IMF Executive Board Concludes 2019 Article IV Consultation with Luxembourg
May 13, 2019
On May 8, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Luxembourg. [1]
Luxembourg has benefited from strong growth in recent years, supported by sound economic policies, a qualified workforce, and favorable global economic conditions. Driven by strong private consumption and a positive contribution of the external sector, GDP growth reached 2.6 percent in 2018, above the EU average. Thanks to buoyant corporate and personal income tax revenues, the fiscal position has remained strong with fiscal surplus estimated at about 2.4 percent of GDP. With unemployment at record post-crisis lows and confidence indicators well above long-term averages, the economy is currently operating close to its potential.
Growth prospects remain favorable, but downside risks arise from a weaker-than-expected global growth, a disorderly Brexit, changes in international tax rules, and a sharp tightening of global financial conditions. Domestically, rising real estate prices could exacerbate already elevated household indebtedness and increase affordability challenges.
Executive Board Assessment [2]
Executive Directors commended the authorities for the sound economic policies that continue to support a favorable growth outlook, while noting that risks are tilted to the downside from both external and domestic factors. Against this backdrop, Directors encouraged the authorities to maintain prudent fiscal policies, continue to implement new international tax standards, further enhance the resilience of the financial system, and address key structural gaps.
Directors praised the authorities for the strong fiscal position and low public debt. While stressing the need to maintain adequate buffers, they welcomed the fiscal plans aimed at lifting the economy’s potential and making growth more inclusive, by increasing public investment and introducing more growth‑friendly, equitable, and “green” taxation. They commended the authorities’ continued commitment to implement the European and global tax transparency and anti‑tax avoidance initiatives. Directors noted the need to quantify revenue risks arising from the changing international tax environment and consider mitigating measures.
Directors welcomed the progress in implementing the 2017 Financial Stability Assessment Program recommendations while emphasizing efforts to further enhance the oversight of the highly interconnected financial sector. In particular, Directors noted the need to continue to strengthen the supervision of banks’ large cross‑border exposures and complete resolution plans for less systemic banks and implement Luxembourg’s component of the euro area credit register. In the investment fund sector, system‑wide supervision and cooperation with relevant jurisdictions should be further enhanced. Directors commended the authorities for strengthening AML/CFT legislation and finalizing their first National Risk Assessment.
While welcoming recent measures to enhance macroprudential surveillance, Directors called for close monitoring of developments in the real estate market and vulnerabilities arising from high household indebtedness. In this context, they also encouraged the authorities to alleviate housing supply constraints and to expand the macroprudential policy toolkit, introducing borrower‑based mortgage lending limits.
While acknowledging that Luxembourg’s pension system is sound over the near term, Directors saw merits in further reforms to ensure its long‑term sustainability. Given the long lags of pension reforms, they considered it essential to engage with key stakeholders in a timely manner, taking into account intergenerational equity and the tradeoffs of various reform options.
Directors noted that key structural gaps need to be addressed to boost Luxembourg’s economic potential and make growth more inclusive. While the youth and low‑skilled were benefiting the most from the recent strong job creation, they noted that more needs to be done to tackle structural unemployment and low elderly labor market participation.
It is expected that the next Article IV consultation with Luxembourg will be held on the standard 12‑month cycle.
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Luxembourg: Selected Economic Indicators, 2014–19 1/ |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm.
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