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Author:
International Monetary Fund. European Dept.
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Publication Date:
26 Jul 2023
eISBN:
9798400246791
Language:
English
Keywords:
monetary policy tightening; statistics Norway; growth potential; article IV consultation discussion; transparency policy
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IMF Country Report No. 23/272

Abstract

IMF Country Report No. 23/272

Copyright Page

IMF Country Report No. 23/272

NORWAY

2023 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT

July 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 2023 Article IV consultation with Norway, the following documents have been released and are included in this package:

  • A Press Release

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on lapse-of-time basis following discussions that ended on June 8, 2023, with the officials of Norway on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 7, 2023.

  • An Informational Annex prepared by the IMF staff.

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

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

E-mail: publications@imf.org Web: http://www.imf.org

International Monetary Fund

Washington, D.C.

© 2023 International Monetary Fund

Press Release

PRESS RELEASE

PR23/274

IMF Executive Board Concludes 2023 Article IV Consultation with Norway

FOR IMMEDIATE RELEASE

Washington, DC - July 26, 2023: On July 24, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Norway and endorsed the staff appraisal without a meeting.2

Norway grew strongly in 2022 but the pace of output growth receded somewhat this year. Record-high energy and food prices together with much higher interest rates put pressure on households’ purchasing power. Nonetheless, mainland GDP growth is still expected to be positive, supported by strong business investment and exports. The fiscal position has remained solid underpinned by very low public debt and high financial assets. Norges Bank continued to tackle stubborn inflation with 9 policy rate hikes over 2022-23, raising policy rate to 3.75 percent by June 2023. Inflation has been stubborn, not least due to the weak krona and tight labor markets.

Executive Board Assessment

In concluding the 2023 Article IV consultation with Norway, Executive Directors endorsed staff’s appraisal, as follows:

Norway experienced one of the highest growth rates among advanced economies last year, and risks remain balanced. Growth is continuing but at a more modest pace. The country has experienced windfall gains from high petroleum and natural gas prices that have so far countered global headwinds. Growth prospects remain favorable, and imminent risks are balanced, not least due to Norway’s solid fundamentals and policy management. The external position in 2022 was moderately stronger than the level implied by medium-term fundamentals and desirable policies.

The fiscal position is strong but should attend to both short- and long-term pressures. In the near term, the fiscal stance should be more supportive of disinflation efforts. The structural non-oil deficit in the revised budget results in a mildly expansionary fiscal stance, contributing to higher aggregate demand, which in the context of persistent inflationary pressures should be avoided. While spending on energy subsidies is projected to decline this year due to lower electricity prices, potential savings could be realized by narrowing their coverage and calibrating them to help only vulnerable households. While public debt is sustainable, over the medium term, given aging-related spending pressures, additional measures are needed to make room for new investment and promoting climate initiatives. Proposals by the Expert Committee on Tax Reform could help make the tax system simpler and more efficient, while suggestions by the Pension Commission to link retirement age limits to life expectancy will have beneficial effects on both the sustainability of the system and labor force participation. However, the changes should be preceded by a comprehensive reform of Norway’s disability benefits.

Further monetary policy tightening is needed as inflation risks are to the upside. GDP growth and the output gap are projected to be positive this year, the labor market is still tight, and consumption, backed by savings accumulated during the pandemic, is still resilient. Against this background, elevated inflation expectations, currency weakness, and broad-based inflation pose upside risks. Accordingly, tighter monetary policy is needed to contain demand and durably bring down inflation to the 2 percent target, which will contribute to high and stable output and employment. Given the uncertainties about the transmission of monetary policy and its impact on the economy, it is important to continue to clearly communicate how economic developments affect the current and future policy stance.

The banking system is strong but tightening global conditions pose risks. Risks to financial stability appear to be broadly manageable, but continued vigilance is needed given the heightened uncertainty. While more data on the CRE sector are now available for surveillance, and several macroprudential measures have been put in place, further broadening of the toolkit remains appropriate, such as gradually introducing a sectoral systemic risk or countercyclical buffer for CRE. Given high household debt and elevated house prices, there is merit in making the limits on the size of mortgage loans relative to value permanent. As cyber risks are becoming a more prominent threat to financial stability, further strengthening of resilience to cyber-attacks is needed. An important step taken by Norges Bank together with the FSA is the roll out of the TIBER (Threat Intelligence-Based Ethical Red-teaming) framework. Improvements to the AML/CFT framework are ongoing, and the recommendations from a recently concluded IMF assessment of regional cross-border threats and vulnerabilities could be usefully implemented to further enhance supervision.

Progress on structural reforms has been piecemeal. Some steps have been taken in further upskilling the workforce, including increased vocational training and the planned introduction of a youth guarantee scheme. However, while spending on retraining has been increased, this has not led to a decline in benefit recipients and their effectiveness should continue to be assessed. Participation in the generous disability benefit system is still very high, draining public finances and depriving the labor market of the much-needed workforce. Also, the issue of housing affordability has become more prominent under high inflation and rising interest rates.

Norway continues make important efforts in climate mitigation and adaptation. Among several initiatives, Norway has introduced a schedule of carbon-price increases and has recently launched large-scale publicly supported projects for carbon-capture and storage. Further efforts are needed to fulfil Norway’s 2030 ambition under the Paris Agreement.

Norway: Selected Economic Indicators, 2020-28

article image
Sources: Norwegian Authorities; International Financial Statistics; United Nations Development Programme; and IMF staff calculations.

Based on market prices which include "taxes on products, including VAT, less subsidies on products."

Authorities’ key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects. Non-oil GDP trend

Over-the-cycle deficit target: 3 percent of Government Pension Fund Global.

Title Page

NORWAY

STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION

July 7, 2023

KEY ISSUES

After strong performance in 2022, some deceleration in growth is expected, given geopolitical headwinds and tightening of financial conditions, including globally. Risks are balanced, and there is ample policy space in the short term to accommodate downside surprises. However, leveraging its strong fundamentals, Norway is encouraged to focus on the longer-term structural agenda, given soon-to-be-pressing issues with demographics.

The revised budget implies a positive fiscal impulse at a time when fiscal policy should be more supportive of Norges Bank’s disinflationary effort. Over the medium-term, multi-year spending commitments and population ageing are expected to squeeze room for public spending on new policy measures. Tax system changes will be necessary, including housing taxation, to generate more revenue. On the expenditure side, pension system reform should be accompanied by changes to the generous disability system.

Monetary policy should be tightened further to rein in inflation. So far, households and businesses have been able to adjust to higher interest rates. Continued vigilance will be important to ensure that banks’ exposure to commercial real estate (CRE) remains contained. High bank capital and provisioning should help cushion against potential fallouts, including from high household debt. Progress made in strengthening the stability of the financial system is welcome. Further steps to buttress stability should include preserving tighter mortgage regulation limits for Oslo, phasing out mortgage interest deductibility, and higher risk buffers for CRE exposures.

Progress on structural reforms has been uneven. Some steps have been taken in further upskilling and integrating workers but addressing long-standing structural challenges that impede growth potential has been slow. High participation in the generous disability benefit system deprives the labor market of the needed participants. To improve affordability of rental and for-sale housing, targeted support to the most vulnerable, easing restrictions on the supply of new housing, and altering regulations to boost construction efficiency should be considered. Norway’s continuing efforts in tackling climate change challenges are commendable.

Approved By

M. Horton (EUR) and N. Tamirisa (SPR)

The Article IV Consultation discussions took place in Oslo during May 30-June 8, 2023. The staff team comprised E. Stavrev (head), S. Dell’Erba, A. Fotiou, and S. Vtyurina (all EUR). B. Slettvag (OED) joined the discussions. H. Jung and R. Srinivas (both EUR) provided administrative and data assistance. The mission met with Norges Bank Governor Ida Wolden Bache, other senior officials from the Ministry of Finance, Norges Bank, Finanstilsynet, Ministry of Labor and Social Inclusion, Ministry of Petroleum and Energy, Ministry of Climate and Environment, and Statistics Norway. The mission also met with representatives of the banking sector, labor unions, real estate sector, and academics.

Contents

  • RECENT DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Fiscal Policies

  • B. Monetary Policy

  • C. Financial Sector Policies

  • D. Structural Policies

  • STAFF APPRAISAL

  • BOXES

  • 1. The Impact of High Energy Prices and Compensating Measures for Households

  • 2. Proposals for Tax Reform

  • 3. Actions to Combat Foreign Bribery

  • 4. Impact of a Higher Carbon Price on the Economy

  • FIGURES

  • 1. Selected Economic Indicators

  • 2. Selected Fiscal Indicators

  • 3. Profit Margins, Labor Costs and Domestic Inflation

  • 4. Monetary Policy and Interest Rates

  • 5. Selected Financial Indicators

  • TABLES

  • 1. Selected Economic and Social Indicators, 2020-28

  • 2. Medium-Term Indicators, 2020-28

  • 3. External Indicators, 2020-28

  • 4. General Government Accounts, 2020-28

  • 5. Financial Soundness Indicators, 2018-22

  • 6. Monetary Survey, 2018-22

  • ANNEXES

  • I. Public Debt Sustainability Assessment

  • II. External Sector Assessment

  • III. Krone Developments and Implications for Monetary Policy

  • IV. Effect of Interest Rate Increases on Consumption in Norway

  • V. Risk Assessment Matrix

  • VI. Macroeconomic Impact of Pension Reform Proposals

  • VII. Status of 2020 FSAP Recommendations

  • VIII. Progress in Strengthening the AML/CFT Framework

  • IX. Authorities’ Responses to Past IMF Article IV Consulation Recommendations

  • X. Fostering Affordable Housing Reforms

1

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.

2

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. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Norway: 2023 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2023: Issue 272
Publisher:
International Monetary Fund
ISBN:
9798400246791
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9798400246791.002