1. Gross domestic product

In the early nineties Switzerland experienced an unusually long (but rather shallow) recession which bottomed out in the middle of 1993 (Chart II-1). Since then the economy has returned to positive growth, with the main impulses coming from commodity exports and private investment (including renewed stockbuilding). The recovery has been hesitant, however, in large measure due to sharp exchange rate appreciation which depressed tourism and induced many producers to switch from domestic to foreign suppliers of intermediate inputs. Indeed, the most recent national accounts revisions point to modest real GDP growth of 1.2 percent in 1994, which is considerably below earlier official estimates and compares unfavorably with growth in other OECD countries.

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Switzerland: Output and Inflation

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.A001

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

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After three years of declining investment there was renewed growth in gross capital formation of close to 6 percent in 1994, reflecting improved business confidence deriving mainly from growing export orders. Investment in machinery and equipment, in particular, was the sole component of domestic demand to grow strongly (11 percent), while construction increased more moderately (Chart II-2). By contrast, volume growth in both private and public consumption remained modest, reflecting consumer unease associated with further declines in real disposable incomes and government efforts at fiscal retrenchment. The contribution to growth of the foreign balance was substantially negative as import volume increased sharply, reflecting the investment boom and falling import prices in domestic currency terms, while commodity exports increased more moderately and services exports actually declined mainly due to the effects of exchange rate appreciation on tourism receipts.

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Switzerland: Aggregate Demand Components

(annual percentage change, volumes)

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.A001

Source: IMF, World Economic Outlook.

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The recovery continued at a moderate pace in the early months of 1995, but slackened considerably as the year progressed and preliminary quarterly estimates indicated stagnation by the third quarter. ^1/ Commodity exports and enterprise investments were again the main growth components, while consumption remained subdued and construction actually declined. ^2/ Higher prices deriving from the introduction of a value-added-tax, coupled with increased contribution rates for unemployment insurance and higher taxation at municipal and cantonal levels, further depressed household disposable incomes. At the same time, exchange rate movements weakened competitiveness of Swiss exporters and led to a disproportionate rise in imports. Consequently, it is estimated that the foreign sector’s net contribution was again substantially negative in 1995 and that real GDP growth did not exceed 1 percent for the year as a whole.

The prospects for 1996, and beyond, are highly conditional on cyclical developments in neighboring countries and future exchange rate movements. Growth of domestic demand components will remain subdued in 1996; while private consumption may pick up somewhat, as real disposable household income increases (for the first time in five years) and the savings ratio declines further, enterprise investment is likely to slow down considerably. Export growth can be expected to accelerate moderately in 1996, assuming stronger growth in OECD countries and no further exchange rate appreciation of the Swiss franc. With the external sector’s contribution turning from sharply negative to near neutral, it is anticipated that real GDP growth will strengthen to perhaps 1 1/4 to 1 1/2 percent.

2. Employment and unemployment

The unemployment rate, which had remained around 1 percent or less throughout the eighties, rose sharply in the early nineties to reach a peak of 5.2 percent in January/February of 1994 (Table A6). While the recession had undoubtedly a negative impact on the demand for labor, a number of other factors on the supply side contributed to this development. The female labor market participation rate continued on its upward trend and a sizable number of foreign workers, including asylum seekers, have obtained permanent resident status. Also, behavioral changes, partly induced by the increasing generosity of the unemployment benefit system, have led a growing number of persons to register as unemployed. ^1/

Over the past two years registered unemployment has tended to decline to about 4 percent of the labor force in the autumn of 1995 (Chart II-3), while the OECD standardized unemployment rate fell by about half a percentage point to 3.3 percent over the same period. In combination with little change in the overall employment index, this suggests that a significant number of people have left the labor force, e.g., as benefits have expired or in connection with early retirement. However, the decline in unemployment has come to a halt lately, and registered unemployment has risen again to 4.2 percent last November. ^2/

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Switzerland: Unemployment Rates: An International and Temporal Comparison

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.A001

Sources: IMF, World Economic Outlook database.1/ Data for 1995 are staff projections.

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Looking forward, some moderate employment gains can be expected as economic growth accelerates in 1996 and beyond. Also, a number of structural factors are likely to contribute to lowering unemployment over the medium term. The growth in foreign labor supply is expected to decelerate in the coming years (partly linked to the relative decline of the construction and tourism industries, which will reduce the number of seasonal and temporary workers and ultimately the growth in foreign permanent residents). Also, the trend to shorter working hours is likely to continue, and changes in education and in the unemployment compensation system--providing incentives and institutional support for job search--are intended to reduce the number of registered unemployed (Chapter V).

From an international perspective the Swiss labor market appears to be a comparatively flexible one--in Europe, only Austria and Luxembourg display similarly low overall unemployment rates--in large measure due to a highly decentralized wage determination process. Other positive features are relatively low youth and female unemployment rates. Youth unemployment is very close to the national average, reflecting the apprenticeship system in Switzerland, while the female unemployment rate is only about one percentage point above the male rate. By contrast, unemployment is disproportionately concentrated in certain regions and among foreign nationals. In the French speaking cantons of western Switzerland and in (Italian speaking) Ticino the unemployment rate is nearly double what it is in the rest of the country (6.1 versus 3.2 percent in October 1995). Foreign nationals represent about 26 percent of the labor force but over 42 percent of the registered unemployed, which translates in an unemployment rate of 7.7 percent compared with 3 percent for Swiss nationals (October 1995). Finally, the share of the long-term unemployed (over one year) in total unemployment has risen sharply from about 7 percent in 1990 to 29 percent in 1994; however, this share is dominated by older workers and has shown some modest decline in recent months.

3. Prices and wages

Despite a return to positive growth, inflationary pressures eased in 1994. The CPI inflation rate decelerated rapidly in the early months, to reach 0.4 percent in May, and was little changed during the remainder of the year; on average the consumer price index rose by slightly less than 1 percent in 1994 compared with over 3 1/4 percent in the preceding year. A number of factors contributed to this development, e.g., continued wage moderation, a cautious monetary policy stance, subdued consumer confidence, and especially the strength of the Swiss franc on the exchange markets. As mentioned, import prices actually declined, but domestic goods inflation also weakened (especially in services).

Consumer price inflation accelerated in the early months of 1995, reaching a peak of 2.1 percent last June, but has stabilized in recent months. The main explanation resides in the introduction of VAT at the beginning of the year, which had a significant impact on the prices of services. Goods prices, by contrast, were only marginally affected by the new tax. ^1/ The one-time VAT effect on consumer prices is now estimated at slightly over 1 percentage point, whereas the impact on the GDP deflator is considerably lower at less than 1/2 percentage point. Besides VAT, the other major factor affecting inflation was the dampening effect of further exchange rate appreciation, so that import prices have on balance little changed over the past year.

Table II-1.

Switzerland: Prices

(Percent changes over the same period a year earlier)

Source: Swiss National Bank.

Table II-1.

Switzerland: Prices

(Percent changes over the same period a year earlier)

		1993	1994				1995
			Q1	Q2	Q3	Q4	Q1	Q2	Q3
Consumer price index		3.3	1.7	0.7	0.6	0.5	1.4	1.9	2.0
	Goods	1.7	0.7	-0.2	0.3	-0.1	0.5	0.4	0.3
	Private services	4.5	2.5	1.2	0.4	0.7	1.4	2.5	3.1
	Public services	5.3	3.1	2.1	2.1	1.9	4.5	4.8	4.5
	Rents	…	…	…	-0.8	-0.2	-0.4	0.9	1.8
	Imported goods/services	2.2	0.6	-0.9	-0.5	-1.0	-0.2	-0.3	-0.4
	Domestic goods/services	…	…	…	1.0	0.9	2.0	2.7	2.8
GDP deflator		2.0	1.9	1.7	1.3	0.9	1.8	1.2	…

Source: Swiss National Bank.

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Table II-1.

Switzerland: Prices

(Percent changes over the same period a year earlier)

		1993	1994				1995
			Q1	Q2	Q3	Q4	Q1	Q2	Q3
Consumer price index		3.3	1.7	0.7	0.6	0.5	1.4	1.9	2.0
	Goods	1.7	0.7	-0.2	0.3	-0.1	0.5	0.4	0.3
	Private services	4.5	2.5	1.2	0.4	0.7	1.4	2.5	3.1
	Public services	5.3	3.1	2.1	2.1	1.9	4.5	4.8	4.5
	Rents	…	…	…	-0.8	-0.2	-0.4	0.9	1.8
	Imported goods/services	2.2	0.6	-0.9	-0.5	-1.0	-0.2	-0.3	-0.4
	Domestic goods/services	…	…	…	1.0	0.9	2.0	2.7	2.8
GDP deflator		2.0	1.9	1.7	1.3	0.9	1.8	1.2	…

Source: Swiss National Bank.

With the economy continuing to perform below potential, inflationary pressures are likely to remain contained. Also wage moderation has continued and the VAT effect has worn off. Therefore, in the absence of any significant exchange rate “correction,” it is anticipated that the average annual inflation rate will decelerate in 1996, perhaps to about 1 percent, significantly lower than rates expected to prevail in virtually all other OECD countries.

Nominal wage increases in 1994 averaged about 1 1/2 percent, well below the previous year’s inflation rate which often acts as a benchmark for wage adjustments. With inflation rapidly decelerating during the year, real wages increased typically by about half a percent. The reverse occurred in 1995, with nominal wage increases of about 1 1/4 percent and VAT-induced acceleration of inflation leading to a decline in the purchasing power of wages. Nominal wages are expected to increase only marginally faster in 1996, by perhaps 1 3/4 percent, as there are no signs that last year’s VAT-induced increase in inflation is being incorporated in wage agreements for 1996; if the anticipated lower inflation rate materializes it can be expected that real wages will increase by less than 1 percent in the coming year. While the results of the most recent round of wage negotiations are not yet fully known, there is little doubt about two underlying trends; first, broad automatic inflation adjustments are becoming rare and, second, wage adjustments are increasingly individualized.

1. General government developments

During the early nineties the fiscal position weakened considerably, in part because of recessionary conditions, but also reflecting rapid growth in spending on entitlement programs (particularly pensions and health care). The general government’s finances, which had been broadly in balance at the beginning of the decade, moved into deficit. The latter reached a level of close to 4 percent of GDP by 1993, of which more than two thirds could be attributed to the federal government. Deficits also tended to rise at the levels of the cantons and the municipalities (communes). Consequently, the gross debt of the general government rose sharply from approximately 32 percent of GDP in 1989 to nearly 44 percent in 1993 (Table III-1). During 1990-93, the relative size of government as measured by general government expenditures steadily increased by over 8 percentage points to reach close to 42 1/2 percent of GDP, whereas the share of governmental revenues (including social security contributions) increased more moderately by less than 4 percentage points of GDP over the same period.

Table III-1.

Developments in the Public Finances

Source: Federal Ministry of Finance.

^1/Estimates.

^2/Budgets as of January 1996.

^3/Administrative basis; the pension fund surplus has not been subtracted from revenues and the railway loans have not been added to expenditures.

^4/Financial statistics basis; adjusted for pension fund surplus in federal government figures.

Table III-1.

Developments in the Public Finances

				1988	1989	1990	1991	1992	1993	1994	1995 1/	1996 2/
				(In percent of GDP)
Federal government
	Financial balance 3/			0.5	0.3	0.3	-0.6	-0.8	-2.3	-1.4	-1.1	-1.1
	Gross debt			14.6	13.2	13.0	13.8	16.3	19.8	21.4	21.8	22.5
General government balances 4/
	Territorial authorities			0.2	-0.3	-1.1	-3.0	-3.5	-4.6	-3.4	-2.6	-2.2
		Federal government		0.1	-0.1	-0.2	-1.2	-1.5	-2.7	-1.9	-1.4	-1.4
		Lower levels		0.1	-0.1	-0.9	-1.8	-2.0	-1.9	-1.5	-1.2	-0.9
			Cantons	0.2	-0.1	-0.6	-1.1	-1.2	-1.6	-1.1	-0.9	-0.7
			Communes	--	-0.1	-0.3	-0.6	-0.8	-0.3	-0.4	-0.3	-0.2
	Social security			0.8	1.1	1.1	0.9	--	0.9	0.4	0.1	0.1
Overall balance				1.0	0.8	--	-2.1	-3.5	-3.7	-3.0	-2.5	-2.1
Gross debt				35.1	32.6	31.9	33.7	38.4	43.8	46.9	48.2	49.4

Source: Federal Ministry of Finance.

^1/Estimates.

^2/Budgets as of January 1996.

^3/Administrative basis; the pension fund surplus has not been subtracted from revenues and the railway loans have not been added to expenditures.

^4/Financial statistics basis; adjusted for pension fund surplus in federal government figures.

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Table III-1.

Developments in the Public Finances

				1988	1989	1990	1991	1992	1993	1994	1995 1/	1996 2/
				(In percent of GDP)
Federal government
	Financial balance 3/			0.5	0.3	0.3	-0.6	-0.8	-2.3	-1.4	-1.1	-1.1
	Gross debt			14.6	13.2	13.0	13.8	16.3	19.8	21.4	21.8	22.5
General government balances 4/
	Territorial authorities			0.2	-0.3	-1.1	-3.0	-3.5	-4.6	-3.4	-2.6	-2.2
		Federal government		0.1	-0.1	-0.2	-1.2	-1.5	-2.7	-1.9	-1.4	-1.4
		Lower levels		0.1	-0.1	-0.9	-1.8	-2.0	-1.9	-1.5	-1.2	-0.9
			Cantons	0.2	-0.1	-0.6	-1.1	-1.2	-1.6	-1.1	-0.9	-0.7
			Communes	--	-0.1	-0.3	-0.6	-0.8	-0.3	-0.4	-0.3	-0.2
	Social security			0.8	1.1	1.1	0.9	--	0.9	0.4	0.1	0.1
Overall balance				1.0	0.8	--	-2.1	-3.5	-3.7	-3.0	-2.5	-2.1
Gross debt				35.1	32.6	31.9	33.7	38.4	43.8	46.9	48.2	49.4

Source: Federal Ministry of Finance.

^1/Estimates.

^2/Budgets as of January 1996.

^3/Administrative basis; the pension fund surplus has not been subtracted from revenues and the railway loans have not been added to expenditures.

^4/Financial statistics basis; adjusted for pension fund surplus in federal government figures.

Over the past two years the public finances have strengthened considerably (Chart III-1). In 1994, both the federal and the general government deficits declined by nearly 1 percentage point. While there was also progress with deficit reduction at the levels of the cantons and municipalities, the effect--in terms of its impact on the general government balance--was neutralized by a reduction in the social security surplus. Further significant deficit reduction was achieved at all governmental levels (excluding social security) in 1995, well ahead of budgetary targets and despite a weakening of economic activity. Preliminary estimates indicate that the consolidated general government deficit has declined by another half percentage point to about 2 1/2 percent of GDP. The recent improvement in the fiscal position, however, was insufficient to arrest the unfavorable debt dynamics and the public debt ratio is likely to have risen further to exceed 48 percent of GDP.

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Switzerland: Fiscal Developments ^1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.A001

Source: IMF World Economic Outlook database.^1/ Data for 1995 and 1996 are staff projections.

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Compared with most other countries, Switzerland’s public sector deficit and debt remain moderate in scope. Furthermore, the sharp increase in the size of government and in the debt/GDP ratio that occurred in the early nineties have induced the authorities to take corrective action. These efforts at fiscal consolidation should be continued, at least until stabilization of the debt ratio is achieved, in order to preserve leeway for anti-cyclical policy and for coping with likely new challenges in the future.

2. Federal government finances

The 1994 budget envisaged a moderate reduction in the federal deficit to approximately 2 percent of GDP on a cash basis. While expenditures were still planned to increase somewhat faster than nominal GDP, revenues were expected to grow much faster mainly due to the two-year collection cycle for income taxes which typically results in disproportionately large receipts in even-numbered years. In the event, the actual outcome in 1994 was considerably more favorable and the cash deficit declined to about 1 1/2 percent of GDP; both current expenditures and tax revenues moved closely in line with budgeted numbers, but capital expenditures fell considerably short of earlier intentions and accounted for the lower deficit.

The 1995 budget anticipated a federal cash deficit of about 1 3/4 percent of GDP. It was a conservative budget in the sense that overall expenditure would change little (relative to 1994 budget numbers) and revenue would increase modestly by only 2 percent, despite the expectation of additional revenue of about SW F 1 billion deriving from the switchover from the turnover tax to a VAT tax. While expenditure restraint was envisaged throughout the federal government, the main factor was a sharp reduction in federal transfers to the social security system made possible by an increase (at the beginning of 1995) in the contribution rate to the unemployment insurance system from 2 percent to 3 percent of gross wages. ^1/

Preliminary estimates indicate that the fiscal outcome in 1995 was again considerably better than had been envisaged in the budget, essentially because VAT receipts have been substantially higher than budgeted (Tables A8 and A9). Other tax receipts have been somewhat weaker on account of the unanticipated slowdown in economic activity, while overall expenditure was barely changed relative to 1994. As a result, the federal cash deficit has declined to slightly over 1 percent of GDP. However, two adjustments are in order. First, the cash surplus of the civil servants’ occupational pension scheme (EVK), estimated at about Sw F 1.2 billion in the past year, should not be treated as federal revenue. Second, regular loans to the railways of over SW F 1.1 billion should be properly treated as federal expenditure (“lending minus repayments”) as they are motivated by public policy purposes rather than profit or liquidity management and are unlikely to be repaid ever. When account is taken of these adjustments the federal deficit is still close to 1 3/4 percent of GDP.

The federal budget for 1996 aims to lower the deficit by about half a percentage point (compared with the previous year’s budget numbers) to about Sw F 4.3 billion. However, given recent estimates of a more favorable outcome over the past year, this would leave the deficit little changed at about 1 1/4 percent of GDP. If, again, adjustment is made for the civil servants’ pension fund surplus on the revenue side and for railway loans on the expenditure side, the deficit would reach close to Sw F 6.2 billion or 1 3/4 percent of GDP. Overall expenditure is expected to increase broadly in line with (assumed) nominal GDP growth of 4 percent, but current expenditure is budgeted to grow significantly faster, particularly in the areas of transfers to the cantons and to the social security funds. ^1/ Also, agricultural support payments and the federal interest burden are rising relatively fast, whereas defense and infrastructural spending are declining. At first sight, overall revenue growth of close to 10 percent (budget to budget) appears remarkable. However, it reflects mainly a number of incidental factors: (1) buoyancy of income tax revenue in even years due to the two-year collection cycle; (2) for the first time VAT will be paid over a full year (the first quarter was excluded in 1995); and (3) nontax revenue is boosted by over Sw F 1 billion in loan repayments from the unemployment insurance consolidation fund. When account is taken of these factors, “adjusted” revenue growth is likely to be less than 2 percent in 1996.

1. The conduct of monetary and exchange rate policy

The overall objective of the Swiss monetary authorities remains the pursuit of price stability which is considered to be equivalent to an annual rise in the CPI of about 1 percent. They do not maintain any formal exchange rate commitment, but rather orient their policy to money supply targets. The operational target variable of the Swiss National Bank (SNB) is the seasonally adjusted monetary base (MO), which consists of cash in circulation and banks’ sight deposits with the central bank. ^2/ A medium-term targeting framework has been adopted: the first targeting period began in the fourth quarter of 1989 and ended in the fourth quarter of 1994, and a new 5-year period is presently running through the fourth quarter of 1999. In both cases, the target average growth rate of M0 was set at 1 percent a year. ^3/

Over the shorter term, the central bank keeps the public informed by announcing its forecasts concerning the rate of growth of M0 both on an annual and on a quarterly basis. While the medium-term target creates a framework for the SNB’s own activities and also provides an anchor to market expectations, pragmatic considerations enter into the short-run conduct of monetary policy. To illustrate, for 1995 the SNB forecasted the monetary base to grow by approximately 2 percent, well in excess of the 1 percent medium-term target; the rationale was to take account of (anticipated) higher demand for money emanating from the economic upturn and the introduction of value added tax, and to partially correct for the fact that during the previous targeting period M0 had remained well below its targeted path.

While the National Bank Law allows for a variety of operations which can influence the monetary base, in practice the main instrument that is used to influence banks’ reserves consists of swap transactions in the foreign exchange market. Open market operations are also undertaken regularly, but they are hampered somewhat by a poorly developed money market and a relatively low level of short-term (federal) government debt. Minimum reserve requirements have not been used over the past two decades, and official interest rates play only a limited role in the conduct of monetary policy. The Lombard rate on secured advances is maintained at 200 basis points above the daily call money rate and Lombard loans are in principle used only for short periods to tide over liquidity shortages. The SNB typically does no longer discount credits by buying securities before they mature; therefore, changes in the discount rate have no direct effect on monetary conditions but are infrequently used as a signaling device.

2. Monetary developments

In the early nineties the authorities pursued a rather restrictive monetary policy to curb persistent inflationary pressures. Short-term interest rates at times exceeded 9 percent, and the growth rate of the monetary base lagged significantly behind the medium-term target. As in other European countries, an easier monetary policy stance was taken from about the middle of 1992; short-term rates declined sharply, while long-term rates eased more moderately in line with developments abroad, and the previously inverted yield curve turned gradually into a positive slope (Tables A12 and A13).

The policy stance turned more cautious in 1994, as short-term interest rates were kept broadly stable around 4 percent in Switzerland (Chart IV-1). At the same time, the interest differential vis-à-vis Germany tended to narrow, and the effective exchange rate continued its appreciating trend (Table A14). ^1/ While this development contributed to a rapid decline in domestic inflation, there were growing concerns expressed about deteriorating competitiveness. On balance, the gap between the targeted medium-term growth path and the actual level of the monetary base (M0) did not narrow in 1994; after growing somewhat ahead of the SNB’s desired rate in the first half of the year, M0 declined in the second half and, on balance, increased by only 0.6 percent between the fourth quarter of 1993 and the fourth quarter of 1994 (Chart IV-2).

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Switzerland: Interest Rates

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.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.

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Switzerland: The Monetary Base ^1/

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.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.

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Over the whole period of 1990-94 M0 grew on average by only 0.2 percent a year and at the end-point of the medium-term target path it fell short by close to 4 percent. The SNB has attributed slightly more than half of this deviation to lower demand for base money deriving from improved liquidity management by the banks and the growth of cashless payments. As mentioned, at the end of 1994, a new medium-term growth target for M0, equivalent to 1 percent per annum, was announced for the period through the fourth quarter of 1999. The starting point of the new target path was set slightly below the end point of the previous medium-term target path, but was still about 2 3/4 percent above the actual M0 level; in doing so, account was taken of the fact that actual output was still far below its potential level and allowance was made for the anticipated VAT-induced jump in the price level. ^1/

For 1995, the central bank envisaged base money growth of about 2 percent which would have reduced the gap with the target path. In the event, monetary growth was again considerably below target in the first half of the year, as economic activity remained subdued and the inflationary impact of VAT introduction was lower than expected. As evidence mounted that underlying inflation was under control, monetary policy became more accommodative and the SNB allowed money market rates to fall steadily from about 4 percent at the beginning of the year to about 2 percent in December. Long-term interest rates have also declined by about 1 percentage point. As money market rates fell the central bank, with a certain lag, also lowered the official discount rate by half a percentage point each in March and again in July. A third discount rate cut of the same magnitude in September was coupled with more explicit efforts to lower money market rates further by supplying additional base money to the banks. By mid-December it was estimated that the seasonally-adjusted monetary base in the fourth quarter of 1995 would exceed the corresponding year-earlier level by approximately 1.3 percent, well below the 2 percent annual target. On December 15, the discount rate was cut for the fourth time by another half a percentage point to the current level of 1 1/2 percent. Also, the SNB has announced that it is again aiming for M0 growth “in excess of the medium-term growth rate of 1 percent” in 1996. ^2/

Meanwhile, the exchange rate has strengthened further considerably in 1995, particularly in March/April and September when there were renewed tensions on international currency markets. Weakness of the US dollar led to pressures within the European Monetary System and there was also considerable nervousness about plans for European monetary union. As often in the past, the Swiss franc appeared to play the role of “safe haven” currency. Compared with a year ago, the effective exchange rate has appreciated by close to 9 percent in nominal terms and over 7 percent in real terms. This development has contributed to the recent slowdown in economic activity and, as mentioned, has led to lower interest rates which in turn have stimulated faster growth in the broader monetary aggregates during the last three quarters of 1995 (Chart IV-3).

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Switzerland: Monetary Aggregates

(12-month percent changes)

Citation: IMF Staff Country Reports 1996, 031; 10.5089/9781451807134.002.A001

Source: Swiss Institute for Business Cycle Research.

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3. Developments in the balance of payments

1. Labor market policies

As mentioned, the Swiss labor market appears to be relatively flexible when compared with most other European countries as the wage determination process is highly decentralized, with settlements differing significantly depending on the specific circumstances prevailing in individual industries and firms. However, increased unemployment in the early nineties and emerging signs of significant structural unemployment, particularly the rising share of the long-term unemployed, have spurred efforts to strengthen work incentives and to enhance labor mobility. An example of the latter is improved portability of occupational pension rights which took effect at the beginning of 1995.

A major development in 1995 was the adoption of the new federal law on unemployment insurance by both chambers of the Swiss federal parliament in June, which is indicative of a growing shift towards more active labor market measures. The reform involves two major components: (1) intensive follow-up to promote speedy (re)integration of the unemployed into gainful employment, and (2) a tightening of benefits in order to promote job search and strengthen work incentives.

The follow-up measures include an increase in the number of “slots” in active programs (training courses, employment programs, and on-the-job traineeships) from 9,000 in 1993 to 25,000 by 1997. While these programs are to be provided by the cantons, the federal government will initially finance the bulk of the cost. The cantons have a strong financial incentive to get the unemployed back to work, however; they contribute to the financing a lump sum of Sw F 3,000 per slot per year and, after the so-called framework period of two years, carry all the costs associated with welfare payments). The cantons are also required to set up regional placement offices (RPO) with placement officers to provide intensive counselling and job-search assistance to the unemployed; as benchmarks will serve the ratios of one RPO per 1,000 unemployed and one placement officer per 75-150 unemployed.

Benefit provisions have been tightened in a number of ways. A waiting period of 5 days before the start of unemployment benefits will apply and unemployed school leavers may have to wait up to twelve months. Passive benefit payments are to be paid only for 150 days (longer periods apply for those over ages 50 and 60). Thereafter jobseekers are obliged to participate in labor market programs and receive so-called active benefits. Both passive and active benefits are paid only during the “framework period of two years.” Also embodied in the new law is a more stringent definition of what is “suitable work” for a benefit recipient, particularly in terms of remuneration relative to previous earnings, and penalties for uncooperative behavior have been increased. For example, work which pays at least 70 percent of previous earnings has to be accepted, and the maximum period of benefit cuts for uncooperative behavior has been raised from 40 to 60 days.

2. Revitalization program

Already in 1993 the authorities announced a revitalization program aimed at liberalizing domestic markets and thereby ameliorating a major factor responsible for Switzerland’s comparatively weak growth performance. ^1/ Over the past year, an important milestone was the adoption of the “internal market law” by parliament in early October, which is to take effect next July. The new law stipulates the principle of nondiscrimination with regards to public procurement at all government levels. The present competition law has been strengthened and the behavior of companies “with substantial impact” will be monitored closely. Regional fragmentation of the national market, deriving from cantonal regulations and prohibitive practices will be removed. While the bulk of Swiss technical regulations have already been harmonized with those existing in important trading partners, the new law on technical barriers to trade (TBT) institutionalizes and perpetuates the harmonization process; in future, exceptions will need to be based on considerations of an “overwhelming public interest” and can neither be a means for arbitrary discrimination nor a hidden trade barrier.

For the new legislative period, which started in October 1995, the authorities plan to focus on the second part of the revitalization plan. They will seek to promote innovation through further efforts in education and research (e.g., creation of innovation and technology sectors), and to pursue fiscal reforms in order to preserve fiscal advantages that induce foreign corporations to locate in Switzerland. Other central issues concern the debate on the financing of the social security system, further steps in the agricultural sector, and liberalization of market access in the infrastructure area (e.g., telecommunications and electricity, see further).

3. Public enterprises

The Federal Government’s plans to reform the PTT and to liberalize the markets for telecom and postal services remain at the consultation stage. Draft bills will be debated by parliament in late 1996 and the goal is for the new laws to take effect at the beginning of 1998. It is proposed to split the PTT into two autonomous businesses. The Postal Service is to remain a fully state-owned corporation, while Telecom will be opened to private investment (with the nonfederal share limited to 49 percent). ^1/ The monopoly on network infrastructure and telephone services will be totally removed, while the monopoly on postal services will be reduced. Special regulations are to secure the availability of basic telecom and postal services in the whole country.

Reform plans for the reorganization of the Federal Railways (SBB) are also in the consultation stage and will be debated by parliament in the first half of 1996. Managerial autonomy and responsibility will be enhanced. A separation between infrastructure and operations will be effected, and new rules for financing will be established (including contributions by the cantons to cover the cost of noncommercial services).

Attempts are being made to promote competition in the energy sector. Last June, a report was issued on the electricity sector which recommended a number of broad changes: third party access, higher efficiency, more rapid and transparent authorization procedures, and international harmonization. However, discussions on practical propositions to realize these changes are still in an early stage. The Federal Energy Office will make its recommendations in 1996 concerning the electricity sector; it is currently also engaged in discussions with the gas sector to seek similar changes.

4. International trade and agriculture

On July 1, 1995, Switzerland became a founding member of the World Trade Organization (WTO) and, through adoption of the so-called GATT-Lex, formally brought the Uruguay Round Agreements under Swiss federal law. The legislative changes involved a number of laws in the areas of agricultural protection, intellectual property rights, and banking law. In addition, about 80 regulations concerning the application of these laws were enacted by the Federal Council, and a new law on federal public procurement entered into force on January 1, 1996, thereby implementing the corresponding WTO Agreement.

During the Uruguay Round negotiations, Switzerland actively participated in the sectoral initiatives on pharmaceuticals, chemical products, scientific instruments, furniture, and medical, agricultural, and construction equipment. The textiles and fashion industry also stands to gain from tariff reductions in third markets (outside European partners with which Switzerland has Free Trade Agreements). Of particular importance are the agreements on services and intellectual property, as Switzerland is the world’s sixth largest exporter of services (counting the EU as one) and produces the highest number of patents per inhabitant.

The level of agricultural protection remains very high, despite the transformation of nontariff barriers into tariffs and even after implementation of tariff cuts mandated by the Uruguay Round. Agricultural prices in Switzerland are still typically double those in the EU. Since 1993, reforms have taken the form mainly of a gradual switch from price supports to direct income support. In particular, rapid growth has occurred in direct payments that are linked to the provision of environmental services or that promote ecological modes of production (in order to achieve the goal of “sustainability” in agriculture). Last October the government issued a report on “Agriculture 2002,” containing proposals for a second phase of agricultural reforms, thereby starting a process of extensive consultations. The goal is to achieve significant liberalization of market regulations (e.g., abolition of milk quotas) to promote competition, not only in the agricultural sector but also in downstream sectors such as food processing and distribution.

Over the past year the Swiss authorities have been seeking harmonization with the EU through bilateral negotiations in seven major areas: research and development, air transport, land transport, technical trade barriers, agriculture, public procurement, and free movement of labor. While there appears to be great interest on both sides in reaching agreement, significant differences remain concerning the free movement of persons and land transportation, and negotiations are continuing in the early months of 1996. Following the rejection of the EEA agreement in December 1992, the Swiss position remains that free circulation of people can only be envisaged in the distant future, although qualitative improvements should be possible in the near future. Negotiations regarding land transportation are hampered by the absence of full harmonization within the EU itself. Major stumbling blocks involve the size of trucks, taxation, the use of railways, and construction of new alpine tunnels.