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IMF Concludes 2009 Article IV Consultation With Switzerland,
by Ulrika Lomas, Tax-News.com, Brussels
Friday, June 05, 2009
The IMF has concluded its Article IV consultation with Switzerland. The IMF expects
that, given Switzerland’s openness and the size of its financial sector,
the economy will experience a significant contraction in the near-term, with sizable
downside risks to the outlook. The key policy priority according to the IMF is to maintain domestic
financial stability, which contributes also to international financial stability
through Switzerland’s strong international linkages.
Measures taken towards this key priority include a relaxation of macroeconomic
policies, creation of the bank stabilization fund, enhancements to deposit insurance,
and introduction of innovative capital requirements, including a minimum leverage
ratio. The creation of a new integrated supervisor (FINMA) provides a good opportunity
to strengthen financial supervision.
Switzerland enjoyed above average economic performance from 2004
to 2007. However the IMF expects economic growth to decline from 1.6% in 2008
to -3.0% in 2009. CPI inflation declined sharply in late 2008 due to fuel and food price
decreases and is expected to remain negative in the near-term, given base effects
and a weak global environment. For 2009, inflation is projected to average -0.6%,
with negative inflation continuing into 2010. Flat real wage growth helped to
support competitiveness, but export market shares have fallen.
With inflationary expectations declining rapidly, and the currency appreciating
due to safe haven effects, the Swiss National Bank (SNB) aggressively relaxed
the monetary stance. The SNB’s target range for the 3-month Libor has
been decreased by 250 basis points since October and now stands at 0 to 0.75%.
To counter an unwanted tightening of monetary and financial conditions, the
SNB implemented quantitative easing measures in March, including foreign exchange
intervention to limit upward pressure on the Swiss franc.
After budgetary surpluses in 2006–07 of some 2% of GDP, the fiscal stance
was neutral in 2008. The general government recorded a surplus of about 1%,
as continued surpluses at lower levels of government offset a small federal
deficit. Debt to GDP ratios have fallen below 42% but aging-related expenditures
are expected to reverse this trend in the medium-term. A fiscal impulse and
full use of automatic stabilizers are expected to push the general government
balance into deficit in 2009.
The IMF Directors' assessment included the following:
They praised the authorities for their active cooperation with other central
banks, including in Eastern Europe, to ensure liquidity to the international
interbank market. They expected FINMA to integrate sectoral regulatory approaches
and strengthen forward-looking systemic surveillance. The authorities’
commitment to a timely and orderly exit from quantitative easing once recovery
commences was welcomed, as was their intention to reverse the build-up in the
monetary base to protect price stability. In the view of the IMF, careful communication of policy intentions
by the authorities will remain important. The IMF commended Switzerland’s
strong fiscal performance in recent years, which has provided room for the welcome
fiscal stimulus in the 2009 budget and the full use of automatic stabilizers.
A further stimulus package in 2010 could be appropriate but the IMF understood
the authorities’ wish to preserve fiscal space for possible additional
financial sector support given the significant uncertainty surrounding global
financial developments. In any case the IMF believes that long-term fiscal sustainability requires
that any new stimulus be temporary and targeted, and that long-term reforms
of entitlement programs remain firmly on the authorities’ agenda.
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