Washington, DC – January 20, 2025:
An International Monetary Fund (IMF) mission, led by Kazuko Shirono,
conducted discussions for the 2025 Article IV Consultation during
January 7‑20 with the Principality of Liechtenstein. At the end of the
visit, the mission issued the following statement:
Context
1. The Principality of Liechtenstein, the IMF’s
newest member from October 2024, is participating in its first Article IV
consultation. Liechtenstein has a high per capita income and a
fiscal framework that has ensured no deficits since 2013, virtually no
public debt, and accumulation of large fiscal buffers. Activity is
underpinned by specialized and export-oriented manufacturing and private
banking and wealth management oriented financial services. Liechtenstein is
globally integrated, with close economic ties with Switzerland and the EU.
Recent economic developments and outlook
2.
In recent years, economic activity has been volatile and affected by
consecutive shocks.
Output contracted in 2020 with COVID-19 but strongly rebounded in 2021. The
economy contracted again in 2022-23, reflecting disruptions in exports and
spillovers from Russia’s war in Ukraine. Unemployment has been lower than
the EU average. The labor market remains tight reflecting skills shortages
and labor hoarding.
3. The economy is recovering
moderately. The economy likely recorded growth of
around 0.5 percent in 2024 and is expected to continue to expand moderately
in 2025, supported by a recovery in external demand and growth in the
financial sector. The labor market will remain tight, supporting activity,
and unemployment will slightly decline. In the medium-term, the economy is
projected to reach potential growth of 2 percent—slightly below
pre-pandemic average growth. Inflation is expected to remain low and in
line with Switzerland.
4. Risks are tilted to the downside. As
an open economy, a potential global slowdown or accelerated
geo-fragmentation would adversely affect exports and impede recovery. Other
risks are heightened uncertainty in major economies, sharp appreciation of
the franc, and/or negative interest rates in Switzerland. The financial
center faces some risks from dependency on a foreign client base. Elevated
household indebtedness presents vulnerabilities to large shocks. On the
other hand, 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
5. Fiscal policy is expected to remain conservative
with continued surpluses and accumulation of buffers. The
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.
6. Fiscal policy should broaden its scope beyond
building buffers. The fiscal framework aims at maintaining at least
a balance in the central government’s income statement, independent of the
cycle. This has supported consolidation for the past decade, establishing
credibility and building large buffers, justified in part by
Liechtenstein’s vulnerability to shocks. However, this approach abstracts
from fiscal policy’s role as the sole lever to mitigate the impact of the
cycle in the absence of monetary policy. While the effect of fiscal policy
is more limited than for larger economies due to Liechtenstein’s small size
and openness, the Principality is well equipped with the necessary tools to
dampen the impact of shocks—automatic stabilizers, notably progressive
personal income taxes and unemployment benefits that are automatically
triggered during downturns. In navigating the uncertain global environment
and with substantial buffers now in place, the authorities should focus on
the stabilization role of fiscal policy going forward.
7. Liechtenstein faces medium-term spending needs
arising from aging, climate, and public investments. In
the medium-term, surpluses of over 3 percent of GDP are expected. No major
tax reforms are envisaged, and investment in health and education will be
accommodated within budget rules. However, future budgets will need to
address looming medium-term spending pressures, whose full extent is yet to
be assessed:
-
Demographics: The population 65 years and above is expected to
reach 28.6 percent by 2050, adding to pensions and health outlays.
Pillar I pension projections indicate that 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: Liechtenstein is exposed to extreme weather
events, including drought, flooding, and landslides; transitional risks
towards a greener economy are also present. Reaching ambitious climate
targets will necessitate more spending on renewable energy.
-
Growth-enhancing investment: Data point to declining
growth over time. Sustaining Liechtenstein’s growth model depends on
a continued supply of foreign, skilled workers and therefore more
productivity-supporting investments, including for infrastructure and
public services.
8. Despite long-term spending needs, costing has been limited. Against the background of
large fiscal buffers, planning for necessary long-term investments is key.
While budget rules have some flexibility, they require upfront
identification of financing. All large investment projects should be
systematically identified, costed and prioritized, with funding sources and
implementation modalities set at a later stage.
Financial Sector Policies
9. The financial center strategy following the
global financial crisis has been anchored by compliance with international
standards and regulations. Key measures have included reform of the
laws governing the fiduciary sector, adherence to automatic exchange of
information in tax matters and the OECD's Base Erosion and Profit Shifting
(BEPS) initiatives, and implementation of comprehensive AML/CFT measures.
Financial supervision is fully integrated with the European System of
Financial Supervision framework, with the Financial Markets Authority (FMA)
as the independent national supervisory authority. EU regulations are
promptly transposed into Liechtenstein law.
10. The banking sector is liquid and
well-capitalized although risks remain. The sector is focused on
private banking and wealth management and dominated by three banks. Balance
sheets and assets under management (AUM) are large relative to the size of
the GDP. The sector’s capital and liquidity buffers are well above
regulatory requirements. Non-performing loans are low. However,
profitability is under pressure, reflecting the high cost of the private
banking model, compliance, and digitalization investments. AUM activities
are off-balance sheet and do not present direct financial risks; however,
the international client base warrants continued close monitoring,
including for ML/TF risks and adherence to sanction regimes.
11. Macroprudential policies should continue to be
calibrated in
line with the evolution of financial stability risks.
Household indebtedness, primarily mortgages, remains high at 115 percent of
GDP. The authorities employ a comprehensive macroprudential toolkit, with
capital-, lender-, and borrower-based measures, including an amortization
requirement for mortgages based on affordability standards. The FMA has
improved data collection to better monitor mortgage-related risks, and
additional data on market prices would further support macroprudential
oversight. The authorities plan to implement CRR-III rules in 2025,
including for mortgage exposures.
12. While the comprehensive AML/CFT
framework has been further strengthened in recent years, continued
vigilance is warranted.
The financial center model presents ML/TF risks, and adherence to sanctions
regimes is fundamental. Even small breaches carry risks that could, for
example, jeopardize correspondent banking relationships, with a negative
impact for the sector. The FMA initiated risk-based AML/CFT supervision in
2018, and an update of the national ML/TF risk analysis (NRA) is scheduled
for February 2025. In response to recommendations in the 2022 MONEYVAL
review, the authorities have notably increased onsite inspections,
including for the fiduciary sector. The planned revision of the
Professional Trustees Act, which would provide the FMA more insight and
power to intervene, is an important step to further mitigate prudential
risks in the sector.
Structural Reforms
13. Continued reforms are neededto
address skills shortages. Demand for skilled workers is expected to
persist and exceed resident labor supply. Reflecting skills shortages, the
share of cross-border commuters has 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. In
addition, residents should increasingly attain required skills. Government
efforts appropriately prioritize job training and reintegration, expanded
educational programs, and skills development through targeted incentives.
14. Additional efforts are needed to increase labor
supply, including women and older workers. While
the female labor market participation has increased, it remains below men.
A sizeable gender wage gap exists, higher than in Switzerland or the EU
average. Offering flexible work options, extending parental leave for men,
and subsidizing childcare should continue. As labor shortages are
exacerbated by demographics, measures to enhance labor supply of older
workers should be explored, including flexibility in retirement age and
work schedules.
15. The pension system has substantial buffers, but
actions are needed to close future financing gaps. Pillar I assets
account for 60 percent of GDP, laying a foundation for retirement incomes
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). Yet aging will pressure the system going forward,
calling for measures to ensure sustainability, including raising the
retirement age and/or contributions.
16. Climate reforms are progressing. Liechtenstein
successfully met its Kyoto target, achieving a 20 percent reduction in GHG
emissions. Recently, 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; the 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.
17. Policies to address cybersecurity risks have
been implemented and continued oversight is needed. The
National Cyber Security Unit was created in 2022 to monitor threats,
protect critical infrastructure, and coordinate information sharing within
the country and with neighboring authorities. This has been supplemented
with a new unit within the FMA tasked with supervising and auditing
cybersecurity at financial institutions. The unit will oversee
implementation of the EU Digital Operational Resilience Act (DORA), which
became effective in January 2025. Going forward, intra-institutional
coordination remains key due to the evolving cybersecurity risks.
Closing data gaps
18. Liechtenstein has significant
gaps in macroeconomic statistics that the
authorities have pledged to address. The gaps reflect the small
size of the administration and limited resources allocated. The authorities
agree that improving the timeliness of national accounts (currently
available 23 months after the reference year) and then establishing balance
of payment (BOP) statistics are priorities. Additional resources allocated
to the Office of Statistics is a step in the right direction, and leveraging
intra-institutional collaboration, including with the Office of Statistics,
the FMA, the Fiscal Authority, and the Liechtenstein-Institute, will
further facilitate data collection, compilation, and dissemination.
* * * * *
The IMF team is grateful to the authorities and other stakeholders for
their exchange of comprehensive background information, candid and
constructive discussions, and generous hospitality.