Finland: Staff Report for the 2005 Article IV Consultation

This 2005 Article IV Consultation highlights that Finland’s economic performance in recent years continued to be favorable. Growth has outpaced that in the euro area and is expected to pick up to more than 3 percent in 2006. The external current account has remained comfortably in surplus, and inflation has remained below the euro area average. The authorities are taking some steps to address the long-term fiscal pressures. Proposals are also being debated to reform the financing of local governments and restructure their activities to raise efficiency in the provision of public services.


This 2005 Article IV Consultation highlights that Finland’s economic performance in recent years continued to be favorable. Growth has outpaced that in the euro area and is expected to pick up to more than 3 percent in 2006. The external current account has remained comfortably in surplus, and inflation has remained below the euro area average. The authorities are taking some steps to address the long-term fiscal pressures. Proposals are also being debated to reform the financing of local governments and restructure their activities to raise efficiency in the provision of public services.

I. Economic Background and The Policy Setting

1. Finnish economic performance continues to be remarkable on several counts. Growth is outpacing the euro area average despite the temporary setback of a production shutdown in the key paper industry, inflation remains low, employment has started to pick up, and the fiscal surplus remains among the largest in the European Union (EU). Growth has been underpinned in recent years by productivity gains in the electronics sector led by Nokia, Finland’s flagship technology company. The longer-term outlook, however, is clouded by imminent aging of the population, with old-age dependency set to rise most rapidly in the EU.

2. The authorities and the staff generally agree on the broad agenda of reforms needed to face the demographic shock and globalization. The Fund’s assessment that large fiscal surpluses are needed over the coming decade to ensure sustainability is shared by the authorities.1 The recently initiated pension reforms are consistent with the thrust of past Fund advice. The multi-year program of tax cuts aimed at promoting employment is supported by the staff although, without the recommended offsetting restraint on public spending, it has led to declining structural fiscal surpluses. A widening of the compressed wage structure and a shift to a more decentralized wage-setting system are desirable, but the authorities see these as goals that can only be achieved gradually, given the tradition of solidaristic wage bargaining.

3. Following buoyant growth in 2004, a lengthy shutdown in the paper industry dealt a major but temporary setback to growth in 2005. Although its role is gradually declining, the sector remains a mainstay of the Finnish economy, accounting for 20 percent of merchandise exports. The seven-week disruption in the second quarter, stemming from a labor dispute, cut annual GDP growth by almost 1 percentage point in 2005. The resolution of the dispute, however, is expected to lead to an offsetting rebound in activity in 2006 (Figure 1).

Figure 1.
Figure 1.

Finland: Growth, Demand and Employment, 2002–07

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: Statistics Finland; ETLA; WEO; and Fund staff calculations.

GDP and Demand

(percent change)

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Sources: Statistics Finland; and staff projections.

Contribution to growth.

4. After three years of stagnation, employment picked up and unemployment fell. The gains in employment since late 2004 are driven by public and private services (health, construction, and especially part-time retail trade), and aided by the moderate multi-year collective wage accord through September 2007, covering around 90 percent of the labor force. The unemployment rate, stuck at 9 percent since 2000, has begun to edge down slowly toward the estimated NAIRU of 8 percent (Figure 2). However, vacancies have risen markedly of late, suggesting continued skill mismatching. The authorities’ goal of raising the employment rate from the present 68 percent to 70 percent by the end of the current electoral cycle in 2007 remains elusive.

Figure 2.
Figure 2.

Finland: Labor Market Characteristics, 1997–2005

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: Finnish Labor Review; OECD Employment Outlook 2004; and Fund staff calculations.1/ Income tax plus employee and employer contributions (as a percentage of labor costs); single person without children.2/ Defined as the unemployment rate of persons with less than upper secondary education.3/ 2005 data are for first two quarters only.

Inflation, Labor Market and Output Gap Indicators

(percent change)

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Sources: Statistics Finland; and staff projections.

Percent of labor force.


In percent of potential ouput.

5. Productivity gains and wage moderation have kept inflation unusually subdued, despite the rise in energy prices.2 HICP inflation fell to 0.1 percent in 2004—the lowest in the euro area—reflecting reduced excise taxation, low non-energy import prices, and rising competition in services such as retailing and telecoms. Inflation has gradually picked up during 2005, in part due to the higher oil prices, but is estimated to reach only about 1 percent for the year as a whole.

6. The extended period of low interest rates has boosted credit growth, especially that for housing. Mortgage lending has grown by more than 15 percent in 2005, and now exceeds 40 percent of bank lending (Table 4). In addition to low interest rates, intensified competition lowering lending margins, strong disposable income growth and buoyant income expectations have underpinned household borrowing. The debt-income ratio has risen to levels last seen in the early 1990s. However, much lower interest rates have kept debt servicing burdens significantly lower than in the earlier period. House prices have risen moderately, by about 6–7 percent annually over the past three years.

Table 1.

Finland: Main Economic Indicators, 2002–2009 1/

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Sources: Ministry of Finance, Bank of Finland; and staff projections.

Projections are staff estimates based on the authorities’ current policy indications.

A negative value indicates a level of potential output that is larger than actual GDP.




Using weights for real short- and long-term interest rates and the real effective exchange rate (ULC) of 1/3 each.

Based on relative normalized unit labor costs.

Table 2.

General and Central Government Financial Accounts, 2002–2009 1/

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Sources: Ministry of Finance; and staff projections.

On ESA95 basis.

The fall in revenues in 2003 reflects, in part, planned cuts in some indirect taxes as well as the fading out of one-off factors related to exceptional tax revenues due to income from stock options in earlier years.

Defined as noninterest (structural) revenue minus noninterest (structural) expenditure.

Corrected for the influence of the business cycle as measured by the output gap.

One-off factors include exceptional tax revenues due to income from stock options.

Includes stock-flow adjustements reflecting changes in the portfolio allocation of Finnish pension funds.

Table 3.

Finland: Balance of Payments, 1999–2009

(in billions of euros)

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Sources: Bank of Finland; and staff projections.
Table 4.

Finland: Indicators of Financial Vulnerability, 2000–2005

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Sources: Bank of Finland; The Finnish Bankers’ Association; Financial Supervision Authority; Statistics Finland; and Fund staff estimates.

Euro-denominated lending only, which accounted for about 98 percent of total lending in 1999 and 2000.

Loans are defined as the sum of claims on: credit institutions, the public, and public sector entities.

Average lending rate minus average deposit rate.

2001 adjusted for large intra financial conglomerate transactions.

Liquid assets are defined as the sum of bills discounted by the central bank, debt securities, and the balance sheet item “liquid assets”.

7. The central government finances have moved into a deficit of about ½ percent of GDP in 2005. The general government surplus is more than accounted for by the surplus of the social security funds, with both the central and local governments now in deficit. The dwindling of the surplus from over 5 percent of GDP in 2001 is largely the consequence of a sharp discretionary policy shift in recent years (Figure 3).

Figure 3.
Figure 3.

Finland: Selected Indicators, 2002–07

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: Statistics Finland; WEO; and Fund staff calculations.

8. The budget for 2006 continues the authorities’ recent efforts to alleviate the high tax burden. The cuts in income taxation (of almost ½ percent of GDP) and increased employment subsidies are aimed especially at workers at the lower end of the income scale. In recent years, personal income taxes have been reduced, a number of excises have been cut sizably in response to EU tax harmonization, and the corporate income tax was reduced by two percentage points to 26 percent in 2005. Taxes on labor are to be reduced further in 2007 as part of the wage accord.

General Government Overall Balances

(percent of GDP)

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Sources: Statistics Finland; Ministry of Finance; and staff projections.

II. Short-Term Prospects

9. Economic growth is projected to rebound strongly in 2006. Exports are expected to lead the recovery, aided by a bounce-back in exports of paper as the industry shakes off the effects of the shutdown, and by improved prospects for the global technology sector. Private consumption will continue to sustain demand, stimulated by tax cuts, employment gains, low interest rates and robust confidence. The recent slight tightening of monetary conditions is not expected to hamper the recovery (Figure 4). Staff’s forecast is for GDP to grow by 3½ percent in 2006 and around 2¾ percent in 2007.

Figure 4.
Figure 4.

Finland: Interest Rates and the Real Effective Exchange Rates, 1997–2005

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: IFS; Bank of Finland; and Fund staff calculations.

10. Inflation is projected to rise in 2006–07 toward but remain below the euro area average. As the impact of higher energy prices is transmitted through the economy and output begins to exceed potential toward the latter half of 2006, inflation is likely to rise from recent exceptionally low levels. Solid productivity gains are expected to keep unit labor costs in check. A further fall in the terms of trade, in line with a secular decline in the prices of Finland’s exports (notably paper and cellphones) is likely.

11. The risks to the forecast for growth are tilted to the downside. Prolonged high energy prices could dampen confidence at home and growth in export markets. Weaker growth in the euro area than currently projected would be a drag on exports, although Russia’s re-emergence as a major export market, and the important role of Sweden, the United Kingdom and China as trading partners, will serve to cushion any adverse impact. While Finland’s external competitive position remains comfortable, a sharp appreciation of the euro could pose risks to growth. The main domestic uncertainty stems from the tentativeness of the recovery in employment.

III. The Policy Discussions

12. Against the backdrop of the favorable near-term outlook, the discussions focused on policies in three main areas that would help ensure fiscal sustainability and promote long-term growth.

  • Reforms of public and social services: How to raise efficiency in the provision of public services, provided largely at the local government level, in the face of rising demand as rapid aging sets in;

  • Policies to improve the functioning of the labor market: How to boost employment among younger and older workers, reduce labor market mismatches, and raise the demand for low-skilled labor;

  • Broadening productivity gains: How to raise the diffusion of productivity gains, especially in sheltered sectors (utilities, transport and retail services, and agriculture), including through improved training and strengthened competition.

A. Fiscal Policy and Reform of Public Services

13. The near-term task for policy is to restore balance in the finances of the central and local governments. Officials acknowledged that the objective of balancing central government finances by 2007 was not expected to be achieved. Indeed, the latest Stability Program projections (November 2005) envisage a deficit of ½ percent of GDP persisting into 2009. The new system of expenditure ceilings, in place since 2004, has worked well so far, but would come under strain in 2007. In the authorities’ view, the moderate stimulus implied in the budget for 2006 (by 0.4 percent of GDP) was considered acceptable, since it stemmed from the tax cuts that were deemed desirable from a structural standpoint. The staff, however, noted that the stimulus was not needed, especially in the light of the easy monetary conditions. Moreover, the sobering fiscal outlook underlined the need for further expenditure restraint.

14. As demographic pressures on the demand for public services escalate, how to raise efficiency in their provision has emerged as a major challenge. Despite recent efforts, the tax burden remains well above the average in the advanced economies, and with an imminent dwindling of labor supply, officials noted that economic growth and the revenue base for public services would rely increasingly on productivity gains. Even allowing for the difficulties in measuring productivity in public services, there was evidence of declining productivity in the provision of education and social services since the late 1990s (Figure 5). In addition to the reforms in the structure of municipalities currently under debate, the authorities are also pursuing plans to raise productivity in central government services, intending to replace only one of every two expected retirees through 2011.3

Figure 5.
Figure 5.

Finland: Government Productivity and Employment

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Source: Statistics Finland.1/ Provided by municipalities.

15. The task of restructuring municipalities and the scope and financing of their services are beset with political and social sensitivities. Reflecting historical reasons and an emphasis on local autonomy and regional equity, Finland has a large number (432) of small municipalities, with an average size of about 11,000 people, much smaller than in Denmark and Sweden. A commission, set up to determine responsibilities for service provision and its financing over at least the next decade, is expected to submit its recommendations by May 2006, with legislative changes to take effect from January 2007. The options being debated include mergers of smaller municipalities and creation of 20 to 25 new regional entities to whom taxes and transfers would accrue, with services provided by existing municipalities on contractual bases. The mission, while welcoming these initiatives as essential, pointed to the need to also consider rebalancing the public and private provision and financing of social services. Consolidation of activities may be useful in some localities to capture scale economies, while public-private partnerships may induce increased efficiency in more urban areas. User charges, levied for some services, should be reassessed, and could also be considered for less essential services. Concurrent efforts to reform municipal structures in Denmark may hold useful lessons for Finland.

16. A reform of the fiscal framework governing municipal finances is essential to changing incentives. The rapid rise in municipal employment in recent years, if continued, could seriously undermine the fiscal strategy—as well as prospects for growth (see para 20)—since rising transfers would put a heavy strain on central government expenditure ceilings and/or force municipalities to raise income tax rates, frustrating the authorities’ efforts to reduce taxation. Limited reforms to municipal finances, including abolition of the automatic adjustment of state grants when local spending exceeds plans, will come into effect at the beginning of 2006. A more far-reaching change such as a shift from relatively cyclical tax bases to property taxes, while desirable from an economic standpoint, was seen as politically infeasible in the near term.

17. Looking ahead, the fiscal room for maneuver will be increasingly constrained by the timing and magnitude of the aging shock. Despite starting from a net asset position, with aging occurring a decade earlier than most other European countries and its stronger fiscal impact due to the relatively comprehensive character of public welfare provision in Finland, substantial adjustment would be needed to assure fiscal sustainability, as acknowledged by the authorities in their latest Stability Program.4 With this in view, a significant reform of the public pension system was initiated in early 2005. Key elements, to be phased in over an extended period, include the replacement of the standard retirement age of 65 with a flexible retirement age ranging from 63 to 68, and an increased accrual rate for older workers. The goal is to raise substantially the current effective retirement age of about 59. Officials noted that tentative, early evidence suggests that older workers may be staying in the labor force longer. Nevertheless, there was agreement that mutually reinforcing labor and product market reforms would reduce substantially the need for fiscal adjustment.5

B. The Labor Market and Bargaining Framework

18. The recent accord ensures wage moderation, but represents only modest progress towards more flexible wage-setting. The accord is expected to maintain competitiveness. However, the centralized bargaining model, by solidifying wage rigidities that are unfavorable to the young and unskilled workers, hinders employment growth in the less productive sheltered sectors (Figure 6). The authorities concurred with the mission that the wage-setting mechanism needed to evolve to accommodate greater productivity differentials. In response to this concern, the 2006 budget includes a temporary wage subsidy targeted towards low-paid older workers, designed to reestablish work patterns that would, with on-the-job gains in productivity, result in continued employment after the subsidy expires. Moreover, officials conceded that in the coming years, the limited fiscal room will make it increasingly difficult to “buy” wage moderation through tax cuts, as has been the case in recent years.

Figure 6.
Figure 6.

Finland: Labor Market

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: OECD; Bank of Finland.1/ In percent of total employment. Low-skill services are defined as wholesale and retail trade, hotels and restaurants, expressed as a percentage of total employment.2/ First half of 2005.

19. While the recent pick-up in employment is encouraging, increasing signs of labor market mismatches are a cause for concern. Vacancies have increased sharply, notwithstanding continued high unemployment, reflecting skill and geographic mismatches. Active labor market policies are attempting to address retraining needs of older workers, and the authorities are trying to make available more land for residential development to ease housing shortages in urban centers. Officials noted that continued mismatches pose a risk of emerging upward wage pressures in some sectors (e.g., construction) in coming years.

20. Over the longer run, demographics could dampen growth prospects, especially if public sector employment continues to grow rapidly. Finland’s working-age population is anticipated to begin declining at the end of the decade. In addition, municipal authorities are not immune to population aging, with an expected sharp uptick in retirements. Officials noted that simply replacing retiring municipal workers would imply clear risks of upward wage pressures, and attendant adverse implications for private sector growth.6 In response to these trends, the authorities, as a part of the pension reforms, extended by two years (to 57) the age at which the long-term unemployed can enter the “unemployment pipeline” to early retirement. In addition, the unemployment pension (available at an earlier-than-standard age) is to be phased out in 2009.

C. Long-Term Prospects for Growth

21. The discussions also explored the outlook for long-term growth in light of the demographic transition, an issue facing most advanced economies, but with an imminence and special resonance for Finland. Growth in living standards will increasingly depend on the extent to which the productivity performance of the information technology and financial services sectors could be replicated throughout the economy. In addition, investment in equipment and machinery, generally a vehicle for introducing new technologies, has been lagging. Moreover, officials noted that recent research confirmed the suspicion that an older society is likely to face ageing related stagnation in human capital productivity, especially with rapidly transforming technologies.7 Were recent trends in hours worked and labor productivity to persist, under a pessimistic scenario, annual GDP growth could well fall to barely 1 percent in the second half of the decade. The serious implications of this possibility for the viability of the welfare state were yet to be grasped by the general public.

22. The absence of more widespread productivity gains despite many favorable preconditions remained somewhat puzzling. Causes for the low investment rates were not well understood. Indicators such as research and development, levels of skill, cost of capital, and external competitiveness were roughly on par with those in Sweden and the United States (Figure 7). Although Finnish financial markets were generally less deep and sophisticated, especially regarding availability of later-stage venture capital, officials did not think that legal or regulatory impediments could account for Finland’s productivity lag. Some believed that cultural factors, such as the social stigma attached to bankruptcy, may explain the relatively weak entrepreneurial climate.

Figure 7.
Figure 7.

Finland: Research, Innovation and Investment Indicators

Citation: IMF Staff Country Reports 2006, 036; 10.5089/9781451813265.002.A001

Sources: Eurostat; WEO; Bank of Finland.1/ 2003.

23. It was clear, however, that continued emphasis on labor and product market liberalization was the appropriate policy response. Some recent progress was evident in the telecoms and retail sectors. Nevertheless, a faster pace of deregulation would promote a smoother reallocation of resources and assist in the introduction of new products and adoption of new technologies. Officials noted their efforts to encourage partnerships between business and academia, including greater emphasis on life-long learning and retraining to improve labor market matching.

D. Financial Sector Issues

24. Monetary conditions were excessively easy from a Finnish perspective, posing potential financial sector and macroeconomic risks. The financial supervisory authorities expressed some concern that the robust growth in disposable incomes, boosted also by tax cuts, was unlikely to persist. As a result, some, especially younger, households may be basing their borrowing decisions on overly optimistic expectations of income growth. Moreover, this trend may be abetted by increased competition among lenders, reflected in lowered lending margins, especially for mortgages, which were characterized as something of “loss leaders,” attempting to capture customers for other banking services. Supervisors expressed concerns that lengthening mortgage maturities posed a threat to banks by locking in low profit margins for an extended period. As a result, supervisors had recently sounded a public note of caution about growing risks to the banking system.

25. Changes in domestic financial market structure and growing international financial integration were also expected to pose additional supervisory challenges. The authorities noted that current indicators suggested that financial institutions on average were in a strong position. Stress tests recently conducted by the central bank implied that a supply shock such as a further rise in oil prices would increase loan loss reserves and weaken, but not eliminate bank profits. Nevertheless, the authorities and staff concurred on the need for vigilant banking supervision in light of emerging risks from rapid credit growth.8 The recent acquisition of a domestic insurance company by a bank also pointed to the need for close cooperation between the respective supervisors.

IV. Staff Appraisal

26. Finland’s recent economic performance and near-term outlook are favorable, but difficult challenges remain over the longer run. Solid growth, sizeable fiscal surpluses and a skilled labor force provide a strong platform to prepare for the demographic transition ahead. The authorities have taken some welcome steps in this direction, such as the recent initiation of pension reform. However, further steps to put the public finances on a sustainable footing and enhance growth prospects are required.

27. Although the current state of the public finances is satisfactory, recent trends are of concern. The focus on raising employment has come at the cost of a worsening fiscal position. Cuts in personal income taxes, targeted especially toward lower income brackets, are desirable and welcome. However, without commensurate expenditure restraint, these cuts have already shifted the central government finances into deficit, and entail risks to public finances in the longer run. Further steps to restrain spending are required to respect the medium-term spending rule and meet the authorities’ goal of a central government balance.

28. Raising the efficiency of public services is key to meeting the coming demographic challenge. The efficiency of local governments, which provide the bulk of the aging-related services, has declined significantly in recent years. In this context, the authorities’ efforts to reorganize responsibilities for the provision and financing of public services are timely and welcome. However, the difficulties in capturing efficiency gains should not be underestimated, and will call for resolve among all social partners. Greater use of benchmarking municipal services, including publishing the results, may spur local authorities to adopt best practices.

29. Efforts to raise efficiency will need to be complemented by measures to limit the burgeoning demand for public services. Mechanisms that would bring demand in line with the costs of providing less essential services, including through a shift to private providers, also deserve consideration. User charges should be reviewed to reflect changing costs. Given the long gestation periods needed for implementing such reforms, an early start would be highly desirable.

30. While these steps will go far in strengthening the fiscal position, ensuring sustainability will require further measures, including revisiting pension system parameters. The substantial pension reforms in train go some way toward alleviating fiscal pressures by encouraging longer working lives and limiting the growth in pension outlays. However, these steps are insufficient to assure fiscal sustainability. Therefore, it will be important to assess the ongoing impact of recent measures on sustainability, and be prepared to undertake additional revisions to the pension regime. Moreover, efforts should be made to limit early exits from the labor force, including accelerating the phasing-out of unemployment pensions.

31. The wage bargaining system needs to allow for greater flexibility in wage-setting across the economy. The latest accord has locked in moderate wage increases over an extended period, promising a continued favorable competitive position, but, at the costs of tax concessions which may not be available in the future. Moreover, while partially stemming the process of growing compression of the wage structure, it failed to allow for a fuller reflection of productivity differentials. The “solidaristic” bargaining model also risks leaving a substantial portion of the workforce outside the system, hindering the economy’s ability to address the demographic challenge by preventing the fullest use of labor resources.

32. Measures are also called for to ease growing labor market mismatches and reduce structural unemployment. The authorities’ efforts to “price in” labor through subsidies for lower-skilled older workers are welcome if they are well targeted. Temporary active labor market programs can help promote employment opportunities for underutilized segments of the labor force. In addition, other supporting structural measures would be essential to achieve the authorities’ ambitious employment goals.

33. Finland’s high ranking in competitiveness may mask shortcomings in institutions and attitudes. Despite a skilled labor force, the paucity of investment and lack of strong economy-wide productivity gains raise questions about long-term growth prospects. Despite some recent progress in telecoms and retail trade, Finland would benefit from enhanced competition, as suggested by its high price level. As aging reduces effective labor supply, it would be all the more important to remove impediments to realizing a fuller return on the nation’s human capital wealth.

34. The financial system is sound and well-supervised, as shown by the FSAP and recent indicators, but faces some challenges. Heightened competition for market shares has increased the risk that credit standards could suffer, especially for housing loans. The current low lending margins may also constrain future profitability. Growing financial integration in the Nordic-Baltic region also underscores the need for closer cooperation between national supervisory authorities.

35. It is proposed that the next consultation take place on the standard 12-month cycle.

Finland: Fund Relations9

(As of November 30, 2005)

Membership Status: Joined January 14, 1948; Article VIII.

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans: None

Latest Financial Arrangements: None

Projected Payments to Fund

(SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Arrangements:

Finland is a founding member of EMU, with a euro conversion rate of Finnish markka (Fmk) 5.94573. Finland has accepted the obligations of Article VIII (Sections 2, 3, and 4) and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions, apart from those in accordance with:(i)IMF Executive Board Decision No. 144-(52/51) and the relevant UN Security Council resolutions—measures have been taken to freeze the accounts of the Taliban and of listed individuals and organizations associated with terrorism; (ii) EU regulations and the relevant UN Security Council resolutions—certain restrictions are maintained on the making of payments and transfers for current international transactions with respect to Myanmar, certain individuals associated with the previous governments of Iraq and the former Republic of Yugoslavia, and Zimbabwe; (iii) EU Regulation No. 147/2003, effective January 27, 2003—financing of and financial assistance related to military activities in Somalia are prohibited. Restrictions also apply on transfers with respect to members of Al-Qaida and the Taliban, and individuals and organizations associated with terrorism.

VIII. Article IV Consultation:

Discussions for the 2004 Article IV consultation were held in Helsinki during October 19–28, 2004 and the Executive Board concluded the consultation on January 28, 2005. Country Report No. 05/25 summarizing the views of the Executive Board, was published.

Finland: Table of Common Indicators Required for Surveillance

(as of December 23, 2005)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (including central government extrabudgetary funds), local governments, and social security funds.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).


The staffs extensive assessment of fiscal sustainability during the last consultation (IMF Country Report No. 05/36, February 2005) underscored that the pace and magnitude of the demographic transition in Finland and the implied earlier expected rise in age-related spending than elsewhere call for ambitious fiscal surpluses.


The productivity gains are especially high in a few sectors such as the Nokia-centered technology cluster. The low spillover effects to the rest of the economy are at least in part a reflection of the relative inflexibility of Finland’s labor and product markets (see Box 1, IMF Country Report No. 05/35, February 2005).


A Bank of Finland study (Kinnunen, Helvi, “Expenditure Pressures on Public Finances: How Much Can We Afford?” Bank of Finland Bulletin, 2004:3) suggests that even modest productivity growth in aging-related public services (especially health) would make a significant contribution to fiscal sustainability.


With estimated general government net financial assets of about 70 percent of GDP at end-2005, sustainability over the medium term is not in question.


Staff analysis suggests that additional measures to permanently raise the general government surplus by some two percentage points of GDP would be needed to ensure sustainability. However, as also underlined by similar recent work by Finnish officials, raising labor and product market efficiency could boost growth prospects and significantly reduce the degree of required fiscal adjustment (Box 2, IMF Country Report No. 05/35, February 2005, and Kilponen and Ripatti, “Labor and Product Market Reforms in General Equilibrium—Simulation Results Using a DGE Model of the Finnish Economy”, preliminary draft manuscript, May 2005).


OECD staff recently estimated that with unchanged productivity, replacing retiring municipal workers would by itself more than double the share of new labor market entrants pre-empted by municipalities from 20 to over 40 percent.


Daveri, Francesco, and Mika Maliranta “Aging, Technology and Productivity,” preliminary draft manuscript, September 2005.


The exposure of Finland’s financial parent institutions to risks from rapidly growing balance sheets in their Baltic offspring remains minimal at present.


Updated information relating to members positions in the Fund can be found on the IMF web site (

Finland: Staff Report for the 2005 Article IV Consultation
Author: International Monetary Fund