IMF Executive Board Concludes 2022 Article IV Consultation with Finland
January 23, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Finland on January 18, 2023.
The strong post-Covid recovery is faltering due to the spillovers from Russia’s invasion of Ukraine. Government policies has helped bring output back to the pre-pandemic trend and employment to a record-high level. But growth turned negative in the third quarter of 2022, reflecting the fallout from the war: reduced trade with Russia and higher energy prices weighing—alongside higher interest rates—on private consumption and investment. Energy prices are passing through to core prices, sustaining inflation. Wage growth has remained moderate, but recent agreements in the public sector point to pressures.
Economic activity is expected to stall in 2023. Further contraction in private demand is expected to be only partially offset by higher public spending. Growth is projected to start recovering in 2024 and return to a subdued trend rate of around 1¼, reflecting adverse demographics and low productivity growth. Risks are skewed to the downside given uncertainties related to the war. Headline inflation is expected to remain at about 4½ percent in 2023, and to return to the 2 percent target in the medium term.
The fiscal deficit is expected to widen, providing a mild stimulus in 2023 and putting public debt on a riskier path. The deficits are projected to be higher than the pre-war path by about 1 percentage point. The widening of the 2023 deficit reflects the impact of measures to compensate for higher energy prices along with higher security-related spending. The latter persists into the medium term. Under unchanged policies, the debt ratio would increase from around 72 percent of GDP in 2022 to close to 80 percent by 2028.
The banking sector is well-capitalized and profitable, and in terms of solvency, resilient to adverse macroeconomic shocks. However, the banking sector is also large, concentrated, highly connected with other financial systems in the Nordic region, and heavily reliant on wholesale funding which exposes it to liquidity shocks. Household debt remains elevated and corporate debt has also risen.
Executive Board Assessment [2]
Executive Directors commended the authorities’ decisive response to the spillovers from Russia’s war against Ukraine, including finding alternative energy sources. They also welcomed the adoption of structural reforms to boost employment and productivity. However, they noted that the economic outlook has deteriorated, and inflation remains elevated. In that context, Directors encouraged the authorities to focus their policy efforts on enhancing fiscal sustainability, while continuing to implement reforms necessary to address remaining structural impediments, reinforce the resiliency of the financial system, and advance Finland’s ambitious green agenda.
Directors agreed that fiscal policy, in the near term, should be supportive of monetary policy. They generally concurred that a slightly tighter fiscal stance relative to 2022 would be desirable in 2023 and agreed that security spending and support to the vulnerable should be prioritized. While acknowledging implementation difficulties in a short timeframe, Directors encouraged the authorities to better target the support measures in response to elevated energy prices. Noting widening fiscal deficits over the medium term, Directors agreed that a gradual but sustained fiscal consolidation is needed to put the public debt ratio on a declining path and create room for aging-related spending. The authorities’ plan to strengthen the fiscal framework and carry out a comprehensive spending and tax revenue reviews to identify possible consolidation measures is welcome.
Directors agreed that boosting employment and productivity remains key for growth and sustainability. They called for further measures to reduce work disincentives, improve access to tertiary education and attract foreign labor, and for more flexibility within the coordinated wage bargaining framework to support employment. They welcomed government’s proposal to increase R&D spending to 4 percent of GDP in the medium term and called for the spending to be targeted.
Directors agreed that the financial system remains resilient post pandemic. They welcomed the progress in recent years in strengthening the oversight of the Finnish financial system and broadly supported the key policy recommendations of the 2022 Financial Sector Assessment Program (FSAP). Directors concurred that additional measures, including strengthening the operational independence of the financial supervisory authority (FIN-FSA), reinstating systemic risk buffers, enhancing the banking sector’s resilience to liquidity shocks and cross-border exposures in the Nordic region, and improving the macroprudential toolkit to address vulnerabilities from high household indebtedness, are needed. Directors also encouraged the authorities to legislate a positive neutral rate for the countercyclical capital buffer to help build macroprudential policy space in the medium term. Further strengthening of the AML/CFT supervision remains important.
Directors commended Finland’s ambitious climate goals but emphasized that further measures, including reforms to carbon pricing, would be needed to achieve the 2035 carbon neutrality target.
It is expected that the next Article IV consultation with Finland will be
held on the standard
12-month cycle.
[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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Finland: Selected Economic and Social Indicators, 2020–28 |
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2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
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|
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Proj. |
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|
(Percentage change, unless otherwise indicated) |
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|
Output and demand (volumes) |
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|
GDP |
-2.2 |
3.0 |
2.0 |
0.0 |
1.3 |
1.3 |
1.3 |
1.3 |
1.2 |
|
Domestic demand |
-2.0 |
2.8 |
3.5 |
0.1 |
0.8 |
1.6 |
1.3 |
1.3 |
1.3 |
|
Private consumption |
-4.0 |
3.7 |
2.5 |
-0.1 |
0.6 |
0.7 |
0.9 |
0.8 |
0.8 |
|
Public consumption |
0.3 |
2.9 |
1.9 |
0.9 |
0.1 |
0.9 |
0.9 |
1.0 |
1.0 |
|
Gross fixed capital formation |
-0.9 |
1.5 |
4.3 |
-0.3 |
1.0 |
3.5 |
2.0 |
2.1 |
2.1 |
|
Net exports (contribution to growth in percent of GDP) |
-0.7 |
-0.2 |
-1.5 |
-0.1 |
0.5 |
-0.3 |
0.0 |
0.0 |
0.0 |
|
Prices, costs, and income |
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|
Consumer price inflation (harmonized, average) |
0.4 |
2.1 |
7.2 |
4.4 |
2.5 |
2.2 |
1.8 |
1.8 |
1.8 |
|
Labor market |
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|
Labor force |
-0.4 |
2.2 |
1.9 |
0.5 |
0.1 |
0.0 |
0.2 |
0.0 |
0.0 |
|
Employment |
-1.5 |
2.4 |
2.8 |
0.0 |
0.4 |
0.2 |
0.2 |
0.2 |
0.0 |
|
Unemployment rate (in percent) |
7.8 |
7.6 |
6.8 |
7.3 |
7.0 |
6.9 |
6.9 |
6.8 |
6.8 |
|
Potential output |
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|
Output gap (in percent of potential output)1 |
-2.7 |
-0.9 |
0.1 |
-0.8 |
-0.5 |
-0.3 |
-0.1 |
0.0 |
0.0 |
|
Growth in potential output |
0.9 |
1.0 |
1.0 |
1.0 |
1.0 |
1.1 |
1.1 |
1.1 |
1.2 |
|
(Percent of GDP) |
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|
General government finances2 |
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|
Overall balance |
-5.5 |
-2.7 |
-1.5 |
-2.6 |
-2.2 |
-2.5 |
-2.5 |
-2.7 |
-2.8 |
|
Primary balance3 |
-5.4 |
-2.8 |
-1.6 |
-2.6 |
-2.2 |
-2.4 |
-2.4 |
-2.6 |
-2.8 |
|
Structural balance (in percent of potential GDP) 4 |
-3.4 |
-2.2 |
-1.8 |
-2.0 |
-1.9 |
-2.3 |
-2.4 |
-2.6 |
-2.7 |
|
Structural primary balance (in percent of potential GDP) 5 |
-3.3 |
-2.2 |
-1.9 |
-2.0 |
-1.9 |
-2.2 |
-2.2 |
-2.5 |
-2.7 |
|
Gross debt |
74.8 |
72.3 |
72.1 |
73.6 |
74.7 |
75.9 |
77.1 |
78.7 |
80.3 |
|
Net debt6 |
-64.1 |
-72.1 |
-66.5 |
-61.3 |
-56.8 |
-52.3 |
-48.2 |
-44.1 |
-40.0 |
|
Balance of payments |
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|
Current account balance |
0.7 |
0.6 |
-2.9 |
-2.9 |
-1.7 |
-0.9 |
-0.6 |
-0.5 |
-0.3 |
|
Goods and services balance |
0.2 |
0.2 |
-3.0 |
-3.1 |
-2.1 |
-1.6 |
-1.3 |
-1.2 |
-1.1 |
|
Net international investment position |
-4.5 |
-1.4 |
-4.1 |
-6.8 |
-8.2 |
-8.7 |
-8.9 |
-9.1 |
-9.0 |
|
Gross external debt |
222.7 |
208.1 |
211.9 |
215.1 |
216.3 |
216.1 |
216.5 |
217.4 |
217.4 |
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Sources: Bank of Finland, BIS, International Financial Statistics, IMF Institute, Ministry of Finance, Statistics Finland, and IMF staff calculations. |
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1 A negative value indicates a level of actual GDP that is below potential output. |
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2 Fiscal projections include measures as specified in the General Government Fiscal Plan. |
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3 Adjusted for interest expenditures and receipts. |
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4 Not adjusted for COVID-related one-off measures. |
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5 Adjusted for interest expenditures and receipts. Not adjusted for COVID-related one-off measures. |
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6 Defined as the negative of net financial worth (i.e., debt minus assets). |
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MEDIA RELATIONS
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