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Country focus: Swiss recovery needs continued fiscal prudence

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2005
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Swiss recovery needs continued fiscal prudence

The Swiss economy returned to growth in 2004, supported by external demand and domestic policies. However, the recovery has been fragile, the IMF said in its annual economic review. Growth is projected to continue in 2005, although at a slower pace. The IMF Executive Board commended Switzerland’s sound economic management and flexible labor markets, which have secured low inflation and unemployment, and a high standard of living.

However, the Board noted downside risks stemming from possibly weaker demand in major trading partner countries, higher oil prices, and further appreciation of the Swiss franc. Raising the economic growth rate and tackling the fiscal pressures associated with population aging continue to be Switzerland’s main challenges.

Switzerland2001200220032004

Estimates
2005

Projections
(percent change)
Real GDP1.00.3-0.41.71.2
Domestic demand2.3-0.80.21.01.1
Average CPI1.00.60.60.81.2
(percent of GDP)
General government
balance10.1-1.2-1.6-1.0-1.6

Excludes privatization revenue and gold sales. Includes confederation, cantons, communes, and social security.

Data: IMF Public Information Notice, June 2005

Excludes privatization revenue and gold sales. Includes confederation, cantons, communes, and social security.

Data: IMF Public Information Notice, June 2005

The Board stressed the importance of opening up sheltered sectors, intensifying competition in product markets, and eliminating non-tariff barriers.

The Swiss National Bank has maintained an accommodative stance, and the Board agreed that the current low level of interest rates should be maintained for the time being. However, it noted that with a narrowing output gap, some monetary tightening will be needed sooner or later.

The general government deficit is estimated to have narrowed in 2004, and the federal government plans further steps under the debt-brake rule to eliminate the structural deficit. Mounting pressure on the social security system in the years ahead will require continued fiscal prudence and reforms in cooperation with cantonal governments. In this context, proceeds from gold sales by the Swiss National Bank should be used exclusively for debt reduction. The agreement for a new structure of fiscal federalism should enhance coordination between the various levels of government, improve transparency, and reduce incentives for spending on non-priority projects.

More information on Switzerland can be found in IMF Country Report Nos. 05/188 and 05/190 on the IMF’s website (http://www.imf.org).

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