{
  "title": "Luxembourg: Staff Concluding Statement of the 2022 Article IV Mission",
  "publication": "IMF News, March 11, 2022",
  "sourceUrl": "https://www.imf.org/en/news/articles/2022/03/11/luxembourg-staff-concluding-statement-of-the-2022-article-iv-mission",
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  "summary": "Luxembourg: Staff Concluding Statement of the 2022 Article IV Mission",
  "publishDate": "2022-03-11",
  "sections": [
    {
      "heading": "Context and recent developments",
      "content": "- Real GDP surpassed its pre-COVID trend; GDP is estimated to have rebounded by 6.9 percent in 2021.\n- Employment and unemployment returned to pre-pandemic levels amid record high vacancies.\n- Share of long-term unemployment has been rising, reflecting skills mismatches.\n- Inflation picked up notably, driven mostly by energy prices; automatic wage indexation triggered in October 2021.\n- Core inflation, so far muted, has been rising amid supply bottlenecks and labor shortages.\n- The 2021 fiscal position was better than expected, supported by revenue overperformance.\n- Financial sector has been resilient, but rapidly growing housing prices for the third consecutive year raise concerns about affordability and medium-term financial stability."
    },
    {
      "heading": "Outlook and risks",
      "content": "- The Russia-Ukraine conflict is expected to weigh on the recovery mainly through effects on global financial conditions, confidence, and lower growth of trading partners.\n- Staff will revise growth projections down relative to the October 2021 World Economic Outlook; risks clearly tilted to the downside.\n- Higher energy and commodity prices will fuel inflationary pressure further this year.\n- Elevated demand, rising construction costs, and persistent supply constraints will likely maintain pressure in the housing market.\n- Medium-term outlook is more positive but hinges on decisive action to address housing imbalances and navigate the green and digital transitions."
    },
    {
      "heading": "Fiscal policy — findings and recommendations",
      "content": "- Current stance:\n  - Moderately accommodative stance in 2022 and recently adopted fiscal measures to shield households from rising energy prices are broadly appropriate.\n  - Measures noted: increase in the cost-of-living allowance; subsidy to stabilize electricity prices and cover the distribution costs of gas providers.\n- Guidance:\n  - Fiscal policy should remain flexible given uncertainty about the magnitude and impact of shocks.\n  - Measures should, to the extent possible, be targeted (to low- and middle-income households) and timebound.\n  - Consider other measures in line with those proposed by the EC as needed.\n  - In close consultation with social partners, consider temporarily limiting the frequency of wage indexation to one per year while using targeted support to protect the most vulnerable.\n  - Postpone non-urgent public hiring to help relieve pressures in the labor and housing markets.\n  - If risks dissipate, resume gradual policy normalization next year to promote non-inflationary growth; if downside risks materialize, consider additional support measures.\n- Fiscal reform priorities:\n  - Reforms to diversify sources of revenue and improve equity while preserving attractiveness for workers.\n  - Address revenue risks from changes to international taxation, impact of carbon taxation, and remote/hybrid work.\n  - Reform areas: property and environmental taxation, the corporate wealth tax, and personal income taxation (in line with past Article IV recommendations).\n  - Better target social spending (including homebuyers assistance) and improve efficiency of public investment to help rebuild fiscal buffers."
    },
    {
      "heading": "Financial sector — findings and recommendations",
      "content": "- System resilience and vulnerabilities:\n  - On aggregate, banks remain well capitalized and liquid.\n  - Asset quality improved somewhat as the economy rebounded; pandemic did not result in higher bankruptcies and unemployment.\n  - Banks’ structurally low profitability remains a source of concern.\n  - Investment funds benefited from global risk appetite in 2021 but remain vulnerable to market corrections and abrupt increases in risk premia.\n  - Direct exposures of banks and investment funds to Russia and Ukraine are very limited as a share of assets.\n- Risks and monitoring:\n  - Impact of the conflict will mainly depend on spillovers to global financial conditions and confidence.\n  - Rising inflation could complicate the trade-off between price and financial stability.\n  - Continue close monitoring of evolving risks (including cyber security), coordination between supervisors, and communication with financial sector participants.\n- Macroprudential and supervisory recommendations:\n  - Consider further tightening of borrower-based limits given rapidly rising house prices and households’ indebtedness.\n  - Authorities rightly kept the countercyclical capital buffer unchanged during the pandemic.\n  - Introduced loan-to-value limits (LTV) in January 2021 reduced the LTV ratio; however, debt-service-to-income and debt-to-income ratios remain high.\n  - Staff suggests:\n    - Introducing debt-service-to-income and debt-to-income limits.\n    - Clarifying objectives of the differentiated LTV limits.\n    - Accelerating implementation of the credit registry.\n    - Considering sectoral concentration limits (on real estate loans).\n  - For investment funds, continue active engagement in international fora for the design and calibration of a macroprudential toolkit.\n  - Enhance liquidity stress tests, including accounting for second-round effects; implemented ESMA guidelines on alternative investment funds."
    },
    {
      "heading": "Housing market and structural policies",
      "content": "- Risks and priorities:\n  - Rapid housing price growth for the third consecutive year poses medium-term financial stability risks, affects affordability, and could reduce attractiveness for workers.\n  - Efforts to boost housing supply, including affordable and social housing, and reduce speculation through higher taxation of unused land and empty dwellings are welcome but will take time.\n- Multipronged policy recommendations to alleviate current pressures:\n  - Fiscal measures to contain housing demand pressures:\n    - Better target assistance for homebuyers.\n    - Reduce expected returns (e.g., by phasing out deductibility of interest payments).\n  - Increase efficiency in using existing resources:\n    - Construct higher, ecologically sustainable buildings with greater density.\n    - Address bottlenecks in the construction sector (including labor shortages, availability of landfills, and streamlining burdensome administrative processes).\n    - Strengthen public-private partnerships to enhance sector productivity.\n  - Other measures:\n    - Encourage residential mobility by reducing transaction costs for buyers’ main residence and limiting eligibility for exemptions from capital gains tax on inherited properties to 1-2 years.\n    - Lower geographic concentration of housing demand by decentralizing activities to rural and regional development centers, continuing infrastructure development, and promoting remote work."
    },
    {
      "heading": "Green and digital transitions",
      "content": "- Green transition:\n  - Luxembourg is well positioned to take advantage of the green transition, especially through sustainable finance.\n  - Transition may be associated with sizable revenue losses, mainly due to large carbon leakages.\n  - Recommendations:\n    - Increase carbon taxation gradually, with clear communication.\n    - Support transitions with improvements in public transportation and incentives to promote behavioral change (including for cross-border commuters).\n    - Accompany carbon taxation with compensation for low-income households.\n    - Complement carbon tax with gradual removal of implicit subsidies (e.g., on diesel) and increases in taxes on non-road carbon emissions and car user fees.\n    - Make incentives for greener and more energy-efficient products more progressive (increased for lower income).\n    - Increase investment in climate adaptation and improve financial sector preparedness for transition risks.\n- Digital transition and labor market implications:\n  - Digitalization could increase polarization of the labor market, inequality, and skills mismatches.\n  - Authorities are focusing on reskilling and investing in digital education (e.g., Future Skills initiative and Ministry of Education efforts).\n  - Strengthen active labor market policies to focus on cross-sector reallocation through skills development and training programs.\n  - Extend programs to allow participation by currently employed workers and offer lifelong learning opportunities.\n  - Monitor and identify occupations at risk of obsolescence with private sector input to adapt educational programs and avoid large-scale skill mismatches.\n  - Design training programs to reduce future skill obsolescence of aging workers and improve labor participation of the older population.\n  - Reduce incentives for early retirement.\n  - Enhance vocational training and apprenticeship programs to increase worker productivity and better match job seekers with opportunities."
    },
    {
      "heading": "Closing",
      "content": "- The IMF team thanks Luxembourg’s authorities and other interlocutors for constructive and insightful discussions.\n\nLuxembourg: Staff Concluding Statement of the 2022 Article IV Mission, March 11, 2022.\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- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2022/03/11/luxembourg-staff-concluding-statement-of-the-2022-article-iv-mission"
    }
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    "Published: March 11, 2022",
    "Real GDP surpassed its pre-COVID trend; GDP is estimated to have rebounded by 6.9 percent in 2021.",
    "Employment and unemployment returned to pre-pandemic levels amid record high vacancies.",
    "Share of long-term unemployment has been rising, reflecting skills mismatches.",
    "Inflation picked up notably, driven mostly by energy prices; automatic wage indexation triggered in October 2021.",
    "Core inflation, so far muted, has been rising amid supply bottlenecks and labor shortages.",
    "The 2021 fiscal position was better than expected, supported by revenue overperformance.",
    "Financial sector has been resilient, but rapidly growing housing prices for the third consecutive year raise concerns about affordability and medium-term financial stability.",
    "The Russia-Ukraine conflict is expected to weigh on the recovery mainly through effects on global financial conditions, confidence, and lower growth of trading partners.",
    "Staff will revise growth projections down relative to the October 2021 World Economic Outlook; risks clearly tilted to the downside.",
    "Higher energy and commodity prices will fuel inflationary pressure further this year.",
    "Elevated demand, rising construction costs, and persistent supply constraints will likely maintain pressure in the housing market.",
    "Medium-term outlook is more positive but hinges on decisive action to address housing imbalances and navigate the green and digital transitions.",
    "Current stance:",
    "Guidance:",
    "Fiscal reform priorities:",
    "System resilience and vulnerabilities:",
    "Risks and monitoring:",
    "Macroprudential and supervisory recommendations:",
    "Risks and priorities:",
    "Multipronged policy recommendations to alleviate current pressures:",
    "Green transition:",
    "Digital transition and labor market implications:",
    "The IMF team thanks Luxembourg’s authorities and other interlocutors for constructive and insightful 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/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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