IMF Executive Board Concludes 2018 Article IV Consultation with Luxembourg

April 3, 2018

On March 30, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Luxembourg. [1]

Luxembourg is a key intermediary of global capital flows and has benefitted from strong growth supported by its competitive advantages of fiscal stability, prudent financial sector oversight, a qualified workforce, and business friendly regulations. Economic growth reached 2.3 percent in 2017, above the EU average, and was driven by net exports of financial services and private consumption. Growth is projected at 3.5 percent for 2018, with continued strong job creation, and a temporary slowdown in inflation.

In 2017, buoyant corporate tax revenues contributed to a fiscal surplus of 1.4 percent of GDP. The full impact of 2016 tax reform, and a continued need for high public investment are expected to result in a small fiscal surplus over the medium-term.

Growth prospects are favorable but downside risks arise from international corporate tax developments; uncertainties associated with post-Brexit arrangements; and financial volatility associated with unexpectedly large monetary policy tightening or a spike in global risk aversion. The implementation of the evolving international tax transparency and anti-tax avoidance agenda, could impact Luxembourg’s activity and tax revenues negatively but this risk is mitigated by strong fiscal buffers and Luxembourg’s other competitive advantages. Rising real estate prices due to supply constraints could lead to excessive indebtedness of some households.


Executive Board Assessment [2]

The Executive Directors praised the authorities’ sound policies, which have underpinned the country’s continued strong macroeconomic performance. Directors considered that growth prospects remain favorable, although subject to downside risks related to changing international tax rules, Brexit, and financial volatility possibly triggered by higher global interest rates. Domestically, rising real estate prices pose affordability problems and could lead to excessive household indebtedness. Against this backdrop, Directors encouraged the authorities to continue efforts to further improve the oversight of the financial system, adapt the tax regime to the changing international environment, and implement reforms to ease tensions in the housing market and make the economy more inclusive.

Welcoming the ongoing process, Directors encouraged the authorities to continue enhancing regulation and supervision, in line with the 2017 Financial Sector Assessment Program recommendations. They stressed the importance of continuing to strengthen the oversight of investment funds and closely engage with relevant foreign regulators, as well as develop system wide methodologies for liquidity stress testing. Directors advised increasing on site bank inspections, and stressed the importance of rigorous supervision of cross border exposures of foreign oriented banks and of the authorities’ ongoing commitment to reinforce the oversight of nonbank holding companies. Directors commended the authorities’ continued close monitoring of risks in the real estate market, and advised adjusting policies if necessary, including by setting limits on debt service to income ratios. Directors encouraged further strengthening of macroprudential oversight, including by publishing the substance of the macro financial risk analysis of the systemic risk committee. They recommended further addressing risks related to anti money laundering and combating the financing of terrorism.

Directors commended the authorities’ ongoing commitment to prudent fiscal policies. They endorsed maintaining fiscal buffers, including low public debt, for use in the event downside risks materialize. Directors welcomed the authorities’ proactive engagement to implement the European and global tax transparency and anti tax avoidance initiatives. They recommended developing measures to address revenue risks as well as to take advantage of opportunities that may arise from implementation of this agenda. Directors also recommended continued reform of the pension system to ensure its long term viability.

Directors welcomed the authorities’ reform efforts to increase the employment prospects for the young and low skilled. They considered that additional efforts are needed to reduce skill mismatches and make work more rewarding, and to increase the participation rate of women and seniors. Directors recommended that the authorities make a determined effort to expand the stock of housing, including by pruning red tape, better coordinating zoning decisions, and increasing the supply of social housing, while making tax incentives for house purchase more means tested.



Luxembourg: Selected Economic Indicators, 2015–19

2015

2016

2017

2018

2019

Proj.

Proj.

Real economy

(Change in percent, unless otherwise indicated)

Real GDP

2.9

3.1

2.3

3.5

3.4

Gross investment

-2.8

0.0

-1.1

2.2

2.5

Unemployment (percent of the labor force)

6.8

6.3

5.9

5.5

5.2

Resident employment (thousands)

244.7

250.2

257.1

263.3

269.0

Total employment (thousands)

406.1

418.5

432.4

443.4

453.1

CPI (harmonized), p.a.

0.1

0.0

2.1

1.5

1.9

Public finances

(Percent of GDP)

General government revenues

42.8

43.8

43.2

42.7

42.3

General government expenditures

41.5

42.1

41.8

41.7

41.8

General government balance

1.4

1.6

1.4

1.1

0.5

General government gross debt

22.0

20.8

23.0

22.8

22.5

Balance of payments

Current account balance

5.1

5.1

5.0

5.0

5.0

Balance of trade in goods and services

35.1

34.2

34.4

34.6

35.0

Factor income balance

-31.6

-30.0

-29.9

-30.1

-30.5

Transfer balance

1.5

0.9

0.5

0.5

0.5

Exchange rates

U.S. dollar per euro

1.1

1.1

1.1

Nominal effective rate (2010=100)

97.0

98.9

101.5

Sources: Data provided by the authorities; IMF, WEO database; and IMF staff estimates.




[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://www.imf.org/external/np/sec/misc/qualifiers.htm .

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