IMF Commends Switzerland On Fiscal Policy During Crisis

by Ulrika Lomas, Tax-News.com, Brussels

09 March 2009

Monetary and fiscal policy measures adopted by Switzerland during the course of the financial and economic crisis have been commended this week by the International Monetary Fund following its recent evaluation of the jurisdiction.

The findings are published within the IMF’s Annual Country Report on Switzerland, a periodical review of the Swiss economic and financial climate which was carried out by an IMF delegation between February 25 and March 9, 2009.

Within its findings the IMF emphasised that the Swiss economy was in robust health at the start of the global financial and economic crisis. Growth was strong, unemployment was low and inflation was modest, while the fiscal and external positions were strong. However, due to its international openness, in particular of its financial sector and its trade in goods, Switzerland is also more vulnerable to shocks in the global markets. It thus cannot 'escape' the significant, international, financial turmoil and the global economic downturn, warned the IMF.

For 2009 the IMF expects a significant economic decline in the Swiss economy. Above all the slump in exports and the drop in investment expenditures will have a negative impact. Domestic consumer spending, which up to now has been resilient, will also drop, should unemployment continue to rise. The IMF however has cited that growth should pick up gradually in 2010, in line with the expected global recovery.

Due to the economic importance of its financial centre, financial market stability is particularly significant for Switzerland. In this respect, the IMF recognises the effectiveness of the package of measures to strengthen Switzerland's financial system. However, the IMF does not rule out another wave of instabilities in the financial system. There are risks in particular linked to a possible decline in asset values of the big institutions and funding constraints in international capital markets.

In the opinion of the IMF, effective regulation and supervision of the financial sector is essential. FINMA must therefore promote the build up of the necessary capacities, integrate the various sectoral regulatory approaches and strengthen its systemic surveillance. Due to the fact that the instability has an impact on other areas of the financial sector, surveillance of big insurance companies and medium and small banks should in particular be paid particular attention, alongside the surveillance of the big banks. In addition, there is a need to continue strengthening pension fund supervision (by cantons), suggested the IMF.

The IMF welcomes the measures taken by the Swiss National Bank in a difficult economic environment over the last few months. The internationally coordinated, aggressive cut in the base rates and the increased liquidity supply had a supportive effect. In Switzerland, there are no discernible signs of a credit squeeze, showed the IMF’s findings. The mortgage market is currently benefiting from low interest rates and stable property prices. In spite of low interest rates, the National Bank's room for manoeuvre has not yet been exhausted, established the IMF.

Despite welcome economic stability measures introduced up to now, the IMF has urged the use of a third package of measures to support domestic demand in the coming year.

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