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Finland: Staff Report for the 2014 Article IV Consultation - Informational Annex

Author(s):
International Monetary Fund. European Dept.
Published Date:
May 2014
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Fund Relations

(As of April 30, 2014)

Mission: March 3 to March 14, 2014 in Helsinki. The concluding statement of the mission is available.

Staffteam: Mr. H. Berger (Head), Mr. N. Arnold, Ms. B. Mircheva, Mr. A. Al-Eyd (all EUR).

Interlocutorsandoutreach: The team met with Mr. E. Liikanen, Governor of the Bank of Finland, Ms. J. Urpilainen, Minister of Finance, and other senior officials of the central bank, the Ministry of Finance, the Ministry of Employment and Economy, the Financial Supervisory Authorities, local and regional authorities; Members of Parliament; social partners; and members of the business, financial sector, and research communities. The mission held a press conference at the Bank of Finland after the concluding meeting.

Fundrelations: The previous Article IV consultation discussions were held in Helsinki during March 3 to 14, 2014 and the staff report was discussed by the Executive Board on May 21, 2014. The Executive Board’s assessment and staff report (IMF country Report No. 14/XXX, May 2014) are available at [Link to 2014 SR here]. The next Article IV discussions with Finland will be based on the 12-month consultation cycle.

Membership Status: Joined January 14, 1948; Article VIII.

General Resources Account:

SDR MillionPercent of Quota
Quota1,263.80100.00
Fund holdings of currency847.5467.06
Reserve Tranche Position416.2732.94
Lending to the Fund
New Arrangements to Borrow227.70

SDR Department:

SDR MillionPercent of Quota
Net cumulative allocation1,189.51100.00
Holdings1,120.7194.22

Outstanding Purchases and Loans: None

Latest Financial Arrangements: None

Projected Payments to Fund:

(SDR million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20142015201620172018
Principal
Charges/Interest0.100.100.100.100.10
Total0.100.100.100.100.10

Exchange Rate Arrangements:

Finland’s currency is the euro, which floats freely and independently against other currencies.

Finland has accepted the obligations under Article VIII, Sections 2(a), 3, and 4 of the Fund’s Articles of Agreement. It maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for those measures imposed for security reasons in accordance with Regulations of the Council of the European Union, as notified to the Executive Board in accordance with Decision No. 144-(52/51).

Statistical Issues

(As of April 30, 2014)

Assessment of Data Adequacy for Surveillance:

General: Data provision is adequate for surveillance.

Data Standards and Quality

Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since June 3, 1996. Uses SDDS flexibility options for timeliness on data for central government operations.

A data ROSC was electronically published on October 31, 2005

(http://www.imf.org/external/pubs/cat/longres.cfm?sk=18675.0).

Finland: Table of Common Indicators Required for Surveillance

(As of April 14, 2014)
Date of latest observationDate receivedFrequency of Data7Frequency of Reporting7Frequency of Publication7Memo Items:
Data Quality–Methodologic al soundness 8Data Quality–Accuracy and reliability 9
Exchange Rates04/14/1404/14/14DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities102/201404/2014MMM
Reserve/Base Money02/201404/2014MMM
Broad Money02/201404/2014MMM
Central Bank Balance Sheet02/201404/2014MMM
Consolidated Balance Sheet of the Banking System02/201404/2014MMM
Interest Rates204/14/1404/14/14DDD
Consumer Price Index03/1404/14MMMO, O, O, OLO, O, LO, O, O
Revenue, Expenditure, Balance and Composition of Financing3 – General Government4201303/14AAALO, LO, LNO, OLO, O, O, O, O
Revenue, Expenditure, Balance and Composition of Financing3– Central Government201303/14AAA
Stocks of Central Government and Central Government-Guaranteed Debt503/1404/14MMM
External Current Account Balance02/1403/14MMMO, O, O, LOLO, O, LO, O, O
Exports and Imports of Goods and Services02/1403/14MMM
GDP/GNPQ4 201303/14QQQO, O, O, OLO, O, LO, O, O
Gross External DebtQ4 201304/2014QQQ
International Investment Position6Q4 201304/2014QQQ

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government, including National Insurance Scheme, and local governments.

Including currency and instrument composition.

Includes external gross financial asset and liability positions vis-a-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC (published in October 2005, and based on the findings of the mission that took place during May 10–25, 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government, including National Insurance Scheme, and local governments.

Including currency and instrument composition.

Includes external gross financial asset and liability positions vis-a-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC (published in October 2005, and based on the findings of the mission that took place during May 10–25, 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

Past Fund Staff Recommendations and Implementation

Past Staff RecommendationsImplementation
Fiscal Policy
Strong and credible commitment to a measured budget consolidation, balancing output and fiscal sustainability gaps. Fiscal adjustment efforts should focus on expenditure restraint, notably at the local level and via pension, old age and healthcare reforms, as well as tax base broadening. The efficiency of public services needs to be increased.Fiscal adjustment measures have been implemented since 2012—including the most recent measures decided in March 2014—but two years of negative growth have weakened the headline fiscal position. Since 2011 the Government has in various contexts decided on measures designed to reduce public expenditure and to increase revenue. Measured in 2018 nominal terms the net effect of these measures comes to around 3.1% of GDP. The standard VAT rate was increased by one percentage point to 24 percent, with energy and excise taxes also raised to allow for a broadly revenue neutral cut in the corporate income tax rate from 24.5 to 20 percent. Pension reforms since 2012 have increased contribution rates. The average effective retirement age has risen to around 60.9 at end-2013 (from 59.4 in 2008).
Labor Market Policy
The wage bargaining system needs to allow for greater flexibility in wage setting. Measures are needed to ease labor market mismatches, reduce structural unemployment, and induce early entry into the labor force. Reforms of tertiary educational financing could also promote earlier employment among the youth. At the other end of the age spectrum, the unemployment pipelines ought to be further restricted or eliminated.The government has undertaken to reduce structural unemployment through reforms of the tax and benefits system and intensified active labor market policy. The Finnish central-level labor market organizations concluded a broad-based framework agreement in 2013. The new agreement sets the framework for pay and cost increases in branch-level collective agreements for a period of 2 years, with an option to potentially extend the agreement by one year. Agreed wage increases are moderate. On education, the duration of financial support for tertiary students has been reduced, the financing of tertiary education has been reformed to encourage faster graduation, and university entrance procedures have been streamlined. Since 2013, a “Youth Guarantee,” offers youth, within 3 months of becoming unemployed, a job, on-the-job training, a study place, or a period in a workshop or retraining.
Competition Policy
Increase competition in services and product markets, especially in ‘sheltered’ sectors, to boost productivity growth.The 2011 Competition Act brought regulation in line with recommendations from the European Commission. It allows for stricter merger control, enhanced damage compensation, whistle-blowing instruments, and expanded investigative powers for the Finnish Competition Authority. Recent reform proposals aim to build on this, including measures to increase retail and construction sector competition.
Financial Sector Policy
Bank capital and liquidity buffers should be gradually enhanced. Supervision and crisis management frameworks for large cross-border institutions must be strengthened, with ex-ante burden-sharing guidelines defined to limit contagion. Vigilance on liquidity risk and banks’ funding and risk profiles should be stepped up. An independent Macroprudential Policy council should be established and macroprudential policy tools reinforced, including binding LTV ratio and countercyclical capital buffers (CCBs). A national loan registry should be developed to assist systemic risk monitoring.A Memorandum of Understanding (MoU) on financial stability, crisis management, and crisis resolution has been signed among the Nordic and Baltic authorities in 2012. Legislation to establish the independent FIN-FSA board as macroprudential policy authority has been drafted. A government bill to designate the independent FIN-FSA board as macroprudential policy authority has been submitted to Parliament. The draft legislation includes the option for the FIN-FSA Board to apply macroprudential policy tools, including CCBs and an adjustable and binding LTV-ratio. In February 2014, a Government working group proposed new legislation on the resolution of financial market crises, a new crisis resolution structure for authorities, and the establishment of a new Deposit Guarantee and Resolution Fund.

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