IMF Executive Board Concludes 2025 Article IV Consultation with Luxembourg
IMF News, June 5, 2025
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- Published: June 5, 2025
Summary and Outlook
- On May 30, 2025, the Executive Board of the International Monetary Fund (IMF) concluded the 2025 Article IV Consultation with Luxembourg and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- Luxembourg’s fundamentals remain strong, but recent economic performance has been lackluster and the projected recovery faces headwinds from weaker external demand and tighter and/or more volatile financial conditions.
- Growth projections:
- GDP growth: -0.7 (2023), 1.0 (2024), 1.6 (2025), 2.2 (2026).
- Total domestic demand: 1.1 (2023), 0.1 (2024), 1.7 (2025), 2.6 (2026).
- Foreign balance contribution to GDP growth: -1.4 (2023), 0.0 (2024), 0.4 (2025).
- Labor market and prices:
- Unemployed (average, thousands): 16.2 (2023), 18.0 (2024), 19.5 (2025), 20.1 (2026).
- Unemployment (percent of total labor force): 5.2 (2023), 5.7 (2024), 6.1 (2025), 6.2 (2026).
- Total employment (levels): 512.0 (2023), 517.8 (2024), 524.8 (2025), 533.9 (2026).
- GDP deflator (percent change): 6.3 (2023), 1.2 (2024).
- CPI (harmonized), p.a.: 2.9 (2023), 2.3 (2024).
- CPI core (harmonized), p.a.: 3.9 (2023), 2.5 (2024).
- CPI (national definition), p.a.: 3.7 (2023), 2.0 (2024).
- Risks:
- Short-term downside risks predominate (weaker external demand, tighter/volatile financial conditions, trade policy uncertainty, geopolitical tensions, possibly higher interest rates for longer).
- Medium-term growth risks are more balanced, but fiscal risks are assessed to be high.
- Structural concerns: declining productivity, domestic real estate sector challenges, aging-related fiscal pressures, and the large share of cross-border workers contributing to external position volatility.
Fiscal Assessment and Recommendations
- 2024 fiscal outcome:
- Fiscal balance improved to a surplus of 1 percent of GDP in 2024, boosted by one-off revenues.
- General government revenues (percent of GDP): 46.2 (2023), 47.9 (2024), 47.4 (2025), 47.6 (2026).
- General government expenditures (percent of GDP): 47.0 (2023), 46.9 (2024), 48.3 (2025), 49.0 (2026).
- General government gross debt (percent of GDP): 25.0 (2023), 26.3 (2024), 26.7 (2025), 27.6 (2026).
- IMF advice:
- Prudent fiscal policy should prioritize a more efficient use of fiscal space given structurally high revenue volatility and low fiscal multipliers.
- A less expansionary fiscal stance in 2025 would have been preferable.
- Scope to review effectiveness and targeting of current measures while preserving savings from revenue overperformance or budget execution.
- Medium-term expenditure path is broadly appropriate but needs measures to contain the growth of the wage bill, enhance spending efficiency, and avoid further erosion of the tax base.
- Increase revenue resilience by diversifying revenue sources due to a concentrated and volatile revenue base.
- Strengthen medium-term anchoring: implement the planned national fiscal rule combining a debt anchor with a net spending ceiling that accounts for revenue uncertainty and allows appropriate flexibility.
- Reform the budgeting framework and strengthen the fiscal council to make the new framework more effective.
- Pension reforms:
- Public consultations on pension reform are welcome.
- Early reforms needed, including reducing the generosity of benefits—the highest in Europe—increasing both the effective and statutory retirement ages, and a well-calibrated increase in contributions to minimize negative labor market impacts.
Financial Sector and Macroprudential Policy
- Financial sector soundness:
- Financial sector is resilient, with well-capitalized and liquid banks; 2024 FSAP found the financial sector sound and well-diversified.
- Some deterioration in asset quality observed; persistent solvency and liquidity risks in the corporate sector—especially in real estate—warrant close monitoring.
- Nonbank financial sector:
- Large nonbank financial sector (notably OFI sector) has pockets of liquidity mismatches and leverage; a better understanding of OFI intermediation role is needed.
- IMF recommendations:
- Continue ensuring adequate provisioning, collateral valuation, and loss absorption capacity.
- Prioritize continued oversight of the nonbank financial sector.
- Macroprudential stance:
- Current CCyB level is appropriate.
- If recovery firms, strengthen releasable capital buffers and address household indebtedness by introducing income-based measures in line with FSAP recommendations.
- If credit pressure continues, some loosening of the CCyB could be envisaged.
- Strengthen macroprudential policy framework, building on progress in implementing 2024 FSAP recommendations for banks and investment funds.
Structural Reforms to Support Private Sector-Led Growth
- Key constraints and recommended reforms:
- Wage indexation: identified as a key constraint on competitiveness; increase labor market flexibility.
- Boost productivity and contain cost of living by streamlining regulatory and administrative burden, removing barriers to entry in some sectors, and addressing housing and infrastructure supply bottlenecks.
- Capitalize on comparative advantages in AI adoption and financial sector development while minimizing transition costs.
- Recent measures to enhance technology diffusion and ongoing upskilling programs are welcome.
- Policy aim: promote private sector-led growth and sustain living standards through targeted structural reforms and investment incentives.
Balance of Payments and External Position
- Current account (percent of GDP): 11.2 (2023), 13.8 (2024), 8.8 (2025), 7.8 (2026).
- Balance on services (percent of GDP): 43.5 (2023), 43.6 (2024), 42.9 (2025), 42.0 (2026).
- Net factor income (percent of GDP): -31.5 (2023), -31.1 (2024), -35.5 (2025), -35.4 (2026).
- IMF assessment:
- Luxembourg’s current external position is assessed to be substantially stronger than the level implied by medium-term fundamentals, but this assessment is subject to limitations due to the country’s specific features (small open economy, global financial center, large share of cross-border workers) that make the external position volatile.
Key Statistics (selected exact figures from Table 1)
- Real Economy (percent change):
- Gross domestic product: -0.7 (2023); 1.0 (2024); 1.6 (2025); 2.2 (2026).
- Total domestic demand: 1.1 (2023); 0.1 (2024); 1.7 (2025); 2.6 (2026).
- Foreign balance 1/: -1.4 (2023); 0.0 (2024); 0.4 (2025); (2026 not listed).
- Labor Market:
- Unemployed (average, thousands): 16.2 (2023); 18.0 (2024); 19.5 (2025); 20.1 (2026).
- Unemployment (percent of total labor force): 5.2 (2023); 5.7 (2024); 6.1 (2025); 6.2 (2026).
- Total employment (levels): 512.0 (2023); 517.8 (2024); 524.8 (2025); 533.9 (2026).
- Public finances (percent of GDP):
- General government revenues: 46.2 (2023); 47.9 (2024); 47.4 (2025); 47.6 (2026).
- General government expenditures: 47.0 (2023); 46.9 (2024); 48.3 (2025); 49.0 (2026).
- General government gross debt: 25.0 (2023); 26.3 (2024); 26.7 (2025); 27.6 (2026).
- Balance of Payments:
- Current account: 11.2 (2023); 13.8 (2024); 8.8 (2025); 7.8 (2026).
- Exchange rates:
- U.S. dollar per euro (period averages): 1.08 (2023); … (2024).
- Credit and yields:
- Nonfinancial private sector credit (eop, percent change) 2/: -2.9 (2023); -4.7 (2024); 3.8 (2025).
- Government bond yield, annual average (percent): 3.1 (2023); 2.7 (2024).
- Potential and output gap:
- Output gap (percent deviation from potential): -2.0 (2023); -2.1 (2024); -1.6 (2025).
IMF Communications Department: "IMF Executive Board Concludes 2025 Article IV Consultation with Luxembourg", June 5, 2025.