International Monetary Fund highlights challenges to Switzerland's fiscal policy and financial stability

Bern, 28.03.2024 - At the conclusion of its annual consultations with the Swiss authorities and the private sector, the International Monetary Fund (IMF) has published its preliminary findings. The IMF expects the Swiss economy to grow at a moderately higher rate of 1.3% in 2024. Fiscal policy is well anchored with the debt brake, while rising spending pressure requires measures to eliminate structural deficits, including to ensure financial security for the pension system. Lessons for financial stability and the regulatory and supervisory framework should be learned from the takeover of Credit Suisse by UBS.

According to the IMF, Switzerland's fiscal policy strikes the balance between avoiding excessive cuts that could jeopardise the economic recovery and creating fiscal space for future additional spending pressures. The overall fiscal surplus amounted to 0.5% of GDP in 2024. However, spending pressures from defence, infrastructure, climate and demographic-related additional costs are increasing. The planned relief measures should enable the federal government to comply with the debt brake this year. This instrument supports debt reduction and a countercyclical fiscal policy, which also enables extraordinary expenditure if necessary. Additional measures will be necessary in the coming years to eliminate the structural deficits at federal level.

The financial sector is robust, although according to the IMF, particular attention must be paid to risks from the commercial real estate market. The availability of official data on the real estate market and other instruments to preventively reduce risks for banks is important. The measures taken by the authorities as part of the takeover of Credit Suisse by UBS have strengthened the stability of the financial sector, but further steps are needed. The lessons from this crisis situation point to the need for increased regulation, particularly in view of the size and complexity of the Swiss big bank's global activities. The analyses of the Swiss National Bank SNB and the Swiss Financial Market Supervisory Authority FINMA, as well as the Federal Council's report on the review of the too-big-to-fail regulations, which is expected in April, are decisive in this regard.

With inflation comfortably in the 0% to 2% price stability range, the SNB was right to lower its policy rate in March, according to the IMF. Medium-term inflation expectations remain well anchored at around 1.2%. Monetary policy should be forward-looking and remain responsive to incoming data on economic activity and the international environment. Given the risks associated with its large balance sheet, the SNB should continue to build equity and utilise any scope for reducing its balance sheet.

The IMF also addressed the challenges facing the labour market, which is dependent on a sufficient number of well-trained specialists. Participation in the labour force, especially by women, must be maintained and promoted. In order to achieve this and to financially secure the pension system, a higher retirement age should be considered. In any case, additional financing measures will be necessary from 2026 onwards in order to stabilise first pillar pension financing in the medium to long term. The IMF also welcomed the progress made in climate policy with the adoption of the revised CO₂ Act and the efforts to further develop foreign economic relations, both with the EU and with bilateral partners.

The regular evaluation of the economic and financial situation of its member states within the scope of the Article IV Consultation is a core element of the IMF's economic policy monitoring activities.

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