IMF Executive Board Concludes 2023 Article IV Consultation with Norway
July 26, 2023
Washington, DC: On July 24, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation19F21F [1] with Norway and endorsed the staff appraisal without a meeting. 22F [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.
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Norway: Selected Economic Indicators, 2020–28 |
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Population (2022): 5.4 million |
Quota (3754.7 mil. SDR/0.78 percent of total) |
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Per capita GDP (2022): US$ 106,328.4 |
Literacy: 100 percent |
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Main products and exports: Oil, natural gas, fish (primarily salmon) |
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Projections |
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2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
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Real Economy |
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|
Real GDP (change in percent)1/ |
-1.3 |
3.9 |
3.3 |
2.1 |
2.5 |
1.8 |
1.5 |
1.4 |
1.4 |
|
Real mainland GDP (change in percent) |
-2.8 |
4.2 |
3.8 |
1.4 |
1.9 |
2.0 |
1.8 |
1.8 |
1.8 |
|
Final Domestic demand |
-3.9 |
4.0 |
4.8 |
0.9 |
1.6 |
1.9 |
1.9 |
1.9 |
1.9 |
|
Private consumption |
-6.2 |
4.4 |
6.9 |
0.6 |
1.1 |
1.9 |
2.0 |
2.0 |
2.0 |
|
Public consumption |
-0.5 |
5.0 |
0.1 |
1.6 |
1.7 |
1.6 |
1.6 |
1.6 |
1.6 |
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Gross fixed capital formation |
-3.1 |
1.7 |
6.7 |
0.5 |
2.4 |
2.4 |
2.2 |
2.2 |
2.1 |
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Exports |
-9.9 |
5.9 |
11.0 |
3.2 |
3.0 |
2.9 |
2.5 |
2.5 |
2.5 |
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Imports |
-10.5 |
2.7 |
11.5 |
1.5 |
1.7 |
2.1 |
2.2 |
2.3 |
2.3 |
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Unemployment rate (percent of labor force) |
4.6 |
4.4 |
3.3 |
3.6 |
3.8 |
3.8 |
3.8 |
3.8 |
3.8 |
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Output gap (mainland economy, - implies output below potential) |
-0.7 |
1.4 |
2.1 |
0.5 |
-0.5 |
-0.2 |
0.0 |
0.0 |
0.0 |
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CPI (average) |
1.3 |
3.5 |
5.8 |
5.8 |
3.5 |
2.6 |
2.2 |
2.0 |
2.0 |
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Core Inflation (average) |
3.0 |
1.7 |
3.9 |
5.9 |
4.4 |
3.0 |
2.4 |
2.0 |
2.0 |
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Real economy |
-1.3 |
3.9 |
3.3 |
2.1 |
2.5 |
1.8 |
1.5 |
1.4 |
1.4 |
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Public Finance |
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Structural non-oil balance (percent of mainland trend GDP) 2/ |
-11.7 |
-10.8 |
-9.8 |
-10.3 |
-10.1 |
-9.9 |
-9.8 |
-9.8 |
-9.8 |
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Fiscal impulse |
3.8 |
-0.9 |
-1.0 |
0.5 |
-0.2 |
-0.2 |
-0.1 |
0.0 |
0.0 |
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in percent of Pension Fund Global Capital 3/ |
-3.7 |
-3.3 |
-2.8 |
-3.0 |
-2.7 |
-2.5 |
-2.4 |
-2.4 |
-2.3 |
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Gross Public Debt (percent of GDP) |
46.1 |
42.8 |
37.2 |
38.8 |
38.7 |
38.4 |
38.3 |
37.8 |
37.3 |
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Money and credit (end of period, 12-month percent change) |
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Broad money, M2 |
12.1 |
10.4 |
5.6 |
… |
… |
… |
… |
… |
… |
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Domestic credit, C2 |
4.9 |
4.9 |
5.6 |
… |
… |
… |
… |
… |
… |
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Interest Rates (year average, in percent) |
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Three-month interbank rate |
0.4 |
0.8 |
0.8 |
… |
… |
… |
… |
… |
… |
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Ten-year government bond yield |
0.8 |
1.1 |
1.3 |
… |
… |
… |
… |
… |
… |
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Balance of Payments (Percent of total GDP) |
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Current account balance |
1.1 |
13.6 |
30.4 |
23.5 |
21.3 |
19.7 |
17.9 |
16.5 |
14.9 |
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Balance of goods and services (percent of mainland GDP) |
-1.1 |
16.6 |
44.2 |
33.1 |
29.7 |
27.0 |
24.2 |
21.9 |
19.4 |
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Terms of trade (change in percent) |
-16.1 |
43.3 |
45.1 |
-10.4 |
-5.2 |
-4.2 |
-5.4 |
-4.8 |
-5.0 |
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International reserves (end of period, in billions of US dollars) |
73.6 |
83.0 |
72.1 |
72.1 |
72.1 |
72.1 |
72.1 |
72.1 |
72.1 |
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Gross national saving |
32.5 |
39.2 |
51.0 |
46.0 |
44.7 |
43.6 |
42.1 |
41.0 |
39.7 |
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Gross domestic investment |
31.4 |
25.6 |
20.6 |
22.4 |
23.4 |
23.9 |
24.3 |
24.5 |
24.8 |
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Balance of payments (percent of total GDP) |
1.1 |
13.6 |
30.4 |
23.5 |
21.3 |
19.7 |
17.9 |
16.5 |
14.9 |
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Exchange Rates (end of period) |
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Bilateral rate (NOK/USD), end-of-period |
9.4 |
8.6 |
9.6 |
… |
… |
… |
… |
… |
… |
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Nominal effective rate (2010=100) |
76.2 |
80.5 |
79.9 |
… |
… |
… |
… |
… |
… |
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Real effective rate (2010=100) |
78.1 |
83.1 |
80.8 |
… |
… |
… |
… |
… |
… |
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Memo: |
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Nominal GDP (in Billions of US Dollars) |
367.6 |
490.3 |
579.4 |
524.9 |
527.6 |
534.2 |
536.6 |
549.5 |
561.0 |
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Sources: Norwegian Authorities; International Financial Statistics; United Nations Development Programme; and IMF staff calculations. |
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1/ Based on market prices which include "taxes on products, including VAT, less subsidies on products." |
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2/ Authorities' key fiscal policy variable; excludes oil-related revenue and expenditure, GPFG income, as well as cyclical effects. Non-oil GDP trend estimated by staff. |
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3/ Over-the-cycle deficit target: 3 percent of Government Pension Fund Global. |
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[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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