2002 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Switzerland

This 2002 Article IV Consultation highlights that the economy of Switzerland cooled in 2001 as business investment fell and exports were hit by the global slowdown and an appreciation of the Swiss franc. Real GDP growth dropped to 1.3 percent, unemployment edged up, and the external current account surplus declined to 10 percent of GDP. The IMF staff projects that real GDP will grow by just under 1 percent in 2002 on the back of a global recovery in the second half of the year and effects of the monetary easing in 2001.


This 2002 Article IV Consultation highlights that the economy of Switzerland cooled in 2001 as business investment fell and exports were hit by the global slowdown and an appreciation of the Swiss franc. Real GDP growth dropped to 1.3 percent, unemployment edged up, and the external current account surplus declined to 10 percent of GDP. The IMF staff projects that real GDP will grow by just under 1 percent in 2002 on the back of a global recovery in the second half of the year and effects of the monetary easing in 2001.

I. Economic Background

1. The Swiss economy performed solidly in the late 1990s following a protracted period of stagnation. Annual GDP growth recovered to 2.2 percent in 1997-2000, albeit still below the EU average of 2.9 percent, and unemployment dropped to 1.7 percent. The output gap was closed and businesses reported growing shortages of skilled labor. Nonetheless, inflation remained around 1 percent, the lowest in Europe. The external current account surplus soared, reaching a record 13 percent of GDP in 2000. Consolidation brought the fiscal accounts into structural surplus.

2. More recently, growth has again weakened. As in many industrial countries, growth started to weaken in early 2001 with a retrenchment in investment as “new economy” euphoria came to an end, and in response to earlier interest rate increases. The downturn intensified during 2001 when the global slowdown and an appreciation of the Swiss franc hit exports, and firms scaled back investment sharply as business sentiment plunged (Figure 1). Although private consumption held up well, economic activity stagnated in the second half of 2001, reducing annual real GDP growth to 1.3 percent after a decade-high 3 percent in 2000 (see tabulation below). Unemployment edged up and by end-2001 output is estimated to have slipped to about 1 percent below potential.1 Expectations surveys suggest that the slowdown may have bottomed in early 2002. However, as of April, the evidence of a turning point was less compelling than in many other industrial countries (Figure 2).

Figure 1.
Figure 1.

Switzerland: GDP and its Components, 1997-2001

(Annualized quarter-on-quarter rates of change)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: IMF, World Economic Outlook.
Figure 2.
Figure 2.

Switzerland: Leading Indicators, 1984-2002

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: KOF database; and Bloomberg.

GDP and its Main Components

(Annual rates of change, in percent)

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Source: Fund staff estimates.

Contribution to GDP growth

3. The economic reverberations of the September terrorist attacks were relatively pronounced in Switzerland. The attacks were the final straw in bankrupting Swissair, tourist activity slumped, and insurance companies will have to make large payments on policies covering the World Trade Center.2 Other effects, including a safehaven-related appreciation of the Swiss franc, a sharp decline in business and consumer confidence, and a fall in stock prices, had large temporary components, with the stock market quickly returning to pre-September 11 levels and pressures on the exchange rate subsequently easing somewhat. Even so, and in line with developments in international markets, stock prices were in April 2002 about 20 percent below their end-2000 peak (Figure 3). And a significant part of the Swiss franc’s safehaven gains persisted with the exchange rate in the first quarter of 2002 about 4 percent more appreciated in nominal effective terms than it was at end-2000 (Figure 4). The Swiss franc came under renewed upward pressure in April.

Figure 3.
Figure 3.

Share Price Indices, 1990-2002 (1990=100)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Sources: KOF database; and IMF, International Financial Statistics.
Figure 4.
Figure 4.

Switzerland: Exchange Rates, 1992-2002

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Sources: IMF, International Financial Statistics; and Fund staff estimates.

4. Inflation and unemployment remain very low. Headline and core consumer price inflation have generally been below 1 percent since mid-2001 (although both measures jumped up to just over 1 percent in April due to special factors), benefiting from the appreciation of the Swiss franc, lower oil prices, and increasing competition in domestic markets (Figure 5). Price stability has been underpinned by moderate wage increases. Despite still low unemployment (2.5 percent in April 2002) and remaining shortages of skilled labor, wages rose by only 2½ percent in 2001 and are expected to decelerate in 2002 (Figure 6).

Figure 5.
Figure 5.

Switzerland: Consumer Prices, 1994-2002

(12-month percent change)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: KOF database.
Figure 6.
Figure 6.

Switzerland: Labor Market Indicators

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: KOF database.

5. A benign inflation outlook allowed the SNB to cut interest rates aggressively, but exchange rate appreciation has blunted the easing of monetary conditions. Beginning in 2000, the SNB adopted a framework in which its medium-term inflation forecast plays a key role.3 Amid intensifying signs of weakening economic activity and moderate projected inflation, the SNB cut its policy rate on four occasions in 2001 by a total of 175 basis points, with most cuts (150 basis points) concentrated in the period following September 11 (Figure 7). As a result, real short-term interest rates fell to ½ percentage point below their historical average, although because of exchange rate appreciation, monetary conditions did not appear particularly easy by recent historical standards (Figure 8). The SNB cut rates by a further 50 basis points at the beginning of May 2002. Interest rates at both the long and short end of the spectrum remain significantly below euro area rates. With SNB cuts exceeding those of the ECB since September 11 by 100 basis points, the differential has increased recently (Figure 9).

Figure 7.
Figure 7.

Switzerland: Short-Term Interest Rates, 1998-2002

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: Bloomberg.
Figure 8.
Figure 8.

Switzerland: Monetary Conditions Index,1/ 1998-2002

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: Fund staff estimates.1/ The Weights of the interest rate and the detrended exchange rate or proportional to 3 to 1, respectively.2/ At this date, the economy is extimated to have been at potential.
Figure 9.
Figure 9.

Switzerland: Interest Rates, 1990-2002

(In percent)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

6. Fiscal policy was expansionary in 2001 and is expected to remain moderately so in 2002. The general government structural balance deteriorated by 0.8 percent of GDP last year reflecting support for Swissair, the biannual adjustment of pensions, and revenue losses of cantons. The actual general government balance deteriorated far more, to an estimated deficit of 0.3 percent of GDP in 2001, after a surplus of 2.4 percent of GDP in 2000. At the federal level, the deficit slightly exceeded the limit consistent with the constitutionally mandated balanced budget. However, more than half of the deterioration in the public finances can be attributed to declines in withholding taxes on capital income and stamp duties, which are erratic revenue sources, from record levels in 2000 (Table 1). Excluding movements in erratic revenue items and one-off revenues from a share buy-back by Swisscom (a partly publicly-owned telecommunications firm), staff estimates a small fiscal impulse for 2002. Gross public debt is projected to rise to 53 percent of GDP at end-2002.4 In January 2003, Switzerland’s new fiscal framework will go into effect—the so-called “debt brake”, which requires the federal accounts to be in balance after adjustment for the economic cycle.5

Table 1.

Switzerland: Fiscal Estimates and Projections

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Source: Fund staff calculations.

Withholding tax and stamp duties. Understood to be mostly borne by foreigners.

Also includes proceeds from Swisscom’s share buy-back.

Corrects for the business cycle and privatization proceeds; smooths erratic revenue items.

Excluding the railway fund.

7. Lower returns on foreign assets led to a sharp reduction in the external current account surplus, although it remains one of the largest among industrial countries. The current account surplus fell to 10 percent of GDP in 2001 mainly due to a 2½ percent of GDP decline in net investment income on Switzerland’s large net foreign assets (124 percent of GDP at end-2000). The large surplus reflects high national savings (mainly of corporations) and a drop in the investment rate in the 1990s, albeit to a still high level by international standards (Figure 10). Much of the drop in the investment rate was due to the correction of an earlier real estate bubble. But investment has also been affected by globalization, which has generated demand for foreign investment, and by falling capital goods prices.

Figure 10.
Figure 10.

Switzerland: National Savings and Investment, 1985-2001

(In percent of nominal GDP)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: IMF, World Economic Outlook.

II. Policy Discussions

8. The discussions focused on the role policies should play in the face of the economic slowdown and on the scope for accelerating structural reforms to strengthen longer-term growth performance. With fiscal policy guided by a constitutional mandate to balance the budget, the main issue for the near term concerned the appropriate stance of monetary policy: specifically, had the bottom of the interest rate cycle been reached and what factors should trigger interest rate moves in coming months. Staff also used the opportunity of the recent Financial Sector Assessment Program (FSAP) mission to review the impact of economic developments on the health of the financial system. Looking further ahead, a key question was whether the better growth performance of the past five years represented a break from Switzerland’s longer-run low growth performance. It was agreed that, to underwrite faster potential growth, the main requirement was to improve competition in domestic markets.

A. The Economic Outlook and Macroeconomic Policies

9. Staff and the authorities viewed the short-term outlook with cautious optimism. The authorities, private forecasters, and staff expected the slowdown to be short-lived and shallow by historical standards, with growth largely stagnating in the first half of 2002 and gathering momentum in the second half of the year (Figure 11). A rebound of exports and investment was considered key to recovery and relied primarily on a global pickup in the second half of 2002 and the effects of the monetary easing in 2001. Even so, average real GDP growth is projected to be only about 1 percent in 2002 and the output gap would widen to 1½ percent. And although growth is projected to pick up to 2½ percent in 2003, the output gap would not be closed until the following year at the earliest. The risks are balanced: while the prospects for global recovery have improved markedly, recent gyrations in oil prices have added some new uncertainties to the outlook. Given current global imbalances and Switzerland’s role as a major international financial center, volatility of the Swiss franc cannot be ruled out. The economy thus remains vulnerable to a sharp exchange rate appreciation—either due to safehaven effects in the event of turbulence in international financial markets or if the Swiss franc were caught up in the tail wind of a strengthening of the euro vis-a-vis the U.S. dollar.6

Figure 11.
Figure 11.

Switzerland: GDP Growth Over the Business Cycle

(Annualized rates in percent)

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: IMF, World Economic Outlook; and Fund staff estimates.

10. With the outlook for inflation seen as benign and monetary conditions supportive of growth, the SNB favored a wait-and-see posture for the period ahead. Both staff and the SNB expected headline CPI inflation to remain under 1 percent for most of 2002 and to rise only moderately in 2003 and 2004, staying well within the SNB’s definition of price stability. Staff noted that the SNB’s medium-term inflation forecast assumed that interest rates stayed at current low levels: more realistically, rates would be expected to rise over the course of the cycle, further dampening medium-term inflation. As core inflation was already low, the output gap was still widening, and exchange rate appreciation had blunted the impact of interest rate cuts on monetary conditions, the SNB had room to lower rates if the expected economic recovery appeared to falter. SNB officials pointed out that the economy was only slightly below potential and that the global recovery could be stronger than expected. They thus favored keeping interest rates on hold in the near term, emphasizing that monetary conditions were expansionary and the transmission process was drawn out. If the recovery proceeded as expected, they anticipated that interest rates would need to be raised later in the year. The SNB would, however, take into consideration the impact on monetary conditions of a further, significant appreciation of the Swiss franc. Subsequent to the mission in early May, in response to renewed appreciation pressures and their assessment that recovery was taking hold more slowly than anticipated, the SNB cut rates by a further 50 basis points.

11. The new monetary policy framework is working well. The focus on medium-term inflation helped the SNB to respond swiftly and straightforwardly last year to business cycle and exchange rate developments. In canvassing financial market participants’ views, staff found that the framework appears to have provided an effective vehicle for communicating policy intentions and was well understood. SNB officials noted that they had started publishing details of their inflation models and intended to continue to expand the information provided about the analytical underpinnings to the inflation forecast and the rationale for policy decisions. At the same time, they saw no reason to make modifications to the basic framework. For example, they did not see any significant benefit in specifying a point target for medium-term inflation, compared to the current arrangement: the gains from perhaps helping financial markets to form more precise inflation expectations would be minimal at best. And while the SNB had so far not made much use of the 1 percentage point band for its intermediate interest rate target, the officials viewed the range as providing potentially valuable room to move its intermediate rate, particularly in response to exchange rate movements, without signaling a more fundamental change in the stance of monetary policy.

12. The authorities noted that countercyclical fiscal policy in 2001 and 2002 was not intentional and that arresting public debt growth remained their priority. The strong fiscal position in 2000 had allowed them to let automatic stabilizers play, absorb the fallback of erratic revenue items, and accommodate unplanned expenditure. They viewed the breach of the balanced budget amendment in 2001 as regrettable, but explained that it had been caused by unplanned expenditure (largely on Swissair) that had been explicitly sanctioned by parliament. With receipts from the share buy-back by Swisscom, they believed budget balance could be easily achieved in 2002, even though tax revenues would remain weak for cyclical reasons and erratic revenue items would again come in low. Staff pointed out that, in the current economic situation, some fiscal stimulus would not be problematic. However, in a small open economy, monetary policy should shoulder the main burden of countercyclical macroeconomic policy. In this vein, it would be important that one-off revenues that had not been anticipated, such as the receipts from Swisscom, should not give rise to additional stimulus via new spending or tax breaks. Rather, such revenues should be used to keep a rein on public debt.

13. Compliance with the new debt brake framework in 2003 and beyond will require some fiscal consolidation and greater expenditure flexibility. Staff estimates a medium-term adjustment need on the order of ¼ to ½ percent of GDP, depending on whether pending new requests are rejected or adopted. The authorities saw an adjustment need toward the lower end of this range in 2003 and 2004 and believed that savings already incorporated in the current financial plan would be sufficient to balance the budget by 2005, notwithstanding already-approved tax cuts. At any rate, they fully agreed that there was no room for additional tax cuts or spending initiatives in the coming years—and that legislators would have to learn to conform to the strictures of the debt brake. In this context, staff pointed to the need for more expenditure flexibility to safeguard the quality of public spending in the face of consolidation and to increase the efficiency of expenditure more generally. Not only were transfer obligations sizable, but the widespread practice of earmarking revenues (earmarked revenues account for some 20 percent of federal revenue) further reduced spending flexibility. The authorities were open to the staffs suggestion of subjecting earmarked revenues to sunset clauses, but were unsure about its political viability.

14. The authorities and staff both rejected tax hikes as the way to meet the requirements of the debt brake. Although official statistics put the revenue ratio at 38 percent of GDP, which is low by OECD standards, the estimate excludes publicly mandated pension contributions and health insurance premia amounting to about 7 percent of GDP. While it was agreed that pension contributions might not have the same economic effects as taxes, the authorities accepted that a higher tax burden was unwarranted. Staff also pointed out that Switzerland’s tax structure appeared to be skewed toward the taxation of capital income with a relatively light burden on consumption and labor income.7 Staff encouraged the authorities to consider this issue when designing future tax reform.

15. The debt brake will help to consolidate Switzerland’s public finances ahead of demographic aging. Although public debt equivalent to over 50 percent of GDP can no longer be considered particularly low, cross-country comparisons need to take into account the sizable capitalization of second-pillar pension funds. Such funds have assets equivalent to about 120 percent of GDP, of which just under one half are related to mandatory contributions. The authorities explained that public debt will increase further in the next couple of years, but only because of off-budget operations related to capitalizing civil service pension funds.

16. The debt brake provides room for automatic stabilizers to play but erratic revenue items and actions by lower-level governments could still give rise to procyclical fiscal policy. Given the relatively small share of the federal budget in general government operations, the automatic stabilizers at the federal level might not be sufficient to help counter large demand shocks in a setting where monetary policy was constrained by low interest rates. Moreover, fluctuations in withholding tax and stamp duty revenue can easily swamp cyclical effects on government revenue. Staff encouraged the authorities to implement the debt brake in a manner that prevented shortfalls in erratic revenue items from forcing expenditure cuts at times of weak economic activity. It also stressed that automatic stabilizers needed to operate in the social security funds and lower levels of government. Staff thus encouraged the authorities to pursue their objective of building up a reserve in the unemployment insurance fund so that it could remain in balance over the business cycle, avoiding the need for pro-cyclical changes in contribution rates, as had occurred in the past. This might require delaying plans to reduce contribution rates.8

B. Financial System

17. Financial institutions currently face a challenging economic environment, but in general appear to be well-capitalized. The performance of the large international banks weakened in 2001 due to dwindling fee income from trading and investment banking activity, worsening asset quality worldwide, and stock market losses. However, these banks had moved swiftly to cut costs, and capital adequacy ratios were comfortably high (Table 2). Their exposures were closely monitored by the Swiss Federal Banking Commission (SFBC) and the banks had state-of-the-art risk management systems—although large off-balance sheet exposures made it hard for staff to assess vulnerability to shocks from international financial markets.9 The domestically-oriented banks were also sensitive to the business cycle, but according to the assessment of Switzerland’s financial sector under the FSAP, which was undertaken in conjunction with the Article IV consultation, the economic climate would need to worsen considerably before problems became acute (Box 1). Outside banks, the insurance sector had been affected by claims related to the September 11 terrorist attacks and low capital market returns. The effect of the latter was exacerbated by the mandatory minimum 4 percent return on pension accounts. The authorities considered the sector to be sufficiently capitalized to weather the current situation but agreed with staff that, in a low interest rate environment, mandatory minimum rates of return and payout ratios on pension assets needed to be determined by more flexible formulae.

Table 2.

Switzerland: Indicators of External and Financial Vulnerability

(In percent of GDP, unless otherwise indicated)

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Sources: Swiss National Bank, Monthly Statistical Bulletin; Swiss Federal Banking Commission; IMF, International Financial Statistics; and IMF, World Economic Outlook.

Excluding foreign direct investment.

Switzerland: Main Conclusions of the Financial System Stability Assessment

  • Switzerland’s financial sector is highly developed and diversified. Two banks, ranked among the world’s largest, dominate the system. Although their performance weakened in 2001, both are well-capitalized. Profitability in the private banking segment has been high, but the segment faces increasing competitive pressure from foreign onshore wealth managers. Some further consolidation among smaller, domestically-oriented players in the retail sector is likely and would further enhance the system’s efficiency. A phasing out of cantonal banks’ preferential treatment is desirable to create a level playing field in the system. Stress tests suggest that banks are overall resilient to shocks, the main risk arising from a deep and global recession.

  • Swiss securities markets are liquid and efficient and have an increasingly international orientation. The market infrastructure, including electronic trading, clearing and settlement systems, is highly advanced. The insurance sector is large and has a history of strong performance. Strains are emerging, however, following the September 11 terrorist attacks and lower financial market returns. The mandatory minimum 4 percent return on pension accounts, and longer life expectancy against a fixed 7.2 percent payout ratio at retirement, are a challenge for insurance companies and pension funds alike.

  • Supervision of banks, securities markets, and insurance by the SFBC and the Federal Office for Private Insurance is effective. It has been strengthened in recent years in terms of quality and quantity, with a focus on large institutions and a more risk-based approach. In light of the large number of financial institutions in Switzerland and the modest resources of the supervisory authorities, external auditors and self-regulatory bodies play a key role within the supervisory process. This dualistic approach, which has served the system well, would benefit from a more formalized quality assurance program for supervising external auditors and an increase in joint onsite inspections, for which an expansion of professional staffing levels would be warranted.

  • Further integration of banking and insurance supervision would be welcome. If a single supervisory authority were to be created, it should have full financial and operational independence. Supervision of pension funds could be included under its responsibilities. The recently established Competence Center for Systemic Stability in the SNB will provide a useful additional line of defense against financial sector problems.

  • Systems of regulation and supervision are in general fully or largely compliant with international financial standards and codes. The assessments of banking supervision, securities regulation, and insurance supervision identified a lack of budgetary independence and weak information sharing arrangements among domestic agencies as lacunae that could become sources of vulnerability in a stressful market environment. The coverage of the regulatory framework appears to have some gaps, notably with regard to individual asset managers and to non-financial companies, whose power to take deposits from employees should be withdrawn. New legislation currently being prepared will help to close these gaps.

  • The Swiss anti-money laundering (AML) regime in the financial supervisory area is broadly in line with international best practice. The legal and institutional framework against money laundering has recently been enhanced and extended to cover the application of AML rules to nonbank financial intermediaries.

18. Supervision is adapting to structural changes in financial markets. In view of the important role of financial conglomerates, the authorities were preparing legislation to integrate banking and insurance supervision and establish a combined supervisory authority. A Center for Financial Stability had also been set up in the SNB to monitor developments in the financial system and identify vulnerabilities. Other initiatives included the setting up of two expert groups to (1) review the current supervisory framework with a view to strengthening safeguards in the use of external bank auditors and increasing reliance on onsite inspections by the SFBC, and (2) review the existing systems of bank reorganization and liquidation and depositor protection. The insurance supervision law was also being revised to address, among other things, the issue of inter-jurisdiction and inter-agency exchange of information, and corporate governance. Staff welcomed these initiatives, which were in line with the recommendations in the FSSA report. The authorities support measures to counter the financing of terrorism, have implemented UN Security Council Resolution 1267, and intend to ratify the UN Conventions on the financing of terrorism as well as the FATF’s special recommendations. The anti-money laundering regime in the financial supervisory area is broadly in line with international best practice. A doubling of the resources of the Money Laundering Control Authority is planned.

C. Potential Growth, Structural Policies, and Competitiveness

19. Boosting growth performance remains a challenge. Real GDP growth averaged barely 2 percent a year in the last upswing despite significant enterprise restructuring during the long recession that preceded it, putting Switzerland at the bottom of the growth league (Figure 12). Staff analysis suggests that growth could be sustained around 2 percent in the medium term.9 The authorities were more cautious, noting that slow productivity growth in major services sectors (health care, education) and in agriculture would continue to act as a drag on growth, although attaining 2 percent potential growth might be possible if skill shortages were addressed and technological progress accelerated. There was consensus that, while Switzerland’s relatively slow growth was partly a catch-up phenomenon of other countries (Switzerland is still one of the richest countries in terms of per capita GNP), product market inefficiencies were also to blame. Globalization has intensified restructuring in enterprises exposed to international competition but restructuring in sheltered sectors remains slower than in other industrial countries.10

Figure 12.
Figure 12.

Real Output Growth in Selected Countries

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: OECD, Analytical Database.Source: World Bank Database.

20. Staff thus encouraged efforts to strengthen competition policy. Domestic markets remain fragmented, reflecting entry barriers at the cantonal (state) level and informal cartel agreements, which lead to inefficiencies and high domestic prices. To boost competition, the authorities noted that legislation to strengthen the Competition Commission’s ability to impose sanctions on cartels should soon gain parliamentary approval. And under new guidelines, the Commission would take a stricter line against vertical agreements in the distribution chain. Staff welcomed the initiatives, but noted that the new law might not provide for sufficient deterrence as envisaged fines for offenders failed to systematically exceed cartel profits. Moreover, the critical issue would be to provide the Competition Commission with the support and resources to implement the new law and guidelines rigorously. The Commission should also be given powers to prosecute suspected violators of the Internal Market Law. However, to be successful, the standing of the law would also need to be enhanced: courts currently tend to support cantons’ rights over the imperatives of the Internal Market Law.

21. The pace of liberalization of sheltered sectors remains slow. Deregulation has been fastest in the telecommunications sector, where prices have dropped below OECD averages and services have expanded considerably. But unbundling of the “last mile” of the network continues to be held up by legal complications. In electricity, where there are over a 1,000 different suppliers operating in segmented markets and prices for industrial users are among the highest in Europe, parliament has approved a bill to open up the market over a six-year period along the lines of the EU model. But the regulatory framework remains to be decided and public support for liberalization is weak: the authorities anticipated that more work would be needed on the bill and accompanying regulations to enhance its referendum prospects later this year. The legislative process for the liberalization of the gas and postal services is at a very early stage and resistance from interest groups is strong. In agriculture, subsidies amount to three quarters of value added and tariff protection is high (see below). Productivity in agriculture is only half the national average and grows at much slower rates than in comparable industrial countries. The reform agenda for 2004-07, currently in the public consultation process, envisages a further shift from agricultural price supports to direct payments. Staff welcomed the shift away from price supports but noted that it would take years before protection of agriculture dropped to even the high level of the EU.

22. The failure of Swissair and the poor performance of several major enterprises have raised questions about the quality of corporate governance. These cases highlighted that a lack of transparency of operations, restrictions in voting rights, a lack of separation between board and management, and cross-memberships in boards of directors contributed to weak shareholder control and performance.11 Partly in response, an employer’s organization and the Swiss Stock Exchange had proposed codes of conduct aimed at strengthening disclosure requirements and setting out guidelines for good corporate governance. The authorities were also planning to abolish restrictions on the participation of foreigners in boards of Swiss corporations, thereby broadening the pool of talent for Swiss corporations. Staff welcomed the moves as first steps. It encouraged the authorities to foster debate on the topic and look to where the legal code might also be amended to provide support to better corporate governance. Staff further encouraged the authorities to conduct a review of standards and codes based on the OECD Principles of Corporate Governance. On Swissair, staff welcomed the government’s stated intention not to provide additional budgetary support and to disengage from the successor airline, Swiss, at an early date.

23. A flexible labor market has contributed to low unemployment. Shortages of skilled workers are, however, a drag on growth. Fairly liberal policies towards foreign work permits—foreigners account for one fourth of the labor force—have mitigated skill shortages, but the authorities acknowledged that reforms in the education system would be needed to address skill shortages on a more permanent basis. A proposed amendment to the unemployment insurance law that envisages a shorter duration of unemployment benefits and lower contribution rates would help to sustain Switzerland’s low structural unemployment rate.

24. Short-term adjustment problems stemming from the recent appreciation notwithstanding, competitiveness was not seen as a concern. The latest appreciation has brought the real effective exchange rate roughly back in line with its longer-term underlying trend; in the past twenty years, real appreciation, as measured by relative CPIs, has been about 0.6 percent a year (Figure 13). The trend real appreciation is consistent with the large external current account surplus and the trend improvement in the terms of trade.12 The authorities were not concerned about the underlying appreciation of the franc and noted that traditional competitiveness indicators should be interpreted with caution in a country like Switzerland where manufacturing is oriented increasingly toward niche markets (competing for quality rather than price) and the large financial services sector tends to benefit from a strong franc. Staff suggested that the high domestic price level (as much as 30 percent above comparable EU countries) reflected a lack of competition in sheltered sectors for which the solution was product market reforms that would decrease non-traded goods prices, rather than depreciation.13

Figure 13.
Figure 13.

Switzerland: Real Effective Exchange Rate (CPI based), 1980-2002

Citation: IMF Staff Country Reports 2002, 106; 10.5089/9781451807196.002.A001

Source: IMF, International Financial Statistics; and staff calculations.

D. Other Issues

25.Switzerland has an open trade regime, with the exception of agriculture where protection remains very high.14 Average tariff protection for agriculture goods is 34 percent and some import duties are almost 700 percent. The authorities noted their support for the launching of the Doha trade round as well as their active involvement in international liberalization initiatives at the multilateral, regional and bilateral levels. Switzerland was committed to eliminating all barriers to imports from the least developed countries by 2006.

26. The authorities reaffirmed their intention to raise official development assistance from 0.3 to 0.4 percent of GDP by 2010.

27. Despite continuing improvement, deficiencies in the availability and quality of economic statistics remain. In particular, general government statistics are incomplete and subject to long delays; high frequency wage statistics are not available; the national accounts are still waiting to be upgraded to ESA95 and quarterly data are incomplete. The authorities noted that budgetary constraints impeded efforts to address such problems.

28. Swiss legislation conforms to the OECD Convention on anti-bribery, except in respect of liability of legal persons for bribery. The authorities expect the requisite additional legislation will be introduced by 2003.

III. Staff Appraisal

29. Sound macroeconomic policies have put the economy in a good position to weather the current economic slowdown. Indications are that the economy is now more resilient than it was in the 1990s and hence better placed to benefit from the expected upswing in global activity. Policy makers can facilitate sustained recovery by continuing to adhere to stability-oriented macroeconomic policies and by accelerating the structural reform agenda, particularly as regards product markets.

30. With inflation risks low and output below potential, monetary policy can afford to remain accommodative in the period ahead. The latest interest rate cut was justified given the tightening of monetary conditions implicit in recent renewed upward pressure on the Swiss franc and the still only tentative signs of recovery. However, should the recovery turn out to be robust, it will be necessary to begin raising interest rates later this year.

31. The monetary policy framework is working well. The focus on medium-term inflation has allowed the SNB to respond flexibly to business cycle conditions and exchange rate developments. So far, the framework has provided an effective vehicle for communicating policy intentions and appears to be well understood by financial markets. The SNB is encouraged to continue expanding the information it provides about its inflation forecast and the rationale for policy decisions.

32. Fiscal policy is also supporting recovery, although its role should be constrained. While fiscal stimulus in 2002 is not problematic from a cyclical perspective, slippage in the form of new expenditure or tax relief should be strongly avoided, especially as it would add to the adjustment strains next year when the “debt brake” mechanism takes effect. Unbudgeted one-time revenues, for example from the buyback by Swisscom of its shares, should be used to reduce government debt—not to finance new expenditures.

33. Savings are likely to be needed at the federal level in coming years to comply with the debt brake. The principle of running balanced budgets over the economic cycle and stopping the accumulation of public debt is prudent given the need to plan for longer-run demographic strains. The solution to future budget constraints should not be higher taxes. Instead, expenditure growth needs to be restrained. This will require changes in behavior at all budget levels: demands for supplementary appropriations will need to be scaled back and greater flexibility in reshuffling expenditure items will need to be exercised if high-priority items are to be accommodated without tax hikes. A reduction of the currently pervasive earmarking of revenues would enhance such flexibility.

34. The financial sector is well-capitalized and the lines of defense against potential financial sector problems appear to be functioning properly, but the risk in the current environment requires continued vigilance. In this context, moves to further strengthen cooperation among financial regulators, for example along the lines of the proposed single supervisory authority, and to introduce a more formalized quality assurance program for supervising external auditors, are welcome. Ongoing efforts to prevent money laundering and the authorities’ initiatives to track terrorist financing are also important safeguards for the reputation of the Swiss financial system.

35. Enterprise restructuring in the 1990s holds the promise of improved economic performance in coming years, but competition in sheltered domestic sectors will need to be increased. Productivity performance is the key to achieving a higher underlying growth rate. Switzerland has a competitive export sector, including a vibrant financial services industry, which has adapted to the discipline of an upward trend in the real exchange rate. The externally-oriented sector will need to continue to live with such discipline in the future given the large external current account surplus. By contrast, vitality in the more sheltered domestic markets has been lacking and it is here that improved performance will be needed.

36. To sustain faster productivity growth, the drive for reforms should be strengthened. The proposed new Competition Law should provide a significantly better framework to address restrictive practices in Switzerland and the Competition Commission should be given the support to implement it rigorously. Consumers, and particularly industrial users, would benefit from opening up the electricity market, where prices are high by international standards. A faster phasing-out of distortive subsidies and tariff barriers in agriculture would confer significant benefits to consumers as well as redirecting resources to more productive sectors.

37. The collapse of Swissair has put the spotlight on the need for higher standards of corporate governance. Transparent reporting requirements, high accounting standards, structures that allow fair representation of shareholder interests, and strong safeguards against conflicts of interest are necessary ingredients of good governance. In this regard, proposed codes of conduct represent a useful first step. Further strengthening the codes and the supporting legal framework is recommended.

38. Flexible labor markets and a qualified labor force should remain key competitive advantages of the Swiss economy. In recent years, policies and an open approach to foreign labor have contributed to the smooth functioning of labor markets. As economic growth relies increasingly on a skilled, well-educated population, it will be important that the education system turns out adequate numbers of suitably qualified persons.

39. Staff welcomes the authorities’ initiative to eliminate trade barriers for the poorest countries and encourages them to bring forward their 2010 target for raising official development assistance to 0.4 percent of GDP.

40. Economic statistics would benefit from further upgrading. Notwithstanding progress in improving the statistical infrastructure, deficiencies remain in key areas such as the national accounts, wages, and fiscal data.

41. It is recommended that the next Article IV consultation with Switzerland be held on the standard twelve-month cycle.

APPENDIX I Switzerland: Basic Data

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Fund staff estimates and projections unless otherwise noted.

Change as percent of previous year’s GDP.

Nominal wage growth per employee.

Including railway loans as expenditure.

Switzerland: Basic Data

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Sources; International Monetary Fund, World Economic Outlook database; Swiss National Bank; and Swiss Institute for Business Cycle Research.

Fund staff estimates and projections unless otherwise noted.

Data for 2002 refer to March.

Data for 2002 refer to May.

Based on consumer prices.

APPENDIX II Switzerland: Fund Relations

(As of March31, 2002)

I. Membership Status: Joined 5/29/92; Switzerland has accepted the obligations of Article VIII, Sections 2, 3 and 4.

General Resources Account:

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SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arranagments: None

VI. Projected Obligations to Fund: None

VII. Exchange Rate Arrangement:

The Swiss National Bank does not maintain margins in respect of exchange transactions. However, the Swiss National Bank has intervened when warranted by the circumstances. Switzerland’s exchange system is free of restrictions on the making of payments and transfers for current international transactions. However, Switzerland continues to apply exchange restrictions vis-a-vis Iraq (since August 1990).

VIII. Article IV Consultations:

Switzerland is on the standard 12-month Article IV consultation cycle.

IX. Technical Assistance: None

X. Resident Representatives: None

XI. Other FSAP, October 2001

APPENDIX III Switzerland: Statistical Appendix

Switzerland publishes timely economic statistics and posts most of the data and the underlying documentation on the internet. Switzerland is in full compliance with the Fund’s Special Data Dissemination Standard (SDDS) and its metadata are currently posted on the Dissemination Standards Bulletin Board. However, a number of statistical gaps and deficiencies remain to be addressed: wage statistics are available only on an annual basis; reliable general government statistics appear with considerable lags, mainly due to delays in compiling fiscal accounts at the level of cantons and communes; internationally comparable fiscal statistics on an accrual basis are not available; pension statistics are published with a long lag; the quarterly national accounts lack a production account; national accounts are still based on ESA79; national accounts by industry appear with considerable lag; capital stock data are not available; moreover, there are no flow-of-funds data. To a large extent, these deficiencies reflect a lack of resources and the limited authority of the Federal Statistical Office (BfS) to request information.

To address statistical deficiencies, the authorities have taken or intend to take the following steps:

The SNB has shortened from nine to six months the lag of publishing annual data on the international investment position and plans to publish, starting from 2003, quarterly foreign debt statistics. In 2001, the SNB revised also its effective exchange rate indices (adopting the Törnqvist methodology) and monthly credit statistics (information is now provided on credits to small- and medium-sized debtors and on non-performing loans). The SNB will also participate in the Coordinated Portfolio Investment Survey.

The BfS published in 2001 statistics on the composition of wages in 2000, including bonuses and other fringe benefits; established a new business register that will allow the measurement of activity at the group/enterprise level; continued preparatory work for the introduction of ESA95, tentatively planned for 2003; has been reviewing the methodology of calculating value added in the financial services sector as well as the corresponding deflators; continued work on the methodology for compiling financial accounts (a joint project involving the FSO and the SNB); and has been negotiating a cooperation agreement with the EU for the harmonization of Swiss statistics with EU standards.

The Federal Finance Administration has started preparations for the adoption of the 2001 GFS classification and the revamping of the accounting framework, although implementation of the new framework is not expected before 2006. In the interim period, government finance statistics on a national accounts basis will have to be estimated.

Switzerland: Core Statistical Indicators as of April 30, 2002

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BFS = Federal Statistical OfficeSNB = Swiss National BankKOF = Swiss Institute for Business Cycle ResearchMoF = Federal Ministry of FinanceBFK = Federal Office for Economic Policy

The output gap estimate is subject to considerable uncertainty, not least because an elastic pool of foreign workers makes it difficult to gauge potential labor supply.


The Swissair failure is estimated to have resulted in 4,500 job losses and entailed fiscal costs of SwF 2.5 billion (0.6 percent of GDP). WTC-related liability claims on the two largest insurance companies are estimated at US$2 billion (¾ percent of GDP), but are likely to be paid over a number of years. To the extent that such claims will be paid out of insurance companies’ technical reserves, the payments will not affect GDP; they will show up as current transfers, reducing the external current account surplus and national income.


The new monetary policy framework, which was analyzed in Switzerland: Selected Issues, IMF Country Report No. 01/75 (May 2001), defines price stability as headline inflation of less than 2 percent but positive and sets monetary policy on the strength of the SNB’s three-year ahead inflation forecast. A 100 basis point target range for the three-month Swiss franc LIBOR is used as the operational target.


In recent years, gross debt has increased by more than the deficit largely because the government assumed the debt and has begun to capitalize the pension funds of public enterprises that were commercialized. The largest operation related to Swiss Rail. Capitalization of these pension funds is well advanced, but further injections will be required in the years ahead to bring them into actuarial balance.


The new fiscal framework was analyzed in Switzerland: Selected Issues, IMF Country Report No. 01/75 (May 2001). Under the debt brake, federal expenditure levels are set equal to revenues scaled by the ratio of potential (or trend) to actual GDP. Unanticipated deficit outcomes must be reversed in the following years. The debt brake can be breached in exceptional circumstances, although this must be supported by a majority of members in both chambers of parliament.


In past episodes of significant weakening of the U.S. dollar, the Swiss franc tended to appreciate against European currencies.


See Chapter II of the accompanying Selected Issues Paper.


Higher contribution rates since 1996 have put the unemployment insurance fund into surplus and are expected to help eliminate by 2003 the debt that the fund accumulated during the recession of the 1990s.


Off-balance sheet positions are regularly monitored by banks and supervisors, but were not evaluated in the staff’s stress testing exercise.


See Chapter I of the accompanying Selected Issues Paper


Switzerland had the slowest pace of regulatory reform in product markets among OECD countries in 1978-98, and rose from 18th to 5th position in terms of the restrictiveness of its regulatory framework (OECD, Economic Department, Working Paper 312).


A recent study by the St. Gallen Institute of International Management showed that in 60 percent of listed public companies the governing boards do not have active auditing and planning subcommittees and many boards include persons associated with their domestic competitors. Family- or bank-controlled listed companies tended to have the weakest checks and balances.


Under the assumption of an unchanged real effective exchange rate, staff projects that the current account surplus would persist at over 10 percent of GDP in the medium term. This would be higher than estimates of the equilibrium current account surplus based on historical relationships of the savings-investment balance and analysis presented in Chapter LT of Switzerland: Selected Issues, IMF Country Report No. 00/43 (April 2000).


Relatively slow reform of domestic product markets in Switzerland tends to accentuate productivity growth differentials between the traded- and non-traded goods sectors and lead to real appreciation (Balassa-Samuelson effect) without loss of competitiveness.


Switzerland’s rating in the IMF’s trade restrictiveness index is 4 (on the 1-10 scale, with 1 being the least restrictive), similar to that of most industrial countries.

Switzerland: 2002 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Switzerland
Author: International Monetary Fund