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IMF Executive Board Concludes 2014 Article IV Consultation with Norway

September 1, 2014

ENP Newswire - 01 September 2014

Release date- 29082014 - On August 28, 2014 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Norway.1.

The Norwegian economy slowed in 2013 with both mainland (i.e. non-oil) and offshore growth below the 2012 pace. Mainland growth moderated to 2.1 percent in part due to weak private consumption and mainland investment, while lower oil production kept offshore growth down. The unemployment remains low, at around 3.5 percent, in spite of a growing labor force due to immigration. House prices stabilized in mid-2013 although at high levels and the housing market shows signs of cooling. Inflation rose to about the inflation target, 2.5 percent, partly due to last year's exchange rate depreciation. The structural non-oil deficit was 3.1 percent of Government Pension Fund Global (GPFG) assets and 5.1 percent of trend mainland GDP. This is below the deficit permitted under the authorities' fiscal policy rule, but it still implies a positive fiscal impulse due to the strong growth in GPFG assets. The overall current account surplus remains high at 14 percent of mainland GDP but declined in 2013 partly due to weaker petroleum exports.

Banks' profitability has improved and capital ratios have strengthened. Banks continue to rely on wholesale funding, mostly in the form of covered bonds, and many banks still have some way to go before meeting the Liquidity Coverage Ratio (LCR) requirement. Norway's financial system is part of a tightly integrated Nordic-Baltic system. Inward links are mainly from Swedish and Danish banks with a combined market share of a quarter to a third. Outward links are relatively modest and concentrated in Nordic and Baltic countries and the shipping industry.

The near-term outlook remains stable with moderate growth and inflation. However, the medium and longer term present new challenges and uncertainties, particularly because of expected slowdown in oil and gas investment. Steadily increasing oil and gas investment over the last decade culminated in a 17 percent growth rate in 2013. With this investment expected to flatten out in 2014-15 before beginning a slow decline, new sources of growth are needed. Staff's central forecast is a continuation of growth with only a modest rise in unemployment in the next few years and inflation gradually rising back toward the target. However, this is based on a scenario in which the sources of growth shift away from supplying the oil and gas sector and toward other sectors of the economy or exports of oil-related goods and services.

There are risks to this scenario. A substantial decline in oil and gas prices could undercut growth through a reduction in demand for mainland goods and services, and through a reduction in private demand due to confidence and income effects. A significant reduction in housing process would likely reduce household consumption with adverse consequences for retail trade, construction, and commercial real estate and lenders to those sectors. Also, a more difficult transition to a growth model less dependent on supplying the oil and gas sector could result in slower growth and higher unemployment during the shift.

Executive Board Assessment2

Executive Directors commended Norway's continued steady economic growth, moderate inflation, low unemployment, and large current account and fiscal surpluses. Nevertheless, challenges remain. Directors agreed that policy priorities and structural reforms should be geared towards preserving financial stability, supporting the transition to an economy less dependent on oil and gas, and improving productivity and competitiveness.

Directors concurred that the current stance of monetary policy, under the authorities' inflation-targeting framework, is appropriate. Given that the economy is roughly at its potential, inflation is close to target, and house prices are stabilizing, the argument for a rate increase has diminished for now. Directors noted that the policy rate might eventually have to normalize to a level above the inflation target to meet the objectives of monetary policy, and to mitigate risks of overheating, particularly, in the real estate market.

Directors welcomed the authorities' prudent fiscal policy, in particular the decision to keep the spending of oil revenues well below 4 percent specified under the fiscal rule. While acknowledging the availability of resources for additional investments, most Directors saw merit in a more neutral fiscal policy stance as long as the economy remains near capacity. Directors welcomed the stronger capital requirements for banks ahead of the Basel III deadlines, in particular the higher capital requirements for mortgage lending. Given that these requirements are still in their early stages, they may need to be adapted as implementation proceeds. Directors commended the agreement among Nordic authorities on aligning capital requirements for mortgage lending by branches and subsidiaries to local economic conditions. They agreed that tighter capital standards and loan-to-value limits on mortgages should be maintained given the vulnerabilities stemming from high house prices and household debt and banks' reliance on wholesale funding, even if the housing market softens further.

Directors emphasized the importance of further structural reforms to improve productivity and competitiveness, and to promote the non-oil economy, and they looked forward to the report of the Productivity Commission. Priorities include further reforms of the labor market, pensions and public services, greater wage differentiation across sectors, and reducing protection and subsidies in agriculture. Directors also recommended increased use of cost-benefit analysis in the selection of infrastructure projects, and a simpler income tax system with fewer incentives for promoting housing to encourage productive investment.

Norway: Selected Economic and Social Indicators, 2008-15

Population (2013): 5.1 million

Per capita GDP (2013, USD): $100,318

Quota (1883.7 mil. SDR/0.79 percent of total)

Main products and exports: Oil, natural gas, fish (primarily salmon)

Literacy: 100 percent


2008 2009 2010 2011 2012 2013 2014 2015

Real economy (change in percent)

Real GDP 1/

0.0 -1.4 0.6 1.1 2.8 0.7 1.6 1.9

Real mainland GDP

1.5 -1.4 1.7 2.5 3.3 2.0 1.9 2.4

Domestic demand

1.1 -4.0 3.6 3.2 3.4 3.3 2.1 2.4

Private consumption

2.0 -0.1 3.7 2.6 3.0 2.2 1.8 2.3

Private mainland fixed investment

2.3 -18.4 -4.1 7.7 5.9 2.9 2.9 4.8

Government consumption

2.4 4.5 1.2 1.1 1.8 1.8 2.1 2.1

Unemployment rate (percent of labor force)

2.6 3.2 3.6 3.3 3.2 3.5 3.7 3.8

Output gap (mainland economy, - implies output below potential)

1.2 -1.1 -1.3 -0.9 0.2 -0.1 -0.3 -0.3

CPI (average)

3.8 2.2 2.4 1.3 0.7 2.1 2.0 2.0

CPI (end of period)

2.1 2.0 2.8 0.2 1.4 2.0 2.0 2.0

Gross national saving (percent of GDP)

40.4 34.0 35.2 37.3 39.2 37.5 37.3 37.5

Gross domestic investment (percent of GDP)

24.5 22.3 23.3 23.8 24.9 26.4 26.6 27.2

Public finance

Central government (fiscal accounts basis)

Overall balance (percent of mainland GDP) 2/

21.7 9.8 8.6 13.1 13.4 9.9 7.4 ...

Structural non-oil balance (percent of mainland trend GDP) 3/

-3.2 -5.1 -5.1 -4.4 -4.9 -5.1 -5.8 ...

in percent of Pension Fund Global capital 4/

2.9 -4.3 -3.9 -3.0 -3.3 -3.1 -2.8 ...

General government (national accounts basis)

Overall balance (percent of mainland GDP)

25.8 13.4 14.2 18.0 18.5 14.1 14.3 12.9

Net financial assets (percent of mainland GDP)

177.8 202.3 215.9 216.0 228.9 269.4 275.8 277.5

of which: capital of Government Pension Fund Global (GPFG)

122.0 140.6 154.7 159.5 174.1 217.6 226.3 230.4

Money and credit (end of period, 12-month percent change)

Broad money, M2

3.8 2.4 5.2 6.2 3.8 6.0 ... ...

Domestic credit, C2

12.0 2.9 6.1 6.9 5.9 6.8 ... ...

Interest rates (year average, in percent)

Three-month interbank rate

6.2 2.5 2.5 2.9 2.2 1.8 ... ...

Ten-year government bond yield

4.5 4.0 3.5 3.1 2.1 2.6 ... ...

Balance of payments (percent of mainland GDP)

Current account balance

21.9 14.9 15.3 17.9 19.0 14.4 14.0 13.3

Balance of goods and services

23.7 15.6 15.3 18.1 17.7 14.0 14.4 12.9

Mainland trade balance of goods

7.8 -6.5 -6.8 -7.5 -8.0 -8.0 -9.4 -9.1

Offshore trade balance of goods

31.4 21.7 22.0 26.0 26.4 24.8 24.9 22.9

Exports of goods and services (volume change in percent)

0.7 -3.7 0.1 -1.4 1.1 -3.3 1.2 1.3

Imports of goods and services (volume change in percent)

4.1 -12.7 9.3 3.6 2.2 2.7 2.4 2.7

Terms of trade (change in percent)

13.1 -17.3 7.2 9.9 1.2 0.8 ... ...

International reserves (end of period, in billions of US dollars)

50.9 48.9 52.8 49.4 51.9 58.3 ... ...

Fund position

Holdings of currency (percent of quota)

88.4 80.6 76.6 71.4 71.1 78.2 ... ...

Holdings of SDR (percent of allocation)

169.0 102.4 102.0 97.5 96.1 95.1 ... ...

Quota (SDR millions)

1,672 1,672 1,672 1,884 1,884 1,884 ... ...

Exchange rates (end of period)

Exchange rate regime


Bilateral rate (NOK/USD), end-of-period

7.0 6.2 5.8 5.7 5.8 6.0 ... ...

Nominal effective rate (2005=100)

87.5 99.8 99.9 101.4 105.4 95.3 ... ...

Real effective rate (2005=100)

86.4 99.4 99.9 98.9 102.4 93.2 ... ...

Sources: Ministry of Finance, Norges Bank, Statistics Norway, International Financial Statistics, United Nations Development Programme 2011, and IMF staff calculations.

1/ Based on market prices which include 'taxes on products, including VAT, less subsidies on products'.

2/ Projections based on authorities's 2014 budget.

3/ Authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects.

4/ Over-the-cycle deficit target: 4 percent.

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. 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 summing up can be found here:

2 At the conclusion of the discussion, the Managing Director, as a 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 summing up can be found here:


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Source: ENP Newswire

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