Principality of Liechtenstein: Staff Concluding Statement for the 2025 Article IV Mission
IMF News, January 20, 2025
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- Published: January 20, 2025
Context
- Liechtenstein became the IMF’s newest member in October 2024 and is participating in its first Article IV consultation.
- High per capita income, fiscal framework with no deficits since 2013, virtually no public debt, and accumulation of large fiscal buffers.
- Economy underpinned by specialized and export-oriented manufacturing and private banking and wealth management oriented financial services.
- Close economic ties with Switzerland and the EU.
Recent economic developments and outlook
- Recent volatility and consecutive shocks:
- Output contracted in 2020 with COVID-19 and strongly rebounded in 2021.
- The economy contracted again in 2022-23 reflecting export disruptions and spillovers from Russia’s war in Ukraine.
- Labor market:
- Unemployment lower than the EU average.
- Labor market remains tight due to skills shortages and labor hoarding.
- Near-term outlook:
- The economy likely recorded growth of around 0.5 percent in 2024.
- Expected to continue to expand moderately in 2025, supported by a recovery in external demand and growth in the financial sector.
- Unemployment will slightly decline.
- Medium-term outlook:
- Projected to reach potential growth of 2 percent—slightly below pre-pandemic average growth.
- Inflation expected to remain low and in line with Switzerland.
- Risks (tilted to the downside):
- Potential global slowdown or accelerated geo-fragmentation, heightened uncertainty in major economies, sharp appreciation of the franc, and/or negative interest rates in Switzerland.
- Financial center risks from dependency on a foreign client base.
- Elevated household indebtedness presents vulnerabilities to large shocks.
- Large fiscal buffers provide room to address shocks.
- Businesses’ tendency to retain skilled workers during downturns helps stabilize employment and maintain tax revenue streams.
Fiscal policy: assessment and recommendations
- Current stance:
- Fiscal policy expected to remain conservative with continued surpluses and accumulation of buffers.
- 2025 budget envisages higher spending on investment, including a national hospital and a reserve allocation to the occupational pension scheme for state employees, offset by higher tax revenues (CIT and VAT).
- A surplus of 3 percent of GDP is expected—just below the 3.2 percent in 2024.
- Policy advice:
- Fiscal policy should broaden its scope beyond building buffers and focus on stabilization given the absence of independent monetary policy.
- Automatic stabilizers (progressive personal income taxes and unemployment benefits) should be leveraged during downturns.
- With substantial buffers in place, authorities should emphasize the stabilization role of fiscal policy going forward.
- Medium-term spending needs and vulnerabilities:
- Surpluses of over 3 percent of GDP are expected in the medium-term.
- No major tax reforms envisaged; investment in health and education to be accommodated within budget rules.
- Planning for necessary long-term investments is key; all large investment projects should be systematically identified, costed and prioritized, with financing sources and implementation modalities set later.
- Specific pressures to assess and address:
- Demographics:
- Population 65 years and above expected to reach 28.6 percent by 2050.
- Pillar I pension projections indicate assets will fall from 9.8 to 3.1 years of annual expenditures by 2043, well below the statutory 5-year minimum.
- If reserves fall below the minimum threshold, the law suspends the inflation adjustment of the old-age, survivors' and disability insurance benefits.
- Climate:
- Exposure to extreme weather events (drought, flooding, landslides) and transitional risks to a greener economy; reaching ambitious climate targets will necessitate more spending on renewable energy.
- Growth-enhancing investment:
- Data point to declining growth over time; sustaining the growth model depends on continued supply of foreign, skilled workers and more productivity-supporting investments, including infrastructure and public services.
Financial sector policies and risks
- Regulatory and compliance framework:
- Strategy anchored by compliance with international standards: reform of fiduciary laws, adherence to automatic exchange of information in tax matters and the OECD's BEPS initiatives, and implementation of comprehensive AML/CFT measures.
- Financial supervision integrated with the European System of Financial Supervision; Financial Markets Authority (FMA) is the independent national supervisory authority.
- EU regulations are promptly transposed into Liechtenstein law.
- Banking sector condition:
- Sector focused on private banking and wealth management and dominated by three banks.
- Balance sheets and assets under management (AUM) are large relative to GDP.
- Capital and liquidity buffers are well above regulatory requirements; non-performing loans are low.
- Profitability under pressure due to high costs of the private banking model, compliance, and digitalization investments.
- AUM activities are off-balance sheet and do not present direct financial risks but warrant monitoring for ML/TF risks and adherence to sanction regimes.
- Macroprudential framework:
- Household indebtedness, primarily mortgages, remains high at 115 percent of GDP.
- Authorities use a comprehensive macroprudential toolkit: capital-, lender-, and borrower-based measures, including an amortization requirement for mortgages based on affordability standards.
- FMA improved data collection to better monitor mortgage-related risks; additional data on market prices would further support oversight.
- Authorities plan to implement CRR-III rules in 2025, including for mortgage exposures.
- AML/CFT and sanctions compliance:
- Continued vigilance warranted given ML/TF risks tied to the financial center model.
- Even small breaches could jeopardize correspondent banking relationships.
- FMA initiated risk-based AML/CFT supervision in 2018; an update of the national ML/TF risk analysis (NRA) is scheduled for February 2025.
- In response to the 2022 MONEYVAL review, authorities increased onsite inspections, including for the fiduciary sector.
- Planned revision of the Professional Trustees Act would provide the FMA more insight and power to intervene.
- Cybersecurity:
- National Cyber Security Unit created in 2022 to monitor threats, protect critical infrastructure, and coordinate information sharing.
- FMA established a new unit to supervise and audit cybersecurity at financial institutions and to oversee implementation of the EU Digital Operational Resilience Act (DORA), which became effective in January 2025.
- Continued intra-institutional coordination is key due to evolving cybersecurity risks.
Structural reforms and labor market
- Skills and labor supply:
- Continued reforms needed to address skills shortages; demand for skilled workers expected to persist and exceed resident supply.
- Share of cross-border commuters increased to 57 percent of employment from 25 percent in the 1980s.
- Infrastructure constraints, including in transport, could limit growth in commuters and should be addressed.
- Government priorities: job training and reintegration, expanded educational programs, and skills development through targeted incentives.
- Increasing labor force participation:
- Female labor market participation has increased but remains below men's; sizeable gender wage gap exists, higher than in Switzerland or the EU average.
- Recommendations: offer flexible work options, extend parental leave for men, subsidize childcare, and explore measures to enhance labor supply of older workers (including flexibility in retirement age and work schedules).
- Pensions:
- Pillar I assets account for 60 percent of GDP, with a replacement ratio of 35 percent.
- Occupational pension schemes complement Pillar I with 120 percent of GDP of assets, along with private savings (Pillar III).
- Aging will pressure the system; measures needed to ensure sustainability, including raising the retirement age and/or contributions.
- Climate policy progress:
- Liechtenstein met its Kyoto target, achieving a 20 percent reduction in GHG emissions.
- Parliament adopted a long-term climate strategy aiming for climate neutrality by 2050 and an interim target to reduce greenhouse gas emissions by 55 percent by 2030 relative to 1990.
- Authorities intend to amend the Emission Trading Act in line with the EU’s directive.
- Estimating climate related expenditures in the forthcoming update of the climate adaptation strategy is important to advance the green transition.
Data gaps and statistical capacity
- Significant gaps in macroeconomic statistics due to small administration and limited resources.
- Prioritized improvements:
- Improve timeliness of national accounts (currently available 23 months after the reference year).
- Establish balance of payment (BOP) statistics.
- Steps taken:
- Additional resources allocated to the Office of Statistics.
- Leverage intra-institutional collaboration among the Office of Statistics, the FMA, the Fiscal Authority, and the Liechtenstein-Institute to facilitate data collection, compilation, and dissemination.
International Monetary Fund — Staff Concluding Statement for the 2025 Article IV Mission, Principality of Liechtenstein