{ "title": "Luxembourg - Staff Concluding Statement of the 2021 Article IV Mission", "publication": "IMF News, March 15, 2021", "sourceUrl": "https://www.imf.org/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission", "overlayPath": "/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/index.md", "summary": "The authorities consented to publication; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.", "publishDate": "2021-03-15", "sections": [ { "heading": "Context", "content": "- The authorities consented to publication; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.\n- Luxembourg managed the COVID-19 pandemic relatively well due to \"unprecedented policy support, both domestically and globally, and a quick adjustment to teleworking given the structure of the economy.\"\n- The economy is \"dominated by financial services\" and adapted quickly to teleworking.\n- Sizeable and flexible policy support and quick reopening—underpinned by a large-scale testing and tracking strategy—helped attenuate the economic fallout.\n- The economy \"contracted last year driven by weak domestic demand\" despite faring much better than the euro area." }, { "heading": "Outlook and risks", "content": "- GDP performance:\n - \"Following a mild GDP contraction of 1.3 percent in 2020, IMF staff anticipate a rebound in 2021, with GDP increasing around 4½ percent amid continuing targeted policy support and accommodative global financial conditions.\"\n- Medium-term forecast:\n - Output is forecast to remain slightly below the pre-crisis trend, partly reflecting \"some impairment in corporate balance sheets and scarring in the labor market.\"\n- Risk balance:\n - Risks are \"skewed to the downside and are dominated by the virus dynamics in the near term.\"\n - Upside: \"quicker containment of the infection could bring back activity significantly faster.\"\n - Downside: \"a prolongation of the health crisis into 2021 could delay the recovery.\"\n - Broader risks: tightening of financial conditions; acceleration of de-globalization; \"potentially non-negligible revenue loss from changes in international taxation.\"" }, { "heading": "Fiscal policy: Supporting a strong, sustainable, and greener recovery", "content": "- Policy stance:\n - Fiscal policy \"should remain supportive until a firm recovery is underway, increasingly focusing on the most vulnerable as the recovery gains speed.\"\n - Fiscal normalization \"should be state contingent and start only when output has broadly recovered to its pre-COVID level.\"\n - The unwinding of policy support \"should be carefully calibrated against the evolution of the pandemic and economic conditions.\"\n- Targeting and safety nets:\n - Subsequent measures should be \"targeted to the most vulnerable, including lower-income households and firms in the most affected sectors.\"\n - \"Allowing automatic stabilizers to fully operate would continue to support those groups, while unwinding the extraordinary policy measures.\"\n- Greening and investment:\n - Luxembourg should proceed with greening the economy and \"maintain high levels of public investment to close infrastructure gaps.\"\n - Specific measures in the 2021 budget welcomed by staff include:\n - \"the introduction of a carbon tax, accompanied with a tax credit to mitigate the impact on the most vulnerable,\"\n - \"the reduction of the subscription tax for sustainable investment funds,\"\n - \"the provision of additional incentives for green investments.\"\n - Continue transition to a data-driven economy by \"accelerating the digitalization of public services and further incentivizing business investment.\"\n - Continue to close physical infrastructure gaps (such as in transportation) by maintaining public investment \"in line with the government’s multi-year spending plan.\"\n- Fiscal risks and revenue diversification:\n - International transparency and anti-tax avoidance initiatives \"could help strengthen the corporate tax base\" but may \"reduce tax revenues in Luxembourg.\"\n - Climate mitigation efforts (notably road transportation) \"may also pose potentially non-negligible revenue loss due to lower sales of fuel and complementary goods.\"\n - Staff recommend exploring revenue diversification, including \"increasing environmental levies (such as the low transport taxes) and housing taxation (such as outdated property valuations).\"\n- Public investment management and procurement:\n - Improve public investment efficiency, including \"the introduction of independent and systematic ex-post project evaluations.\"\n - Staff welcome authorities’ readiness to strengthen public procurement framework, including COVID-related spending, and \"encourage the collection and publication of information on beneficial ownership of winners of public tenders.\"" }, { "heading": "Financial sector policies: Addressing rising vulnerabilities and risks", "content": "- Balance-sheet and liquidity concerns:\n - Liquidity support measures—especially the short-time work scheme—and favorable lending conditions \"helped alleviate potentially costly vulnerabilities concentrated in the sectors most exposed to the pandemic (notably wholesale, retail, and hospitality).\"\n - Liquidity pressures could intensify and may turn into insolvencies if state support is withdrawn prematurely or recovery delayed.\n - In the event of significant unemployment, \"household debt repayment capacity could weaken,\" with lower-income households being most vulnerable.\n- Banking sector:\n - The sector \"remained well capitalized and liquid overall.\"\n - Higher provisions are \"weighing on bank profitability\" but will \"alleviate the impact of potential credit losses.\"\n - Staff analysis suggests domestically oriented banks \"would remain resilient even in an adverse scenario, but results vary among banks.\"\n - Continued vigilance is required because asset quality deterioration could worsen \"already weak bank profitability,\" especially if the health crisis persists.\n - Structural profitability issues in certain banking segments—such as \"high reliance on capital market developments and relatively low cost-efficiency\"—should continue to be monitored.\n- Investment fund sector:\n - The sector \"weathered the crisis well\" but displayed vulnerabilities:\n - During March 2020 market turmoil, funds increased holdings of cash and liquid assets, leading to \"a procyclical selling of assets.\"\n - After the turmoil, funds reverted to \"increasing liquidity, maturity, and currency mismatches,\" leaving open-ended funds \"prone to widespread outflows and procyclical selling of less liquid assets in a market downturn.\"\n - Staff recommend deepening macroprudential-based surveillance and regulation, and advancing implementation of the 2017 FSAP recommendations.\n - Authorities should develop \"internal methodologies for system-wide liquidity stress testing\" and remain proactive in international fora to advance the macroprudential reform agenda.\n- Macroprudential stance and real estate:\n - Authorities tightened macroprudential stance in 2020 as real estate risks rose.\n - Introduction of differentiated loan-to-value (LTV) limits is \"a step in the right direction.\"\n - If household indebtedness continues to increase, \"the current LTV setup should be revisited, and/or other tools provided in the legal framework for borrower-based measures explored.\"\n - Counter-cyclical buffer was appropriately maintained unchanged given the current credit cycle position.\n - As the recovery firms and credit market pressures reemerge, \"some tightening of the macroprudential stance may help alleviate these pressures.\"" }, { "heading": "Structural policies: Mitigating scarring effects and ensuring inclusive recovery", "content": "- Labor market and reallocation:\n - The pandemic \"seems to have disproportionately affected vulnerable workers\" and increased unemployment among \"the youth, low-skilled, and foreign born.\"\n - Extension of the expanded short-time work scheme \"until mid-2021\" is welcomed.\n - As the recovery firms up, policy should shift \"from preserving jobs to helping workers, especially among the most vulnerable groups, to facilitate labor reallocation.\"\n - Recommended measures include hiring subsidies for viable firms, such as \"subsidies for employer-sponsored apprenticeships,\" and continued support for training programs (e.g., Future Skills) to upgrade skills and promote reintegration.\n- Housing market:\n - Steps in 2020 to improve housing supply are welcome; the pandemic and rising house prices make affordable housing more pressing.\n - Examples of 2020 actions:\n - Pacte Logement 2.0 links subsidies to municipalities to the amount of social housing built.\n - 2021 budget measures include those \"intended to discourage speculation in the real estate market and support rental supply (such as by lowering the depreciation rate for rented properties).\"\n - Staff recommend continuing efforts, including modernizing \"the rigid urban zoning/planning\" and updating communal development legislation to increase the supply of buildable land." }, { "heading": "Closing", "content": "- Staff project a rebound in output in 2021 but emphasize downside risks dominated by virus dynamics.\n- Fiscal support should remain supportive and progressively targeted to protect vulnerable households and firms, while pivoting to greening the economy and sustaining public investment as recovery allows.\n- Financial sector vulnerabilities—in banking and investment funds—warrant continued monitoring and implementation of the 2017 FSAP recommendations.\n- Structural policies should focus on reducing labor market scarring and improving inclusiveness in the housing market.\n- The IMF team thanks Luxembourg authorities and interlocutors for constructive discussions.\n\nSource: Luxembourg - Staff Concluding Statement of the 2021 Article IV Mission, March 15, 2021.\n\n---\n\n\n References\n\n- Luxembourg and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json)", "Published: March 15, 2021", "The authorities consented to publication; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.", "Luxembourg managed the COVID-19 pandemic relatively well due to \"unprecedented policy support, both domestically and globally, and a quick adjustment to teleworking given the structure of the economy.\"", "The economy is \"dominated by financial services\" and adapted quickly to teleworking.", "Sizeable and flexible policy support and quick reopening—underpinned by a large-scale testing and tracking strategy—helped attenuate the economic fallout.", "The economy \"contracted last year driven by weak domestic demand\" despite faring much better than the euro area.", "GDP performance:", "Medium-term forecast:", "Risk balance:", "Policy stance:", "Targeting and safety nets:", "Greening and investment:", "Fiscal risks and revenue diversification:", "Public investment management and procurement:", "Balance-sheet and liquidity concerns:", "Banking sector:", "Investment fund sector:", "Macroprudential stance and real estate:", "Labor market and reallocation:", "Housing market:", "Staff project a rebound in output in 2021 but emphasize downside risks dominated by virus dynamics.", "Fiscal support should remain supportive and progressively targeted to protect vulnerable households and firms, while pivoting to greening the economy and sustaining public investment as recovery allows.", "Financial sector vulnerabilities—in banking and investment funds—warrant continued monitoring and implementation of the 2017 FSAP recommendations.", "Structural policies should focus on reducing labor market scarring and improving inclusiveness in the housing market.", "The IMF team thanks Luxembourg authorities and interlocutors for constructive discussions.", "[Luxembourg and the IMF](http://www.imf.org/external/country/LUX/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[Article IV](https://www.imf.org/external/pubs/ft/aa/index.htm)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/index.md", "json": "/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2021/03/12/mcs031521-luxembourg-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T00:13:59.215Z" }