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IMF Executive Board Concludes 2019 Article IV Consultation with Norway

June 12, 2019

On June 10, 2019, the Executive Board of the International Monetary Fund (IMF) concluded its 2019 Article IV consultation [1] with Norway.

Norway’s economic momentum remains strong, supported by higher oil prices, competitiveness gains stemming from the weaker krone, and a robust labor market. After growing by 2.2 percent in 2018, mainland economic activity is expected to accelerate further and rise by about 2.5 percent this year, before growth slows to 2.1 percent in 2020.

Risks to this outlook are broadly balanced. Global trade tensions persist, as does uncertainty about European growth. On the domestic side, risks from residential house price growth have abated, but not disappeared, while valuations in commercial real estate (CRE) prices are growing strongly and appear stretched in some segments. On the upside, resilient oil prices could lead to stronger-than-expected oil-related investment and exports.

The 2019 budget deficit is likely to be mildly expansionary, following the better-than-expected outturn (and related small contraction) last year. Overall, the structural non-oil deficit is expected to be broadly unchanged over the 2017–19 period. This contrasts with the previous upswing, during which the non-oil deficit grew fast in tandem with the sovereign wealth fund and related space under the fiscal rule. The tax reform continues to shift taxation away from direct taxes toward less-distortionary indirect taxes.

With both headline and core inflation now above target, Norges Bank has started its process of normalizing policy. The main policy rate has been raised by 50 basis points since August last year and is now at 1 percent. The central bank’s forward guidance suggests further rate hikes ahead.

Banks remain liquid, profitable, and well-capitalized. A new anti-money laundering, financing of terrorism law approved in parliament gives the Financial Supervisory Authority greater sanctioning powers against breaches by supervised banks.

An expert commission has recently issued proposals for reforming sickness and disability schemes, within a broader remit on how to raise employment levels. The social partners will convene to discuss the commission’s proposals.

Executive Board Assessment [2]

Executive Directors welcomed Norway’s solid economic performance, supported by stronger terms of trade, competitiveness gains, and a robust labor market. Despite the positive near-term outlook, Directors noted that Norway faces a challenging external environment, as well as longer-term headwinds from demographic pressures and a declining contribution from oil to the economy. They encouraged the authorities to use the current favorable environment to implement further reforms, which will be important to sustaining prosperity, managing transition to a less oil dependent economy, and increasing productivity.

Directors commended the broadly neutral fiscal policy in recent years and welcomed the move away from the earlier pro-cyclical fiscal policy stance. They encouraged the authorities to target a modest consolidation next year to minimize risks of overheating, be consistent with the ongoing monetary policy normalization, and help build additional buffers to respond to future shocks.

Directors noted that spending pressures from worsening demographics together with slower growth of the sovereign wealth fund would reduce space under the fiscal rule in the medium term, requiring expenditure savings or new sources of revenue to accommodate new policy initiatives. They welcomed the authorities’ strategies to address these issues and encouraged measures to make the tax system more efficient, in particular, lowering tax incentives on housing and broadening the VAT base. They also highlighted the importance of reforming the sickness and disability schemes. Directors noted that these measures may have to be offset with well targeted transfers, to protect the most vulnerable.

Directors supported the ongoing normalization of monetary policy as it strikes the right balance between containing inflation and minimizing risks of a self-induced slowdown. They noted that faster tightening would also risk appreciating the krone, compounding downward pressures on inflation. Directors advised the authorities to stand ready to adjust the pace of normalization if circumstances require.

Directors noted that despite recent slowdown in credit growth, household debt continues to rise. In this context, they encouraged the authorities to exercise caution against loosening mortgage regulations when these are reviewed at end 2019, barring unexpected changes in the second half of the year. Directors also noted that commercial real estate valuations (CRE) appear stretched in some segments and pose increasing risks. While monetary policy normalization should help restrain price growth in the sector, they supported the planned increase in the counter-cyclical buffer to increase resilience to CRE risks. Directors encouraged the authorities to close existing data gaps on CRE.

Directors underscored that full compliance with the new AML/CFT framework is paramount given the regional context. They welcomed the broadening of the FSA’s sanctioning powers under the new law, as well as the increase in budgetary resources for supervision of AML/CFT compliance.

Noting the challenges arising from population aging and dwindling oil and gas reserves, Directors called for enhancing both labor supply and overall competitiveness. They considered reform of sickness and disability benefits as the most pressing labor market reform. Directors underscored that priority should be given to tighten eligibility and improve incentives to work as well as to better education and training of beneficiaries and other measures to boost their employment opportunities. They underscored the need to carefully weigh the distributional consequences of these reforms. Continued wage restraint is also needed to underpin competitiveness.

Norway: Selected Economic and Social Indicators, 2016–2020

Population (2018): 5.3 million

Per capita GDP (2018): US$ 81,848

Quota (3754.7 mil. SDR/0.78 percent of total)

Main products and exports: Oil, natural gas, fish (primarily salmon)

Literacy: 100 percent

Projections

2018

2019

2020

2021

2022

Real economy (change in percent)

Real GDP 1/

1.2

2.0

1.4

2.2

1.8

Real mainland GDP

1.1

2.0

2.2

2.5

2.1

Domestic demand

2.0

2.6

2.0

2.4

1.8

Unemployment rate (percent of labor force)

4.7

4.2

3.9

3.7

3.7

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

-0.9

-0.6

-0.2

0.5

0.7

CPI (average)

3.6

1.9

2.8

2.3

1.7

Core inflation

3.1

1.4

1.5

1.9

1.9

Gross national saving (percent of GDP)

32.7

33.8

35.7

35.7

35.6

Gross domestic investment (percent of GDP)

28.7

28.2

27.6

28.3

28.6

Public finance

Central government

Non-oil balance (percent of mainland GDP) 2/

-7.7

-8.0

-7.5

-7.5

-7.0

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

-7.4

-7.6

-7.2

-7.7

-7.7

Fiscal impulse

7.4

0.2

-0.4

0.5

0.0

in percent of Government Pension Fund Global 4/

-2.7

-2.9

-2.5

-2.9

-2.7

General government (percent of mainland GDP)

Overall balance

4.6

5.8

8.8

9.0

9.9

Net financial assets

326.1

350.9

329.4

346.1

348.4

of which: capital of Government Pension Fund Global (GPF-G)

276.8

303.2

283.5

302.6

306.5

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

Broad money, M2

5.1

6.0

5.3

Domestic credit, C2

4.6

6.4

4.8

Interest rates (year average, in percent)

Three-month interbank rate

1.1

0.9

1.1

1.6

2.1

Ten-year government bond yield

1.3

1.6

1.9

2.1

2.6

Balance of payments (percent of mainland GDP)

Current account balance

4.6

6.7

9.8

8.8

8.4

Current account balance (percent of GDP)

4.0

5.6

8.1

7.4

7.1

Exports of goods and services (volume change in percent)

1.1

-0.2

-0.8

2.4

2.8

Imports of goods and services (volume change in percent)

3.3

1.6

0.9

2.9

2.7

Terms of trade (change in percent)

-9.9

4.9

1.1

0.8

-0.9

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

60.9

65.1

63.8

63.6

62.4

Crude Oil Price

42.8

52.8

68.3

59.2

59.0

Fund position

Holdings of currency (percent of quota)

93.9

93.5

88.0

Holdings of SDR (percent of allocation)

88.3

102.7

97.9

Quota (SDR millions)

3,755

3,755

3,755

Exchange rates (end of period)

Exchange rate regime

Floating

Bilateral rate (NOK/USD), end-of-period

8.4

8.3

8.1

Real effective rate (2010=100)

86.6

87.4

87.4

Sources: Ministry of Finance, Norges Bank, Statistics Norway, International Financial Statistics, United Nations Development Programme, and Fund staff calculations.

1/ Based on market prices which include "taxes on products, including VAT, less subsidies on products".

2/ Projections based on the authorities' revised budget; excludes all oil-related revenues and expenditures.

3/ The authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects. Non-oil GDP trend estimated by MOF.

4/ Over-the-cycle deficit target: 3 percent of Government Pension Fund Global


[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.

[2] 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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