IMF Concludes 2003 Article IV Consultation with Norway

In 2003, domestic and external factors in Norway slowed real GDP growth to an estimated 0.5 percent. With inflation pressures waning, Norges Bank cut interest rates aggressively. The non-oil fiscal position has deteriorated somewhat over the past two years, only partly reflecting the cycle. Discussions covered the short-term outlook and policy options, the monetary and fiscal policy frameworks, aging and long-term fiscal sustainability, and structural reform. The financial system has weathered the downturn, though with some weakening of profitability.


In 2003, domestic and external factors in Norway slowed real GDP growth to an estimated 0.5 percent. With inflation pressures waning, Norges Bank cut interest rates aggressively. The non-oil fiscal position has deteriorated somewhat over the past two years, only partly reflecting the cycle. Discussions covered the short-term outlook and policy options, the monetary and fiscal policy frameworks, aging and long-term fiscal sustainability, and structural reform. The financial system has weathered the downturn, though with some weakening of profitability.

On March 22, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway.1


A decade of sustained economic expansion in the 1990s was underpinned by broadly accepted and prudent monetary and fiscal policies. Notably, substantial and rising petroleum revenues were placed in the Government Petroleum Fund (GPF) and invested abroad, mitigating “Dutch disease” effects and preserving wealth for future generations. In 2001, inflation targeting was adopted as the monetary policy framework and fiscal guidelines were adopted tying the central government non-oil budget deficit to the long-run return on the GPF.

In 2003, real mainland GDP growth slowed sharply to 0.7 percent, reflecting a number of factors. The stance of monetary policy had been quite tight through 2002, in response to higher wage growth than expected and an expansionary fiscal stance. As a result, business investment declined, although household consumption remained relatively strong due to the wealth effects of past house price increases. The tight monetary stance, and the resulting interest differentials against the euro area, helped to raise the value of the krone. This appreciation, along with a weak worldwide economy, hurt exports and the exposed sector more generally.

The unemployment rate rose and wage pressures receded. The core inflation rate also eased, falling sharply in the latter part of 2003 as import prices declined.

The outlook for 2004 is promising, with the factors restraining growth last year having been reversed. As inflation pressures eased, the central bank cut interest rates aggressively through 2003: the policy rate fell from 7 percent at the end of 2002 to 1.75 percent by March 2004. These cuts resulted in a narrowing of interest differentials with the euro area and a depreciation of the krone, reversing the earlier appreciation. With monetary conditions now quite supportive, domestic demand is expected to pick up. In addition, worldwide growth seems set to rise, which will help to spur exports. Wage negotiations for the 2004-05 period are expected to result in a moderate settlement, Inflation is expected to rise gradually as the economy recovers, although a more rapid increase is possible as the depreciation passes through.

The non-oil fiscal position has deteriorated somewhat in recent years, and the pressures for greater use of petroleum revenues remain strong. The 2003 deficit is expected to have narrowed somewhat, but to have substantially exceeded the budget target. The 2004 budget involves an increase in the non-oil deficit. The central government structural non-oil deficit is also set to rise, thus exceeding the limit laid out in the fiscal rule adopted in 2001 for the third consecutive year. Moreover, the budget does not foresee the rule being met until 2009.

Executive Board Assessment

The directors commended Norway’s strong macroeconomic policies, which have delivered one of the highest standards of living in the world and enviably low unemployment. The commitment to low inflation and fiscal restraint, and the strategy of investing the bulk of petroleum revenues abroad have been key to promoting macroeconomic stability and growth. The adoption of inflation targeting and fiscal policy guidelines, in 2001, have further strengthened the policy framework. Against the backdrop of an emerging economic recovery from the 2003 slowdown, Directors saw as priorities for the Norwegian authorities to ensure the skillful implementation of the monetary policy framework, reinforce fiscal discipline, address the medium-term challenges of population aging, and further strengthen labor and product markets.

Directors noted the prospects for a robust economic recovery in 2004. This will be supported by the stimulus provided by the decisive monetary easing since late 2002, at a time of weak economic activity and very low core inflation, along with the depreciation of the krone and the improving global economic climate. Looking forward, Directors considered that monetary policy will have to act in a timely manner in moving toward a neutral stance as the recovery gathers pace and inflation prospects move upward toward the target. They also stressed that wage moderation will continue to be key to ensuring a benign inflation outlook, while prudent fiscal policy should help forestall pressures for a real exchange rate appreciation.

Directors welcomed the recent institutional reforms to the inflation targeting framework. They considered that regular parliamentary hearings with the Governor of Norges Bank, the new procedure for appointing Bank Board members, and regular outside reviews of monetary policy will all contribute to further strengthening policy formulation and enhancing transparency. A few Directors suggested that removing the reference to exchange rate stabilization from the regulation on monetary policy could further clarify market perceptions of the policy objective. Many other Directors, however, saw no strong reason for such a step, given the authorities’ stated commitment to low and stable inflation as the operational target for monetary policy.

Directors recognized the authorities’ efforts to contain budget deficits and adhere to the fiscal guidelines introduced in 2001. However, they noted with concern that, on current plans, the key rule limiting non-oil structural deficits to 4 percent of the value of the GPF would not be met until 2009. To safeguard the credibility of the fiscal guidelines, Directors strongly encouraged the authorities to take advantage of the coming recovery to mobilize support for bringing the deficit in line with the 4percent rule at an earlier date. This should be achieved through expenditure restraint, including to create room for the desirable tax cuts planned for the years ahead. While some Directors saw merit in moving toward multiyear expenditure ceilings to buttress the current fiscal guidelines, other Directors considered that the option of discretionary countercyclical fiscal policies should not be foregone in the case of Norway.

Directors underscored the need to address the long-term fiscal challenge arising from population aging, and noted, in this regard, that the assets of the GPF will not be sufficient to cover future pension obligations. They urged the authorities to adopt the recommendations of the Pension Commission with a view to containing spending growth, notably by limiting the degree to which pensions are indexed to wages, aligning benefits to average life-time earnings, and taking into account increases in life expectancy. An explicit linkage of the GPF to the pension system would also be useful in making clear the dependence of future retirement incomes on a careful use of the assets of the fund. Directors also recommended early examination of further measures to ensure long-term sustainability.

Directors commended the strong performance of Norway’s labor market, which is characterized by high employment rates and an unemployment level that is very low by international standards. The rapid uptake of sickness and disability benefits—despite a tripartite agreement to reduce the number of beneficiaries—nevertheless risks eroding labor supply and is costly to the budget. While recent reforms to address these concerns are welcome, Directors called for tightening further the restrictions on access to these benefit programs, as well as for cuts to the generous benefit rates.

Directors highlighted the importance of further improvements in product markets to ensure continued strong productivity growth. Improvements in the tax structure—building on the recommendations of the tax commission—and a general lowering of tax rates will be helpful, in this regard, although it will be important to match tax reductions with strict expenditure discipline. Directors also welcomed recent reforms to streamline the regulatory framework, while noting the desirability of further reducing the still high level of government ownership of economic assets, and continued efforts to strengthen competition.

Directors welcomed the overall strength of the Norwegian banking sector. Going forward, they noted that both financial institutions and supervisors will need to continue to exercise close oversight of risks. Directors looked forward to Norway’s participation in the Financial Sector Assessment Program next year.

Directors commended the generous level of Norway’s development assistance, as well as the goal to raise it even further to 1 percent of GNP. They welcomed the authorities’ support for multilateral trade liberalization, while encouraging continued strong efforts to lower the high agricultural trade barriers.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Norway: Selected Economic Indicators

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Sources: Ministry of Finance; Norges Bank; Statistics Norway; International Financial Statistics; and IMF staff estimates.

Staff projections as of February 2004.

Excludes items related to petroleum exploitation and ocean shipping.

Period average, in percent.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.