Switzerland
Recent Economic Developments
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This paper describes economic developments in Switzerland during the 1990s. Between 1990 and 1993, real GDP fell by a cumulative 1¼ percent. The tightening of monetary policy in response to rising inflation in the late 1980s induced a contraction in domestic demand that sent the economy into decline in 1991. This decline was prolonged by the downturn of other European economies during 1992–93, although the latter had only a modest effect on Swiss exports, which continued to grow slowly.

Abstract

This paper describes economic developments in Switzerland during the 1990s. Between 1990 and 1993, real GDP fell by a cumulative 1¼ percent. The tightening of monetary policy in response to rising inflation in the late 1980s induced a contraction in domestic demand that sent the economy into decline in 1991. This decline was prolonged by the downturn of other European economies during 1992–93, although the latter had only a modest effect on Swiss exports, which continued to grow slowly.

I. Overview

The Swiss economy is in the early stages of a recovery, after a long though not especially deep recession. An inadvertent loosening of monetary policy in the late 1980s had triggered rising inflation, and the subsequent tightening had sent the economy into decline in 1991—a decline which was prolonged by the downturn of other European economies during 1992. The recession bottomed out in the second quarter of 1993. The upturn since then has been led by a pickup in exports and more recently a revival of domestic demand and especially investment. Inflation, which had proved stubborn during most of the recession, has decelerated sharply, to less than 1 percent.

The recession was marked by two developments without precedent in Switzerland’s recent economic history. First, unemployment, which in the past had rarely exceeded 1 percent of the labor force, rose to 5 percent by the end of 1993. The upswing has begun to bring some relief on this front, with unemployment falling to about 4 ½ percent, and employment starting to rise.

Second, the general government finances, which had been in surplus since the mid-1980s, worsened markedly, with the deficit reaching over 4 percent of GDP in 1993. About half of this deterioration can be considered structural, reflecting mainly increases in entitlement spending. Although the implied fiscal stimulus helped to keep the recession shallow, it also meant a need for consolidation as the recovery became established. In 1994, the deficit shrank a little as a result of fiscal measures and the cyclical upswing, and the federal government has taken, or plans to take, further action that would virtually eliminate its deficit by 1998.

The fiscal deterioration and indeed the very shallowness of the downturn, together with tight monetary conditions elsewhere in Europe, had set limits on the speed with which monetary policy could be eased. A sustained easing began in mid-1992, preparing the ground for the current recovery of domestic demand. Since early 1994, short-term interest rates have been broadly stable, while the growth in the monetary base—the National Bank’s target aggregate, within a medium-term framework—decelerated from the high levels reached earlier. With monetary easing proceeding elsewhere in Europe, the Swiss franc appreciated further, continuing a trend begun in mid-1992.

The traditionally large surplus on the external current account rose further during the recession, to reach 8 percent of GDP in 1993. Real wage restraint and productivity improvements have helped exporters avoid a marked decline in competitiveness in the face of the exchange rate appreciation, and the current account surplus shrank only slightly in 1994, despite a strong pickup in import growth reflecting the revival of domestic demand.

The recovery is providing an opportunity to address a number of serious structural rigidities that characterize Swiss product and labor markets—a challenge which is made more pressing by the continuing integration of European and world economies and the fast pace of technological innovation. The government plans to implement extensive structural reforms as part of the so-called “revitalization” program, which was proposed following the rejection of membership in the European Economic Area by voters in 1992.

The following chapters consider in succession developments in output, employment, and inflation; the public finances; monetary policy and developments; the balance of payments; and structural policies, including the revitalization program.

II. Output, Employment, and Prices

1. Aggregate supply and demand

The Swiss economy is recovering from a long but shallow recession: between 1990 and 1993, real GDP fell by a cumulative 1 ¼ percent (Chart II-1). The tightening of monetary policy in response to rising inflation in the late 1980s induced a contraction in domestic demand that sent the economy into decline in 1991. This decline was prolonged by the downturn of other European economies during 1992-93, although the latter had only a modest effect on Swiss exports, which continued to grow slowly. The recession hit the construction sector hardest, with a cumulative fall in value added of 9 percent between 1990 and 1993; value added in industry (including agriculture) declined by 3 percent over the same period, and value added in services stagnated.1/ The recent recession contrasts with previous ones both in its length and in its shallowness (Chart II-2), and its patterns of demand also stand in marked contrast to those of the 1975-76 and 1982 downturns, both of which were precipitated by a drop in foreign demand and exports.

The recession bottomed out in the second quarter of 1993. Overall, growth during 1993 was not sufficient to prevent GDP from declining by 0.9 percent on average in 1993, but in the first three quarters of 1994 GDP growth was 1.9 percent, and by the third quarter of 1994 growth had reached 2.4 percent (Tables Al, A2, A3).2/ Industrial output in particular showed a considerable increase, of 8 ½ percent in the first half of 1994—an increase which affected most sectors, with the exception of the clothing, textile, and watch industries (Table A4). Capacity utilization in industry reached 84 percent in the third quarter of 1994, still a little below its long-term average of 85 percent. According to staff estimates, the output gap in the third quarter of 1994 amounted to about 2 ½ percent, already significantly below its maximum of 3 ¼ percent in the fourth quarter of 1993.

CHART II-1
CHART II-1

Switzerland: Output and Inflation

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Sources: IMF, World Economic Outlook, and Swiss Institute for Business Cycle Research.1/ West Germany, France, Italy.
CHART II-2
CHART II-2

Switzerland: Comparison of GDP and of Components of Demand During Recessions 1/

(Peak = 100)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research.1/ The peak preceding the 1991-93 recession is taken to be 1990, fourth quarter: the corresponding dates for the 1982 and 1974-75 recessions are 1981, fourth quarter and 1974, second quarter.

The recovery was spurred initially by a pickup in export demand. More recently domestic demand has begun to revive, reflecting in part the easing of monetary policy since mid-1992, and as a result of the accompanying upturn in imports the foreign balance is at present making a negative contribution to growth. The path of the current recovery thus resembles that of the upturn following the 1974-75 recession, but not of the recovery after the 1982 recession, in which domestic demand—especially private and public consumption—took the lead.

Exports of goods and nonfactor services began to grow in the second quarter of 1993, and rose by 5 ½ percent over the course of the year, largely reflecting increased demand from Asia and North America. During 1994 the increase in economic activity in Europe gave a further boost to Swiss exports, which were rather volatile but grew overall by 4 percent in the first three quarters of 1994. With estimated export market growth at about 6 percent in 1994, this performance probably reflects to some extent the appreciation of the Swiss franc.

Fixed investment has proved to be the second engine of recovery, having been the main source of weakness during the recession (Chart II-3). Investment in machinery and equipment, which had fallen by 14 percent between 1990 and 1993, increased by 12 percent in the first three quarters of 1994. This sharp rise reflected in part the low levels from which investment was recovering, but also the impetus from rising export demand, advantageous prices of imported investment goods as a result of the strong Swiss franc, and the reaction of Swiss producers to growing competition from Asia and from Middle- and East European countries, which has forced them to modernize their machinery and to put in place leaner production methods. The pickup in investment in machinery and equipment began at a time when capacity utilization in industry was still low, at about 80 percent, but when clear signs of the coming upturn were already apparent, in the form of significant increases in expected orders from January 1993 onwards (Chart II-3).

Investment in construction, which had fallen less sharply during the recession (8 percent between 1990 and 1993), has risen less steeply, by 5 percent in the first three quarters of 1994. Private residential construction has been the main factor behind this increase, as it has been strongly supported by a backlog in demand due to the recession, falling mortgage rates, and a slight drop in prices for real estate and construction costs. Private business construction remains weak, given a still high vacancy rate for business buildings. In addition, fiscal restraint has curtailed the increase in public construction, but the latter has nevertheless shown some recovery since the end of 1993, mainly because the federal government introduced in spring 1993 an investment bonus of 15 percent for all additional and advanced construction by cantons, communes, and state companies. 1/

CHART II-3
CHART II-3

Switzerland: Investment and Cyclical Indicators in Industry

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research.1/ Percentage of respondents expecting an increase in orders minus percentage of repondents expecting a reduction in orders.2/ Seasonally adjusted.

Private consumption, which had been rather resilient during 1991-92, fell significantly in 1993, but has now also begun to pick up (Table A5). A ¾ percent fall in 1993 was a reflection primarily of a squeeze in real household disposable incomes, which fell by 1 ½ percent as both real wages and employment declined; net transfers from the state had a positive effect on disposable income, largely on account of increased payments of unemployment benefit. 2/ The household saving rate (which had risen substantially in 1991, and fallen only slightly in 1992) was reduced from 12 ¾ percent in 1992 to 12 percent in 1993 (Chart II-4), reflecting in part a rise in consumer confidence (Chart II-5). Private consumption gained strength in the first three quarters of 1994, increasing by 1 ½ percent. With real household disposable income probably growing more slowly than this, as a result of modest nominal wage increases, the household saving rate is likely to have fallen further in 1994. 3/ Such a development would have been sustained by further rises in consumer confidence, which may be related in particular to falling unemployment.

Developments in public consumption have been dominated by the efforts of all levels of government to reduce the budget deficit by cutting expenditures. Public consumption fell in 1993 by 1 ¾ percent, mainly owing to lay-offs—especially in the military—and the postponement of procurement of military goods. These efforts lost some momentum in the first three quarters of 1994, and public consumption increased by 1 ½ percent.

As would be expected over the course of the cycle, large reductions in stockbuilding contributed to negative growth in 1991-93, and increases have been contributing to the recovery. 4/ In the first three quarters of 1994, the contribution to growth from stockbuilding exceeded 1 percent of GDP. The magnitude of these fluctuations is broadly in line with the experience of previous cycles, despite improved inventory management practices which might be expected to reduce the amplitude of the stock cycle—perhaps because the greater international division of labor has also led to increased stocks of work-in-progress.

CHART II-4
CHART II-4

Switzerland: Saving

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research, data tape.1/ In percent of disposable income.
CHART II-5
CHART II-5

Switzerland: Labor Markets and Consumer Confidence 1/

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research.1/ All data are seasonally adjusted.2/ Index of job advertisements in newspapers, in square meters.3/ Percentage of respondents expecting an improvement in their situation minus percentage expecting a worsening.

Weak domestic demand in the first half of 1993 was reflected in a drop in imports of goods and nonfactor services. Although they grew rather strongly from the second quarter onwards, imports fell by 1 percent on average in 1993. The first three quarters of 1994 saw continuing growth in imports, which came in 9 percent above their level in the same period in 1993. In addition to the turnaround in domestic demand, and particularly in import-intensive components such as investment and stockbuilding, the rise in imports was supported by the appreciation of the Swiss franc, with import prices falling by 6 percent in the first three quarters of 1994.

2. Employment and unemployment

Unemployment, which in the past had rarely exceeded 1 percent of the labor force, had risen to 5 percent by the beginning of 1994 (Chart II-5, and Table A6). Part of this rise was of course cyclical, but part also represented an unmasking of unemployment that had previously been hidden by the cyclical responsiveness of the labor force. Foreign workers and women, who in previous downturns had tended to withdraw from the labor force, have in recent years tended to register as unemployed. In the case of foreign workers, this change is due mainly to the fact that more of them have now obtained permanent resident status. The increasing generosity of the unemployment benefit system has also strengthened incentives to register as unemployed. For this reason, and because of likely hysteresis effects, the underlying structural component of unemployment has probably also risen. 1/

Registered unemployment has declined from its peak of 5.1 percent in January 1994 to 4.5 percent in October 1994. 2/ Although some of this fall is probably attributable to the deregistration of persons whose benefits have expired, studies which have followed such persons suggest that deregistration can account for only about half of the decline in unemployment from its peak. 3/

The official employment figures indicate that employment fell rather steadily from the beginning of the recession in the second quarter of 1991 to the second quarter of 1994, by about 250,000 in total, to 3.3 million, and that this decline was finally arrested in the third quarter of 1994, with a small increase of 22,000, or about ¾ percent. The main contributor to the recent rise was the construction sector with an increase of employment of 2 ½ percent.

There are, however, indications that official employment figures may be underestimating the rise in employment. Combining the estimates for employment, unemployment, and deregistrations of unemployed persons yields an implausibly large decline in the labor force, of about 2 percent (seasonally adjusted) during the first six months of 1994. 1/ An employment survey produced every five years—the last was in 1990—typically shows that the official figures at the end of these periods significantly underestimate the true amount of employment. Moreover, the so-called “manpower index” (an index of job advertisements) has in the past been a good leading indicator for developments in the labor market. Both the increasing manpower index and the drastic fall in short time work, combined with the drop in unemployment, would seem to point to some increase in employment since mid-1993—although the size of this increase is difficult to quantify.

3. Prices and wages

Price inflation, which had reached over 6 percent following the inadvertent loosening of monetary policy in the late 1980s (see Chapter IV), proved stubborn during the recession (Table II-1). The consumer price index rose by 3.3 percent on average in 1993, the third year of the recession, as the prices of services in particular—public but also private—continued to rise at rates in excess of 4 percent. During 1994, however, CPI inflation fell sharply, to 0.6 percent in the third quarter. This slowdown was facilitated by a fall in unit labor costs, but also by the appreciation of the exchange rate and by declining short-term interest rates, to which rents are tied. Excluding imported goods and rents, the CPI rose by 1.6 percent in the third quarter of 1994, roughly the same as the GDP deflator.

Wage increases were moderate in 1993, reflecting the weakness of employment (Table A7, and Chart II-6). At an average of just under 3 percent, they were well below the CPI inflation rate of the previous year (4 percent), which is typically used as a benchmark in Swiss wage negotiations, and also fell short of the average inflation rate for 1993, so that real wages declined by ¼ percent. Again in 1994, persistent weakness in the labor market kept wage increases, at 2 percent, below the previous year’s inflation rate, but with the sharp deceleration in inflation, to an average of less than 1 percent for January-October 1994, real wages have risen slightly.

Measured economy-wide productivity stagnated early on in the recession, but rebounded strongly as the shake-out in employment took place. In 1993, productivity rose by 1.9 percent, compared with an average increase of 1.5 percent over 1983-90. 2/ Combined with modest wage increases, this rise in productivity yielded a moderate increase in unit labor costs, of 1.9 percent, a significant slowdown from the 3.7 percent recorded in 1992. In 1994, as would be expected in this stage of the cycle, productivity growth appears to have strengthened further. Official figures show an increase of 4 percent in the third quarter of 1994, compared with the same period a year earlier. As a result, and given the continuation of wage moderation, unit labor costs have most likely been falling in 1994.

CHART II-6
CHART II-6

Switzerland: Price and Wage Developments

(Percent changes)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Sources: IMF, World Economic Outlook; and Swiss Institute for Business Cycle Research.1/ Gross wage income per employed person.
Table II-1.

Switzerland: Prices

(Percent changes over the same period a year earlier)

article image
Source: Swiss National Bank.

CPI excluding rents and imported goods.

III. Public finances 1/

1. Overview

There has been a substantial deterioration in the public finances at all levels of government since the late 1980s (Table III-1), with the general government balance moving from a surplus in 1989 to a deficit of 4 ¼ percent of GDP in 1993. 2/ This deterioration has been about equally divided between the federal government and the lower levels. 1/ The higher deficits have been accompanied by a rapid increase in the public debt; the gross debt of the general government is set to reach more than 45 percent of GDP by the end of 1994, compared with a low of 30 percent reached in 1990.

At the federal level, a small deficit first emerged in 1991, towards the beginning of the recession. This deficit has since increased further, peaking in 1993 at 2 ¼ percent of GDP. It is expected to decline slightly in 1994, reflecting the economic recovery and the measures in previous consolidation programs. In the cantons and communes, deficits had by 1993 reached magnitudes last seen in the 1970s. At these levels of government, too, early indications are that the deterioration may have leveled off in 1994. Finally, there has been a worsening in the finances of the public social security funds, from a surplus of 1 percent of GDP in 1991 to a small surplus in 1994.

On the basis of estimates made by the staff, about half of the 1994 deficits at all levels of government can be considered structural. 2/ The increase in the structural component of public deficits since the late 1980s may be attributed principally to the strong growth of primary expenditure—in particular on pensions, health care, and welfare. This increase largely reflected the increasing generosity of public programs—illustrated most recently by the proposed introduction of a maternity insurance plan. This increase in spending has been mirrored in a sharply higher share of the public sector in the economy. Since the mid-1980s, general government expenditure has grown from 33 ½ percent of GDP in 1986 to 38 ½ percent of GDP in 1993. Of this increase, about 2 percent of GDP may be attributed to cyclically sensitive expenditure such as unemployment compensation.

Table III-1.

Developments in the Public Finances

article image
Source: Federal Ministry of Finance.

Estimates.

Budgets.

Administrative basis.

Financial statistics basis.

Neither the public sector deficit nor the debt are high by international standards, nor are they overly worrisome in light of Switzerland’s high rate of national saving. Still, the government is concerned that the tendency of expenditure to grow more rapidly than potential GDP—with pensions strongly affected by demographic developments and health care by technological change as well as demographics—implies that a sustained effort will be needed to stabilize the debt ratio in the longer term if large new increases in taxes and social security contributions are to be avoided, and if room for fiscal policy to respond during future cyclical downturns is to be maintained.

2. Federal government finances

The 1993 federal budget made allowance for a deficit of 0.9 percent of GDP, about the same as the actual deficit in 1992. Compared with the outturn in 1992, revenue and expenditure were both projected to grow by 5 percent, in line with the expected growth of nominal GDP. The measures taken to achieve these objectives included an increase in the petroleum tax of Sw F 0.20 per liter, and a 10 percent linear cut in federal transfers to cantons. Relative to the government’s baseline projection and including the effect of lower interest payments, these measures were expected to reduce the deficit by 1.2 percent of GDP. 1/

Economic performance in 1993 was substantially worse than envisaged in the budget, and unemployment rose markedly. Overall revenue declined by 6.2 percent, reflecting both the weakness of activity and the effect of lower interest rates on withholding tax receipts. Expenditure rose by 7.4 percent, largely because of higher transfers to the unemployment compensation fund. 2/ Interest payments on the public debt were, however, lower than budgeted. The deficit, at Sw F 7.8 billion, or 2.3 percent of GDP, was substantially larger than anticipated.

The 1994 budget was intended to contain the largely cyclical deterioration that occurred in 1993 and reduce the federal deficit to 2.0 percent of GDP. It was assumed that this effort would be supported by a modest recovery in economic activity, with real GDP and nominal GDP growing by 1 percent and 3 ½ percent. Revenue was expected to increase by 8.6 percent relative to the outturn in 1993, while expenditure was budgeted to rise by 4.9 percent. The disproportionately strong performance of revenue assumed in the budget is attributable to the two-year collection cycle for direct taxes, which typically results in larger receipts in even-numbered years. On the expenditure side, the budget contained a small package of measures which was expected to reduce spending by about 0.3 percent of GDP in 1994, relative to the baseline projection.

Growth in 1994 is now thought to have been somewhat stronger than foreseen in the budget, with real and nominal GDP increasing by 2 percent and 4 percent, respectively. Preliminary data suggest that revenue performance was almost exactly on track, although direct taxes appear to have been lower than projected, while stamp duties were higher, reflecting stronger turnover in the financial markets. The early estimates also show that expenditure may be about Sw F ½ billion lower than budgeted, reflecting smaller-than-expected transfers to the unemployment fund. Overall, the deficit is projected to come in at 1.9 percent of GDP, slightly less than initially envisaged.

The objective of the 1995 budget is to contain the deficit at 1.8 percent of GDP. Even though nominal GDP is assumed to increase by 4 percent, and the switchover from the turnover tax to the VAT is expected to yield additional revenue of Sw F 1 billion (about ¼ percent of GDP), overall revenue is projected to increase by only 2 percent relative to the estimated outturn in 1994. 1/ As in the past, this is attributable to the weak performance of the federal direct tax and the withholding tax in odd-numbered years.

Expenditure is budgeted to increase by about 2 percent. This target is to be achieved by measures to reduce spending by about Sw F 1.3 billion (0.4 percent of GDP) relative to the baseline. These include an increase in the contribution rate to the unemployment insurance system from 2 percent to 3 percent of gross wages at the beginning of 1995, as well as widely dispersed cuts in outlays for transport, defense, agriculture, and the main public pension fund (AHV). 2/

The government’s current medium-term consolidation program, first announced in the summer of 1994, envisages cutting the federal deficit to ½ percent of GDP by 1998. 3/ The government estimates that the measures comprising the package—which include the steps to be taken in connection with the 1995 budget—will be sufficient to trim the deficit by Sw F 4 billion relative to the previous baseline projection and to eliminate the structural component by 1998. The plan calls for an increase in fuel levies (to yield in excess of Sw F 1 billion annually), a broadening of the corporate capital gains tax (yielding about Sw F 0.3 billion), an increase in the tobacco tax (Sw F 0.1 billion), and further cuts in transport, defense, agriculture, and basic research (gradually increasing to about Sw F 0.6 billion in 1998). The government also expects that lower deficits will induce a progressive decline in interest payments (estimated to reach Sw F 0.5 billion in 1998).

IV. Monetary Policy and Developments

1. The conduct of monetary policy

The Swiss National Bank (SNB) pursues an objective of price stability, which is regarded as being equivalent to an inflation rate of about 1 percent. Since 1990, the framework for the conduct of monetary policy has centered on a medium-term target for the growth of a chosen monetary aggregate, the seasonally adjusted monetary base (MO). 1/ The first medium-term targeting period began in the fourth quarter of 1989 and ended in the fourth quarter of 1994. 2/ Over this period, the target called for growth in MO of 1 percent a year on average. In December 1994, the SNB announced a continuation of the same framework for a new five-year period, from the fourth quarter of 1994 to the fourth quarter of 1999, and again set the target average growth rate of MO at 1 percent a year. In both periods, the target growth rate for the monetary base was based on an assumed growth rate for potential output of 2 percent a year, and a trend increase in velocity of 2 percent a year.

Over the shorter term, the SNB does not necessarily aim to achieve the targeted average medium-term growth rate of the monetary base. Rather, pragmatism enters into the short-run conduct of monetary policy, with the medium-term framework providing an anchor to expectations and increasing transparency. Both the position of the monetary base relative to its medium-term target path and other considerations, including in particular the stage of the cycle and exogenous influences on the price level (such as the introduction of VAT in 1995), affect decisions regarding the desired rate of growth of the monetary base.

To foster transparency and accountability, the SNB announces its intentions with respect to the desired rate of growth of MO both on an annual and a quarterly basis. For 1991-93, the SNB announced before the beginning of each year that it planned to keep the growth of the monetary base above the medium-term target of 1 percent. For 1994, it stated that it intended MO to grow more rapidly than the medium-term target growth rate, but less rapidly than in 1993—thus in effect announcing an implicit target range of 1-2.8 percent. For 1995, the SNB has stated that it plans to expand the monetary base “more or less in keeping with” an estimated 2 percent rise in the demand for base money—a forecast that reflects its projections for real growth and inflation during 1995. 3/ It added that it would keep the growth of the monetary base above the medium-term target of 1 percent, but that it does not expect the monetary base to reach the medium-term growth path by the end of the year. In so doing it effectively set an implicit target range of 1-3.7 percent. In addition to annual announcements, the SNB develops and publishes quarterly forecasts of the monetary base.

The choice of the aggregate to be targeted is based on considerations of stability (especially) and controllability. MO and its components are the only aggregates for which stable demand functions have been identified thus far, and MO is also pre-eminently controllable by the SNB. However, it may also be vulnerable to structural shifts, especially in an age of rapid financial innovation (e.g., in the form of increasing use of credit cards or automatic teller machines). The SNB therefore frequently reestimates and tests the stability of the demand for MO, and cross-checks developments in the monetary base against developments in the broader monetary aggregates. It has also recently decided on major improvements in the definitions of M1 and M2 (as published). As of January 1995, the coverage of M1, which consists of notes and coin plus sight deposits but previously excluded salary accounts, has been expanded to include salary accounts. 1/ At the same time, the definition of M2, which previously consisted of M1 plus time deposits but did not include the more liquid saving deposits, has been changed to include saving deposits and exclude time deposits. 2/

The implementation of monetary policy focuses on the management of bank reserves. These themselves now constitute only about 10 percent of the monetary base, but by influencing them the SNB also affects inter-bank interest rates and thus bank deposit rates and ultimately notes and coin, which show a well-established response to interest rates and which comprise the remaining 90 percent of the monetary base. The SNB strives to maintain bank reserves at daily target levels consistent with the quarterly forecasts for the monetary base, while also ensuring that inter-bank interest rates do not depart excessively from a general course indicated by the Governing Board when it approves the quarterly forecasts. The main instruments used to influence bank liquidity are foreign exchange swaps, which are undertaken each morning, but short-term open market operations in treasury bills are also used within the day. Official interest rates play a limited role in the conduct of monetary policy. They consist of a Lombard rate, maintained at 200 basis points above the daily call money rate, and a discount rate, which is not in active use as the SNB no longer discounts bills, but which is sometimes used as a signal.

2. Monetary developments

The change to medium-term monetary targeting followed—and indeed was in part a response to—a period in 1988-90 when changes in the payments system and in bank reserve requirements had led to a sharp reduction in bank reserves and thereby seriously destabilized the monetary base, and when inflation had jumped to over 6 percent. In order to bring inflation down, monetary policy was restrictive in 1990, but a first period of easing began toward the end of that year, even as monetary policy elsewhere in Europe was being tightened further. This period came to an end in early 1992, when concerns about the exchange rate in particular led the SNB to tighten policy again. By June 1992 three-month interest rates were back almost at their peaks of early 1990, above 9 percent, and in the year to August 1992, the monetary base declined by 1 ½ percent.

A sustained easing of monetary policy began in mid-1992, at about the same time as in other European countries, although initially more rapidly—so that by the end of 1992 the (negative) differential between Swiss and German short-term interest rates reached 3 percentage points (Chart IV-1). The process of easing continued at a more gradual pace in 1993. The monetary base grew by 2.8 percent during the course of the year (on a fourth quarter basis) (Chart IV-2). By the end of 1993 three-month interest rates had eased to about 4 percent (Table A12); the yield curve, which had been steeply inverted in mid-1992, had turned flat; with the increased pace of monetary easing elsewhere in Europe, the differential with short-term interest rates abroad had shrunk; and the exchange rate had appreciated markedly, by 4 ½ percent in real effective terms (CPI-based) from its level in the first quarter. Like the monetary base, the broader monetary aggregates also accelerated markedly (Chart IV-3, and Table A13). The year-on-year growth of M1 peaked at 13 percent in late summer 1993, partly reflecting the “re-entry” into this aggregate of deposits that had been placed in interest-bearing accounts when interest rates were higher. Broad money (M3) too registered high year-on-year growth rates, of up to 8 percent, in late 1993-early 1994.

Since early 1994, the SNB has countenanced a stance of monetary policy that has kept short-term interest rates broadly stable at about 4 percent. The differential with short-term rates elsewhere in Europe has shrunk further, and the exchange rate has continued its appreciating trend (Table A14). Short-term real interest rates, at about 3 percent, remain rather higher than at a comparable stage in earlier recoveries, when they ranged between 0-2 percent (Chart IV-4). 1/ The growth of the monetary base has gradually decelerated, to 2.0 percent in August (year-on-year), and more recently, at 0.9 percent in October, has even fallen below the implicit target range for 1994. 1/ The growth of the broader aggregates has also slowed down, to 4 ¾ percent (year-on-year) for both M1 and M3 in September.

CHART IV-1
CHART IV-1

Switzerland: Interest Rates

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Sources: Swiss Institute for Business Cycle Research, data tape; and IMF, International Financial Statistics database.1/ For Switzerland, 3-month Euro-Swiss franc deposit rate; for Germany, 3-month money market rate.2/ 10-year government bond yield.
CHART IV-2
CHART IV-2

Switzerland: The Monetary Base 1/

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Sources: IMF. World Economic Outlook database; Swiss National Bank, Monthly Bulletin.1/ Seasonally adjusted; in billions of Swiss francs. The fall in bank reserves and monetary base in 1988-90 was related to changes in reserve requirements and the payments system.
CHART IV-3
CHART IV-3

Switzerland: Monetary Aggregates

(12-month percent changes)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research.
CHART IV-4
CHART IV-4

Switzerland: Real Interest Rates 1/

(In percent)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Swiss Institute for Business Cycle Research, data tape.1/ Real interest rates calculated using forward-looking annual rates of CPI inflation.2/ Three-month Euro-Swiss franc deposit rate.3/ Average yield on government bonds.4/ Average yield on government bonds less three-month Euro-Swiss franc deposit rate.

Longer-term interest rates, in the meantime, which had declined steadily from late 1992 to late 1993, have followed the rising international trend since the beginning of 1994 (Chart IV-1). Ten-year government bond yields have increased from a low of 4 ¼ percent in late 1993 to about 5 ¾ percent in the second half of 1994. As a result, long-term real rates, at about 4-4 ½ percent, are now high by historical standards (the average for the last twenty years being in the neighborhood of 1 ½ percent), and the slope of the yield curve quite steep. 2/ Nevertheless, the increase in long-term rates during 1994 has been smaller than the corresponding increases in many other countries.

3. The new medium-term monetary path

Overall, the monetary base is estimated to have grown by only 0.3 percent a year over the 1990-94 targeting period, well short of the target of 1 percent, and to have ended 3 ¾ percent short of the end-point of the medium-term target path (Chart IV-2). The SNB attributes this deviation in part to a decline in the demand for MO below what had been allowed for under the previous path, reflecting in particular improved liquidity management by the banks. This effect alone would explain some 2 ¼ percentage points of the deviation. The remainder of the deviation can be ascribed to the fact that the SNB was compelled by persistent inflation to adhere to a restrictive monetary stance for much of the 1990-94 targeting period, and that the subsequent recession lasted unusually long. As of late 1994, a significant output gap persists, and is responsible, in the SNB’s interpretation, for the remaining 1 ½ percentage points of the deviation of the monetary base from the medium-term path.

As shown in Table IV-1, in its setting of the starting-point for the new medium-term period, the SNB took into account its new estimate of the demand for the monetary base (at potential output) in the fourth quarter of 1994, and added to this an allowance for the direct price impact of the introduction of VAT in January 1995, which is assumed to affect money demand proportionately. 1/ The new starting-point is thus approximately 1 ¼ percent below the end-point for the previous medium-term targeting period, and—reflecting the allowance for the output gap and the VAT—2 ¾ percent above the level of the monetary base in the fourth quarter of 1994.

Table IV-1.

The Starting Point for the 1995-99 Monetary Targeting Period

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Source: Swiss National Bank.

V. The Balance of Payments

1. Overview 2/

Switzerland’s traditionally large current account surplus rose from 4 ½ percent of GDP in 1991 and 6 percent of GDP in 1992 to reach a peak of 8 percent of GDP (Sw F 27 billion) in 1993 (Table A15). During the recent recession, the worsening of the government deficit was more than offset by the increase in household savings and the sharp fall in investment (Chart V-1). 3/ Low import demand, together with relatively good export performance, contributed to bringing about the small trade surplus in 1993, which was the first one since 1953.

CHART V-1
CHART V-1

Switzerland: Savings, Investment, and the Current Account

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: Bundesamt fur Statistik. konto 5.

As growth in investment and consumption resumed, the current account surplus decreased to 7 percent of GDP in the first three quarters of 1994. Import demand picked up sharply, as domestic absorption increased and as the continued appreciation of the Swiss franc rendered imports cheaper. In volume terms, imports grew faster than exports in the first three quarters of 1994, for the first time since 1989. Nevertheless, benefiting from favorable terms of trade developments (mainly due to the exchange rate appreciation), which have been taking place since mid-1992, the trade balance continued to display a small surplus in the first three quarters of 1994. 1/ The surplus on nonfactor services increased to more than 4 percent of GDP in 1993 and in the first three quarters of 1994, partly thanks to an increase in banking commissions and net revenues from tourism. At the same time, the factor income surplus, which has traditionally been large, owing to Switzerland’s vast stock of net foreign assets (102 percent of GDP in 1993), fell slightly as interest rates declined worldwide.

In the absence of substantial changes in official reserves, the outflow on the capital account has broadly mirrored the current account surplus for a number of years. The composition of the stock of foreign assets and liabilities changed in favor of longer-term items in 1993, in response to the worldwide decline in short-term interest rates.

2. The current account

Switzerland’s exports have performed relatively well in recent years, even after its major trading partners in Europe and North America entered recessions, and in spite of the considerable real exchange rate appreciation observed since mid-1992 (Chart V-2). In volume terms, export growth has been positive since 1991, and exceeded import growth through 1993 (Table A16). Export growth has been particularly sustained in the important categories of chemicals and precision instruments (Table A17). Export performance has benefited from the fact that Switzerland’s trade pattern is now more geographically diversified than at the time of previous recessions. Traditionally, Switzerland’s main trading partners have been the large European economies at its borders (Germany, France, and Italy—exports to which accounted for a little under 11 percent of GDP in 1993) and the United States (Table A18). In recent years, exports to the Far East have increased, and amounted to 2 ¾ percent of GDP in 1993. Strong demand by such new outlets for Swiss products, together with continued relatively high demand by Germany, contributed to mitigating the effects of the recent recession.

The real effective exchange rate has been on an upward trend since mid-1992. Chart V-2 reports alternative measures of competitiveness (nominal and real effective exchange rates), as well as the bilateral rate against the deutsche mark. Though all these measures had previously tended to move strongly together, since the beginning of the most recent recession the real exchange rate has risen by less on the basis of manufacturing unit labor costs than on the basis of consumer prices, owing to a combination of real wage restraint and productivity improvements (particularly in the tradable sector). These developments have in turn helped exporters in their efforts to avoid a marked decline in competitiveness.

CHART V-2
CHART V-2

Switzerland: Exchange Rates

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: IMF, International Financial Statistics database.1/ Based on relative consumer prices.2/ Based on relative normalized unit labor costs in manufacturing.

The nonfactor services surplus increased from 3 ¾ percent of GDP in 1992 to slightly more than 4 percent of GDP in 1993 and 4 ¼ percent of GDP in the first three quarters of 1994. As in 1992, tourism accounted for about half of total nonfactor service revenues, and yielded a net revenue of ½ percent of GDP in 1993, rising to 1 percent of GDP in the first three quarters of 1994. The remainder of the nonfactor service surplus (which is largely due to financial services) increased to 3 percent of GDP both in

1993 and in the first three quarters of 1994, benefitting from the higher level of activity in financial markets compared with 1992.

The surplus on factor incomes fell from its 1991-93 level of about 4 percent of GDP to 3 ¼ percent of GDP in the first three quarters of 1994. Foreign workers’ earnings remitted abroad have fallen slightly since 1991, reaching 2 percent of GDP in 1993 and in the first three quarters of 1994. Part of this decline may be attributed to the rise in unemployment in Switzerland, which has affected foreign workers considerably. Although the capital services surplus continued to be very large by international standards, the decline in worldwide interest rates reduced it from 6 percent of GDP in 1992 and 1993 to 5 ¼ percent of GDP in the first three quarters of 1994 (Chart V-3). Net unrequited transfers (which include transfer outflows by immigrants amounting to almost 1 percent of GDP) have been fairly stable in 1993-94 at 1 ¼ percent of GDP.

3. Capital movements and other items

The various components of the capital account have continued to display higher year-to-year volatility than items in the current account. In 1993, following the worldwide decrease in interest rates, Sw F 14 billion (equivalent to 4 percent of GDP) of fiduciary funds were repatriated and likely reinvested abroad in longer-term financial assets, as suggested by the especially large amount of portfolio investment outflows. 1/ Gross flows of portfolio investment have risen since the beginning of the recovery. In 1993, cross-border portfolio investment flows rose to new record levels: portfolio investment abroad by Swiss residents amounted to Sw F 44 billion (13 percent of GDP), and that into Switzerland by foreign residents was Sw F 18 ½ billion (5 ¼ percent of GDP). On the other hand, foreign direct investment gross flows showed a mild decline in 1993. Foreign direct investment outflows may be particularly large in 1994, as there were two large acquisitions of United States pharmaceutical companies by Swiss multinationals, for a total of US$9 billion. The item “errors and omissions,” which has been positive in almost every year since the 1960s, reflecting unrecorded current account receipts or capital inflows, was relatively small in 1993, at ½ percent of GDP.

CHART V-3
CHART V-3

Switzerland: Factor Income Balance

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Sources: Swiss National Bank; and Swiss Institute for Business Cycle Research, data tape.1/ Yearly average, in percent.2/ In percent of GDP.

4. Net foreign asset position

Though several countries had larger gross stocks of assets, Switzerland continued at the end of 1993 to have the third—after Japan and Germany—largest absolute amount of net foreign assets (US$239 billion) and by far the highest ratio of net foreign assets to GDP in the world (102 percent, up from 101 percent at the end of 1992). This strong position results from a history of large current account surpluses. For a number of years, current account surpluses had been just sufficient to maintain a fairly stable ratio of net foreign assets to GDP. 1/ In 1993, the current account surplus as a ratio to GDP (8 percent) was larger than nominal GDP growth (1 ¼ percent), implying a rise in the net foreign assets to GDP ratio (abstracting from valuation adjustments); and the same is likely to be true in 1994.

The composition of net foreign assets has changed somewhat, in line with the description of capital account developments given above (Table A19). In 1993, the long-run trend in favor of fiduciary funds was reversed, and there was an increase in net holdings of foreign direct investment and portfolio investment items. 2/

VI. Structural, trade, and aid policies

1. Revitalization of the economy 3/

The Swiss economy exhibits a number of severe rigidities in goods and factor markets, with adverse implications for the price level and for growth, especially in an environment of rapid international integration and technological innovation. In order to achieve a far-reaching structural transformation of the Swiss economy, Switzerland had applied for membership in the European Economic Area (EEA) and in the European Union (EU). Following the rejection of EEA membership by voters, and with a view to revitalizing the Swiss economy, the federal government presented to Parliament, under the name “Swisslex,” two packages of measures incorporating many of the structural changes that would have been required under the EEA.

The first package was presented in February 1993 and was aimed particularly at reforming competition policy, liberalizing domestic markets, and improving freedom of movement (especially for foreign workers). The second package, outlined in June 1994, deals mainly with fiscal policy, social security, infrastructure (post and railways), and agriculture. Most of the measures are still at the draft or even preliminary draft stage, and only a few have been implemented thus far.

The Swiss government and the EU are also pursuing the further integration of Switzerland into Europe via reciprocal agreements about freedom of labor movement, the removal of technical trade barriers, public procurement, research, agriculture, and transport. In October 1994 the EU Council of Ministers gave the go-ahead for negotiations in the above mentioned sectors, with the exception of transportation.

A draft of a new cartel law was first presented in September 1993, and forwarded to Parliament in November 1994. The present law is weak in several respects: it does not prohibit cartels, but merely steps in against their harmful social or economic effects; it places the burden of proof concerning the harmfulness of a cartel with the Cartel Commission, which has only weak rights to request the necessary private information; and it gives the Commission the right to examine a merger before it takes place, but not to prohibit it even if it considers the merger to be against the public interest. In addition, the Cartel Commission is severely understaffed, with only nine specialists. The new law would establish for the first time the presumption that certain practices of horizontal and vertical cartels are socially and economically harmful, provide for a stricter definition of the notion of abuse of dominant position and a simplification of procedures, and give the Cartel Commission the right to stop mergers. The government also intends to increase the staff of the Cartel Commission to 40.

Efforts are also being made to abolish cantonal permit or license requirements. Such requirements are used by most of the cantons in order to restrict market entry and protect companies located in their district. 1/ This is most often the case for taxi services, restaurants, bathroom and kitchen installation, notaries, lawyers, doctors, dentists, real estate agencies, the wine trade, and mountain guide services. As a result, it is costly for a company or individual domiciled in one canton to do occasional, small-scale business in another canton. The federal government proposed in January 1994 as part of the draft Domestic Market Law that the permits of cantonal or communal governments for companies to start business be mutually recognized, and that companies be held merely to the labor regulations of their canton. The law would also introduce a right of appeal for any company with the necessary qualifications if it is denied entry to the market of another canton. The final draft of this law was presented to Parliament in November 1994. However, the cantons appear to have reservations about this law, favoring instead the (more time-consuming) option of negotiating a state treaty (Konkordat) between them, without participation of the federal government.

Public procurement regulations for the federal government are generally based on competition between market participants to secure an efficient price. Some further liberalization is to be carried out by means of a new law on federal public procurement, a draft of which was presented to the Parliament in September 1994 for proposed entry into force on January 1, 1996. This draft embodies the new “GATT-Codex for Public Procurement” and would thus open public procurement markets to foreign suppliers on a reciprocal basis above a given threshold. 1/ The law would also grant any supplier the right to appeal against unfair decisions.

The procurement regulations of cantons and communes, on the other hand, are strongly biased against enterprises from abroad and from other cantons, and the acceptance of tender by these levels of government is typically not a legal act and is therefore immune from challenge. The cantons are currently working to liberalize their public procurement regulations in line with the standards of the EU and the GATT, for foreign suppliers and between themselves. They have developed a prototype regulation that would liberalize their procurement markets on a reciprocal basis, for procurement above the GATT thresholds. It is currently in discussion between the cantons and it is planned to be put into force as a Konkordat on January 1, 1996. In addition the federal government has proposed wording in the draft of the Domestic Market Law that would grant any Swiss supplier national treatment in Switzerland and the right to appeal against unfair decisions. The main aim of this law is to open public procurement of cantons and communes for Swiss suppliers below the GATT thresholds.

Switzerland is highly integrated in the world economy, and Swiss trade policy is generally liberal. 2/ But important nontariff barriers to imports exist in the form of technical norms and regulations. For a large group of products—including for instance household appliances, cars, trucks and buses, and telecommunication equipment—Swiss technical norms differ from those in the EU or other countries. Importation of these products is prohibited unless they have passed an official approval test, which is costly and time-consuming. The federal government announced in June 1993 a set of measures aimed at eliminating technical barriers to foreign trade. Swiss norms would be harmonized with EU standards and an agreement would be negotiated with the EU about reciprocal recognition of official approval tests to open markets on equal terms. As a first step the federal government planned to bring technical norms into conformity with EU standards between the beginning of 1994 (electrical equipment, some agricultural inputs) and October 1995 (cars, trucks, buses), where it has the competence to change the relevant regulations. In a second step a draft federal law, to be presented in 1995, would bring Swiss technical standards for chemical products and some agricultural inputs like seeds more in line with EU standards.

Swiss regulations about immigration—which has played an important role in the Swiss labor market since the early 1960s—place strong restrictions on the skill levels of immigrants and on the sectors and cantons in which immigrants may work. This policy has led to a sharp bias in immigration toward low-skilled workers and has made it difficult for employers to recruit highly skilled workers from abroad in areas such as information technology. A new policy was announced by the federal government in May 1991, and confirmed in February 1993 in the revitalization program. It would largely foreclose the influx of low-skilled labor from countries outside the EEA and EU, while liberalizing immigration from the EEA and EU, in the belief that the supply of potential immigrants resulting from such a policy would approximate more closely the skill mix the market would demand. Bilateral negotiations between Switzerland and the EU with the aim to achieve a reciprocal agreement that would remove restrictions and grant Swiss as well as EU workers greater freedom of movement are scheduled for spring 1995. In the meantime, the requirement that Swiss executives and highly-qualified specialists must be given priority over foreigners was abolished in May 1993 (thereby also fulfilling Uruguay Round requirements).

In addition, action has been taken to increase mobility of Swiss workers, by improving the portability of pension funds. It was usually very costly for an employee to change employer between the ages of 35 and 45, because the employee had to change his or her pension fund and was not eligible to transfer the whole amount of previous pension payments to the new pension fund. New regulations for pension funds were approved by Parliament in 1994 and entered into force on January 1, 1995; these regulations establish for all pension funds significantly higher minimum payouts in the event an employee leaves, thereby preventing the insured from suffering loss when changing pension funds.

A further major hindrance to labor mobility is the widespread absence of mutual recognition of cantonal diplomas and other examinations between the cantons. The cantonal diplomas for teachers, lawyers, notaries, medical personnel, and some other professions are seldom recognized by the other cantons, and often an additional examination is necessary if someone wants to work in another canton. The federal government has attempted to introduce mutual recognition of cantonal diplomas as well as craft and professional licenses by means of the draft Domestic Market Law of January 1994. This law would introduce the “Cassis de Dijon” principle between the cantons, leaving each canton the right to develop its own examination and license requirements, but committing each canton to recognize the qualifications of other cantons if they fulfill agreed minimum requirements. As an aid to enforcement, the law would also introduce a right of appeal for any person with the necessary qualification whose right of work in another canton is refused. However, in this area too the cantons may opt for the more time-consuming Konkordat option.

The Lex Friedrich, which strongly restricts foreign ownership of real estate for purposes such as agriculture, industry, trade, banking, and insurance, has limited the entry of foreign companies, especially in construction where contractors typically own large projects like commercial buildings during the course of construction. In October 1994, the Parliament passed a new law that will abolish most of these restrictions, maintaining permit requirements only for real estate ownership for speculative investment, for ownership by foreign real estate agents, and for ownership of holiday homes. The new law will enter into force in spring 1995.

2. Agriculture

Agriculture displays by far the greatest distortions of all sectors in the Swiss economy. 1/ Swiss agricultural policy relies on border measures, including tariffs and quantitative restrictions, as well as administrative and regulatory intervention in individual markets. As a result, Swiss domestic prices for agricultural goods are significantly higher than on the world market and than in the EU, and there are problems of overproduction and environmental damage. 2/

In 1992 the Swiss government announced a reform of its agricultural policy, consisting mainly of a switch from price support to direct income support, extensive deregulation (e.g. regarding construction of farm buildings or livestock breeding), and environmental protection. In addition, the successful conclusion of the Uruguay Round in 1993 will lead to a transformation of all nontariff barriers like import quotas into tariffs and a reduction in border measures and export subsidies. This would imply extremely elevated tariff levels in agriculture, with rates as high as 800 percent for some products. The tariff cuts mandated by the GATT agreement (36 percent over the next six years) would be offset in part by higher direct payments to producer and another major element of the new agricultural policy, environment premiums (Ökobeiträge). These premiums provide incentives for farmers to protect the environment by using e.g. less fertilizer and pesticides. However, given its very high starting level, the level of agricultural protection would remain high even after the tariff cuts.

3. Financial markets

Switzerland’s strong presence in international financial markets was challenged by increasing international competition in the second half of the 1980s, as widespread liberalization and deregulation gave the most liberal and most lightly taxed centers a competitive advantage. As a result, the government took action to dismantle structural rigidities in the financial markets.

Most of the cartels in the banking and insurance sector were dismantled at the end of the 1980s and beginning of the 1990s, but it appears that a few are still operating. A new banking law, adopted in March 1994, will introduce most elements of EU banking supervision standards and give the federal government the right to negotiate reciprocal agreements about mutual recognition of banking licenses, especially with the EU. Issue and transfer taxes on transactions in financial markets (stamp tax) were lowered significantly in April 1993. 1/

In addition, a draft stock exchange law, representing the first federal legislation in this area, may be passed by Parliament in early 1995. The main proposals of the planned law are an increase in transparency of transactions and protection of the investor; the introduction of rules of conduct; and regulation of tender. 2/ Moreover, the number of stock exchanges in Switzerland has been reduced from eight to three, and will be reduced further, starting in spring 1995, to just one—a fully computerized exchange, based in Zurich. Finally, a mutual funds law adopted in March 1994 expanded the range of instruments available for investment companies; allowed international cooperation by the supervisory authority; and introduced the possibility of launching investment funds which fulfill the EU regulations.

These efforts have contributed to a significant revival of the Swiss financial markets. The volume of foreign share and bond issues in Swiss francs rose sharply in 1993 and the beginning of 1994, and some trading in secondary markets moved back from London to Zurich.

4. Other labor market policies

The emergence of substantial unemployment, including structural unemployment (which most estimates put at between 2 and 3 percent), has raised strong concerns in the Swiss government. The implementation of the revitalization program is expected to improve flexibility in the labor market (see above). In addition, more direct measures are to be taken to provide for the training of unemployed persons.

The Swiss government has announced a new job qualification program that would require individuals receiving unemployment benefits to accept temporary positions after they have received benefits for 150-400 days (depending on age). It is intended that in the immediate future about 50,000 mainly young people (about one third of all unemployed) would be placed in such qualification programs. (At present, some 3,000 people are taking part in similar programs, and 100,000 of the current unemployed would qualify for the new program.)

The job qualification program consists of two parts: about half the participants are expected to be placed in occupational training and the other half in on-the-job training positions which could be in the private or the public sector. The program will be closely monitored by the government and the unions to prevent any abuse, such as the displacement of existing workers through subsidized labor. The ceilings for payments in the qualification program will be the previous unemployment benefits, and payment will come from the unemployment insurance fund, except in the case of on-the-job training where the employer will pay an amount equivalent to about one fifth of the previous unemployment benefits.

The draft law for this new program has been approved by the lower chamber of Parliament but was rejected by the responsible committee in the upper house of Parliament. Given the time typically needed to find a compromise, the law may come into effect in spring 1996.

5. Trade policy

Except in the area of agriculture, Switzerland has had a relatively liberal trade policy, exemplified for instance by its low tariffs on industrial goods (averaging 1.8 percent). Efforts to liberalize trade further are under way in a number of spheres, though in some cases there is considerable uncertainty—due to political factors, which include the possibility of referenda—about the extent of progress that will actually be made. The process has begun for implementation of the Uruguay Round agreement, which was ratified by the Swiss Parliament in December 1994. After the rejection of the European Economic Agreement in the December 1992 referendum, the Swiss strategy for further economic integration with the European Union is being pursued within the framework of sectoral negotiations. In recent years, Switzerland has also signed free trade agreements with a number of central and eastern European countries (CEECs). 1/

While imports from the CEECs have not yet taken off, exports to the CEECs have already risen considerably (Chart VI-1). The Swiss bilateral trade balance vis-à-vis the CEEC-6 (Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia) has so far improved, mainly because of a relatively large increase in Swiss exports to the CEEC-6, and to a smaller extent because of a slight fall in Swiss imports from the CEEC-6. The fall in imports has been concentrated to some extent in sectors in which the CEECs are perceived to have a comparative advantage and which might therefore be regarded as “sensitive” (such as agriculture, textiles, low-technology chemicals, and iron and steel), suggesting that some of the benefits of the free trade agreements are still to be realized.

6. Official development assistance

Total net disbursements of Swiss official development assistance (ODA) amounted to US$793 million in 1993, or 0.33 percent of GNP, returning to the levels of 1990 and 1991, after the temporary marked increase to 0.45 percent of GNP in 1992, which mainly reflected the surge in multilateral disbursements associated with Switzerland’s first contribution to the World Bank Group (Table VI-1). 2/ ODA disbursements were thus slightly above the Development Aid Committee (DAC) average of 0.29 percent of GNP for 1993, but still fall short of the Swiss ODA target of 0.4 percent of GNP. The funding for ODA comes mainly from the confederation, with cantons and communes contributing only 2 percent of total ODA. Private Swiss flows to developing countries have traditionally been considerable and amounted to 1.14 percent of GNP in 1993.

In 1993, 77 percent of Swiss ODA was in the form of bilateral grants, largely untied. 69 percent of bilateral aid was allocated to low-income countries (by the United Nations definition). Geographically, 32 percent of bilateral aid was allocated to African countries, with the main recipients in this region being Rwanda, Mozambique, and Madagascar; 27 percent was disbursed to Asian recipients, in particular India, Indonesia, Vietnam, Jordan, and Bangladesh; in Latin America, which received 9 percent, Bolivia and Peru were the main beneficiaries; the former Yugoslavia received 4 percent of total bilateral ODA.

CHART VI-1
CHART VI-1

Switzerland: Trade with CEEC6 Countries 1/

(Millions of U.S. dollars)

Citation: IMF Staff Country Reports 1995, 022; 10.5089/9781451807127.002.A001

Source: IBRD, “Trade Analysis and Research System”.1/ CEEC6 are: Bulgaria, former Czechoslovakia until 1992, Czech Republic and Slovakia thereafter, Hungary, Poland, and Romania.2/ Sensitive sectors are Food (0), Chemicals (5), Iron and Steel (67), Textile Yarn (64), Clothing and Apparel (85). Standard International Trade Classification codes in parentheses.
Table VI-1.

Switzerland: Official Development Assistance

(In millions of US dollars)

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Sources: Swiss Development Corporation, Swiss National Bank.

Includes official export credits, equities and bilateral assets, and other multilateral flows.

Includes direct investment, bilateral and multilateral portfolio investment, and private export credits.

1/

Estimates of value added by sector are available only with a long lag; the figures quoted are preliminary.

2/

Unless otherwise indicated, comparisons are with the same period of the previous year.

1/

The cantons, communes, and state companies were eligible for the investment bonus (equivalent to 15 percent of total construction costs) from the federal government if they added construction projects to those already planned or advanced them and finished them before mid-1995.

2/

Net transfers from the state consist of social security payments to households, less social security contributions and income taxes.

3/

Household disposable income accounts are available only on an annual basis.

4/

The data for stockbuilding in the national accounts also include errors and omissions.

1/

See SM/94/4, Chapter VI, for a detailed assessment of developments in Swiss labor markets, including estimates of the structural component of unemployment.

2/

Figures quoted for unemployment and employment are seasonally adjusted.

3/

This calculation is based on estimates by the Federal Ministry of Industry, Crafts, and Labor, according to which deregistrations amount to about 1,000 a month.

1/

This result should be seen as suggestive, given the influence of seasonal adjustment and the potential for changes in seasonal patterns.

2/

As official figures may overestimate the decline in employment in 1993 and underestimate the rise in 1994, increases in productivity may be overestimated.

1/

See also Tables A8, A9, A10, and All.

2/

Data on the general government finances are on a financial statistics basis. Data on a national accounts basis—which are commonly used in international comparisons—are not currently available in Switzerland. The Federal Statistical Office plans to begin publishing figures on a national accounts basis in 1995.

1/

The lower levels include the cantons, communes, and the social security funds.

2/

The estimated size of the structural deficit is highly sensitive to the choice of a “cyclically neutral” base year and estimates of the output gap, defined as the percentage deviation of actual real GDP from potential real GDP. Estimates from various Swiss sources put the portion of the overall federal deficit that can be considered structural between 30 percent to 80 percent. A similar margin of error probably holds for the general government structural deficit. Moreover, the two-year collection cycle for the federal direct tax and the withholding tax, under which tax revenues are usually much stronger in even than in odd years, leads to significant distortions if conventional methods of estimating structural imbalances and fiscal impulses are used; the staff has used an averaging procedure to eliminate this effect.

1/

That is, without these measures, the budget would have envisaged a deficit of 2.1 percent of GDP in 1993.

2/

Although booked as spending in the budget, these transfers are formally loans.

1/

The replacement of the turnover tax with the VAT at the beginning of 1995 entails a substantial change in the tax base: services will be subject to VAT, but investment goods will no longer be taxed. Thus, the introduction of the VAT is estimated to have a substantially larger impact on consumer prices (+1.4 percentage points) than on the GDP deflator (+0.4 percentage points), reflecting a net decline in investment good prices. Analogously, the relatively small increase in net tax revenue resulting from the changeover consists of a relatively large increase in revenue from private consumption, which is partly offset by a decline in revenue from investment goods. The prevalence of historical cost accounting implies that the lower cost of investment goods is not immediately reflected in higher company tax receipts.

2/

The increase in the contribution rate, while technically a revenue measure at the level of the general government, will allow the federal government to reduce its transfers to the unemployment insurance fund.

3/

Further details may be found in Chapter I of the accompanying paper on Selected Background Issues. The official program assumes that real GDP will grow by 2 percent annually in 1996-98. Growth may very well be faster than this, and the budget deficit could well be smaller if the measures contained in the program are fully implemented.

1/

References to the monetary base hereafter are to the seasonally adjusted monetary base.

2/

The decision to adopt a medium-term targeting framework was announced at the end of 1990, and the decision to use the fourth quarter of 1989 as the base period at the end of 1992.

3/

“Monetary Policy Decisions of the Swiss National Bank for 1995,” SNB Press Release, December 16, 1994.

1/

“Salary accounts” are interest-bearing accounts widely used for transaction purposes, but which were included with savings accounts in bank data and therefore counted in M3 but not in M1.

2/

The new M2 is the aggregate that was previously known as M1b.

1/

The quoted real interest rates use forward-looking annual rates of CPI inflation. Real interest rate calculations in 1994 are complicated by the price jump expected upon introduction of the VAT in early 1995, but this should affect real three-month rates only toward the end of 1994; expected inflation is assumed to be 1 percent during 1994.

1/

The sharp slowdown in these last few months reflects an unexpected decline in bank reserves, thought to be due to a further improvement in banks’ liquidity management: bank reserves had fallen by almost 6 percent in October (year-on-year), while the demand for notes had risen by 1 ½ percent.

2/

Real rates are again based on forward-looking annual rates of CPI inflation; in 1994, expected inflation is assumed to be 1-1 ½ percent. The calculations are based on the average yield on government bonds, for which longer time series are available than for 10-year bond yields alone. The average yield on government bonds in October 1994 was 5.6 percent, compared with 5.9 percent for the yield on 10-year government bonds.

1/

In addition, there was a minor technical adjustment to M0, consisting of eliminating both from the actual monetary base and from the starting-point of the new path some deposits of nonbanks, which had previously been included in the data for the monetary base.

2/

Chapter II of the accompanying report on Selected Background Issues analyzes long-run issues in the balance of payments.

3/

Official data on the components of saving are available only on an annual basis. Government saving fell from 3 percent of GDP in 1989 to negative one percent in 1993, net investment fell from 19 percent of GDP to 11 percent and household saving increased from 7 percent of GDP to 8 percent (continuing its upward trend from 4 percent of GDP in 1985), while corporate and social security saving remained roughly unchanged at 6 percent of GDP.

1/

Since mid-1992, unit values of imports have fallen by 8 percent, while unit values of exports have been stable.

1/

Fiduciary funds are accounts care of Swiss banks, mainly consisting of short-term assets denominated in foreign currency. They are off-balance sheet items as they reflect operations undertaken on behalf of and at the risk of the client. Their popularity is due to their fiscal advantages.

1/

The ratio was also 100 percent in 1984, the first year for which official data are available.

2/

The main components of net foreign assets are portfolio investments, direct investments, fiduciary funds, assets of the public sector (mainly reserves of the central bank), and assets of banks. The residual (which is negative) includes real estate. Net foreign assets of the banking system have fallen from Sw F 40 billion in 1985 to Sw F 6 billion in 1992, while fiduciary funds have risen from Sw F 44 billion to Sw F 93 billion over the same period.

3/

More detailed information on the revitalization program can be found in Chapter III of the accompanying report on Selected Background Issues.

1/

These are additional to the usual qualification requirements.

1/

The thresholds are Sw F 10 million for construction projects and Sw F 260,000 for other goods and services. The federal government and the cantons intend to use the EU addition method for the calculation of the threshold, so that for large construction projects (e.g. railway tunnels or metro lines) the whole amount of expenditures planned for these projects will be measured against the GATT threshold. This is important insofar as large construction projects are often split into smaller tenders and each of these tenders might otherwise be below the threshold.

1/

A recent study by the OECD shows for 1992 net producer subsidy equivalents (PSEs) for Switzerland of 75; for Norway of 77; for Japan of 71. The average for the OECD countries is 44. PSEs are here expressed as the total value of assistance (including differentials between producer prices and world market prices) as a percentage of the adjusted producer value, where the adjusted values are the value of output plus any direct net payments.

2/

Swiss producer prices for beef, milk, and wheat are between 1 ½ and 3 times higher than those in the EU.

1/

See SM/94/4 for details.

2/

This law would apply to Switzerland the internationally agreed standards of the International Organization of Securities Commissions (IOSCO) and the EU guidelines.

1/

Free trade agreements have already become effective within the framework of the European Free Trade Association with the former Czechoslovakia (July 1992; converted into agreements with the Czech Republic and Slovakia), Romania (May 1993), Bulgaria (July 1993), Hungary (October 1993) and Poland (November 1993), and bilaterally with Lithuania (April 1993), Estonia (April 1993), and Latvia (April 1993), and are under negotiation with Slovenia and Albania.

2/

Actual payments to the World Bank and regional development banks are scheduled to take place over a number of years. However, under the DAC accounting method (adopted in Table VI-1), all payments are recorded in 1992—the year in which they were agreed upon—while under the Swiss accounting method each tranche is recorded at the time when it is actually disbursed.

Table Al.

Switzerland: Components of Real GDP

(Percentage changes at 1980 prices) 1/

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Source: Swiss Institute for Business Cycle Research, data tape.

For quarterly data, growth rates are with respect to the same quarter of the previous year.

Contribution to growth of GDP.

Table A2.

Switzerland: Components of Nominal GDP

(In millions of Swiss francs, at current prices)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A3.

Switzerland: Implicit Price Deflators

(Percent changes)

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Source: Swiss Institute for Business Cycle Research, data tape.

Change over QI-III 1993.

Table A4.

Switzerland: Industrial Production by Sector

(Percent change)

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Source: Swiss Institute for Business Cycle Research.

Average annual compounded growth rate.

Percentage change over same period previous year.

Table A5.

Switzerland: Household Disposable Income and Savings

(Percent change, unless otherwise indicated)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A6.

Switzerland: Labor Market 1/

(In millions)

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Source: Swiss Institute for Business Cycle Research; data tape.

The data are averages for the periods shown, unless otherwise indicated.

February 1994.

Second quarter, 1994.

January-October, 1994.

Table A7.

Switzerland: Prices, Wages, and Productivity

(Percentage changes) 1/

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Sources: Swiss Institute for Business Cycle Research, data tape; IMF, World: Economic (Outlook database.

For quarterly data, growth rates are with respect to the same quarter of the previous year.

Gross wages per employee, economy-wide.

Deflated by consumer price index.

Deflators for goods.

Table A8.

Switzerland: Government Finances

(Billions of Federal Swiss francs)

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Source: Federal Ministry of Finance.

Preliminary, November 1994. The budget approved by the lower house of parliament in mid envisages a deficit of Sw F 6.1 billion.

Military procurement only.

Includes loans to unemployment insurance fund.

Relative to GDP projection underlying the budget.

Table A9.

Switzerland: Federal Government Tax Revenue

(Billions of Swiss francs)

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Source: Federal Ministry of Finance.

Preliminary.

The VAT (value-added tax) was introduced at the beginning of 1995.

Relative to GDP projection underlying the budget.

Table A10.

Switzerland: Federal Government Assets and Liabilities

(End-of-period: in billions of Swiss francs)

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Source: Federal Ministry of Finance.

Amount by which liabilities exceed all other assets.

Largely deposits of federal pension fund (EVK) with the federal government.

Difference between gross financial debt and financial assets.

Table A11.

Switzerland: General Government Finances

(In millions of Swiss Francs)

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Source: Federal Finance Administration. Öffentliche Finanzen der Schweiz. 1991: and data provided by the authorities.

Preliminary.

Estimates, November 1994.

Table A12.

Switzerland: Interest Rates and Equity Prices

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Source: Swiss Institute for Business Cycle Research, data tape.