IMF Concludes Article IV Consultation With Sweden

by Ulrika Lomas, Tax-News.com, Brussels

14 August 2009

On August 7, the Executive Board of the International Monetary Fund (IMF) released details of the Article IV consultation with Sweden, concluded on July 22.

Sweden has been hit hard by the global financial crisis. Two of its banks built up large exposures in the Baltics that significantly increased loan losses beyond normal recessionary levels. Liquidity crunched in the wake of dysfunctional wholesale funding markets on which these banks increasingly relied, and extensive public guarantees only partly mitigated market unease about their capital adequacy, reports the IMF. Sweden was particularly vulnerable to the global recession that followed the crisis given the dominance of its output bundle by investment goods and consumer durables. Exports turned sharply negative in the fourth quarter after weakening throughout 2008, and with investment following them down, leading to large reductions in economic activity and inflation.

Monetary policy decisions have supported the economy and helped address downside tail risks, but prospects for recovery are very much dependent on developments abroad. If global demand for Sweden’s output bundle recovers slowly relative to other components, the IMF believes that Sweden could have a late exit out of the current recession. The IMF estimates that the economy will contract by 6% in 2009, with a modest recovery beginning in the middle of 2010.

In its recommendations the IMF endorsed the significant fiscal stimulus provided by the 2009 budget, notably via full play of the large fiscal stabilizers and the planned discretionary measures—which has been made possible by Sweden’s strong fiscal performance in recent years. While most Directors consider that at this point there is no need for additional discretionary fiscal action, the Executive Board as a whole underscored that any future measures should be carefully weighed-up in order to maintain Sweden’s fiscal sustainability and mitigate rising public debt. The IMF advocated that current fiscal rules should be retained, and many Directors considered that the nominal spending ceilings could be supported by a new commitment allowing for adjustments to the spending ceilings that offset the revenue impact of any further discretionary tax reforms.

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