IMF Executive Board Concludes 2018 Article IV Consultation with Luxembourg
IMF News, April 3, 2018
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- Published: April 3, 2018
Consultation outcome and macroeconomic outlook
- On March 30, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Luxembourg.
- Luxembourg is described as a key intermediary of global capital flows and has benefitted from strong growth supported by 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.
Fiscal position and public finances
- 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.
- Directors commended the authorities’ ongoing commitment to prudent fiscal policies and 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 and recommended developing measures to address revenue risks and take advantage of opportunities from implementation of this agenda.
- Directors also recommended continued reform of the pension system to ensure its long term viability.
Risks and financial sector oversight
- Downside risks to growth noted: 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; 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.
- Directors encouraged continued 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.
Executive Board assessment — findings and policy recommendations
- Findings:
- Directors praised the authorities’ sound policies underpinning strong macroeconomic performance.
- Growth prospects remain favorable but are subject to the downside risks noted above.
- Domestically, rising real estate prices pose affordability problems and could lead to excessive household indebtedness.
- Financial sector recommendations:
- Continue enhancing regulation and supervision, in line with the 2017 Financial Sector Assessment Program recommendations.
- Continue to strengthen oversight of investment funds and closely engage with relevant foreign regulators.
- Develop system wide methodologies for liquidity stress testing.
- Increase on site bank inspections.
- Rigorous supervision of cross border exposures of foreign oriented banks and reinforce oversight of nonbank holding companies.
- Further strengthen macroprudential oversight, including by publishing the substance of the macro financial risk analysis of the systemic risk committee.
- Further address risks related to anti money laundering and combating the financing of terrorism.
- Housing and labor market recommendations:
- Adjust policies if necessary to contain real estate risks, including by setting limits on debt service to income ratios.
- 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.
- Make tax incentives for house purchase more means tested.
- Continue reform efforts to increase employment prospects for the young and low skilled; further reduce skill mismatches; make work more rewarding; and increase the participation rate of women and seniors.
Selected economic indicators, 2015–19 (as presented)
- Real economy (Change in percent, unless otherwise indicated)
- Real GDP: 2015: 2.9; 2016: 3.1; 2017: 2.3; 2018: 3.5; 2019 (Proj.): 3.4
- Gross investment: 2015: -2.8; 2016: 0.0; 2017: -1.1; 2018: 2.2; 2019 (Proj.): 2.5
- Unemployment (percent of the labor force): 2015: 6.8; 2016: 6.3; 2017: 5.9; 2018: 5.5; 2019 (Proj.): 5.2
- Resident employment (thousands): 2015: 244.7; 2016: 250.2; 2017: 257.1; 2018: 263.3; 2019 (Proj.): 269.0
- Total employment (thousands): 2015: 406.1; 2016: 418.5; 2017: 432.4; 2018: 443.4; 2019 (Proj.): 453.1
- CPI (harmonized), p.a.: 2015: 0.1; 2016: 2.1; 2017: 1.5; 2018: 1.9
- Public finances (Percent of GDP)
- General government revenues: 2015: 42.8; 2016: 43.8; 2017: 43.2; 2018: 42.7; 2019 (Proj.): 42.3
- General government expenditures: 2015: 41.5; 2016: 42.1; 2017: 41.8; 2018: 41.7
- General government balance: 2015: 1.4; 2016: 1.6; 2017: 1.1; 2018: 0.5
- General government gross debt: 2015: 22.0; 2016: 20.8; 2017: 23.0; 2018: 22.8; 2019 (Proj.): 22.5
- Balance of payments
- Current account balance: 2015: 5.1; 2016: 5.0
- Balance of trade in goods and services: 2015: 35.1; 2016: 34.2; 2017: 34.4; 2018: 34.6; 2019 (Proj.): 35.0
- Factor income balance: 2015: -31.6; 2016: -30.0; 2017: -29.9; 2018: -30.1; 2019 (Proj.): -30.5
- Transfer balance: 2015: 0.9
- Exchange rates
- Nominal effective rate (2010=100): 2015: 97.0; 2016: 98.9; 2017: 101.5
Press Release No. 18/119
