The regular evaluation of the economic and financial climate of its member states is a core element of the economic monitoring function of the IMF. From 24 February to 5 March 2007, an IMF delegation met with representatives from the federal administration, the Swiss National Bank (SNB), the private sector, parliament and civil society in order to carry out the annual Country Report on Switzerland.

The IMF forecasts confirm the healthy state of the Swiss economy. After a growth peak in 2006, the IMF anticipates continued solid growth of around 2% in 2007. The IMF highlights strong consumer demand due to employment growth and high capacity utilisation combined with continued low inflation levels. The latter could signify that potential growth in the Swiss economy may today amount to more than 1.5% as a result of greater openness and sustained structural reforms .

Monetary policies will have to be particularly vigilant and flexible in this environment. On the one hand, the inflation rate should remain low due to cost pressures from international competition. On the other, a number of international developments are responsible for the weakness of the Swiss franc against the euro, such as the current low interest in the franc as a safe haven and the so-called carry trades (interest-rate arbitrage dealings in different currencies). These developments could well be temporary in nature, which is why attentiveness is the order of the day. The monetary policy framework of the Swiss National Bank (SNB) and its communications strategy are working well in the opinion of the IMF.

It its evaluation of fiscal policy, the IMF once again commended the debt brake as an effective instrument. It underscored the elimination of the structural deficit which occurred in 2006, as well as the fact that the debt ratio has declined for the third year in a row. The IMF was critical of the way in which extraordinary expenditures are handled. Funds such as the infrastructure fund restrict the controllability of fiscal policy. All extraordinary expenditures should in the medium term be compensated for within the framework of the debt brake.

The long-term fiscal challenges, in other words, future increases in expenditure due to demographics, will, in the opinion of the IMF, are not covered by the debt brake. Further measures will be necessary. In this regard, the IMF welcomes the sustainability report on public finances to be drawn up by the Federal Department of Finance (FDF), which, amongst other things, will analyse the costs of various measures in the social sector in the long term. The IMF notes that any delays in decision-taking will increase the costs of adjustment.

Within the scope of the follow-up evaluation of the Financial Sector Assessment Programme (FSAP), the IMF last year subjected the Swiss financial sector to an in-depth examination. The results of this follow-up FSAP will be published in May 2007 together with the Country Report in the form of a report on financial system stability.

The Swiss financial sector is highly competitive and has sound monitoring structures. The follow-up evaluation to the FSAP has shown the financial system to be solid and the outlook may be considered to be positive. The most significant risks are external in nature and dependent upon possible increases in volatility. The results of the stress tests show that the banking sector is resistant to a number of events, whereas several insurance companies remain sensitive to share and property price adjustments. The pension funds have improved their financial position but the aggregative coverage is still not adequate, especially in the area of public pension funds.

The IMF recognises that Switzerland is adapting its regulatory and supervisory legal framework to the changes in the risk situation and high international standards. The creation of a strong and independent Financial Market Supervisory Authority (FINMA) is therefore welcomed. It is important that FINMA be equipped with adequate staffing and financial resources. With the Swiss Solvency Test (SST), the Federal Office of Private Insurance has a modern, risk-based, supervisory system. Supervision of pension funds is fragmented and uneven, and should for this reason be upgraded.

The IMF certifies Switzerland’s favourable growth potential