IMF Executive Board Concludes 2012 Article IV Consultation with Finland

Public Information Notice (PIN) No. 12/103
August 31, 2012

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 2012 Article IV Consultation with Finland is also available.

On August 27, 2012 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Finland.1


While Finland has strong fundamentals and a track record of good policies, the near-term economic outlook is highly vulnerable to external developments. This owes in particular to the high export dependence and financial sector interlinkages with other Nordic countries. Spillovers to Finland have already been significant with growth decelerating at end-2011 as the euro area sovereign debt crisis intensified. Although Finland has benefited from safe-haven status during the European sovereign debt turmoil so far, risks to the outlook are tilted to the downside.

After the deep recession of 2008–09, the Finnish economy rebounded robustly in 2010 but the sovereign debt turmoil in the euro area dragged it to a standstill in late 2011. Though activity in the first quarter of 2012 turned out slightly stronger than expected, weak investment continued to point to a deteriorating growth outlook, consistent with a deterioration in construction and producer confidence indicators. The unemployment rate came down gradually in 2011, after a moderate increase during the 2008–09 crisis partly due to labor hoarding, but it ceased to improve in the second quarter of 2012. Meanwhile, inflation started to moderate in the second half of 2011 after the effects of indirect tax increases waned. While competitiveness remains adequate it has deteriorated markedly as Finland continued to lose export market shares during the past decade, and for the first time in nearly two decades recorded a small current account deficit in 2011.

The banking system has remained generally sound despite the increasing strains in the euro area financial markets. Capital comfortably exceeds regulatory requirements and the non-performing loan rate remains low, though it increased somewhat during 2011. However, banks’ operating profits have declined amid weakening interest income and increased competition for retail business. In addition, the Finnish banking sector is highly concentrated with a majority of assets controlled by subsidiaries of foreign Nordic banks, exposing it to the risk of short-term funding shortfall and financial-sector spillovers from a potential intensification of the euro area crisis. The insurance and pension fund sectors have weathered the ongoing crisis well, though the insurance sector has suffered a reduction in solvency margins during 2010–11. Nonetheless, these still remain high and well above regulatory minima. Household debt has risen rapidly during the past decade and now accounts for more than 110 percent of disposable income, while house prices appear broadly in line with fundamentals.

The fiscal position improved markedly in 2011 after a sharp deterioration in 2009. As fiscal policy turned to support growth through automatic stabilizers and discretionary budget stimulus, the general government budget position worsened by about 7 percentage points of GDP in 2009 but remained below the Maastricht deficit limit in 2009–10. With some policy tightening and continued economic recovery into 2011, the headline deficit of the general government improved markedly to less than 1 percent of GDP, and gross debt, while continuing to increase, ended 2011 at below 50 percent of GDP. Nonetheless, projected weak growth in 2012 will likely result in a renewed worsening of the headline deficit and population aging remains a challenge for long-term fiscal sustainability.

Executive Board Assessment

Executive Directors commended Finland’s strong economic fundamentals and continued sound policy management. Directors noted, however, that as a small open economy, with deep trade and financial linkages, the country is sensitive to adverse spillovers from the turmoil in the euro area. Economic activity has slowed and risks to the outlook are tilted to the downside. The economy also faces longer-term challenges arising from an aging population and slowing productivity, which could impact competitiveness and growth. Against this backdrop, Directors welcomed the authorities’ commitment to prudent policies aimed at improving internal and external imbalances, safeguarding financial sector stability, and ensuring long-term fiscal sustainability.

Directors welcomed that the banking sector is sound and well capitalized. In light of the high dependence on wholesale funding and foreign parent banks, they emphasized the importance of gradually building up bank capital and liquidity buffers. This will also be important with regard to the transition to Basel III and the additional efforts needed for some individual institutions to satisfy leverage ratio and liquidity requirements.

Directors welcomed the authorities’ plans to strengthen macroprudential supervision and underscored the need to strengthen limits to loan-to-value ratios and to introduce a national loan registry to guard against excessive borrowing. They also recommended close monitoring of banks’ risk-taking behavior given the vulnerability of households to a rapid rise in the interest rate owing to the large share of variable-rate loans.

Directors highlighted the need to enhance cross-country supervision and crisis resolution frameworks in response to increased cross-border banking activities and the prominent role of large international groups. While a common bank-resolution framework-along with a common enforcement mechanism—at the EU level is preferable, most Directors noted that national or regional plans should be designed in the interim.

Directors supported the current broadly neutral fiscal stance and the authorities’ adjustment plan aimed at addressing long-term fiscal challenges and closing the sustainability gap. They agreed that automatic stabilizers should be allowed to operate if downside risks materialize, and many Directors saw merit in a flexible approach to implementing medium-term consolidation plans, in particular if growth underperforms significantly.

Directors observed that fiscal efforts should focus on mitigating the expected rise in health and long-term care costs and further tightening unemployment and disability pipelines to early retirement as well as increasing the statutory minimum and maximum retirement age. On the revenue side, they recommended broadening the tax base and a shift from labor taxation to consumption and property-based taxation. Improvements to the fiscal framework to slow down increases in local government spending could also help achieve sustainability.

To boost potential growth and competitiveness, Directors emphasized the need for reforming the labor market and improving productivity. They welcomed the recent steps to increase the effective retirement age and adjust pension entitlements, but highlighted the need for further efforts towards greater labor force participation. They also recommended refocusing public R&D expenditures toward basic research, further competition in the service sector, and increased flexibility in wage setting.

Finland: Selected Economic Indicators, 2010–13
  2010 2011 2012 1/ 2013 1/

Real economy


GDP (change in percent)

3.3 2.7 0.6 1.4

Consumer price inflation (harmonized, average) 2/

1.7 3.3 2.8 2.3

Unemployment rate (in percent) 2/

8.4 7.8 7.6 7.7

Gross national saving (in percent of GDP)

19.9 19.6 18.3 18.5

Gross domestic investment (in percent of GDP)

18.5 20.8 19.9 19.8

Public finances (general government, in percent of GDP)


Overall balance

-2.9 -0.8 -1.3 -0.9

Primary balance 3/

-1.5 0.6 0.0 0.4

Gross debt (Maastricht definition)

48.6 49.1 52.5 53.8

Money and credit (end of year, percentage change)


M3 (Finnish contribution to euro area, growth rate, e.o.p.)

4.8 6.9

Finnish MFI euro area loans (growth rate, e.o.p.)

6.3 6.2

Interest rates (year average, percent)


3-month money market rate 4/

0.8 1.4 0.7

10-year government bonds yield 4/

3.0 3.0 2.0

Balance of payments (in percent of GDP)


Trade balance

1.4 -0.6 -0.2 -0.3

Current account

1.4 -1.2 -1.6 -1.3

Exchange rate


Exchange rate regime


Present rate (July 18, 2012)

USD1.22 per euro

Nominal effective rate (appreciation in percent)

-4.5 0.0

Real effective rate (appreciation in percent) 5/

-5.4 0.1


Sources: Finnish authorities, International Financial Statistics, and IMF staff estimates.

1/ Fund staff estimates and projections, unless otherwise indicated.

2/ Consistent with Eurostat methodology.

3/ Adjusted for interest expenditure.

4/ 2012 data are from June 29.

5/ CPI-based real effective exchange rate.

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:


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