Abstract
IMF Country Report No. 23/56
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IMF Country Report No. 23/56
FRANCE
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR FRANCE
January 2023
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with France, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its January 25, 2023, consideration of the staff report that concluded the Article IV consultation with France.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 25, 2023, following discussions that ended on November 18, 2022, with the officials of France on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 4, 2022.
An Informational Annex prepared by the IMF staff.
A Staff Supplement updating information on recent developments.
A Statement by the Executive Director for France.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2023 International Monetary Fund
Press Release
PR23/21
IMF Executive Board Concludes 2022 Article IV Consultation with France
FOR IMMEDIATE RELEASE
WASHINGTON, DC – January 30, 2022: On January 25, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with France.
France saw a robust recovery from the Covid-19 shock but is now facing the repercussions of Russia’s war in Ukraine. In 2021, output rebounded by 6.8 percent and recovered to pre-crisis levels. The recovery was broad-based and faster than in most other European countries. While France is less directly exposed to the energy shock, the war in Ukraine is dampening the recovery by denting confidence and exacerbating supply-side difficulties. Staff expect growth of 2.6 percent for 2022. Inflation has surged over the past year, driven by supply chain bottlenecks and the energy price shock, but remains well-below peers thanks to energy price controls and subsidies. These and other measures to support purchasing power keep the fiscal deficit elevated despite the unwinding of Covid-19 support. While capacity utilization remains below pre-crisis levels, labor market conditions have further tightened. The banking sector has weathered the crisis soundly, though financial stability risks are increasing.
The large fiscal response to the energy price shock has cushioned the economic impact but has been costly, poorly targeted, and distortionary. Support totaling 2 percent of GDP in 2021-22 has been centered on households and largely channeled through untargeted, and thus costly, energy price measures and cash transfers. For 2023, the price cap is raised by 15 percent—with poorer households compensated upfront through cash transfers—while a more targeted fuel voucher (“chèque carburant”) for households earning up to median income replaces the fuel subsidy (“remise carburant”). In parallel, energy bill support to firms will be scaled up, funded from a new infra-marginal rent tax and solidary contribution from energy producers. France’s fiscal response to successive shocks over 2020-22 has been swift and effective but costly, narrowing its fiscal space and widening the public debt gap relative to Euro Area peers.
Staff projects growth at 0.7 percent in 2023, while inflation will remain persistent over the next two years as price controls ease. Near-term risks are titled to the downside stemming from a prolonged war and an escalation of sanctions and a further spike in gas and electricity prices, faster-than-expect monetary policy adjustments in Europe or elsewhere, and a deeper slowdown in the US or China. Over the medium-term, output will grow near potential but scarring from the pandemic and the energy shock will leave output some 2 percentage points below the pre-pandemic trend. The government sees unemployment, pension, and vocational training reforms, as well as measures to foster youth employment as key levers to raise labor supply and potential growth. The energy crisis also presents opportunities to accelerate the green transition.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They noted that France saw a strong economic recovery from the Covid-19 shock but is now facing strong headwinds. While it has been less affected than most EU countries by the energy crisis due to a lower reliance on Russian gas and a strong policy response, economic activity is slowing sharply and inflation will remain persistent as energy price controls ease. Directors stressed that risks are titled to the downside stemming from possible further impacts of Russia’s war in Ukraine, faster-than-expected monetary tightening and a deeper global slowdown.
Directors welcomed the effectiveness of the fiscal response to the energy shock in containing the impact on output and inflation but noted that its largely untargeted nature pushed up costs and reduced incentives to lower energy consumption. While many Directors agreed with the staf f’s recommendation for a modest fiscal tightening in 2023, including by accelerating the phase-out of energy price controls and better targeting support, a number of Directors saw merit in a more gradual adjustment with the exit from price controls conditional on market developments and the policy response at the regional level. Directors broadly agreed that a sustained expenditure-led fiscal consolidation over the medium term will be critical to rebuild buffers and bring debt on a firmly downward path while leaving space to accelerate green and digital investment. Noting that implementation of the unemployment benefit and pension reform plans could deliver part of the needed adjustment, they emphasized the need for additional reforms, including to rationalize tax expenditures and enhance spending efficiency.
Directors noted that the banking sector has weathered the crisis soundly, but global financial stability risks are increasing, including from the impact of the economic slowdown on corporate balance sheets, increased credit risk from energy intensive and inflation affected sectors, and a possible downturn in the housing market. Directors supported the authorities’ decision to raise the counter-cyclical buffer to guard against the buildup of financial stability risks but cautioned that the buffer should be promptly released should there be a sudden deterioration of financial conditions.
Directors urged continued action to reduce labor market frictions and increase labor supply. They welcomed the recently approved unemployment benefits reform and upcoming pension reform which will help raise the labor supply. In addition, Directors recommended policies to improve educational outcomes and alleviate skills mismatches.
Directors underscored the urgency of the transition to cleaner and more secure energy sources. They stressed the importance of streamlining regulatory and judicial procedures for renewable energy development and increasing carbon pricing while providing support for vulnerable households as part of a broader package of climate measures.
Directors commended the authorities for France’s leadership in multilateral cooperation and looked forward to their continued leadership in addressing global challenges.
It is expected that the next Article IV consultation with France will be held on the standard 12-month cycle.
France: Selected Economic Indicators, 2019-23
France: Selected Economic Indicators, 2019-23
| Projections | |||||
|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Real economy (change in percent) | |||||
| Real GDP | 1.9 | -7.9 | 6.8 | 2.6 | 0.7 |
| Domestic demand | 2.1 | -6.7 | 6.6 | 3.1 | 0.5 |
| Foreign balance (contr. to GDP growth) | -0.3 | -1.0 | 0.0 | -0.6 | 0.1 |
| CPI (year average) | 1.3 | 0.5 | 2.1 | 5.9 | 5.0 |
| GDP deflator | 1.2 | 2.9 | 1.3 | 2.6 | 3.5 |
| Public finance (percent of GDP) | |||||
| General government balance | -3.1 | -9.0 | -6.5 | -5.0 | -5.3 |
| Revenue | 52.3 | 52.5 | 52.5 | 53.5 | 52.8 |
| Expenditure | 55.4 | 61.5 | 59.1 | 58.4 | 58.1 |
| Primary balance | -1.7 | -7.8 | -5.2 | -3.2 | -3.7 |
| Structural balance (percent of pot. GDP) | -2.1 | -5.8 | -5.2 | -4.4 | -4.5 |
| General government gross debt | 97.4 | 114.7 | 112.6 | 111.6 | 112.0 |
| Labor market (percent change) | |||||
| Employment | 0.8 | -0.3 | 1.7 | 0.4 | -0.1 |
| Labor force | 0.1 | -0.7 | 1.6 | 0.0 | 0.0 |
| Unemployment rate (percent) | 8.4 | 8.0 | 7.9 | 7.5 | 7.6 |
| Credit and interest rates (percent) | |||||
| Growth of credit to the private non-financial sector | 5.3 | 8.1 | 2.5 | 3.8 | 4.2 |
| Money market rate (Euro area) | -0.4 | … | … | … | … |
| Government bond yield, 10-year | 0.1 | … | … | … | … |
| Balance of payments (percent of GDP) | |||||
| Current account | 0.5 | -1.8 | 0.4 | -1.5 | -1.6 |
| Trade balance of goods and services | -0.9 | -1.8 | -1.2 | -1.7 | -1.5 |
| Exports of goods and services | 32.7 | 28.4 | 31.2 | 39.3 | 40.7 |
| Imports of goods and services | -33.6 | -30.2 | -32.4 | -41.1 | -42.2 |
| FDI (net) | 1.1 | 0.2 | -0.4 | 0.4 | 0.8 |
| Official reserves (US$ billion) | 69.7 | … | … | … | … |
| Exchange rates | |||||
| Euro per U.S. dollar, period average | 0.89 | … | … | … | … |
| NEER, ULC-styled (2005=100, +=appreciation) | 97.1 | … | … | … | … |
| REER, ULC-based (2005=100, +=appreciation) | 90.2 | … | … | … | … |
| Potential output and output gap | |||||
| Potential output (change in percent) | 1.0 | -3.3 | 3.7 | 1.5 | 1.0 |
| Memo: per working age person | 1.2 | -3.2 | 4.1 | 1.5 | 1.0 |
| Output gap | 0.0 | -4.7 | -1.9 | -0.8 | -1.1 |
France: Selected Economic Indicators, 2019-23
| Projections | |||||
|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Real economy (change in percent) | |||||
| Real GDP | 1.9 | -7.9 | 6.8 | 2.6 | 0.7 |
| Domestic demand | 2.1 | -6.7 | 6.6 | 3.1 | 0.5 |
| Foreign balance (contr. to GDP growth) | -0.3 | -1.0 | 0.0 | -0.6 | 0.1 |
| CPI (year average) | 1.3 | 0.5 | 2.1 | 5.9 | 5.0 |
| GDP deflator | 1.2 | 2.9 | 1.3 | 2.6 | 3.5 |
| Public finance (percent of GDP) | |||||
| General government balance | -3.1 | -9.0 | -6.5 | -5.0 | -5.3 |
| Revenue | 52.3 | 52.5 | 52.5 | 53.5 | 52.8 |
| Expenditure | 55.4 | 61.5 | 59.1 | 58.4 | 58.1 |
| Primary balance | -1.7 | -7.8 | -5.2 | -3.2 | -3.7 |
| Structural balance (percent of pot. GDP) | -2.1 | -5.8 | -5.2 | -4.4 | -4.5 |
| General government gross debt | 97.4 | 114.7 | 112.6 | 111.6 | 112.0 |
| Labor market (percent change) | |||||
| Employment | 0.8 | -0.3 | 1.7 | 0.4 | -0.1 |
| Labor force | 0.1 | -0.7 | 1.6 | 0.0 | 0.0 |
| Unemployment rate (percent) | 8.4 | 8.0 | 7.9 | 7.5 | 7.6 |
| Credit and interest rates (percent) | |||||
| Growth of credit to the private non-financial sector | 5.3 | 8.1 | 2.5 | 3.8 | 4.2 |
| Money market rate (Euro area) | -0.4 | … | … | … | … |
| Government bond yield, 10-year | 0.1 | … | … | … | … |
| Balance of payments (percent of GDP) | |||||
| Current account | 0.5 | -1.8 | 0.4 | -1.5 | -1.6 |
| Trade balance of goods and services | -0.9 | -1.8 | -1.2 | -1.7 | -1.5 |
| Exports of goods and services | 32.7 | 28.4 | 31.2 | 39.3 | 40.7 |
| Imports of goods and services | -33.6 | -30.2 | -32.4 | -41.1 | -42.2 |
| FDI (net) | 1.1 | 0.2 | -0.4 | 0.4 | 0.8 |
| Official reserves (US$ billion) | 69.7 | … | … | … | … |
| Exchange rates | |||||
| Euro per U.S. dollar, period average | 0.89 | … | … | … | … |
| NEER, ULC-styled (2005=100, +=appreciation) | 97.1 | … | … | … | … |
| REER, ULC-based (2005=100, +=appreciation) | 90.2 | … | … | … | … |
| Potential output and output gap | |||||
| Potential output (change in percent) | 1.0 | -3.3 | 3.7 | 1.5 | 1.0 |
| Memo: per working age person | 1.2 | -3.2 | 4.1 | 1.5 | 1.0 |
| Output gap | 0.0 | -4.7 | -1.9 | -0.8 | -1.1 |
Title page
FRANCE
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
January 4, 2023
KEY ISSUES
Context: France saw a robust recovery from the Covid-19 shock but is now facing the repercussions of Russia’s war in Ukraine. In 2021, output rebounded by 6.8 percent and recovered to pre-crisis levels. The recovery was broad-based and faster than in most other European countries. While France is less directly exposed to the energy shock, the war in Ukraine is dampening the recovery by denting confidence and exacerbating supply-side difficulties. Inflation has surged but remains well-below peers thanks to energy price controls and subsidies. These and other measures to support purchasing power keep the fiscal deficit elevated despite the unwinding of Covid-19 support. While capacity utilization remains below pre-crisis levels, labor market conditions have further tightened.
Outlook: Staff estimates growth at 2.6 percent in 2022 and 0.7 percent in 2023, with inflation averaging 5.9 and 5 percent, respectively. Near-term risks to the outlook are tilted to the downside, dominated by possible further impacts of Russia’s war against Ukraine. Under current policies, the fiscal deficit is expected to narrow as support is phased out and the economy recovers but will remain elevated at 4 percent of GDP in the medium term.
Policies: Key policy priorities are:
Fiscal Policy: The fiscal stance in 2023 should begin to normalize from its highly stimulative position over the last 3 years, thus supporting monetary policy by easing demand pressures, through a structural effort of 3/4 ppt of GDP relative to staff’s baseline structural deficit of 41/2 percent of GDP. Better targeting energy support and accelerating the phase-out of energy price controls would help underpin this effort. This should be followed by a steady, expenditure-led consolidation until reaching a structural deficit of 0.4 percent of GDP in 2030, consistent with France’s previous medium-term objective (MTO). Doing so would require a sustained annual effort averaging 0.7 percent over 2024-30, for a cumulative effort of about 5 percent of GDP relative to staff’s baseline. This would bring public debt on a firmly downward path from 2024.
Financial policy: Systemic risks in the financial sector have increased since the onset of the war, despite high profitability. Banking supervision should remain vigilant against possible negative effects of increased credit risk from vulnerable corporates. Staff support the authorities’ decision to further tighten the counter-cyclical buffer to a rate above pre-pandemic levels given the buildup of financial stability risks and still low cost of capital for banks.
Structural policy: Labor market policies should ensure smooth transition of apprentices into permanent work while addressing skills shortages and inferior educational outcomes. Continuing structural reforms, particularly in pensions, unemployment, and product and services markets will be essential for future fiscal health as well as better competitiveness and growth. The energy crisis presents an opportunity to accelerate the green transition through energy conservation and a faster switch to renewable energy.
Approved By
Julie Kozack (EUR) and Maria Gonzalez (SPR)
Discussions took place virtually and in Paris from November 7– 18, 2022. The staff team comprised J. Franks (mission head), R. Vermeulen, I. Teodoru, M. Patnam, R. Lee (all EUR), and was assisted at headquarters by P. Castillo and K. Cerrato (both EUR). Arnaud Buisse (Executive Director) joined the mission. Staff met with the Central Bank Governor Villeroy de Galhau; senior officials in the president and prime minister’s offices, various ministries, and the Cour des Comptes; financial sector interlocutors, think tanks, and academics; trade union and employer association representatives; and had a conference call with the SSM. A press conference was held at the end of the mission.
Contents
CONTEXT AND RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Fiscal Policy: Focusing Crisis Support and Reducing the Deficit
B. Maintaining Financial Sector Stability in Choppy Waters
C. Structural Policies to Increase Potential Growth
STAFF APPRAISAL
BOXES
1. EDF’s Renationalization
2. Spending Efficiency and Educational Attainment in France
3. Investment Needs for the Climate Transition in France
FIGURES
1. Economic Recovery, Confidence, and Supply-Side Difficulties
2. Energy Supply, Gas Imports, and Gas Storage
3. Inflation, Wages, and Effect of the Energy Shock on Households Burdens
4. Emissions and Targets for ETS and ESR Sectors by 2030
5. Real Sector Developments
6. Labor Sector Developments
7. External Sector Developments
8. Fiscal Sector Developments
9. Financial Sector Developments
TABLES
1. Purchasing Power Measures
2. Selected Economic Indicators, 2019–27
3. General Government Operations, 2019–27
4. Balance of Payments, 2019–27
5. Vulnerability Indicators, 2014–22
6. Core Financial Soundness Indicators, 2016-22
ANNEXES
I. Authorities’ Response to Past IMF Policy Recommendations
II. 2019 Key FSAP Recommendations—Implementation Status
III. External Sector Assessment
IV. Risk Assessment Matrix
V. OECD Phase 4 Report
VI. Sovereign Risk and Debt Sustainability Analysis
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 prep ares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Man aging Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explan ation of any qualifiers used in summings-up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
