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IMF Concludes Article IV Consultation With Austria

by Ulrika Lomas, for, Brussels

04 May 2007

The International Monetary Fund on Wednesday published the conclusions reached by its Executive Board during the body's Article IV consultation with Austria.

According to the assessment, which was concluded in late April, Austria's economy is doing well. Economic activity has been strong in recent years, with relatively high growth and declining unemployment. Corporate income taxes performed well above expectations, and sales taxes also surprised on the upside. Initially, the 2006 deficit was projected to be 1.8% of GDP, but it is now estimated at 1.2%.

In a statement, the Board announced that:

"Executive Directors welcomed Austria's strong economic performance, which testifies its commendable record of sound macroeconomic policies and structural reforms, and has consistently surpassed that of the euro area. Economic growth in 2006 was broad-based and the highest since 2000; unemployment has been relatively low and declining; inflation remains well contained; and the fiscal deficit has come down. Directors expected the economy to continue to do well, based on continued strong international competitiveness and a positive outlook for Europe."

It went on to add:

"Directors welcomed the authorities' intention to consider tax cuts only towards the end of the government period, once expenditure measures have been implemented. This will be key to safeguarding the objective of reaching a balanced budget over the cycle. Future tax cuts should be focused, in particular, on reducing the burden on labor."

"Directors noted that the banking system remains well capitalized and profitable, with limited nonperforming loans. However, they emphasized that the rapidly expanding activities of the financial sector require close monitoring and effective risk management. While the expansion by Austrian banks into CESE has been very profitable and helped financial deepening in the host countries, the risks have also grown. The growth of foreign currency lending by the banks warrants special attention."

"Directors emphasized the importance of both domestic and cross-border supervision. They welcomed the agreements signed between Austrian and foreign supervisors regarding information exchange and cross-border cooperation, and the efforts to increase consumer awareness of the risks associated with foreign-currency borrowing. Directors urged the authorities to continue to ensure that the banks use adequate risk management techniques, including when preparing for Basel II."

"Directors supported the measures taken to further strengthen corporate governance in the banking sector. They recommended the forceful implementation of actions already underway, including more frequent on-site inspections and intensified off-site examinations, and the consideration of additional measures going forward. Directors welcomed the authorities' interest in an Financial Sector Assessment Program update."

The IMF Executive Board concluded:

"Directors commended Austria for its official development assistance of about 0.5% of GNP in 2006, and encouraged a further increase toward the UN target."

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