2.7 1.8 -1.1 1.2

Real mainland GDP 1/

4.4 4.4 4.6 5.6 2.2 -1.2 2.3

Domestic demand

6.7 5.5 5.6 5.0 2.5 -2.3 2.4

Private consumption

5.6 4.0 4.8 5.4 1.3 -0.1 3.3

Private mainland fixed investment

11.3 15.9 12.0 17.2 0.1 -15.4 -3.2

Unemployment rate (percent of labor force)

4.5 4.6 3.4 2.5 2.6 3.1 3.7

Output gap (mainland economy, - = output below potential)

-1.9 -0.6 1.0 3.5 3.1 -0.3 -0.1

CPI (average)

0.5 1.5 2.3 0.7 3.8 2.2 1.4

CPI (end of period)

1.1 1.8 2.2 2.8 2.1 2.0 1.6

Gross national saving (percent of GDP)

32.7 37.4 39.2 39.1 41.6 35.9 36.7

Gross domestic investment (percent of GDP)

20.0 21.2 22.0 23.6 22.7 21.8 20.8

Public finance


Central government (fiscal accounts basis) 2/


Overall balance (percent of GDP)

7.1 10.8 14.4 13.9 15.9 6.2 2.6

Structural non-oil balance (percent of mainland trend GDP) 3/

-3.2 -3.4 -3.4 -3.5 -4.2 -7.2 -7.8

in percent of Government Pension Fund-Global capital 4/

-5.2 -4.8 -3.7 -3.2 -3.6 -5.7 -5.7

General government (national accounts basis, percent of GDP) 5/


Overall balance

11.1 15.1 18.5 17.8 18.7 7.3 8.5

Net financial assets

86.5 99.6 109.4 115.1 112.9 134.7 136.2

of which: Capital of Government Pension Fund-Global

58.3 71.8 82.5 88.8 89.4 109.5 112.6

Money and credit (end of period, 12-month percent change) 6/


Broad money, M2

7.5 11.7 13.7 16.7 3.7 1.5

Domestic credit, C2

8.6 13.2 14.3 14.0 12.0 5.1

Interest rates (year average, in percent)


Three-month interbank rate

2.0 2.2 3.1 5.0 6.2 2.5

Ten-year government bond yield

4.4 3.7 4.1 4.8 4.5 4.0

Balance of payments (percent of mainland GDP)


Current account balance

16.4 21.8 23.5 18.6 26.0 18.7 21.7

Balance of goods and services

17.4 22.1 24.7 20.2 26.8 17.5 20.9

Net exports of oil and gas

24.8 29.3 31.4 27.5 33.7 24.1 27.6

Exports of goods and services (volume change in percent)

1.1 1.1 0.0 2.3 0.9 -5.2 0.2

Imports of goods and services (volume change in percent)

8.8 8.7 8.4 8.6 2.2 -10.5 3.5

Terms of trade (change in percent)

7.7 15.6 11.9 -1.6 12.2

International reserves (end of period, in billions of US dollars)

44.4 47.0 56.5 61.1 51.1

Fund position (as of November 30, 2009)


Holdings of currency (percent of quota)


Holdings of SDR (percent of allocation)


Quota (SDR millions)


Exchange rates (end of period)


Exchange rate regime


Free float

Bilateral rate (NOK/USD) 7/

6.0 6.8 6.3 5.4 7.0 5.9

Nominal effective rate (2000=100) 6/

110.6 111.5 110.9 116.5 100.7 107.9

Real effective rate (2000=100) 6/

109.7 110.7 110.3 115.3 100.4 107.1

Social Indicators (reference year):


Per capita GDP (2008): $96,100; Income distribution (ratio of after-tax income received by top and bottom 20th percentile, 2007): 3.4;

At-risk-of-poverty rate (2007): 11.7; Life expectancy at birth (2008): male: 78.3, female: 82.9.

Population (2008): 4.69 million; Population density (2008): 14.5 inhabitants per square km.


Sources: Ministry of Finance; Norges Bank; Statistics Norway; International Financial Statistics; and IMF staff estimates and projections.
1/ Excludes items related to petroleum exploitation and ocean shipping.
2/ Projections based on authorities' 2010 budget.
3/ Authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPF-G income, as well as cyclical effects.
4/ Over-the-cycle deficit target: 4 percent.
5/ Staff projections, incorporating higher 2010 oil price assumption than the authorities' 2010 budget.
6/ 2009 data as of end-October.
7/ 2009 data as of December 18, 2009.

1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100